-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PXHbCKCgGj1QwZZpMuL4WSrW/FkLr5gv0fOWmH/H127VJmsxCq9IYD/Ka+8k9qRj hkGdk0XaBsqDhLSfZvtkPg== 0000912057-96-013350.txt : 19960701 0000912057-96-013350.hdr.sgml : 19960701 ACCESSION NUMBER: 0000912057-96-013350 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19960628 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ONGARD SYSTEMS INC CENTRAL INDEX KEY: 0000888428 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 841149380 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-04552 FILM NUMBER: 96587516 BUSINESS ADDRESS: STREET 1: 2323 DELGANY ST CITY: DENVER STATE: CO ZIP: 80216 BUSINESS PHONE: 3032932090 MAIL ADDRESS: STREET 2: 40 COMMERCE DRIVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 SB-2/A 1 FORM SB-2/A As filed with the Securities and Exchange Commission on June 27, 1996 Registration No. 333-4552 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _________________________ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 _________________________ FORM SB-2 AMENDMENT NO. 1 _________________________ ONGARD SYSTEMS, INC. (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) _________________________ DELAWARE 5047 84-1149380 (State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.) Incorporation or Organization) Classification Code Number)
Mark E. Weiss 40 Commerce Drive 40 Commerce Drive Hauppauge, New York 11788 Hauppauge, New York 11788 516-231-8989 516-231-8989 (Address and telephone number of (Name, address and telephone number principal executive offices and of agent for service) principal place of business) Copies to: Arnold R. Kaplan, Esq. Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C. 1700 Lincoln Street, Suite 3725 Denver, Colorado 80203 (303) 831-0909 Approximate date of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.[ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.[ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------- Title of Each Class of Amount to be Proposed Maximum Offering Proposed Maximum Amount of Securities to be Registered Registered(1) Price Per Share(1) Aggregate Offering Price(1) Registration Fee - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Common Stock par value 4,637,227 shares $6.50 $30,141,975 $10,393.78 $.001 per share - ----------------------------------------------------------------------------------------------------------------------------------
(1) Based on the closing price of the Company's Common Stock as reported on the NASDAQ (Small CapSM) system as of April 26, 1996 pursuant to paragraph (c) of Rule 457. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ONGARD SYSTEMS, INC. CROSS REFERENCE SHEET BETWEEN ITEMS OF FORM SB-2 AND PROSPECTUS
ITEM IN FORM SB-2 LOCATION IN PROSPECTUS - ----------------- ---------------------- 1. Front of Registration Statement and Outside Front Cover of Prospectus .................................. Outside Front Cover Page. 2. Inside Front and Outside Back Cover Pages of Prospectus .................................. Inside Front Cover Page; Outside Back Cover Page. 3. Summary Information and Risk Factors ....................... Prospectus Summary; Risk Factors. 4. Use of Proceeds ............................................ Prospectus Summary; Use of Proceeds. 5. Determination of Offering Price ............................ Plan of Distribution. 6. Dilution ................................................... Not applicable. 7. Selling Security Holders ................................... Selling Stockholders; Plan of Distribution. 8. Plan of Distribution ....................................... Plan of Distribution. 9. Legal Proceedings .......................................... Business - Legal Proceedings. 10. Directors, Executive Officers, Promoters and Control Persons ........................................ Management. 11. Security Ownership of Certain Beneficial Owners and Management ...................................... Principal Shareholders. 12. Description of Securities .................................. Outside Front Cover Page; Description of Capital Stock. 13. Interest of Named Experts and Counsel ...................... Experts. 14. Disclosure of Commission Position on Indemnification for Securities of Act Liabilities ....... Description of Capital Stock - Liability Limited on Directors and Officers. 15. Organization Within Last Five Years ........................ Not applicable. 16. Description of Business .................................... Prospectus Summary; Business. 17. Management's Discussion and Analysis or Plan of Operation ....................................... Management's Discussion and Analysis of Financial Condition and Results of Operations. 18. Description of Property .................................... Business - Facilities. 19. Certain Relationships and Related Transactions ............. Certain Transactions. 20. Market For Common Equity and Related Stockholder Matters ................................ Price Range of Securities and Dividend Policy. 21. Executive Compensation ..................................... Management - Executive Compensation. 22. Financial Statements ....................................... Financial Statements. 23. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure ..................... Not applicable.
ONGARD SYSTEMS, INC. 4,637,227 SHARES OF COMMON STOCK The Prospectus relates to the sale of up to 4,637,227 shares (the "Shares") of Common Stock, $0.001 par value (the "Common Stock") of OnGard Systems, Inc. (the "Company") which may be offered by certain Selling Stockholders. The Shares or rights to purchase the Shares were acquired by the Selling Stockholders in various transactions as described under the caption "Selling Stockholders," herein. The Selling Stockholders may offer the shares for sale as described under the caption "Plan of Distribution." Investment in the Company involves substantial risk and should be considered only by persons able to sustain a total loss of their investment. See "Risk Factors." THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH AN OFFER WOULD BE UNLAWFUL. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNDERWRITING DISCOUNTS AND PROCEEDS TO SELLING COMMON STOCK PRICE TO PUBLIC(1) COMMISSIONS(2) SHAREHOLDERS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Per Share $5.25 N/A $5.25 Maximum Total $24,345,442 N/A $24,345,442 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Based on the average of the high and low price of the Company's Common Stock as reported on the NASDAQ (Small-CapSM) system as of April 26, 1996. (2) No underwriter will participate in any sales on behalf of the Selling Stockholders. See "PLAN OF DISTRIBUTION." All expenses of the offering, which are estimated to be $50,000 will be paid by the Company. OnGard Common Stock is quoted in the NASDAQ (Small-CapSM) system under the symbol "OGSI." The closing bid of OnGard Common Stock on June 24, 1996 was $5.25 See "Price Range of Securities and Dividend Policy." THE DATE OF THIS PROSPECTUS IS JUNE 7, 1996. 1 AVAILABLE INFORMATION OnGard is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy and information statements and other information filed by OnGard can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at Northwestern Atrium Center, 500 West Madison Street, Suite 1600, Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto contained elsewhere in this Prospectus. THE COMPANY The Company designs, develops and markets products and services within the infection control market. Although the Company initially focused on the handling, storage and disposal of contaminated medical waste, more recently it has expanded the scope of its products to include production of sterilization supplies and equipment. The Company's infection control activities are divided into three primary components. The first component includes medical waste services and products. OnGard's medical waste product line, which features a mail-back service, allows for comprehensive product and service offerings within non-hospital, clinical markets. See "Business-Medical Waste Services." The second component previously consisted of sterile medical packaging, which is designed and manufactured for medical device manufacturers. Sterilization medical packaging is used to contain new, unused medical devices during the sterilization process and maintain sterility during transport and presentation. These products were primarily sold under private label. Sterile medical packaging is constructed on specially designed machines that are capable of handling multiple webs and completing sealing operations through the application of heat and adhesives. In 1993, the Company acquired substantially all of the assets of Med-Device Packaging, Inc. ("MDPI"), a company engaged in the design, production and distribution of sterile medical packaging. A number of customers of MDPI became customers of the Company. See "Business-Sterilization Medical Packaging." Customers included Boston Scientific, U.S. Surgical, Symbiosis and Baxter HealthCare. The Company announced on November 3, 1995 it had signed a letter of intent to sell its medical packaging line to Oliver Products of Grand Rapids, Michigan and consummated the transaction on December 7, 1995. The sale included production equipment and inventory with proceeds from the sale aggregating $620,500. The gain on the sale was $233,000. The Company retained related accounts receivable. The Company intends to focus its efforts on sterilization supplies and equipment, described below. The third component of the infection control market consists of sterilization supplies and equipment. Sterilization involves the complete elimination or destruction of all forms of microbial life, including high numbers of bacterial spores. Sterilization is required for those instruments or devices that penetrate skin or contact normally sterile areas of the body. Through its acquisition of Pharmetics, now OST, the Company manufactures and markets a complete line of institutional and pharmaceutical grade sterilizers, washers and dryers. Sterilization supplies may include containers, wraps and pouches and indicators and monitors which indicate that the sterilization process has been completed. Sterilization supplies are primarily utilized by hospital and clinical facilities during the reprocessing of reusable instrumentation. Sterilization equipment may be used by hospitals in the sterilization process for reusable instrumentation or for the sterilization of materials prior to the disposal of medical waste, and by pharmaceutical companies. The Company has developed three proprietary products which it has begun to commercialize. These products and the markets they serve are central to the Company's marketing efforts. See "Business--Products Under Development and Commercialization Activities". The Company, a Delaware corporation, was founded in 1989 as a successor by merger to a Colorado corporation, On Guard Systems, Inc., which was founded during December 1988. The Company's headquarters are currently located at 40 Commerce Drive, Hauppauge, New York 11788 and its telephone number is (516) 231-8989. On November 3, 1995, the Company announced its plan to consolidate its two facilities at its Hauppauge, New York facility. This occured by December 31, 1995. (See "Business Facilities"). In the third quarter of 1992, the Company completed its initial public offering of 920,000 shares of its Common Stock and 920,000 Warrants. Effective October 1, 1994, the Company acquired Pharmetics Incorporated ("Pharmetics"), a sterilization equipment manufacturer, pursuant to a merger (the "Merger") of Pharmetics with and into the Company's wholly owned subsidiary, OnGard Pharmetics, Inc., which is now called OnGard Sterilization Technology, Inc. ("OST"). The Company acquired OST in a stock transaction for 359,602 shares of the Company's common stock with a value of $2.6 million. See "Business--Acquisition of Pharmetics." 3 THE OFFERING Securities offered hereby .............. 4,637,227 shares of Common Stock, $.001 par value, by the Selling Stockholders, including 1,744,912 shares issuable upon exercise of warrants, when and if such Selling Stockholders exercise their warrants, and 253,292 shares issuable when and if holders of Series A preferred stock convert their shares to common stock. Common Stock outstanding prior to the offering .............................. 6,488,721 shares including 1,129,940 shares sold in March and April 1996 pursuant to the exercise of warrants issued in the Company's initial public offering in 1992. See "Price Range of Securities and Dividend Policy." Use of proceeds ....................... The Company will not receive any proceeds from this offering. However, in the event certain stockholders exercise their warrants, the Company may receive up to $7.7 million. Because the Company is unable to predict the number of warrants that will be exercised pursuant to this offering, it has not allocated the proceeds for specific purposes. The Company anticipates using the proceeds from such excercise for working capital and marketing. Risk Factors .......................... Investment in the Company involves substantial risk and should be considered only by persons able to sustain a total loss of their investment. See "Risk Factors." NASDAQ symbols ........................ Common Stock .............. OGSI The Company's Common Stock is quoted in the NASDAQ (Small-CapSM) system. Warrants also quoted in the NASDAQ System expired April 30, 1996. Units, each consisting of one share of Common Stock and one Warrant, were quoted in NASDAQ but were withdrawn by the Company from quotation effective October 26, 1993. 4 ONGARD SYSTEMS, INC. SUMMARY FINANCIAL INFORMATION
THREE MONTHS ENDED YEARS ENDED DECEMBER 31 MARCH 31 ------------------------------------------- --------------------------- 1995 1994(1) 1994 1996 1995 ----------- ----------- ----------- ----------- ----------- (PROFORMA) STATEMENT OF OPERATIONS DATA: Revenues................................. $ 4,975,069 $ 4,915,638 $ 3,928,345 $ 727,750 $ 1,292,218 Operating Margin (Deficit)............... (311,289) (524,657) 457,636 (159,539) (95,955) Operating Expenses....................... 6,485,513 7,443,469 6,174,390 1,447,578 1,083,701 Loss From Operations..................... (6,797,102) (7,968,126 (5,716,754) (1,607,117) (1,179,656) Net Loss................................. (6,988,000) (7,220,609) (5,890,008) (1,761,439) (1,257,166) SHARE DATA: Net Loss Per Share....................... $(1.76) $(2.60) $(2.32) $(.32) $(.41) Weighted Average Shares Outstanding...... 3,961,700 2,776,450 2,534,900 5,515,190 3,065,318
BALANCE SHEET DATA: DECEMBER 31, 1995 MARCH 31, 1996 Working Capital............................... $ 1,973,805 4,627,300 Total Assets.................................. 10,129,438 13,607,088 Accumulated Deficit........................... (17,990,995) (19,752,827) Stockholders' Equity.......................... 6,036,840 8,969,125 Common Stock Outstanding...................... 5,355,281 6,314,733
(1) The 1994 proforma data is based on estimates and assumptions which have been applied solely for the purpose of combining the historic financial statements of OnGard and OST for the twelve months ended therein. Actual results may vary from this unaudited proforma presentation. See "Proforma Financial Information". 5 RISK FACTORS Investment in the Company involves substantial risk and should be considered only by persons able to sustain a total loss of their investment. In addition to the other information contained in the Prospectus, prospective investors should carefully consider the following risk factors in evaluating the Company and its business. ACCUMULATED LOSSES OnGard was founded in June 1989 and made its first commercial shipments in 1990. OnGard has recorded a loss in each quarter since its inception, which losses have increased annually. OnGard expects losses to continue through much of 1996. The accumulated losses of OnGard at March 31, 1996 were $19,753,000. Stockholders' equity totaled $8,969,000 as of March 31, 1996. There can be no assurance that OnGard will ever be able to operate profitably. NEW BUSINESS COMBINATION Effective October 1, 1994, the Company acquired Pharmetics pursuant to the Merger. Investors bear inherent risks in any relatively new business combination that has not competed in the market as an aggregate entity for an extended period of time (see "Pharmetics Acquisition"). OnGard has historically been engaged in disposable sterility products and their manufacture; Pharmetics has competed in equipment sterilization products and their manufacture. There is no assurance that OnGard can operate successfully in this new market. WORKING CAPITAL DEMANDS At March 31, 1996, OnGard had working capital of $4,627,000 resulting from the exercise of warrants in March 1996 described below. However, OnGard's working capital demands have continued to increase since its acquisition of OST and due to the development and production prototypes of three new products, their related commercialization, and for funding of OnGard's operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." In order to fund its working capital requirements, OnGard has had to continually obtain funds from the capital markets. For example, OnGard completed a private placement aggregating $7,714,070 in gross proceeds on September 29, 1995 (the "September 1995 Private Placement") resulting from the sale of 2,204,021 shares of its common stock; it raised $2,100,000 in gross proceeds from a private and offshore offering of units in July 1994 (the "July 1994 Private Placement"); $1,500,000 in gross proceeds from a private offering of convertible debentures in October 1994 (the "October 1994 Private Placement"); and $320,000 in gross proceeds from the exercise of Class A Warrants during February 1995. Subsequent to December 31, 1995, and through April 30, 1996, the Company received $6.0 million (gross proceeds) resulting from the conversion of Common Stock Purchase Warrants. Although OnGard has been successful to date in obtaining sources of financing sufficient to meet current and past due trade obligations and other expenses and to enable it to pursue its business plans generally, there is no assurance that it will be successful in this regard in the future. OnGard's expenses have exceeded its revenues since inception, and if they continue to do so, OnGard will need additional capital in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." PHARMETICS ACQUISITION AND FINANCIAL INFORMATION; GOING CONCERN OPINION FROM PHARMETICS' AUDITORS Effective October 1, 1994, OnGard and Pharmetics completed the Merger in which OnGard acquired the entire equity interest of Pharmetics in consideration for Common Stock of OnGard and Pharmetics merged with OnGard Pharmetics, Inc. ("OGPI"), a wholly-owned subsidiary of OnGard, now called OnGard Sterilization Technology, Inc. ("OST"). 6 OST has incurred significant operating losses in recent fiscal years and has encountered problems in paying its trade creditors and other obligations. OnGard has been required to reverse this condition. The Company believes it has already resolved the majority of OST's creditor issues; however, during the period in which the creditors are paid and in order to reverse operating losses, OST has and will require additional amounts of operating capital, which amounts could be significant. As of September 30, 1994, immediately preceding its acquisition by OnGard, Pharmetics had a working capital deficiency of approximately $1,186,000 (including Pharmetics' demand loan payable to OnGard of $1,883,824) and an accumulated deficit of $3,799,789. It had a net loss for the nine months ended September 30, 1994 of $1,371,415. The losses resulted in significant liquidity problems for Pharmetics. OnGard extended intercompany loans to Pharmetics totaling approximately $2,927,000 through December 31, 1994. The independent auditors for Pharmetics issued their report, dated March 28, 1994, for the year ended December 31, 1993, which indicated that Pharmetics' losses and liquidity problems have raised substantial doubt about Pharmetics' ability to continue as a going concern. REGISTRATION REQUIREMENTS The Shares cannot be exercised unless at the time of exercise the Shares are qualified for sale in such person's state of residence or an exemption from such qualification is available. In addition, unless the prospectus relating to the shares is current as specified by the Securities Act of 1933, as amended, the Company may decline to permit their exercise. No assurance can be given that the Company will be able to maintain a current prospectus or effect any required qualification. DISCRETION OF BOARD OF DIRECTORS REGARDING USE OF PROCEEDS If the Warrants to acquire 1,744,912 shares are exercised, the Board of Directors of the Company will have broad discretion regarding the use of proceeds from such exercise. See "Use of Proceeds." The Board's discretion in this regard is particularly critical in light of the Company's need for additional capital. See "Risk Factors - Working Capital Demands." The Board of Directors will carefully determine that the use of any proceeds is consistent with the Company's near and long term objectives regarding the need for additional capital and product development. However, it is necessary that investors trust the ability of the Company's directors to implement these objectives in the best interest of the Company. See "Management." OUTSTANDING WARRANTS A portion of the Shares being offered hereby have not been issued by the Company but are subject to Warrants issued by the Company to purchase such Shares. Such Shares may not be sold by the owners of such warrants unless and until they exercise such warrants. The following is a description of outstanding warrants. 7 GUARANTORS' WARRANTS OnGard has obtained debt financing facilitated by third party Guarantors, John Pappajohn ($2 million) and Edgewater Private Equity Fund, L.P. ($.5 million), both of Des Moines, Iowa, totaling $2.5 million. The $2.5 million loans were pursuant to notes ("Notes") executed by OnGard in favor of a commercial lender, Norwest Bank Colorado ("Bank"). The Notes are secured by OnGard's inventory, equipment, accounts receivable and intangible assets as well as certificates of deposit provided by the Guarantors for the most recent $1.0 million. In consideration for the $2.5 million guarantee, OnGard issued the Guarantors or its assigns five year warrants ("Guarantors' Warrants") to purchase an aggregate of 600,000 shares of Company Common Stock at an exercise price of $4 per share. The Notes, of which there are three, matured in April 1996 and were paid in full. The market price of OnGard Common Stock on the date of the three dates of the Guarantors' Warrant was $5-5/8, $6-5/8 and $5. The issuance of these Guarantors' Warrants resulted in OnGard recording debt issuance costs which are amortized as a non-cash charge against earnings over the life of the loan. The 600,000 warrants have an anti-dilution provision which has been triggered by some of the Company's securities transactions. OnGard believes that the exercise price of the initial 400,000 warrants issued in connection with the original credit line of $1.5 million would be $3.41 and the shares issuable upon exercise would be 468,700. OnGard believes the remaining 200,000 warrants issued in connection with the subsequent $1.0 million, would be adjusted to 224,080 shares and the exercise price would be $3.57. CLASS A WARRANTS The July 1994 Private Placement contained Warrants (the "Class A Warrants") to purchase one share of the Company's Common Stock for $6. The Class A Warrants will be exercisable until 5:00 p.m., Mountain Time, three years from the final closing date of the July 1994 Private Placement, i.e., July 18, 1997. The Class A Warrants contain an anti-dilution provision which is triggered by (i) a sale of any shares of the Company's Common Stock for a consideration per share less than the then current fair market value per share of Common Stock or the purchase price pursuant to the Class A Warrants on the date of sale, (ii) the issuance of any shares of Common Stock as a stock dividend to the holders of Common Stock, and (iii) a subdivision or combination of the outstanding shares of Common Stock into a greater or lesser number of shares. The Warrant agreement specifically provides that anti-dilution provisions are NOT triggered by the Pharmetics Merger or the initial 400,000 Guarantor's Warrants. Three hundred thousand (300,000) Class A Warrants were issued, of which 71,429 were exercised during the first quarter of 1995. The Company believes the adjusted exercise price of each Class A Warrant would be $5.20 and the number of shares issuable upon exercise of remaining Class A Warrants would be 268,341. CLASS B WARRANTS The sale of Series A Preferred Shares sold in the October 1994 Private Placement, which was completed in February 1995, contained warrants (the "Class B Warrants") to purchase one share of the Company's common stock for $6. A total of 375,000 Warrants were issued. The Class B Warrants are identical in terms as the Class A Warrants described above. The three year exercise period, during which time the Class B Warrants are exercisable, expires on February 16, 1998. The Class B Warrants contain an anti-dilution provision that has been triggered by the securities transactions which have occurred since the October 1994 Private Placement. The Company believes that the exercise price of each Class B Warrant would be $5.23 for 287,471 warrants, and $5.31 for 141,060 warrants, and the number of shares issuable upon exercise of each Class B Warrant would be 428,531. UNDERWRITER'S WARRANTS AND EXERCISE THEREOF Underwriter's warrants ("Underwriter's Warrants") to purchase a total of 80,000 units at a unit exercise price of $7.00 per unit (each unit consisting of one share of Common Stock and one stock purchase warrant with an exercise price of $9.45) were issued to the Royce Investment Group, the underwriter ("Underwriter") as part of the Company's initial public offering. For the five- year life of these warrants the Underwriter is given, at a nominal cost, the opportunity to profit from a rise in the market value of Common Stock. The Underwriter's Warrants contain an anti-dilution provision that has been triggered by the securities transactions described 8 above. The Company believes the exercise price of each Underwriter's Warrant would be $4.65 and the number of shares issuable upon exercise of such Underwriter's Warrants would be 120,391. The warrants underlying the Underwriter's Warrants also contain an anti- dilution provision that has been triggered. OnGard believes the exercise price of each warrant underlying the Underwriter's Warrants would be $6.25 and the number of shares issuable upon exercise of the Warrants underlying the Underwriter's Warrants would be 120,391. The Underwriter of the Company's initial public offering has been granted warrants to purchase a total of 30,000 Units (each Unit consisting of two shares of common stock and one purchase warrant) at $7 per unit in connection with the Company's July 1994 Private Placement. The 30,000 warrants underlying the Underwriter's private placement warrants are identical in terms to the Class A Warrants discussed above except that they are not subject to redemption. The shares issuable upon exercise of these 30,000 warrants are not being offered pursuant to this Prospectus. The Company believes that the exercise price of the 60,000 shares underlying units would be $3.01 and the number shares would be 69,652 and that the exercise price of the purchase warrants would be $5.17 and the number of shares would be 34,826. LESSOR'S GRANTED RIGHTS In connection with the acquisition of Pharmetics Incorporated, the Company became liable for certain amounts of lease payments in arrears and owed by Pharmetics to the lessor of its facilities in Hauppauge, New York. In December 1994, the Company entered into an agreement with EEC Corp., the lessor. Pursuant to the agreement, OnGard issued 22,700 shares of its common stock to EEC Corp. in settlement of the payments in arrears. The agreement provided that if OnGard did not file a registration statement which included such shares within 12 months of the date of the agreement, then it would grant the right to purchase 10,000 shares of its common stock to EEC Corp. at an exercise price of $7.50 per share. GOVERNMENT REGULATION--GENERAL OnGard sells integrated systems that allow generators of infectious waste to handle, store, and dispose of such waste in compliance with applicable federal and state regulations. The Company is, or its products are, currently subject to regulations of the Occupational Safety and Health Administration ("OSHA"), the U.S. Postal Service, and state and local regulation relating to the handling and disposal of infectious waste. The Company's medical waste disposal products meet or exceed Postal Service regulations regarding the transport of medical waste, and its mail-back waste kits bear the Company's Postal Code numbers, U.S.P.S. -002 A-F. The enactment by federal, state or local governments of significant new laws or regulations, or a change in existing laws and regulations, including their interpretation, relating to the handling, storage and disposal of medical waste, could increase the cost of producing the Company's products or otherwise adversely affect or eliminate the demand for its current products and could require the Company to change substantially its products to address such changes. The Company's medical waste product line, in its current form, is dependent upon the ability of the U.S. Post Office to transport medical waste. Although the Post Office has been transporting medical waste on a regulated basis since 1989, the Company cannot predict whether it will continue to do so. A decision by the Post Office to discontinue the transport of medical waste would have a material adverse effect on the Company. STATE REGULATION Although the U.S. Postal Service is authorized to, and does, transport medical waste pursuant to federal regulations, and the Company believes its products comply with such regulations, most states also have regulations that determine appropriate methodologies for the handling and disposal of medical waste. Typically, the state laws in question refer to generators of medical waste as opposed to manufacturers of medical waste disposal products. Several states, including New York, California, and New Jersey, require specific approval of medical waste disposal programs including mail-back medical waste products. During 1993, Minnesota and Maine took the position that mail-back medical waste programs were not consistent with state regulations. The 9 Company made its distributors aware of these regulatory developments. The Director of Pollution Control in Minnesota recently informed the Company that he intended to address the situation through the proposal of new regulations that, if adopted, would provide exemptions relating to the disposal of medical waste through the U.S. Postal Service, and that no enforcement action would be taken in this regard pending adoption of the new rules. There is no assurance, however, that the State of Minnesota will not take such enforcement action. The Company does not actively pursue mail-back medical waste programs in states that do not encourage or that prohibit its use. Maine and Minnesota represent a small percentage of the Company's current market and a correspondingly small percentage of the potential market for the Company's medical waste kits. Although the Company attempts to monitor regulatory developments in all states in order to maintain regulatory compliance, because of the large number of regulators it is possible the Company might not be immediately aware of changes in relevant regulations. Regulations may change frequently, and the Company's activities may be curtailed or limited to the extent that certain states restrict the use of medical mail-back systems. The Company is not aware of any attempt by a state to challenge the authority of the U.S. Postal Service under applicable federal regulations to transport medical waste. FDA REGULATION The Company's medical waste product line and sterile medical packaging products are considered medical devices and as such are subject to regulation by the U.S. Food and Drug Administration (the "FDA"). The FDA is imposing more stringent regulatory requirements with respect to these products. If the Company ultimately were unable to obtain FDA regulatory clearances and maintain Good Manufacturing Practice standards, the Company would be unable to sell these products to its customers. It is possible that the FDA could exercise its discretionary authority to prohibit manufacturers from commercially distributing certain of its products and could require product recalls of specific companies' products or on an industry-wide basis. Although the FDA historically has not exercised device regulatory authority over sharps containers, more recently the Company has learned that the FDA intends to apply its statutory authority over devices to sharps containers on an industry-wide basis. The Company subsequently received clearances for its current line of sharps containers. Sharps containers are containers that are used for the disposal of certain medical instruments which are defined as "sharp." Various jurisdictions and entities have defined the term "sharp." Generally speaking, sharps include used needles and syringes, broken glass and other objects with exposed edges capable of inflicting puncture wounds. Containers manufactured for disposal of sharps are generally made from plastic resins, but can also be made from metal and certain configurations of paper-like resins. The use of sharps containers is defined and described in the OSHA Bloodborne Pathogen Rule. Generally speaking, sharps containers must be resistant to puncture and leakage and capable of closure after use. In June 1994 the Company received notification that all of its 510(k) submittals for sharps containers had been approved and cleared for marketing. The Company has an additional submittal for one of its sharps containers which the FDA had advised it to withhold until the others had cleared, and which the Company is now preparing for submission. COMPETITION The markets for the Company's products and services and those of OST are highly competitive. Compared to the Company, the Company's primary competitors have greater experience, financial, distribution and marketing resources, as well as a more established market presence and reputation. There can be no assurances that additional competition or alternatives will not develop. See "Business--Competition." DEPENDENCE ON KEY CUSTOMERS AND SUPPLIERS In 1993, the Company entered into a five-year supply, distribution and licensing agreement with Sherwood Medical Company ("Sherwood"), pursuant to which the Company sells products to Sherwood for resale where Sherwood takes the inventory risk of such resale. This arrangement is limited to the Company's mail-back medical waste products and accessories. These products appear on the market with both the Sherwood Monoject trademark and the OnGard Systems trademark. The distribution arrangement was exclusive, with several exceptions which the Company and Sherwood continue to negotiate as the Company analyzes new 10 markets it may want to pursue independently. Currently, these exceptions include the Company's direct sales relationships with Caremark, Inc. ("Caremark"), Quantum Health Resources ("Quantum"), and a group of individual customers that have had an existing direct purchasing arrangement with the Company, and certain retail markets. As a result of the Company's continuing increase in direct selling, its arrangement with Sherwood has been concluded. It accepts sales from Sherwood similar to other non-exclusive distributors. For the year ended December 31, 1995, Boston Scientific was the Company's only major customer, comprising $512,000 in revenues or 10% of the Company's total revenues. For the year ended December 31, 1994 the Company had three major customers which accounted for an aggregate of 41% of revenues: Boston Scientific, 16%; Caremark, 13% and Omni Construction, 12%. For the year ended December, 31, 1993, the Company had three customers that accounted for an aggregate of 52% of the Company's revenues: Sherwood, 14%; Caremark, 12%; and Boston Scientific, 26%. Boston Scientific continued to be a key customer in 1994, but when the Company relocated the manufacturing of sterile packaging from Pennsylvania to Denver in 1993, it was unable to reach agreement on rescheduling product shipments with the Milford branch of Boston Scientific, which accounted for 8% of the Company's revenue. During 1994, the Company recovered approximately 4% or half of the sales it lost to the Milford branch due to increased sales at other Boston Scientific locations. During 1992, the Company had four customers that accounted for an aggregate of 45% of the Company's revenues. The Company had two customers that accounted for an aggregate of 57% of the Company's revenues during 1991. The Company no longer sells to two of the customers which represented an aggregate of 25% and 57% of revenues during 1992 and 1991, respectively. In management's opinion, the loss of Sherwood as an exclusive distributor could impact the Company's mail-back medical waste program by approximately $15,000 per month. The Company has already increased its expenditures in sales and marketing and to make direct arrangements with the distribution channels served by Sherwood, and believes it can recoup a portion of these sales. Due to the sale of the Company's medical packaging line, Boston Scientific will cease to be relevant to OnGard's future business. As certain films which are used in the production of AutoPak are available only from single source, the loss of supply from such sources could disrupt the Company's manufacturing operation. The Company has had ongoing relations with its suppliers, many of which are large corporations, and does not anticipate such disruptions. However, there can be no assurance that such disruptions will not occur. DEPENDENCE ON PATENTED AND PROPRIETARY TECHNOLOGY The Company has obtained patents covering different aspects of its technology. To the extent competitors develop equivalent or superior non-infringing technology in these areas, or to the extent that the Company is unable to enforce any patent, the Company's ability to market and sell its products could be materially adversely affected. In addition, the Company may incur significant costs defending its patents from infringement by others. See "Business--Patents and Trademarks." The Company has also filed several patent applications relating to certain of its key products, such as the mail-back system and AutoPak-TM-. There is no assurance that any of these applications will be granted. DEPENDENCE ON KEY PERSONNEL The Company relies to a substantial degree on its president, Mark E. Weiss. Mr. Weiss had an employment agreement with the Company through December 31, 1995. The Board of Directors has agreed to extend the employment agreement through three additional years. The agreement is terminable by OnGard for cause, as defined therein, without further obligation. Mr. Weiss has agreed not to compete in the business of providing medical waste regulatory compliance services to health care facilities and providers without the written consent of the Company for two years after the termination of the employment agreement. See "Management--Employment Agreements." The loss of Mr. Weiss would materially adversely affect the Company. See "Management--Executive Officers and Directors." The Company does not maintain key man life insurance on any of its employees. PRODUCT LIABILITY EXPOSURE As a seller of medical infection control and waste handling systems, the Company could face product liability claims potentially based on accidental infections, loss of waste disposal packages in the mail, or other 11 unforeseen circumstances. See "Business--Legal Proceedings." For example, the Company's sharps containers are used to store "sharps" such as contaminated needles; such needles and other "sharps" pose obvious risks to persons using or coming in contact with them. The Company cannot guarantee that its products will not be misused, or even if used correctly, that accidents will not occur. Risks posed to persons using, handling, storing or shipping sharps are especially severe in today's environment of serious blood-borne diseases, such as acquired immune deficiency syndrome. The Company maintains product liability insurance in an aggregate amount of $1 million. There can be no assurance that such coverage will be adequate to cover future product liability claims, if any, or that it will continue to be available at reasonable prices. See "Business--Insurance" and "Business--Legal Proceedings." PRODUCTS UNDER DEVELOPMENT The Company has designed a new product line consisting of sterilization supplies and equipment. Sterilization supplies and equipment are used by health care facilities during reprocessing of reusable instruments and devices. The Company's sterilization product line includes a variety of pouches and bags used to contain devices and instruments during sterilization as well as sterilization indicators and monitors that are used to indicate that sterilization conditions have been achieved. The Company's primary product in this line is AutoPak, a proprietary product for which it has received 510(k) notice from the FDA and has just commenced selling activities. See also "Business--Acquisition of Pharmetics." Sterilization equipment may include products for the sterilization of reusable instruments or sterilization for treatment of materials prior to disposal of medical waste. The Company has developed and sold, in limited quantities, Waste Clave, a highly efficient hospital autoclave. In addition, HiVac, a tabletop steam sterilizer, has been sold in limited quantities into the European market but continues to be refined. As some of these products are currently commencing sales, the Company will rely on its existing products, primarily its medical waste products, and the sale of institutional grade sterilizers, washers and dryers to generate revenues. The Company has expended funds on product development and may continue to incur expenses without offsetting revenue or the assurance that it will ever derive revenue from its activities. No assurances can be given that the new products being developed by the Company, if introduced, will be accepted or competitive in the market or that the Company will be able to sell such products on a profitable basis. RELIANCE ON THIRD PARTIES Although the Company owns the molds and tooling used to manufacture its products, the Company does not manufacture the components of its waste handling and waste disposal products and is therefore dependent on other manufacturers with whom the Company contracts for the manufacture of these components. Although the Company has not experienced any difficulty in procuring the manufacture of those products, there can be no assurance that the Company's needs for products will continue to be met on a timely basis. The Company contracts for incineration services for its waste disposal systems with National Medical Waste, Inc., a subsidiary of BioMedical Waste Systems, Inc. ("BioMedical Waste"). National Medical Waste had incurred recurring operating losses and experienced a working capital deficiency that raised substantial doubts about its ability to continue as a going concern. National Medical Waste has merged with BioMedical Waste. The inability to continue shipping medical waste to the Company's present incinerator would require the Company to seek alternative arrangements. Although other companies offer medical waste incineration services, changing incinerator companies would necessitate expenditures on preprinted forms and training. The Company has obtained an alternate source of medical waste disposal. See "Business -- Medical Waste Services -- INCINERATION CONTRACT". The Postal Service subcontracts with other carriers, such as airlines, to perform some functions relating to the transport of medical waste. If these carriers determined that they were unwilling or unable to continue providing transportation services, the Company's mail-back program in its current form would be adversely affected. There is no guarantee that third-party transporters, including the U.S. Postal Service, will continue their present policies and practices with respect to the transport of medical waste. 12 NO DIVIDENDS The Company has paid no cash dividends on its Common Stock since its inception and does not expect to declare or pay any cash dividends in the foreseeable future. Any future dividends will depend upon the earnings if any, of the Company, its financial requirements, and other factors. The Common Stock should not be purchased by investors who anticipate the need for dividends from their investments. POTENTIAL FUTURE SALES PURSUANT TO RULE 144 Of the 6,488,721 shares of Common Stock currently issued and outstanding as of April 30, 1996, 2,762,044 are currently freely traded, an additional 2,639,023 are being registered pursuant to the Prospectus and 1,087,654 are "restricted securities," as that term is defined in Rule 144 promulgated under the Securities Act. In general, under Rule 144, a person who has satisfied a two-year holding period may, under certain circumstances, sell within any three- month period a number of shares which does not exceed the greater of 1% of the then outstanding shares of Common Stock or the average weekly trading volume in shares during the four calendar weeks immediately prior to such sale. Rule 144 also permits, under certain circumstances, the sale of shares without any quantity or other limitation to a person who is not an affiliate of the Company and who has satisfied a three-year holding period. The holders of all shares of the Company's Common Stock outstanding on August 11, 1992, the date of the Company's initial public offering, agreed not to publicly offer, sell or otherwise dispose of any of their shares of Common Stock for a period of 24 months after that date without prior written consent of the Underwriter. The 1,087,654 shares of restricted stock are available for sale pursuant to Rule 144 at this time. Any sales of substantial amounts of the Common Stock in the open market could have a significant effect on the market price of securities of the Company. See "Description of Securities--Shares Eligible for Future Sale. NASDAQ LISTING AND MAINTENANCE REQUIREMENTS The Company's Common Stock are quoted in the NASDAQ (Small-CapSM) system. Units, each consisting of one share of Common Stock and one Warrant, were quoted in the NASDAQ (Small-CapSM) system but were withdrawn by the Company from quotation effective October 26, 1993. The Company's warrants were quoted separately on that exchange until they expired on April 30, 1996. There is no assurance that any class of the Company's securities will continue to be quoted in the NASDAQ (Small-CapSM) system. Failure to continue to be quoted in the NASDAQ (Small-CapSM) system would be likely to decrease liquidity in the market for the Company's securities because non-NASDAQ securities traded over-the-counter generally trade at lower volume levels. 13 THE COMPANY The Company designs, develops and markets products and services within the infection control market. Although the Company initially focused on the handling, storage and disposal of contaminated medical waste, more recently it has expanded the scope of its products to include production of sterilization supplies and equipment. The Company's infection control activities are divided into three primary components. The first component includes medical waste services and products. OnGard's medical waste product line, which features a mail-back service, allows for comprehensive product and service offerings within non-hospital, clinical markets. See "Business-Medical Waste Services." The second component previously consisted of sterile medical packaging, which is designed and manufactured for medical device manufacturers. Sterilization medical packaging is used to contain new, unused medical devices during the sterilization process and maintain sterility during transport and presentation. These products were primarily sold under private label. Sterile medical packaging is constructed on specially designed machines that are capable of handling multiple webs and completing sealing operations through the application of heat and adhesives. In 1993, the Company acquired substantially all of the assets of Med-Device Packaging, Inc. ("MDPI"), a company engaged in the design, production and distribution of sterile medical packaging. A number of customers of MDPI became customers of the Company. See "Business-Sterilization Medical Packaging." Customers include Boston Scientific, U.S. Surgical, Symbiosis and Baxter HealthCare. The Company announced on November 3, 1995 it had signed a letter of intent to sell its medical packaging line to Oliver Products, of Grand Rapids, Michigan. This transaction closed on December 7, 1995. The sale, which was in the form of an asset transaction, was comprised of production equipment, including three pouch manufacturing machines, a printing press, plates and dies and testing equipment, open customer accounts and historic records and inventory. The purchase price for these assets was $620,500. The gain on the sale was $233,000. The Company retained related accounts receivable of approximately $316,000. No warranties or guarantees were provided with the assets delivered. Approximately $45,500 was retained in escrow for claims, if any, which arise from products shipped by the Company prior to the effective date of the sale. The escrow account is to be released 180 days after the effective date of transaction. The Company intends to focus its efforts on sterilization supplies and equipment, described below. The third component of the infection control market consists of sterilization supplies and equipment. Sterilization involves the complete elimination or destruction of all forms of microbial life, including high numbers of bacterial spores. Sterilization is required for those instruments or devices that penetrate skin or contact normally sterile areas of the body. Through its acquisition of Pharmetics, now OST, the Company manufacturers and markets a complete line of institutional and pharmaceutical grade sterilizers, washers, and dryers. Sterilization supplies may include containers, wraps and pouches and indicators and monitors which indicate that the sterilization process has been completed. Sterilization supplies are primarily utilized by hospital and clinical facilities during the reprocessing of reusable instrumentation. Sterilization equipment may be used by hospitals in the sterilization process for reusable instrumentation or for the sterilization of materials prior to the disposal of medical waste, and by pharmaceutical companies. The Company has developed three proprietary products which it has begun to commercialize. These products and the markets they serve are central to the Company's marketing efforts. See "Business--Products Under Development and Commercialization Activities". The Company, a Delaware corporation, was founded in 1989 as a successor by merger to a Colorado corporation, On Guard Systems, Inc., which was founded during December 1988. The Company's headquarters are currently located at 40 Commerce Drive, Hauppauge, New York, 11788 and its telephone number is (516) 231-8989. On November 3, 1995 the Company also announced its plan to consolidate its two facilities at its Hauppauge, New York facility. This occurred by December 31, 1995. (See "Business Facilities"). In the third quarter of 1992, the Company completed its initial public offering of 920,000 shares of its Common Stock and 920,000 Warrants. Effective October 1, 1994, the Company acquired Pharmetics Incorporated in a stock transaction for 359,602 shares of the Company's common stock, with a value of $2.6 million ("Pharmetics"), a sterilization equipment manufacturer. See "Business-- Acquisition of Pharmetics." 14 USE OF PROCEEDS UPON EXERCISE OF WARRANTS The Company is not able to predict the number of such warrants that will be exercised; however, the holders of such warrants have requested that the Company include the shares issuable upon exercise of the warrants in this offering. The holders of the warrants may not offer the shares for sale unless they exercise the warrants. If all of the warrants are exercised, the Company would receive an aggregate of approximately $6.5 million. See "Risk Factors -- Outstanding Warrants". Because the Company is unable to predict the number of warrants that will be exercised, it has not allocated the proceeds for a specific purpose. The Company anticipates using the net proceeds from the exercise of the warrants, if the maximum amount is raised, for working capital ($7.2 million), and enhanced marketing ($.5 million). However, as the Company cannot predict when or if the warrants will be exercised, or the amount of proceeds therefrom, it cannot rely on the proceeds for budgeting purposes. The Company will utilize these funds when and if they are available to further the objectives of its business activities. Such activities include further investment in the sterilization product line and completion thereof and purchase of additional equipment to increase capacity. In addition, the Company will continue to look for strategic acquisitions that will enhance the Company's ability to serve infection control and other markets. However, the Company does not have any agreements, agreements in principle, arrangements or understandings relating to any possible acquisition. 15 PRICE RANGE OF SECURITIES AND DIVIDEND POLICY The Company's Common Stock is quoted in the NASDAQ (Small-CapSM) system and its trading symbol is OGSI. As of December 31, 1995, there were approximately 142 record holders and approximately 1,357 beneficial holders of Common Stock. There were 6,488,721 shares outstanding as of April 30, 1996. Prior to the initial public offering in August 1992, there was no market for the Company's Common Stock. The tables below set forth the high and low closing bid prices of the Company's Common Stock, Warrants and Units (each unit consisting of one share of Common Stock and one Warrant) as reported by the National Association of Securities Dealers, Inc. ("NASD") for each of the quarters indicated since the Company's initial public offering (such quotations represent prices between dealers, not actual transactions, and do not include retail mark-ups, mark- downs, or commissions). The Company withdrew the Units from quotation in NASDAQ (Small-CapSM) system effective October 26, 1993. The warrants expired on April 30, 1996.
Year: Quarter Common Stock Year: Quarter Common Stock ----- ------- ------------ -------------- ------------ High Bid Low Bid High Bid Low Bid -------- ------- -------- ------- 1992: 1994: Third Quarter 4-1/2 4-1/2 First Quarter 7-3/4 6-3/4 Fourth Quarter 4-1/2 4-1/2 Second Quarter 8-1/4 4-1/8 1993: Third Quarter 9 6 First Quarter 4-7/8 4-1/2 Fourth Quarter 9 6-1/2 Second Quarter 5-1/8 4-7/8 1995: Third Quarter 6-3/4 5-1/8 First Quarter 8-1/4 6-1/2 Fourth Quarter 8-3/8 6-5/8 Second Quarter 7 4-1/2 Third Quarter 9-1/2 4 Fourth Quarter 8-3/4 6-5/8 1996: First Quarter 9-14 6-5/8
Warrants Units -------- ----- Year: Quarter High Bid Low High Low Bid ------------- -------- Bid Bid ------- --- --- 1992: Third Quarter 7/8 1/2 5-3/8 5 Fourth Quarter 13/16 3/4 5-1/4 5-1/8 1993: First Quarter 1 3/4 5-3/4 5-1/4 Second Quarter 1-1/8 7/8 6 5-3/4 Third Quarter 1-7/8 1 8-3/8 6-1/8 Fourth Quarter 4-1/4 1-3/4 12-1/4* 8-1/4* 1994: First Quarter 4 3-1/4 Second Quarter 2-13/16 1/2 Third Quarter 4 2-1/2 Fourth Quarter 3-3/8 3 1995: First Quarter 3-3/4 2 Second Quarter 2-1/2 1 Third Quarter 5-1/4 1 Fourth Quarter 3-5/8 1-7/8 1996: First Quarter 4-7/8 1-7/8
- ----------------------------------------- * Through October 25, 1993. 16 The closing bid price of OnGard Common Stock in the NASDAQ (Small-CapSM) system on June 24, 1996 was $5.25. The Company has never paid any cash dividends on its Common Stock and does not expect to pay any cash dividends in the foreseeable future. The Company intends to reinvest its earnings in the continues development and expansion of its business. 17 SELLING STOCKHOLDERS The following table provides certain information with respect to the persons offering the Shares pursuant to this prospecus (the "Selling Stockholders) including the transaction in which they acquired the Shares, their name, the number of issued Shares being offered, the number of Shares underlying warrants held by certain Selling Stockholders and the percentage of the outstanding common stock of the Company being offered by each Selling Stockholder if that amount equals 1% or more of the common stock outstanding.
TRANSACTION IN PERCENT OF WHICH SHARES RIGHTS TO COMMON STOCK SHARES/RIGHTS PRESENTLY ACQUIRE SHARES TO OWNED AFTER ISSUED NAME OWNED SHARES(8) BE OFFERED SALE(1) - ---------------------------------------------------------------------------------------------------------------------------------- July 1994 Private Northwest Holdings, Ltd. ------- 92,243 92,243 1.1% Placement Planate Business S.A. 71,429 ------- 71,429 --- William C. and Edna Bartlet 3,570 2,095 5,665 --- Patrick Bennett 42,856 25,156 68,012 --- Charles E. Bohmert Jr. 14,284 8,385 22,669 --- Richard M. and Patricia H. Clark 14,284 8,385 22,669 --- Robert A. Epstein 14,284 8,385 22,669 --- Robert A. Epstein Pension Plan 14,284 8,385 22,669 --- Charles T. Genovese 3,570 2,095 5,665 --- Herman Jeffer 57,142 33,542 90,684 1.1% Eng-Chye Low 57,140 33,541 90,681 1.1% Dennis Scott Mair 28,570 16,771 45,341 --- V.J. Melone Trust 28,570 16,771 45,341 --- Elliot S. and Lois Schlissel 14,306 8,398 22,704 --- Nicholas Veenstra 3,570 2,095 5,665 --- Neil Wager 3,570 2,095 5,665 --- Placement Agent's Unit Royce Investment Group Inc.(2) ------- 345,260 345,260 Purchase Option 4.5% Pharmetics Acquisition Royce Investment Group, Inc.(2) 16,000 ------- 16,000 Loan Guarantee John Pappajohn(3) ------- 580,740 580,740 7.2% Edgewater Private Equity Fund(3) ------- 112,040 112,040 8.1% October, 1994 Edgewater Private Equity Fund 253,292 287,471 540,763 Private Placement
18
TRANSACTION IN PERCENT OF WHICH SHARES RIGHTS TO COMMON STOCK SHARES/RIGHTS PRESENTLY ACQUIRE SHARES TO OWNED AFTER ISSUED NAME OWNED SHARES(8) BE OFFERED SALE(1) - ---------------------------------------------------------------------------------------------------------------------------------- October, 1994 Private Waal Investments, Ltd. Sold 141,060 141,060 1.7% Placement Lease Settlement EEC Corp. 22,700 10,000 32,700 --- September, 1995 Private Haussman Holdings(4) 456,000 ------- 456,000 5.7% Placement Montgomery Growth Partners (4) 64,000 ------- 64,000 2.5% Montgomery Growth Partners II (4) 140,000 ------- 140,000 Nosrob Investments 72,000 ------- 72,000 --- Quota Fund(4) 360,000 ------- 360,000 4.5% Montgomery Small Capital Partners 56,000 ------- 56,000 --- II(4) Oak Hall Investors, L.P. 71,500 ------- 71,500 1.8% Oak Hall Equity Fund 71,500 ------- 71,500 Okebena Partnership K 143,000 ------- 143,000 1.8% Bank of New York as Trustee 143,000 ------- 143,000 1.8% Joe Riccardo 40,000 ------- 40,000 --- Steve Frank 20,000 ------- 20,000 --- Anthony Pace 29,000 ------- 29,000 --- Scott Shevick 14,500 ------- 14,500 --- Jerry Callaghan 40,000 ------- 40,000 --- Thomas Kearns(5) 50,000 ------- 50,000 --- Oscar Schafer 14,500 ------- 14,500 --- Lawrence Kohn 14,500 ------- 14,500 --- Peter Riccardo 4,000 ------- 4,000 --- Frank Morris 10,000 ------- 10,000 ---
19
TRANSACTION IN PERCENT OF WHICH SHARES RIGHTS TO COMMON STOCK SHARES/RIGHTS PRESENTLY ACQUIRE SHARES TO OWNED AFTER ISSUED NAME OWNED SHARES(8) BE OFFERED SALE(1) - ---------------------------------------------------------------------------------------------------------------------------------- September, 1995 H. Michael Weaver 15,000 ------- 15,000 --- Private Placement Paul Rizzo(6) 20,000 ------- 20,000 --- Stuart Bondurant & Susan Ehringhaus 5,000 ------- 5,000 --- Leonard Weiss 27,500 ------- 27,500 --- Eric Steiner(7) 14,500 ------- 14,500 --- Domenick Treschitta(6) 29,000 ------- 29,000 --- Barbara Treschita 10,000 ------- 10,000 --- D. Ware Branch, M.D. 8,500 ------- 8,500 --- Gregg and Sallee Middlekauff 7,142 ------- 7,142 --- Ronald Katz, M.D. 7,150 ------- 7,150 --- Michael R. Barr 7,000 ------- 7,000 --- Courtney Brown 7,000 ------- 7,000 --- Dennis LaValle 10,000 ------- 10,000 --- David Cohn 7,000 ------- 7,000 --- Frank Eagan 20,000 ------- 20,000 --- JAM Enterprises 29,000 ------- 29,000 --- Frisian Holdings, Ltd.(9) 71,428 ------- 71,428 --- Herb Lyman 7,000 ------- 7,000 --- Peter Salas 7,000 ------- 7,000 --- George Wood 8,925 ------- 8,925 --- Jerry Armstrong 8,925 ------- 8,925 --- Ray Brownlie 8,925 ------- 8,925 --- James Wallace 8,925 ------- 8,925 ---
20
TRANSACTION IN PERCENT OF WHICH SHARES RIGHTS TO COMMON STOCK SHARES/RIGHTS PRESENTLY ACQUIRE SHARES TO OWNED AFTER ISSUED NAME OWNED SHARES(8) BE OFFERED SALE(1) - ---------------------------------------------------------------------------------------------------------------------------------- September, 1995 John Mack 28,600 ------- 28,600 --- Private Placement Priscilla Perez 3,000 ------- 3,000 --- Abbey Herman 14,000 ------- 14,000 --- Other Akin Gump 12,500 ------- 12,500 --- Lou Wertman 2,105 ------- 2,105 --- Eric Steiner 10,268 ------- 10,268 ---
(1) Assumes exercise of all warrants. Presented for all share ownership which would comprise 1% or more of the Company's outstanding common stock. (2) Royce Investment Group, Inc. was (a) underwriter of the Company's initial public offering in August, 1992, (b) placement agent for the Company's April and July 1994 private placement, (c) investment banker with respect to the Company's acquisition of Pharmetics, and (d) receives fees with respect to the exercise of the Company's warrants issued in its August, 1992 public offering. (3) John Pappajohn and Edgewater Private Equity Fund have guaranteed certain bank debt of the Company. See "RISK FACTORS -- Outstanding Warrants -- Guarantors' Warrants." (4) Haussman Holdings, Montgomery Growth Partners, Montgomery Growth Partners II, Nosrob Investments, Quota Fund and Montgomery Small Capital Partners II are under the control of Montgomery Asset Management, L.P. See "PRINCIPAL SHAREHOLDERS." (5) Thomas Kearns has served as a director of the Company since December, 1995. See "MANAGEMENT." (6) Paul Rizzo and Domenick Treschitta are consultants to the Company and have been nominated to become directors of the Company if elected by the Company's stockholders at the Company's annual meeting to be held in July, 1996. (7) Eric Steiner is a co-founder of the Company, has served as a director of the Company since its inception and is a principal stockholder. See "MANAGEMENT" and "PRINCIPAL SHAREHOLDERS." (8) Reflects the adjusted number of shares into which the rights to acquire shares would be converted. These rights, when granted, provided for a dilution projection provision which had been triggered by the Company's various financial transactions. (9) Includes principals of Royce Investment Group; see note 2 above. 21 PLAN OF DISTRIBUTION The Shares are being offered by the Selling Stockholders from time to time on the NASDAQ (Small-Cap-SM-) system, in privately negotiated transacations or on other markets. Any Shares sold in brokerage transactions will involve customary broker's commissions. No underwriter will participate in any sales on behalf of the Selling Stockholders. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL SALES, MARKET DEVELOPMENT AND MAJOR CUSTOMERS Since the formation of the Company's predecessor in December 1988, the Company has been engaged in developing products and market positions for the control of infectious diseases. It has recently expanded its disposable supplies business to include equipment lines. During 1992, concurrent with the publication of OSHA's Bloodborne Pathogen Rule which increased awareness of regulatory control of contaminated medical instruments, the Company successfully negotiated medical waste mail-back product sales to Caremark and Quantum Health Resources, which are primarily engaged in the service of home care patients. Revenues attributable to Caremark and Quantum for the year ended December 31, 1994 were $508,000 and $100,000 respectively. Caremark would be characterized as a major customer constituting 13% of the Company's total sales in 1994. In January, 1995, Coram Inc. purchased a division of Caremark, resulting in sales to both Coram Inc. and Caremark Therapeutic, Inc. For the year ended December 31, 1995, sales to Caremark, Coram and Quantum were $398,000, $165,000 and $134,000, respectively. A customer group list was purchased by OnGard from ProMed Sharps in December 1992. During the year ended December 31, 1995, sales to ProMed customers were approximately $240,000. In February 1993, the Company and Sherwood entered into a five-year Supply, Distribution and Licensing Agreement ("Sherwood Agreement") which gives OnGard's medical waste mail-back products access to Sherwood's extensive distribution system. The exclusive arrangement has since terminated in the third quarter of 1995. For the year ended December 31, 1994, the Company's revenues attributable to the Sherwood Agreement were approximately $356,000. While no longer a major customer, Sherwood represented $99,000 of the Company's sales for the year ended December 31, 1995. The Company also continues to expand its direct selling capabilities. With the acquisition of MDPI in 1993 and OST in late 1994, the Company emphasized a direct sales approach. It expanded its sales staff with experienced personnel in both the packaging and equipment lines to expand its market position. Boston Scientific, a sterile packaging customer, has been a major customer representing 16% of the Company's total sales in 1994. OST had one customer, Omni Construction, which accounted for 12% of the Company's revenues in 1994. On November 3, 1995 the Company announced it had signed a letter of intent with Oliver Products of Grand Rapids, Michigan for the sale of its medical device packaging business. This transaction closed on December 7, 1995. The sale included production equipment and inventory with proceeds from the sale aggregating $620,500. The gain on the sale was approximately $233,000. The Company retained all related accounts receivable. Accordingly, Boston Scientific will no longer be a major customer. Revenues from Boston Scientific approximated $512,000 in 1995. However, net profitability from this and other packaging line accounts was nominal after accounting for direct selling expenses and allocation of general and administrative expense. Accordingly, the Company believes the loss of this customer will have no impact on the results of operations and capital resources PRODUCT LINE EXPANSION During 1990, substantially all of the Company's revenues came from the sale of the Recapper and related products. The Recapper is a device which allows clinicians to separate used needles from re-usable syringes without directly touching the needle. During 1991 and 1992, the Company expanded its product line into the medical waste mail-back business. During 1993, the Company experienced significant revenue growth due to the addition of its medical sterile packaging products. Growth in this market is attributable largely to the Company's acquisition of the assets of MDPI described elsewhere herein. Medical sterile packaging products were manufactured to customer specifications and are sold to a variety of medical device manufacturers. In June 1993, the Company relocated its operations to a larger facility that includes a "white room" for the manufacturing of sterile medical packaging. The Company made a significant investment in this new facility and equipment. Revenues attributable to sterile medical packaging business for the year ended December 31, 1993, 1994, and 1995 were $1,715,000, $1,813,000 and $1,905,000 respectively. 23 However, in connection with the relocation and expansion of manufacturing in Denver during 1993, additional shipping costs were incurred for late fees and gross margins were weakened as the Company incurred start-up costs associated with the production process. From 1992 through 1994, the Company made progress in the development of the AutoPak-TM- line of sterile pouches. The Company received approval on its 510(k) notices with the FDA in December 1994 and has completed clinical trials. Commercialization is commencing now with direct selling to hospitals. The Company believes that the acquisition of OST will significantly add to its ability to market comprehensive sterilization supplies and infection control products. The Company has completed its development of a hospital medical waste processing system, WasteClave and a tabletop sterilizer, HiVac, for use in operating rooms, laboratories and other clinical environments. Sales efforts for these products recently commenced. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items from OnGard's Statements of Operations expressed as percentages of revenues:
Year Ended Three Months December 31 Ended March 31 ----------- -------------- 1995 1994 1996 1995 ---- ---- ---- ---- Revenues................................ 100.0 % 100.0 % 100.0 % 100.0 % Costs of Sales.......................... 106.3 88.4 121.9 107.4 ------- ------- ------- ------ Operating Margin.(deficit).............. (6.3) 11.6 (21.9) (7.4) ------- ------- ------- ------ Operating Expenses...................... General and Administrative.............. 87.3 62.1 120.8 48.3 Write down of note receivable........... -- 71.0 -- -- Sales and Marketing..................... 29.5 14.5 58.5 19.4 Depreciation and Amortization........... 6.2 3.8 10.2 6.0 Research and Development................ 7.4 5.7 9.4 10.2 ------- ------- ------- ------ Total................................... 130.4 198.9 83.9 ------- ------- ------- ------ Loss from Operations.................... (136.7) (145.5) (220.8) (91.3) Interest and Other Expense.............. (11.5) (6.1) (27.3) (6.5) Interest and Other Income............... 5.6 1.7 5.9 .5 Forgiveness of Debt..................... 2.1 -- -- -- ------- ------- ------- ------ Net Loss................................ (138.3) % (149.9) % (242.2) % (97.3) % ------- ------- ------- ------ ------- ------- ------- ------
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995 Revenues for the three months ended March 31, 1996 decreased $564,000 or 44%, to $728,000 from $1,292,000 in the same period in 1995. The decrease is primarily attributable to the sale of selected assets of the packaging business, in December 1995, which no longer fit with the Company's long-term strategic plans. Packaging revenues in the first quarter 1995 were $438,000; there were only $20,000 of such revenues in the comparable quarter in 1996. The remaining decrease of $146,000 in sales occurred in the equipment line; sufficient open orders were in place to meet or exceed prior years sales but start-up issues with new production equipment impeded such shipments. Operating margin decreased to a deficit of $160,000 (a deficit of 21.9% of revenues) for the three months ended March 31, 1996 compared to a decifit of $96,000 (7.4% of revenues) for the same period in 1995. The decrease in margin resulted from production start-up costs associated with relocating Autopak 24 operations to the New York facility, and related internal restructuring costs, totalling $77,000. Revenues, however, were insufficient to offset fixed factory overhead resulting in an operating margin deficiency. General and administrative expenses increased $255,000, or 41%, from $624,000 to $879,000 for the respective three month periods ended March 31, 1995 and 1996. Of this increase, $135,000 is attributable to non-cash charges for deferred compensation expense resulting from stock options granted to certain officers and directors; approximately $60,000 is attributable to payroll, and approximately $56,000 for travel and relocation expenses. Sales and marketing expenses increased by 70% to $426,000 in the three months ended March 31, 1996 versus $251,000 in the comparable period in 1995. The Company has increased its direct selling efforts, including manpower and collateral materials, in both its equipment and Autopak product lines. Research and development expenses decreased $63,000 to $68,000 from $131,000, a 48% decrease, from the first quarter ended March 31, 1995 to the comparable quarter in 1996. The decrease relates to the completion of Autopak development ($31,000), and scaling down the development of the Company's tabletop sterilizer ($32,000), as it reached commercialization. Interest expense increased $102,000 to $186,000 for the three months ended March 31, 1996 from $84,000 in the comparable period in 1995, or 121.4%. This results from increased indebtedness on the Company's bank line (the note was increased $1.0 million in April/May 1995) accounting for $27,000 and amortization of debt issuance costs accounting for $75,000. The notes were due on April 15, 1996 and were paid in full at that time. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994. Revenues for the twelve months ended December 31, 1995 increased 27% to $4,975,000 from $3,928,000 in the same period in 1994, or $1,047,000. The increase was attributable to sales from the Company's equipment line, OST, which was consolidated in the Company's operating results for the entire year in 1995, but only for the last quarter of 1994. Operating margin decreased to a deficit of $311,289 (a deficit of 6.3% of revenues) for the year ended December 31, 1995 compared to $457,636 (11.6% of revenues) for the same period in 1994. The gross margin deficiency at the Company's acquired equipment business line, OST, comprised $332,518 of the deficit. This was the result of (1) a lack of financial resources for nearly 9 months during 1995 in which fixed factory overhead was incurred and charged to operations without substantive revenue generation and, (2) upon availability of funds, a significant allocation of production man hours was applied to the development of two new proprietary products, a tabletop sterilizer called HIVAC, and a hospital autoclave, called WasteClave. As a result, shipments of revenue generating products were reduced and insufficient to offset fixed factory overhead. At the Company's disposable product line the operating margin was a positive $21,231. This amount decreased due to unfavorable material and labor usage inefficiencies related to the sterile medical packaging line selected assets of which were sold in December 1995. The Company believes that revenue levels should be sufficient in the later half of calendar year 1996 to provide positive operating margins. Through that date it will fund margin deficiencies and losses with existing funds from its September 1995 Private Placement, and with funds from warrant exercises. General and administrative expenses increased 78% to $4,339,822 (81% of revenues) for the year ended December 31, 1995 from $2,440,935 (62% of revenues) for the 1994 period. The increase is entirely attributable to a non- cash charge for compensation expense related to fully vested, stock option grants at prices less than market value, totaling $1,700,000. Other than this, the administrative expenses at OST increased $513,000 due to a full year of inclusion in 1995 versus one quarter in 1994 after the date of the acquisition; remaining expenses decreased $426,000. 25 Sales and marketing expenses increased 159% from $568,488 in 1994 to $1,468,319 for the year ended December 31, 1995. Of this increase $663,000 was incurred at OST. This, and the remaining increase of $237,000 relates to the Company's efforts to sell directly to its existing customers as well as the development of new customers in conjunction with commercializing its new products, AutoPak, HiVac and WasteClave (see "Business-Products Under Development and Commercialization Activities"). The Company believes its sales and marketing expenses will continue to increase during 1996 while it establishes its sales personnel complement and marketing for this effort. Depreciation and amortization increased from $150,930 to $307,813 for the year ended December 31, 1994 and 1995 respectively or 104%. Approximately $96,000 is attributable to a full year of amortization of goodwill associated with the acquisition of OST versus one quarter in 1994, and the purchase of an updated computer equipment network and software, $60,000. Research and development increased from $223,652 to $369,858 for the year ended December 31, 1994 and 1995 respectively, or 65%. New equipment products being or already developed at OST, accounted for an increase of approximately $221,000. These products include HiVac and WasteClave described above. R&D expenses for disposable products, specifically AutoPak, declined $75,000 resulting from the completion of development of initial product sizes. Interest expense increased as a result of interest and debt issuance cost amortization related to the Company's term loans. The Company obtained a $1.5 million term loan facilitated by a third party guarantor ($764,000 outstanding at December 31, 1995). The total was received in two equal parts in May and November 1994. The loan bears interest at the prime rate plus 2%. The loan calls for monthly payments based on a 36 month amortization schedule with a balloon payment due in April 1996. In April and May 1995, the loan was increased by a total of $1.0 million under similar terms, with the principal portion of the loan is due concurrently with the balloon payment of the original loan in April 1996. The Company granted an additional 200,000 warrants to guarantors of the Company's loan which resulted in debt issuance costs. On December 24, 1995 the Board of Directors granted 700,000 stock options (600,000 at $3.50 and 100,000 at $1.00) to certain officers, directors and consultants of the Company. In the fourth quarter of 1995 the Company recorded compensation expense of $1,700,000 related to fully vested options for an amount representing the difference between the exercise price and fair market value of OnGard common stock on the date of the grant. The Company also recorded deferred compensation expense of $1,087,500 for options which vest ratably over two years, which will be charged to operations over that time. The price of OnGard's common stock at the date of the grant was $7 1/8. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 Revenues for the year ended December 31, 1994 increased 36.1% to $3,928,345 from $2,885,433 in the same period in 1993. The merger with Pharmetics on October 1, 1994, now representing the Company's equipment product line, resulted in increased sales of $954,272 (91.5% of the increase) which occurred in its entirety during the fourth quarter 1994. The remaining increase is due to an increase in sales relating to the sterile packaging line of approximately $112,000. Gross margin increased 5.9% to $457,636 (11.6% of revenues) for the year ended December 31, 1994 compared to $432,292 (15.0% of revenues) for the same period in 1993. The dollar increase results from higher revenues during the period. The decrease, as a percentage of revenues represents a decrease in gross margin for the sterile packaging line. The gross margin for the container line remained relatively unchanged. General and administrative expenses for the year ended December 31,1994 increased 17.1% to $2,440,935 (62.1% of revenues) compared to $2,084,381 (72.2% of revenues) for the same period in 1993. The decrease as a percentage of revenues is due to increased sales during 1994. The dollar increase of approximately $356,000, is attributable to the administrative expenses of Pharmetics which incurred approximately $220,000 during the fourth quarter. The remaining increase relates to the Denver facility for non-cash charges associated with compensation expense for stock option grants. 26 Sales and marketing expenses increased 358.3% to $568,488 (14.5% of revenues) from $124,051 (4.3% of revenues) for the year ended December 31, 1994 and 1993 respectively. The increase is related to selling expenses of the Company's equipment product line during the fourth quarter of 1994 and increased direct selling efforts on disposable product lines. During 1994, the Company initiated an evaluation of the fair value of its investment in OST. The aggregation of advances to OST which became part of OnGard's investment, coupled with the shares of OnGard Common stock issued in connection with the acquisition, substantially exceeded the Company's expectation of the fair value of OnGard's investment in OST. Accordingly, during the third quarter of 1994 OnGard charged off $801,824. During the fourth quarter, the Company continued the analysis of its investment. Because the funding needs of Pharmetics had escalated, based not only on current operating requirements but also for significant payments on past due trade credit, the Company's aggregate acquisition investment was indeterminate until the fourth quarter. Further, OST's financial condition, which had deteriorated considerably in the first three quarters of 1994, had also impacted the market position of its traditional product line, weakening near-term sales expectations. This also became evident late in the fourth quarter. Accordingly, the Company believed an impairment adjustment to the value of its investment was appropriate. In its determination of the impairment, the Company forecasted future sales, earnings, and annual working capital requirements, and discounted the cash flows of its acquired equipment business. The Company projected approximately 25% revenue growth for the period 1996 through the year 2000. It also projected increased gross margins, over this time horizon, from OST's traditional levels of 30% to 44%. This increase is the result of a greater concentration on higher margin custom and proprietary products which are now the focus of direct selling efforts. In addition, margins may be enhanced by the allocation of semi-fixed factory overhead expenses to a greater number of units sold. The projected cash flows were discounted at the rate of approximately 30%. The Company also believes that the new equipment business line which OnGard has directed OST to develop, coupled with a more intensive and updated marketing program will have a beneficial effect during 1995. However, in conjunction with establishing its investment in OST at the date of acquisition, the Company wrote off $801,824 and $1,988,561 in the third and fourth quarters of 1994, respectively. There were no corresponding charges in 1993. Research and development expenses increased 397.5% to $223,652 (5.7% of revenues) in 1994 from $44,953 (1.6% of revenues) in 1993. This is due, in part, to increased expenses as the Company finalized production and material requirements for AutoPak, the Company's proprietary sterile packaging product. The Company received 510K approval from the FDA in December, 1994. In addition, the Company began expanding the equipment product line of OST and has been engaged in the development process of two new products, a tabletop sterilizer, called Hi-Vac, and a hospital autoclave, called Waste Clave. The Company received orders for Hi-Vac in April, 1995 and began installation of the first Waste Clave in the first quarter 1995. Interest expense increased 1746.8% to $215,121 in 1994 compared to $11,648 in 1993. The increase is primarily the result of interest and amortization of debt issuance costs related to the guaranteed $1.5 million bank loan. The Company also incurred interest charges and debt discount totaling $22,500 related to the issuance of convertible debentures. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital at March 31, 1996 increased to $4,627,000 from $1,974,000 at December 31, 1995. Cash and cash equivalents were $5,803,000 at March 31, 1996 versus $3,693,000 at December 31, 1995. Accounts receivable increased $17,000 to $673,000 at March 31, 1996 from $656,000 at December 31, 1995. Inventory increased $ 325,000 to $1,807,000 at March 31, 1996 from $1,482,000 at December 31, 1995. The Company had an accumulated deficit of $19,753,000 at March 31, 1996 and expects losses to continue at least through much of 1996. Cash requirements to fund operating losses have been accomplished primarily through equity and debt placements. Operating losses have accelerated since 1994 as a result of funding the Company's acquired subsidiary, OST, both prior to and after the acquisition, as well as 27 expenditures to complete development of its new products Autopak, HiVac, and WasteClave. The Company invested $1,883,824 in OST prior to its acquisition, and issued 359,602 shares to acquire 100% of the outstanding shares of Pharmetics. Subsequent to the date of its acquisition of OST and through December 31, 1995, a fourteen month period, the Company has applied an additional $2,890,100 which has been used substantially to fund OST's operating requirements. The operating requirements included the repayment of past due trade credit, operating losses and, importantly, the development of two new sterilization products: HiVac, a tabletop steam sterilizer and WasteClave, a highly efficient hospital autoclave. The Company's new products, which are proprietary, should generate better gross margins than the existing products and should improve operating results. The Company commenced selling these products in late 1995 but as it establishes a sales force and marketing programs during early 1996 such expenditures will increase causing continued losses until revenue growth is sufficient to offset losses. This is anticipated in the latter part of 1996. These losses and their financing have been the most significant aspect of the Company's cash flow. Successful completion of the Company's initial public offering in 1992 provided approximately $4.0 million to expand marketing efforts for the Company's initial product lines and continue product enhancement and expansion. However, as working capital at December 31, 1994 amounted to a deficit of $1,032,000, it became necessary for the Company to obtain additional funds. In order to align its capital structure and working capital deficiency, on September 29, 1995, the Company completed a private placement (the "September 1995 Private Placement") of the sale of 2,204,021 shares of the Company's common stock at a price of $3.50 per share aggregating gross proceeds of $7,714,028 and net proceeds of $7,634,028. The September 1995 Private Placement requires that the Company register such Common Shares issued in this placement six months after the closing date, by March 29, 1996. Pursuant to the September 1995 Private Placement, the Company also sold 100 shares of its Series B Redeemable Preferred Limited Voting Stock (the "Series B preferred stock"). Provided that the holders of the Series B preferred stock own in the aggregate at least 5% of the Company's Common Stock, the holders of the Series B preferred stock can nominate and elect one member to the Company's Board of Directors. The Company had also obtained additional funding prior to the September 1995 Private Placement to finance operating losses. During July 1994, the Company completed a Private Placement and an offshore offering of 300,000 units consisting of two shares of common stock and one warrant at $7 per unit. In addition, the Company obtained debt financing facilitated by a third-party Guarantor. A total of $1.5 million was completed in two equal parts; the later half was contingent upon the Pharmetics merger which was consummated effective October 1, 1994. The Note is secured by the Company's inventory, equipment, accounts receivable and intangible assets. In consideration for the $1.5 million guarantee, the Company issued to the Guarantor or its assigns a five- year warrant ("Guarantor's Warrant") to purchase 400,000 shares of Company Common Stock at an exercise price of $4.00 per share. The Note payable to the bank ($622,000 outstanding at March 31, 1996) called for monthly payments at an interest rate of prime plus 2% based upon a 36-month payment schedule and a balloon payment at the end of one and one-half years (April 1996). The Company repaid the loan through existing cash on the due date and is currently seeking other lending sources to provide a working capital facility. During 1994, the Company also initiated a private offering of Convertible Debentures ("Debentures") each unit of which consists of $100,000 in 6% Convertible Debentures and 25,000 redeemable class B common stock warrants to acquire an equivalent number of common shares at $6.00 per share. The Debentures were convertible into shares of the Company's common stock at the option of the holder or into shares of the Company's Series A Convertible Preferred Stock ("Series A Preferred Stock") at the option of the Company, when such Series A Preferred Stock were approved by the Company's Shareholders. Debenture conversion was to be based on a conversion ratio of 25,000 shares for each $100,000 Debenture converted, or $4.00 per share. In January 1995, the Company's shareholders approved, by a majority vote, the authorization of preferred stock. As a result, the total $1.5 million raised from the offering through February 1995 became equity and the Company issued 375,000 Series A preferred shares and 375,000 Class B common stock warrants. 28 In addition, during February 1995 the Company sold shares, through the exercise of Class A warrants from existing warrant holders, totaling $320,000 in gross proceeds. The Company provided an incentive to Class A warrant holders by reducing the exercise price to $4.50 for a period of 30 days. In April and May, 1995, the guarantor of the Company's bank line (described above) and another investor in OnGard facilitated $1,000,000 of additional bank borrowings. The two new $500,000 notes bear interest at the rate of 11% per annum and mature on April 15, 1996. The three notes were paid in full at maturity. An additional 200,000 warrants were provided to the guarantors in exchange for their guarantees. Such warrants were issued under the same terms as the 400,000 warrants described above. In addition, the Company also obtained funds through the exercise of outstanding Common Stock Purchase Warrants. These warrants were to expire on August 15, 1995, but were initially extended until December 31, 1995 and thereafter until March 29, 1996 and April 30, 1996. Through the exercise of Common Stock Purchase Warrants, the Company generated $4.6 million in gross proceeds through March 31, and through the expiration date of the Common Stock Purchase Warrants, April 30, 1996, had received, or had stock subscriptions receivable, totalling $6.0 million in gross proceeds. Although the Company has been successful to date in obtaining sources of financing sufficient to meet current trade obligations and other expenses and to enable it to pursue its business plans generally, there is no assurance it will be successful in this regard in the future. Furthermore, there can be no assurance that the Company will be successful in securing other funds or, that if successful, such funds will be adequate to fund the Company's operations until it is able to generate cash from operations sufficient to sustain its ongoing operations without additional external sources of capital. 29 BUSINESS INFECTION CONTROL MARKET The Company's infection control activities are divided into three primary components. The first component includes medical waste services and products. The Company's medical waste product line allows for comprehensive product and service offerings within non-hospital, clinical markets. See "--Medical Waste Services." The second component previously consisted of sterile medical packaging, which is designed and manufactured for medical device manufacturers. Sterilization medical packaging is used to contain new, unused medical devices during the sterilization process and maintain sterility during transport and presentation. These products were primarily sold under private label. Sterile medical packaging is constructed on specially designed machines that are capable of handling multiple webs and completing sealing operations through the application of heat and adhesives. The Company acquired substantially all of the assets of MDPI, a Pennsylvania corporation engaged in the design, production and distribution of sterile medical packaging. A number of customers of MDPI became customers of the Company. Customers include Boston Scientific, U.S. Surgical, Symbiosis and Baxter HealthCare. The Company announced on November 3, 1995 it had signed a letter of intent to sell its medical packaging line to Oliver Products of Grand Rapids, Michigan. A definitive agreement was completed on December 7, 1995. The Company intends to focus its efforts on sterilization supplies and equipment, described below. The third component of the infection control market consists of sterilization supplies and equipment. Sterilization involves the complete elimination or destruction of all forms of microbial life, including high numbers of bacterial spores. Sterilization is required for those instruments or devices that penetrate skin or contact normally sterile areas of the body. Through its acquisition of Pharmetics, now OST, the Company manufacturers and markets a complete line of institutional and pharmaceutical grade sterilizers, washers and dryers. Sterilization supplies may include containers, wraps and pouches and indicators and monitors which indicate that the sterilization process has been completed. Sterilization supplies are primarily utilized by hospital and clinical facilities during the reprocessing of reusable instrumentation. Sterilization equipment may be used by hospitals in the sterilization process for reusable instrumentation or for the sterilization of materials prior to the disposal of medical waste, and by pharmaceutical companies. The Company has developed three proprietary products AutoPak, HiVac, and WasteClave, which it has begun to commercialize. These products and the markets they serve are central to the Company's marketing efforts. See "Business--Products Under Development and Commercialization Activities". MEDICAL WASTE SERVICES Non-hospital, small quantity generators produce significantly less medical waste than large quantity hospital-based generators but pay a higher cost per pound of waste. Several states have recently increased efforts to regulate home bound and consumer generated medical waste. The Company introduced a consumer version of its mail-back product during the fourth quarter of 1993. See "-- SMALL QUANTITY GENERATORS." Currently, nearly all states regulate the disposal of medical waste. Some states regulate the disposal of medical waste generated in the home environment, and some local governments are responding to pressure to remove this waste from municipal disposal systems. The Company's integrated medical waste handling systems are designed to fit the specific needs of small quantity generators. The handling of medical waste in health care facilities is primarily regulated by the Occupational Health and Safety Administration ("OSHA"), although other federal, state and local regulation may apply. The Company's primary market for medical waste disposal services consists of physicians, dentists and other non-hospital health care facilities that generate relatively small quantities of regulated medical waste. 30 The Company utilizes the U.S. Postal Service to allow its customers to ship contained medical waste from any location to the Company's contracted incineration facilities. The Company believes that the U.S. Postal Service is an effective means of providing nationwide transportation for the Company's medical waste systems. The Company's medical waste disposal solutions incorporate proprietary packaging designs that meet or exceed stringent Postal Service regulations regarding the transport of medical waste. The Company's medical mail-back products are authorized for transport by the Postal Service under U.S. Postal Code number 39 CFR, Part III, and all OnGard mail-back medical waste kits indicate OnGard's Postal Approval Code numbers, U.S.P.S.-002 A-F. See " --MAIL-BACK SYSTEM." The Company has provided training and support to employees at the Nashville Post Office, which is the primary destination for the Company's mail-back system. In addition, the Company has worked with airline personnel who handle OnGard's products at selected baggage facilities. On February 23, 1993, the Company and Sherwood, a subsidiary of American Home Products Corporation, entered into a five year supply, distribution and licensing agreement (the "Sherwood Agreement"). Sales of the Company's products to medical distributors were accomplished through the Sherwood contract. However, the Company and Sherwood were continuously revising the existing agreement in instances where the parties agree that a direct selling approach by the Company was appropriate. Ultimately, the exclusive relationship was terminated during the third quarter of 1995. Loss of the Sherwood contract will require the Company to modestly increase its expenditures in sales and to make direct arrangements with the distribution channels. This process began in the third quarter 1995. MARKETS The Company's initial product was the OnGard Recapper, a patented device offering a mechanical alternative to unprotected handling of contaminated needles. Prior to the Company's entering into the Sherwood Agreement, purchasers of the Recapper and mail-back products included large dental product distributors, such as Sullivan Dental Products, Inc. and Patterson Dental Co., as well as large catalog distributors such as Henry Schein and Darby Dental Supply. The Company will approach some of these distributors again. Sherwood sales efforts began in March 1993. The first shipment of the Company's products to Sherwood pursuant to the Sherwood Agreement occurred in April 1993. For the years ended December 31, 1994 and 1995, the Company's revenues attributable to the Sherwood Agreement were approximately $356,000 and $99,000, respectively. None were recorded during the first quarter ended March 31, 1996. In January 1993, the Company acquired the customer list of PRO-MED SHARPS ("PRO-MED"), formerly a seller of medical waste mail-back kits within the dental and physician office markets. PRO-MED discontinued sale of its mail-back medical waste products. For a one time payment of $20,000, the Company acquired the exclusive use of the PRO-MED mailing list and the support of PRO-MED personnel in converting PRO-MED's customers to the Company's product lines. Many PRO-MED customers are now being served by the Company on a direct basis and through automatic reorder systems. For the years ended December 31, 1994 and 1995, sales to PRO-MED and other direct customers were $197,000 and $240,000, respectively and approximately $50,000 for the first quarter ended March 31, 1996. The Company also continues to serve the home health care market. The Company has a private label relationship with Quantum Health Resources, a national home infusion company that specializes in hemophilia care. The Company also has an agreement to provide disposable containers and mail-back services to Caremark Inc., a leading provider of home care services throughout the United States. In January, 1995 Coram, Inc. purchased a division of Caremark, Inc., resulting in sales to Coram, Inc. and Caremark Therapeutic, Inc. During the year ended December 31, 1995 and for the first quarter ended March 31, 1996, approximate sales attributable to Caremark, Coram and Quantum totaled $398,000, $165,000, and $134,000, and $109,000, $75,000, $26,000, respectively. As a result of the purchase by Coram, Inc. of the Caremark division, Caremark Therapeutic, Inc., neither Coram nor Caremark individually reached sales levels which would constitute a major customer, i.e., exceeding 10% of the Company's 1995 sales. 31 In addition to the markets described above, there are a significant number of insulin dependent diabetics in the United States who use and dispose of contaminated needles and syringes. In 1992, Florida began to regulate disposal of diabetic-used syringes. The Company believes that this market can best be addressed through sales efforts directed at the retail pharmacy level to coincide with insulin and syringe sales. SMALL QUANTITY GENERATORS The Company's waste disposal system is especially suited for small quantity medical waste generators, many of whom are subject to some form of regulation with respect to their waste disposal practices. Small quantity medical waste generators are generally considered to be those medical facilities that produce less than 25 pounds per month of regulated medical waste. INCINERATION CONTRACT The Company has a long-term contract for incineration services with National Medical Waste, Inc. The facility involved is operated by BioMedical Waste, a national operator of medical waste incinerators and medical hauling systems. BioMedical Waste is headquartered in Boston, Massachusetts and operates a medical waste incinerator in Nashville, Tennessee that is utilized for destruction of medical waste generated by OnGard customers. In 1992, the Company entered into a five-year contract with National Medical Waste, Inc., a subsidiary of BioMedical Waste, for incineration services which required the Company to pay a one time fee of $50,000 for prepaid incineration. National Medical Waste had incurred recurring operating losses and experienced a working capital deficiency that raised substantial doubts about its ability to continue as a going concern. If the Company was unable to continue shipping medical waste to its present incineration, the Company would have to contract for comparable services on substantially equivalent terms with another party. National Medical Waste merged into BioMedical Waste, which subsequently filed for protection pursuant to Chapter 11 of the U.S. Bankruptcy Code. BioMedical Waste provides pick-up service at the U.S. Postal Service destination points, audits the waste and inputs and maintains the records required by the Company. This arrangement is designed to assure the Company that transported medical waste is destroyed in compliance with applicable environmental and other regulations. The Company has recently negotiated a new waste disposal contract with a division of Waste Management, Inc. in Chandler, Arizona which provides all of these services. New orders for mail-back products will dispose their waste at this facility. The costs under this agreement are substantially lower than the National Medical Waste contract. However, as the Company has mail-back products, previously sold, with mailing labels addressed to National Medical Waste, it will continue to utilize that facility until outstanding products have been delivered for disposal. MAIL-BACK SYSTEM The Company's mail-back products comprise a fully prepaid system that allows the user to collect and dispose economically of medical waste in compliance with applicable regulations. For one price, the customer receives disposable containers, packaging, tracking services, transportation and incineration. An integral, four-part tracking form allows tracking from generator to incinerator. The entire package is burned without being opened by the incinerator personnel. The system uses the Company's proprietary redundant packaging concept, which incorporates two corrugated fiberboard packages with an intervening plastic liner to enclose the waste container, containing liquid-activated absorbent material. The system is self-sealing; it does not require any special equipment, skill or tape. The packaging meets or exceeds current postal regulation for integrity, strength and durability. This packaging must pass Department of Transportation tests mandated by the U.S. Postal Service, including a thirty-foot frozen drop, a five-foot drop of a thirteen pound spike and a three pounds per square inch pressurized leak-proof test. OnGard mail- back kits are available in special chemo-waste designated containers 32 as well as for sharps regulated medical waste. The Company has filed a patent application, which is pending, with respect to the mail-back system. STERILIZATION MEDICAL PACKAGING The following information is provided as an historic perspective. Effective November 3, 1995 the Company announced it had signed a letter of intent with Oliver Products of Grand Rapids, Michigan for the sale of its medical device packaging line. This transaction closed on December 7, 1995. Effective January 1, 1993, the Company, through a wholly owned subsidiary, OnGard Systems Packaging, Inc. ("OSP"), acquired substantially all of the assets of MDPI, a Pennsylvania corporation engaged in the design, production and distribution of sterile medical packaging. The acquisition was made pursuant to an asset purchase agreement among OSP, MDPI and Donald Marotta, President and sole shareholder of MDPI. The closing date of the acquisition was March 1, 1993 and the effective date was January 1, 1993. The total purchase price of approximately $675,000 included the issuance of 50,000 shares of Common Stock valued for purposes of the Agreement at $4.75 per share. The remaining $437,500 of the purchase price included the assumption of $205,000 of liabilities of MDPI. The assets acquired included, among other things, accounts receivable, inventory, patterns and dies, machinery and plant equipment, furniture and fixtures, cash and goodwill. MDPI used these assets in its business of designing, producing and distributing sterile medical packaging for the medical device industries. In addition, the Company entered into a three-year employment agreement with Mr. Marotta at an annual salary of $100,000, which was subsequently renegotiated into a consulting agreement at a daily rate of $385, subject to certain terms and conditions. Mr. Marotta agreed to a two-year noncompete agreement for an additional $100,000, all of which has been paid. The noncompete agreement is in effect for two years after the termination of the employment agreement. In connection with the sale of assets to Oliver, the noncompete agreement was canceled. The Company entered into a contract dated March 1, 1993 with SkyRun, Inc. ("SkyRun"), an affiliate of MDPI, for the construction by SkyRun of equipment for the manufacture of medical packaging pouches. This new equipment is suitable for the manufacture of the AutoPak' product line discussed below as well as other applications within the sterilization packaging field. See "-- Products Under Development." The Company has excluded this equipment from its sale to Oliver Products described above. The manufacturing contract is a "cost-plus" contract under which OnGard's ultimate payment obligation was $233,000. Although in September 1993 the Company accepted delivery of this machinery and is currently using it in its manufacturing operations, the Company is continuing to make improvements to the machinery. During the summer of 1993, the Company completed relocation of the former MDPI from Doylestown, Pennsylvania to Denver, Colorado. The packaging business formerly carried on by MDPI was operational in the Denver facility. PRODUCTS UNDER DEVELOPMENT AND COMMERCIALIZATION ACTIVITIES The Company has continued to develop sterilization supply and equipment product lines. The Company's ability to introduce sterilization supply product lines will be subject to the receipt of regulatory clearance from the FDA. See "--Regulations--THE FOOD AND DRUG ADMINISTRATION." There is no assurance as to when or if the FDA will give the Company regulatory clearance for all of the sterilization pouch products. In December 1994, the Company received clearance on AutoPak' , the central product of its sterilization supply line. The Company plans to offer a comprehensive product line which will include its AutoPak' product line, a variety of self-seal and heat-seal sterilization packages and an integrated sterilization indicator and monitor product line. The Company has entered into an exclusive marketing agreement with Baxter V. Mueller, a 33 division of Baxter Healthcare Corporation of Deerfield, Illinois. Baxter is a worldwide leader in the manufacture and marketing of health care products in 100 countries. Its V. Mueller division markets surgical instruments and surgical use products to healthcare companies and hospitals. The agreement also calls for other sterile packaging products developed by OnGard to be marketed exclusively by Baxter and for the two companies to address market opportunities in reprocessing of surgical instruments. The territory covers the United States and Canada. The Company will also sell equipment used in the sterilization process for either reprocessing reusable instruments or sterilization of medical waste prior to its disposal. The Company will elect to sell some of its sterilization equipment directly into the hospital market. WasteClave, the Company's product for the sterilization of hospital medical waste has been developed and shipped to three customers. Another proprietary product, a tabletop sterilizer called HIVAC, has been sold in limited quantities into the European markets. The market for sterilization supplies and equipment is primarily hospital based. There can be no assurance that the Company can compete effectively outside of its traditional market. OnGard has also developed, and continues to develop, product lines within the indicator, biological sterilization monitoring and sterilization equipment markets. These product lines, which include both proprietary and non-proprietary products, are expected to be introduced in 1996. The AutoPak System is a proprietary disposable, heavy duty large plastic/non-woven fabric pouch and a proprietary loading system for sterilization of large instrument trays and soft goods. The product is intended to compete in the markets served by central supply room wrap and reusable instrument tray containers. AutoPak's advantages include visual access, reduced storage space, decreased loading time and waste reduction. The loading system consists of a tray holder which will facilitate enclosure of the instrument tray within the AutoPak Pouch. The Company has filed for patent protection on the construction of the package and on the materials contained therein, but there is no assurance that such protection will be granted. To facilitate manufacture of AutoPak, new and proprietary materials were required and developed through a relationship between OnGard and American National Can Company ("American National Can"). In June 1993, the Company and American National Can entered into two letter agreements (the "Letter Agreements") which outlined the principal points of agreement between the parties. Although in the Letter Agreements the parties contemplate entering into a development agreement, there are no plans currently to do so. The parties have used the points of agreement in the Letter Agreements as the basis of their relationship. The Company has an exclusive right to purchase these proprietary materials from American National Can and American National Can has an exclusive right to supply these materials for the AutoPak' product line. In addition, American National Can has agreed to provide research and development advice for further OnGard product development. With respect to all of the products discussed above, there can be no assurance that regulatory clearances will be obtained (other than AutoPak, for which clearance has been received) or that any of them will be commercially successful. If AutoPak is not commercially viable, or if regulatory approvals for it were not obtained, marketing of many of the Company's other products may be adversely affected. ACQUISITION OF PHARMETICS Effective October 1, 1994, the Company acquired Pharmetics through OnGard Pharmetics, Inc. (now OST), a wholly owned subsidiary of the Company. The merger agreement provided for the issuance of one share of the Company's Common Stock for every twelve (12) shares of Pharmetics common stock and 200 shares of the Company's Common Stock for each share of Pharmetics preferred stock. Thus, based upon a closing price of OnGard of $8.125 and Pharmetics of $.50 on September 16, 1994, 3,103,225 outstanding shares of Pharmetics common stock with an aggregate value of $1,551,613 were exchanged for 258,602 shares of OnGard Common Stock with an aggregate value of $2,101,141 and 400 outstanding shares of Pharmetics preferred stock with an aggregate value of $400,000 were exchanged for 85,000 shares of OnGard Common Stock (which amount included an aggregate of 5,000 shares of Common Stock of OnGard paid to preferred stockholders of Pharmetics in lieu of accrued and unpaid dividends) with an aggregate value of 34 $690,625. In addition, Royce Investment Group was granted 16,000 shares of OnGard Common Stock with an aggregate value of $130,000. Theodore Shlisky, former President of Pharmetics, entered into an employment agreement with the Company in which he became an officer. OST, a Delaware corporation, is engaged in the business of designing, manufacturing and remanufacturing sterilization equipment, washers, dryers and associated instrumentation. OST's customers include pharmaceutical and medical device manufacturers, hospitals, clinics, physicians, diagnostic and research laboratories, and universities. OST offers service for its equipment, as well as for its competitors' equipment, in the form of preventive maintenance contracts and per diem arrangements. Pharmaceutical and medical device manufacturers use OST's sterilization equipment in their manufacturing process to reduce or eliminate the possibility that the products they produce will cause disease or complicate treatment. Hospitals, clinics, physicians, laboratories and universities use OST's sterilizers to render their instruments and apparatus biologically sterile so that their use by humans and animals will not transmit or induce illness. Hospitals can also use OST's sterilizers to sterilize medical waste before discarding. The predecessor of OST, Pharmetics, was organized in 1980 and initially operated as a manufacturers' representative for major brands of sterilization equipment. In 1982, Pharmetics commenced manufacturing sterilization equipment of its own design. During the latter part of 1987 and early part of 1988, Pharmetics expanded its product line and commenced the design and manufacture of washers and dryers. OST is marketing its washers and dryers to the same industries to which it sells its sterilizers. The washers cleanse with high temperature water pressure, agitation and detergents and are used by customers in washing items prior to sterilization or with items that require cleansing without sterilization. The dryers are used in conjunction with the washers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" for further information concerning OnGard Pharmetics. MANUFACTURING AND ENGINEERING OnGard currently operates a manufacturing and assembly facility in Hauppauge, New York. The New York facility houses machinery required for the production of AutoPak and other pouches and for OST's medical equipment products. OnGard also has a machine shop which is utilized to maintain and construct equipment as required. Materials and supplies for these products are available from several sources. On November 3, 1995 the Company announced it would close its Denver facility and consolidate facilities at its Hauppauge, New York operation on or about December 31, 1995. (See "Facilities"). In connection with the closing of the Denver facility, the Company incurred certain shipping and relocation costs, which were not material. OnGard designed, developed and owns the molds and tooling used for blow molding and injection molding the sharps containers sold as part of its mail- back line, and the tools used to manufacture the corrugated cardboard components of the waste disposal system. OnGard contracts with third parties for the manufacture of the molded plastic containers, corrugated fiberboard cartons and other components and thus is dependent on them for the manufacture of these products and components. OnGard assembles its mail-back products and ships finished, complete kits to customers. OnGard purchases raw materials for its AutoPak product line from a variety of sources. Principal suppliers include American National Can. A two month inventory of raw materials is generally kept on hand. As certain proprietary films are available only from ANC, the loss of supply from such sources could disrupt manufacturing operations. OnGard's proprietary packaging products are being developed and designed primarily by Mark Weiss, President; and Clay Cannady, Director, Sterility Assurance Products. OST fabricates pressure vessels and washer and dryer housings in-house. Other components and supplies are generally available from a variety of sources. Components are assembled at the OST facility located at 40 Commerce Drive, Hauppauge, New York 11788. 35 OST requires progress payments on all non-standard equipment. In the event of an order cancellation, progress payments are applied against the work in process. OST offers a one year warranty on all equipment. In the event that OST cannot repair a defective unit, it will replace it during the warranty period. Order cancellations and product returns have been immaterial. REGULATION OSHA OSHA regulates work places in general, including medical care facilities. The OSHA blood-borne pathogen regulations encourage the development of certain safe workplace practices for the handling of used sharps. The rules encourage both engineering and procedural solutions consistent with the use of the Company's products. No assurance can be given that OSHA will not develop new regulations and new interpretations of existing regulations to the Company's detriment. The Company's manufacturing and assembly operations are subject to OSHA inspection POST OFFICE The U.S. Postal Service has been transporting medical waste on a regulated basis since 1989. In 1992 the Post Office adopted rules for the mailing of regulated materials that mandate rigorous testing, certification and bonding requirements for packaging used to transport medical waste. The Company's products are designed for shipment via first class/priority mail as required by Post Office regulations. The Company's packaging meets or exceeds all requirements published in the Domestic Mail Manual. In five states, there is a further requirement for the use of registered mail, return receipt requested, service. The Company's kits sold in those states include the additional documentation and postage necessary to comply. STATE AND LOCAL REGULATION Most states have regulations that determine appropriate methodologies for the handling and disposal of medical waste. Several states, including New York, California and New Jersey, require specific approval of medical waste disposal programs including mail-back medical waste products. The Company has obtained approvals from these states. In Minnesota, a change in the overall environmental regulatory framework resulted in mail-back medical waste being excluded in new regulations put into effect during the summer of 1993. Minnesota took the position that use of the Company's system by practitioners was inconsistent with applicable state regulations. The Company made its distributors aware of this development. The Director of Pollution Control in Minnesota recently informed the Company that he intended to address the situation through the proposal of new regulations that, if adopted, would provide exemptions relating to the disposal of medical waste through the U.S. Postal Service. The Company cannot predict when or if these new regulations will be adopted. However, the Director of Pollution Control has orally informed the Company that no enforcement action will be taken in this regard pending the adoption of the new rules. Regardless of these oral representations, there is no assurance that the State of Minnesota will not take such enforcement action. Environmental regulations in Maine are also inconsistent with mail-back medical waste programs. The Company has informed its distributors about Maine's position. The Company does not actively pursue mail-back medical waste programs in states that do not encourage or prohibit its use. Maine and Minnesota represent a small percentage of the Company's current market and a correspondingly small percentage of the potential market for the Company's medical waste kits. Although the Company attempts to monitor regulatory developments in all states in order to maintain regulatory compliance, because of the large number of regulators it is possible the Company might not be immediately aware of changes in relevant regulations. Regulations may change frequently, and the Company's 36 activities may be curtailed or limited to the extent that certain states restrict the use of medical mail-back systems. THE FOOD AND DRUG ADMINISTRATION The Company's existing and planned products are or may be subject to regulation by the FDA pursuant to the provisions of the Federal Food, Drug, and Cosmetic Act ("FDC Act"). Under the FDC Act, several, if not all, of the Company's infection control products, sterilization medical packaging and sterilization supplies are subject to regulation as medical devices. Medical devices are classified into either Class I, II or III. Class I and II devices are not expressly approved by the FDA. However, pursuant to section 510(k) of the FDC Act, the manufacturer or distributor of a Class I or II device that is initially introduced commercially on or after May 28, 1976 must notify the FDA of its intent commercially to introduce the device through the submission of a premarket notification (a "510(k) notice"). Before commercial distribution can commence, the FDA must review the 510(k) notice and clear the device for commercial distribution. The FDA normally has 90 days to review the 510(k) notice and grant or deny clearance to market on the basis that it is substantially equivalent to a device marketed before May 28, 1976. Alternatively, the FDA may postpone a final decision and require the submission of additional information, which may include clinical data. If additional information is required, review and clearance of a 510(k) notice may be significantly delayed. In order to clear a Class I or II device for marketing, the FDA must determine, from the information contained in the 510(k) notice, that the device is "substantially equivalent" to one or more Class I or II devices that are legally marketed in the United States. If a device is not considered "substantially equivalent," it is regulated as a Class III medical device. In general, a Class III medical device must be expressly approved by the FDA for commercial distribution pursuant to the submission of a Premarket Approval Application ("PMA"). A PMA must contain, among other information, substantial information about the manufacture of the device and data from adequate and well controlled clinical trials that demonstrate that the device is both safe and effective. The PMA approval process is substantially more complex and lengthy than the 510(k) premarket notification process. Once a PMA is submitted, it may take 16-24 months, or longer, for the FDA review and approval, if such approval is granted at all. A medical device, whether cleared for marketing under the 510(k) pathway or pursuant to a PMA approval, is subject to ongoing regulatory oversight by the FDA to ensure compliance with regulatory requirements, including, but not limited to, product labeling requirements and limitations, including those related to promotion and marketing efforts, Current Good Manufacturing Practice requirements, record keeping and medical device (adverse reaction) reporting. FDA regulatory oversight also applies to the Company's sterile medical packaging products, which are used by other companies in packaging their own medical devices. Generally, FDA acceptance of the suitability of such packaging products is made in the context of regulatory submissions of other companies concerning the device to be packaged. Thus, the Company requires no separate FDA clearance or approval of these packaging products. Within this framework, the principal regulatory responsibilities of the Company for its sterile medical packaging products are to ensure that the packaging products are manufactured in conformity with Current Good Manufacturing Practice requirements. Although the Company believes that all of its manufacturing activities are in conformity with Current Good Manufacturing Practice requirements, there can be no guarantee of compliance. Historically, the FDA has not exercised device regulatory authority over some types of infection control products, such as sharps containers or mailer packages, including those used in the Company's mail-back system, and has allowed companies to begin commercial introduction (on or after May 28, 1976) of these types of products without a 510(k) clearance. On February 3, 1994, the FDA issued a written policy statement which allowed manufacturers of sharps containers a "discretionary period" of 180 days (until August 2, 1994) to continue marketing their products already in distribution (introduced on or after May 28, 1976) without the benefit of 510(k) clearance provided that required 501(k) notices are submitted to FDA prior to the conclusion 37 of the discretionary period. Manufacturers of sharps containers also must comply with FDA device listing and establishment registration requirements. The FDA has indicated that there is no change in its regulatory posture toward the mailer packages used in the mail-back system and that it does not intend to regulate this product as a medical device. There can, however, be no assurance that the FDA will maintain its current regulatory posture toward the mailing package. OST submitted all but one of the 510(k) notices and expects to submit the remaining one in the near future. In June 1994, the Company received notification that all of its 510(k) submittals for sharps containers had been approved and cleared for marketing. The Company has an additional submittal for one of its sharps containers which the FDA had advised it to withhold until the others had cleared, which it is now preparing for submission. ENVIRONMENTAL REGULATION The Environmental Protection Agency (the "EPA") has the authority to regulate medical waste under the Resource Conservation Recovery Act. Although the EPA has not to date issued any formal rules covering medical wastes, it has issued a guide for infectious waste management. The Hazardous Materials Transportation Act ("HMTA") governs the packaging and transportation of hazardous materials in commerce. The HMTA prescribes certain packaging requirements for enumerated regulated medical waste and infectious substances. Regulations promulgated by the Department of Transportation pursuant to the HMTA describe the requirements to be observed in preparing the materials for shipment, including shipment by highway. The regulations also cover inspection, testing and retesting of the transportation of hazardous materials. The Congress and the EPA may adopt new, or modify existing, laws, regulations and policies regarding the regulation of medical waste. The Company cannot predict what effect, if any, future regulation may have on its operations. PATENTS AND TRADEMARKS The OnGard product line includes patented and other proprietary products. The OnGard Recapper was awarded U.S. Patent No. 4,986,816. The Company was also awarded a patent on the OnGard Medical Waste System (U.S. Patent No. 5,097,950). Patent applications relating to the mail-back product line, the AutoPak-TM- system and other products have also been filed, but the Company cannot predict when or if these patents will be awarded. Although the Company believes its patents are valuable and provide a competitive advantage, there is no assurance that any patents held or secured by the Company will provide any protection or commercial or competitive benefit to the Company. In addition, the Company may incur substantial legal expenses attempting to enforce its patents. There is also no assurance that the Company's products will not infringe upon patents held by others. The Company owns the registered trademark "On-Gard" in its stylized form. In addition, the Patent and Trademark Office has approved the Company's applications (which are in the final stages of pendency) with respect to "OnGard Systems" in stylized and plain letter form and with respect to AutoPak-TM-. The Company believes that it has established valuable trademark rights in OnGard, OnGard Systems and AutoPak-TM-. The Company retains all rights to its trademarks under the terms of the Sherwood Agreement. The Company's unified approach to product name, logo and identity is reflected in its promotional literature, packaging and labeling and the Company intends to continue to promote this identity in all its product offerings and strategic alliances. 38 EMPLOYEES As of December 31, 1995, the Company had approximately 75 employees. None of the Company's employees are subject to a collective bargaining agreement. The Company believes that its relations with its employees are good. COMPETITION The Company operates and markets its mail-back systems in an increasingly competitive environment. Competitors include local and national hauling services and some local or regional mail-back services. At the current time, the Company is aware of five companies which have approval from the U.S. Postal Service to offer mail-back services. None of these companies offer the selection of sizes and capacities currently provided by OnGard. The Company's primary competitor in the mail-back medical waste handling business is a joint venture between Becton Dickinson, a manufacturer of hypodermic needles, and Browning-Ferris Industries, a national waste hauling company. Sherwood and Becton Dickinson are competitors within the needle and syringe sales market and each has the capability to sell needles, syringes and mail-back systems. In addition, both Sherwood and Becton Dickinson have extensive distribution capacities within the target markets. The Company believes that its pricing for mail-back systems is competitive. The sterile packaging industry is extremely competitive. The Company competes with a variety of large and small manufacturers who have similar capabilities. The sterilization supplies market is also competitive and is dominated by several large companies with complete product lines. The market for sterilization equipment is also highly competitive and many competitors of OST have greater financial resources. These companies include American Sterilizer (AMSCO), Steris and Sanipak, which may sell either institutional or tabletop sterilizers, or hospital autoclaves. BACKLOG As of March 31, 1996, the Company had a backlog of $2,650 in the medical waste and medical packaging areas and OST had a backlog of approximately $173,000 in the sterilization equipment area. For these purposes, "backlog" refers to orders received for the purchase of products, which were due by the above date but had not yet been delivered. These do not reflect total open orders, for which OnGard Sterilization Technologies had in excess of $1 million at March 31, 1996. INSURANCE The Company maintains liability insurance with coverage limits of $1 million in the aggregate. The Company also carries other customary business insurance. The Company has posted a $50,000 bond with the U.S. Postal Service under its new regulations. The Company does not maintain key man life insurance on any of its employees. FACILITIES On November 3, 1995 the Company announced its plans to consolidate operations at its facility in Hauppauge, New York. The consolidation was completed by December 31, 1995. The Company has closed its Denver facility. Effective April 1, 1996, the Company had an agreement with a new lessee and the landlord in which the Company has assigned all its rights and interest in 34,000 of the 50,000 square feet which it previously occupied. Under the terms of the agreement the Company will receive amounts ranging from $5,200 to $6,700 per month through May 31, 1998 in consideration for the assignment of its existing lease. 39 Effective April 1, 1996, the Company was released from any monthly lease payments or responsibilities associated with this lease. The Company's corporate and administrative offices, as well as production for AutoPak, are now located at 40 Commerce Drive in Hauppauge, New York. Approximately 35,000 square feet is used for manufacturing and the balance of 7,000 square feet is used for offices. A new lease commenced February 1, 1995. For the three successive annual periods, the annual rent is $116,025 per annum; in the fourth and fifth year, the annual rent is $162,078 and $172,788, respectively. In addition, the landlord advanced $350,000 to remodel the facility in early 1996. This amount will be repaid by the Company in two repayment schedules: the first of which for $50,000 will be repaid beginning February 1, 1996 and ending January 1, 1997 for $4,359 per month and the second, for $300,000, will be repaid over 36 months, beginning February 1, 1996 for $9,600 per month. Prior amounts due the landlord, which were unpaid under Pharmetics lease arrangements, totaling $170,248, were repaid with 22,700 shares of unregistered OnGard Common Stock. The Company has agreed to include such shares in its next registration statement. If such registration statement has not occurred by December 15, 1995, the Company will grant the right to the landlord to purchase an additional 10,000 shares of OnGard Common Stock at an exercise price of $7.50. The grant must be exercised by December 15, 1997. LEGAL PROCEEDINGS The Company does not have any pending legal proceedings other than ordinary routine litigation incidental to its business. As a seller of medical infection control and waste handling systems, the Company could face product liability claims or other claims potentially based on accidental infections, loss of waste disposal packages in the mail, or other unforeseen circumstances. The Company maintains product liability insurance in an aggregate amount of $1 million. There can be no assurance that such coverage will be adequate to cover future product liability claims or that it will continue to be available at reasonable prices. OST, by its merger with Pharmetics, is party to a number of lawsuits filed primarily by trade creditors, and it owed withholding and other payroll related taxes amounting to approximately $230,000, including interest and penalties. The Company has been successful in negotiating settlements to these claims to date and the Company believes that these claims will not have a materially adverse effect on OST's financial condition or results of operations. In addition, although there have been no legal proceedings in this regard, in the second quarter of 1994 the Company initiated, and has completed, discussions with federal and New York state tax authorities to pay prior federal (approximately $110,000), unemployment (approximately $21,000) and New York state (approximately $102,000) taxes, payment for which are due over specified time periods, and which the Company is paying for on a monthly basis. On April 19, 1996, a patent infringement lawsuit was filed in the United States District Court, Central District of California, entitled KENNETH R. WILKES and KENPACK INCORPORATED vs. ONGARD SYSTEMS, INC. AND ONGARD PHARMETICS, INC. As of this date OnGard and OST have responded to this lawsuit. 40 PRO FORMA FINANCIAL INFORMATION PHARMETICS' TRANSACTION AND PRO FORMA BASIS OF PRESENTATION On October 1, 1994 the Company and Pharmetics, Inc. completed a merger in which Pharmetics was merged into a wholly-owned subsidiary of OnGard Systems, OST. The acquisition was transacted through the exchange of stock in which OnGard provided 359,602 shares of its commons stock valued at $2.6 million to the shareholders of Pharmetics. The following unaudited pro forma consolidated, condensed financial statements present the results of operations of OnGard and Pharmetics for the year ended December 31, 1994. The presentation sets forth the results of operations of OnGard as if the acquisition of Pharmetics was consummated as of January 1, 1994. See "Business -- Acquisition of Pharmetics." The following unaudited pro forma consolidated, condensed financial data should be read in conjunction with the accompanying footnotes thereto and the historical financial statements of OnGard and Pharmetics presented elsewhere in this prospectus. The following unaudited pro forma consolidated, condensed financial information is based on estimates and assumptions that are outlined in the footnotes to unaudited pro forma consolidated, condensed financial statements. The actual results reported in the future will vary from such unaudited pro forma consolidated, condensed financial information. 41 ONGARD SYSTEMS, INC. AND SUBSIDIARIES AND PHARMETICS INCORPORATED UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1994
Proforma Adjustments -------------------- Historical Historical Pro Forma OGSI Pharmetics Debit Credit Total - -------------------------------------------------------------------------------------------------- NET REVENUES $3,928,345 $ 987,293 $ $ $4,915,638 Cost of Sales 3,470,709 1,969,586 5,440,295 ---------------------------------------------------------------- 457,636 (982,293) (524,657) ----------------------------------------------------------------- COST & EXPENSES: General & Administrative 2,440,935 733,229 3,174,184 Write-Down of Excess Cost Over Net Tangible Assets Acquired 1,988,561 1,988,561 Provision for losses on advances to Pharmetics 801,824 801,824 Selling 568,488 380,984 949,472 Depression & Amortization 150,930 (5,871) 127,820(a) 272,879 Research & Development 223,652 32,917 256,569 ---------------------------------------------------------------- TOTAL EXPENSES 6,174,390 1,141,259 127,820 0 7,443,469 ---------------------------------------------------------------- Income (loss) From Operations (5,716,754) (2,123,552) (127,820) 0 (7,968,126) ----------------------------------------------------------------- Interest Expense (239,761) (110,191) (349,952) Interest & Other Income 66,507 1,030,962 1,097,469 ----------------------------------------------------------------- Total Other Income/Expense (173,254) 920,771 0 0 747,517 ----------------------------------------------------------------- Loss Before Income Taxes (5,890,008) (1,202,781) (127,820) 0 (7,220,609) Income taxes 0 0 0 0 0 ----------------------------------------------------------------- Net Loss $(5,890,008) $(1,202,781) $(127,820) $0 $(7,220,609) ----------------------------------------------------------------- ----------------------------------------------------------------- Net Loss Per Share ($2.60) ------------ ------------ Weighted Average Number of Shares Outstanding 2,776,460
42 ONGARD SYSTEMS, INC. AND SUBSIDIARIES AND OST NOTES TO UNAUDITED PROFORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ProForma Adjustments and Assumptions The acquisition of OST was accounted for as a purchase. The purchase price, after giving effect to liabilities assumed, was allocated to the tangible assets of Pharmetics based upon their values and the remaining excess of the purchase price over the fair value of net tangible assets acquired is being amortized on a straight-line basis over 20 years. During the third quarter of 1994 and thereafter, OnGard initiated an evaluation of the excess purchase price shown as "Cost in Excess Net Assets of Business Acquired" on its Balance Sheet. The Company, as a result, wrote off amounts as described below. The accompanying unaudited proforma consolidated condensed financial statements give effect to the following proforma adjustments and assumptions: (a) To record the amortization of good will (straight-line over 20 years) as if the acquisition of Pharmetics was effective at the beginning of the respective period. 43 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND SIGNIFICANT EMPLOYEES OnGard's executive officers, directors and significant employees are as follows: Name Age Title Mark E. Weiss 43 President, Treasurer, Director and Chief Executive Officer Philip B. Kart 45 Vice President and Chief Financial Officer Eric L. Steiner, M.D. 43 Director Thomas F. Kearns, Jr. 57 Director Clay C. Cannady 34 Director of Sterility Assurance Products Lawrence H. Cabeceiras 40 Vice President, Marketing Kent Cherrey 40 Vice President, Sales Mark E. Weiss is a co-founder of OnGard and has served as a director, President and Treasurer since OnGard's inception. Prior to OnGard's inception, from September 1987 to June 1989, Mr. Weiss was President and Chief Executive Officer of HealthCare United Management Corporation, a health insurance management organization, and President of HealthCare United, a federally-qualified health maintenance organization. HealthCare United was operating under the supervision of the Colorado Division of Insurance when Mr. Weiss joined the organization as part of a work-out team. As President of HealthCare United, Mr. Weiss worked with the Colorado Division of Insurance to place HealthCare United in an orderly receivership, ensuring that beneficiary coverage was maintained. Prior to that, Mr. Weiss was an independent consultant. Mr. Weiss has a bachelor's degree in mathematics, with a minor in chemistry, from the University of Colorado. Eric L. Steiner, M.D., is a co-founder of OnGard and has served as a director since OnGard's inception. He is not an employee of OnGard. Since 1981, Dr. Steiner has been a board-certified anesthesiologist, specializing in cardiovascular anesthesia, and is past Chairman of the Department of Anesthesiology at Mercy Medical Center in Denver. Dr. Steiner is a 1978 graduate of Hahnemann Medical College and a 1974 graduate of the University of Pittsburgh. Thomas F. Kearns has been appointed to the Board, effective December 24, 1995, to fill the vacancy created by the resignation of Derace L. Schaeffer, M.D., which resignation was effective as of the same date. Mr. Kearns was appointed in accordance with the right of the Series B Preferred stockholders (see "Description of Capital Stock-Preferred Stock") to nominate and elect a director. It is expected that Mr. Kearns will stand for election by the Series B Preferred stockholders at the Company's next annual meeting of stockholders. Mr. Kearns is a retired partner of the investment banking firm of Bear, Stearn & Co., Inc. He also serves as a director of Biomet, Inc., a manufacturer of orthopedic devices, and Pharma Kinetics Laboratories, Inc., a contract research organization, and as a trustee of the University of North Carolina. Philip B. Kart joined the Company in March 1994 as Vice President and Chief Financial Officer. Prior to joining the Company, from 1989 to 1994, Mr. Kart was a principal in Big Stone Partners, a financial advisory 44 firm which assisted growing and troubled businesses in operations restructuring and financial management. Prior to that, Mr. Kart held financial officer or management positions with Lasertrak Corporation, a venture capital backed aviation equipment company, Agrigenetics Corporation, a $100 million (sales) biotechnology company and Union Carbide Corporation. He was also with the public accounting firm of Price Waterhouse. Mr. Kart has a bachelor's degree from Wagner College, an M.B.A. from City University of New York and is a C.P.A. Clay C. Cannady, Director of Sterile Assurance Products has been with OnGard Systems since May 1993. From May 1988 to April 1993, he held various positions in the Sales and Marketing Group of American National Can. Mr. Cannady has a bachelor of arts degree from the University of Missouri and a graduate degree from the University of North Carolina School of Business. Lawrence H. Cabeceiras joined the Company in January 1995 as Vice President, Sales and Marketing. Prior to joining the Company, he had been with AMSCO (American Sterilizer Company) from 1980 through 1994, most recently as Corporate Director of Marketing and Product Commercialization. He had previously been with Union Carbide, Linde Medical Gas Division from 1978 to 1980. Mr. Cabeceiras has a B.A. and M.B.A. from Tulane University Kent Cherrey joined the Company in November 1995 as Vice President of Sales. For the twelve years preceding this, Mr. Cherrey held a variety of positions in sales and sales management, leading to the position of Vice President of Strategic Accounts for Ballard Medical Products, Inc. in Utah. Ballard's product lines focused on disposal products sold to hospitals and related health care companies. Prior to that he was with Respiratory Care, Inc. from 1983 to 1985. Mr. Cherrey has a B.A. from University of Wisconsin. In connection with an initial public offering OnGard completed in September 1992, Royce has the right pursuant to an underwriting agreement to designate a member or a non-voting advisor to OnGard's Board of Directors until August 1997. Royce has not yet exercised its right nor expressed its intent with respect to designating such a person. In connection with its investment in the September 1995 Private Placement, Montgomery Asset Management has the right to designate one member of the Company's Board of Directors. See "Description of Capital Stock - Preferred Stock". Montgomery has indicated it will exercise its right to designate a member of the Board but formal notification and approval has not yet occurred. The following persons, each of whom was an officer or director of the Company, or beneficial owner of more than 10% of the Company's Common Stock, at any time during 1994, failed to file on a timely basis reports required by Section 16(a) of the Exchange Act through December 31, 1995; Lawrence H. Cabeceiras and Kent W. Cherrey, one late report in 1995; Eric L Steiner, two late reports in 1995. EXECUTIVE COMPENSATION The following table sets forth all annual and long-term compensation paid by the Company to those officers whose total annual salary and bonus exceeded $100,000, for services rendered during the calendar years indicated below. 45 SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation --------------------------------- ------------- Name and Principal Year Salary Bonus Other Annual Stock Options Position Compensation - --------------------------------------------------------------------------------------- Weiss, Mark 1995 $150,941 $50,000 - 350,000(2) President - --------------------------------------------------------------------------------------- Weiss, Mark 1994 $130,000 $25,000 $(4) 135,000(6) President - --------------------------------------------------------------------------------------- Weiss, Mark 1993 $126,000 $35,000(5) $0(4) -0- President - --------------------------------------------------------------------------------------- Cabecerias, Larry 1995 $110,909 - - 60,000(3) Vice President Marketing - ---------------------------------------------------------------------------------------
(1) Exercisable at $3.50 per share and expire December 24, 2002. (2) 15,000 options vested and exercisable on January 30, 1995 and 45,000 vested equally in four annual installments exercisable at $6.50 per share. All expire January 30, 2002. (3) Less than $50,000 or 10% of the total of annual salary and bonus. (4) Granted in May 1994 for 1993 performance. (5) Exercisable at $5.00 per share and expire in December 2001.
INDIVIDUAL GRANTS --------------------------------------------------------------------------------------- Percent of All Options Granted to Employees in Number of Shares Fiscal Year Exercise Expiration Date Underlying Price Options --------------------------------------------------------------------------------------- Weiss, Mark 350,000 44.5% $3.50 December 24, 2002 --------------------------------------------------------------------------------------- Cabecerias, Larry 60,000 7.6% $6.50 January 30, 2002 ---------------------------------------------------------------------------------------
The following table sets forth the number of shares of the Company's Common Stock covered by outstanding stock options held by each of the named executives at December 31, 1995, and the value at December 31, 1995, as determined by the spread between the option price and the price of the Company stock as reported by NASDAQ National Market (Small-Cap-SM-). Options granted to the named executives during the fiscal year are shown in the table immediately above and are reflected in the following table. Mr. Weiss elected not to exercise any of his outstanding stock options during the fiscal year.
FISCAL YEAR-END OPTION VALUES ----------------------------------------------------------------------------- Number of Unexercisable Options at Value of Unexercised In-the-Money Options Fiscal Year-End at Fiscal Year-End ----------------------------------------------------------------------------- Name Exercisable Unexercisable Exercisable Unexercisable ----------------------------------------------------------------------------------------------- Weiss, Mark 372,500 175,000 $1,100,625 $656,250 ----------------------------------------------------------------------------------------------- Cabecerias, Larry 15,000 45,000 $11,250 $33,750 -----------------------------------------------------------------------------------------------
COMPENSATION OF DIRECTORS In December 1995, the Board of Directors granted 50,000 and 25,000 non- qualified stock options, respectively to Mr. Thomas Kearns and Dr. Eric Steiner, respectively, pursuant to the Company's 1995 Stock Option Plan. The stock options are exercisable at $3.50 per share and expire on December 24, 2002. These options are vested 50% immediately, with the remainder vested ratably over two years. 46 In December 1994, the Board of Directors granted 100,000 and 50,000 non- qualified stock options, respectively, to Drs. Schaffer and Steiner for their services as directors of the Company pursuant to the Company's 1992 Stock Option Plan. The stock options are exercisable at $5.00 per share and expire on December 22, 2001. The stock options granted to Dr. Schaffer vest ratably over a four year period; the stock options granted to Dr. Steiner vested immediately. EMPLOYMENT AGREEMENTS Mr. Weiss has an employment agreement with OnGard effective through December 31, 1995. The Board of Directors has agreed to extend the employment agreement through three additional years. The agreement is terminable by OnGard for cause, as defined therein, without further obligation. If OnGard terminates Mr. Weiss without cause, he will be entitled to a one-time payment equal to five times his annual base salary at the amount in effect at the date of the termination. Upon any termination, Mr. Weiss is subject to two-year covenants not to compete. Effective January 1, 1996 Mr. Weiss' annual base salary was increased to $200,000. Effective September 29, 1994, OST entered into an employment agreement with Theodore Shlisky in connection with the Pharmetics Merger. The employment agreement provides that Mr. Shlisky shall serve as executive vice president of OST for the three year term of the agreement and in such capacity he will be responsible for all phases of OST's manufacturing and distribution in connection with its sterilization equipment business. Mr. Shlisky is entitled to an annual base salary of $105,000, plus a cash bonus equal to 25% of his base salary for the 12 months ending September 30, 1995 provided OST's sales in the ordinary course of business exceed $4 million by the end of such period; similar bonuses are to be negotiated during the second and third 12 month periods. The employment agreement automatically terminates upon the earlier of (i) the expiration of three years, subject to extension by OST for up to six months; (ii) the death of Mr. Shlisky; (iii) OST's relocation to a facility over 50 miles from the present facility, if Mr. Shlisky elects not to relocate to the new facility; or (iv) the inability of Mr. Shlisky to perform his duties by reason of illness, disability or other incapacity if such inability continues for more than three successive months or five months in the aggregate during any period of 12 consecutive months; and OST may terminate the agreement for cause as defined therein. It may be extended for a period of 6 months at the option of OST and the parties agree to discuss Mr. Shlisky's continued involvement in the Company prior to the end of the three year term. The employment agreement also contains a non-competition clause effective for two years following termination of the agreement. Mr. Shlisky has resigned from the Company effective December 18, 1995. Mr. Shlisky claims that the Company did not fulfill certain of its obligations under his employment agreement. The Company denies this allegation and is currently evaluating with its counsel the potential effect of Mr. Shlisky's departure on the Company, as well as the Company's legal remedies arising out of Mr. Shlisky's termination of his employment agreement. The Company intends to vigorously pursue all its available remedies relating to this matter. There are no arrangements pursuant to which any director of OnGard receives cash compensation; however directors are provided stock options as described above. On December 22, 1994, pursuant to the Company's 1992 Stock Option Plan, the Board of Directors voted to grant the following stock options to the following people: Mark E. Weiss, options for 135,000 shares of Common Stock at $5.00 per share, vesting immediately; Eric L. Steiner, M.D., options for 50,000 shares of Common Stock at an exercise price of $5.00 per share, vesting immediately; Derace L. Schaffer, M.D., options for 100,000 shares of Common Stock at an exercise price of $5.00 per share, vesting ratably over a four year period beginning December 22, 1994; Philip B. Kart, options for 10,000 shares of Common Stock at $6.00 per share, vesting effective March 21, 1994, and options for 50,000 shares of Common Stock at $6.50 per share, vesting ratably over a four year period beginning March 21, 1994; Clay C. Cannady, options for 15,000 shares of Common Stock at $5-1/8 per share, vesting effective May 10, 1993, and options for 45,000 shares of Common Stock at $6.50 per share, vesting ratably over a four year period beginning May 10, 1993. All options expire seven years after the vesting date of the first options to vest under the particular grant. See 47 "Management Discussion and Analysis of Financial Condition and Results of Operations--Year Ended December 31, 1994 Compared to Year Ended December 31, 1993." On December 24, 1995, under similar grants, the Board of Directors voted to grant stock options to the following people at $3.50 per common share, vested 50% immediately and the remainder vested ratably over two years: Mark E. Weiss, 350,000 options; Eric L. Steiner, M.D. 25,000 options; Thomas F. Kearns, Jr., 50,000 options; Philip B. Kart, 25,000 options; Joseph Riccardo, a consultant to the company, 100,000 options; Paul J. Rizzo, a consultant to the company, 50,000 options. In addition, Domenick Treschitta, a consultant to the company, was granted 100,000 options, all vested immediately, but at $1.00 per common share. 48 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of OnGard Common Stock as of March 31, 1996, by (i) each person who is known by OnGard to own beneficially 5% or more of OnGard Common Stock; (ii) each director and officer individually; and (iii) all directors and officers as a group. Except as otherwise indicated, each person has sole voting and investment power over the shares of OnGard Common Stock listed as beneficially owned by him.
Name of individual Shares Beneficially or number in group owned Percentage of Shares Outstanding(1) - ------------------ ------------------- ----------------------------------- Mark E. Weiss 914,837(2)(3) 14.5% (2)(3) 2323 Delgany Street Denver, Colorado 80216 Eric L. Steiner, M.D. 452,248(3)(5) 7.2% (3)(5) 2323 Delgany Street Denver, Colorado 80216 Montgomery Asset Management, L.P. 1,148,000(6)(7) 18.2% (6)(7) 600 Montgomery Street San Francisco, CA 94111 Mellon Bank Corporation 550,000(9) 8.8% (9) One Mellon Bank Center Pittsburgh, PA 15258 The Dreyfus Corporation and 550,000(9) 8.8% (9) 200 Park Avenue New York, NY Quota Fund 360,000(6) 5.7% (6) 600 Montgomery Street San Francisco, CA 94111 Hausmann Funding 456,000(6) 7.2% (6) 600 Montgomery Street San Francisco, CA 94111 Lawrence H. Cabeceiras 26,250(4) .4% (4) 2323 Delgany Street Denver, Colorado 80216 Clay C. Cannady 42,500(4) .7% (4) 2323 Delgany Street Denver, Colorado 80216 Philip B. Kart 47,500(4) .4% (4) 2323 Delgany Street Denver, Colorado 80216 Thomas F. Kearns 75,000(4)(6) 1.2% (4)(6) 40 Commerce Drive Hauppauge, NY 11788
49 Paul Rizzo 45,000(6)(10) .7% (6)(10) 40 Commerce Drive Hauppauge, NY 11788 Domenick Treschitta 139,000(6)(8)(10) 2.2% (6)(8)(10) 40 Commerece Drive Hauppauge, NY 11788 All directors and officers 1,742,335(4) 27.6% (4) as a group (9 persons)
(1) Includees exercise of 757,000 OnGard Common Stock purchase warrants which converted to 957,600 common shares in March 1996. See "Certain Transactions." (2) Includes 226,313 shares owned of record by LEC Irrevocable Trust, a trust of which Mr. Weiss and his family are beneficiaries. Under the terms of the LEC Irrevocable Trust, Dr. Steiner has the power to vote and direct the disposition of these shares and may be considered the beneficial owner thereof. Also includes 113,667 shares owned of record by Blue River Irrevocable Trust (see Footnote 5) and assumes exercise of options to buy 372,500 shares granted to Mr. Weiss which are currently exercisable, 62,500 of which expire in May 2003 and 135,000 of which expire in December, 2002. See "Management--Executive Compensation." (3) The beneficial ownership of 339,980 shares (held by the LEC Trust and Blue River Trust) may be attributable to both Mr. Weiss and Dr. Steiner and is included in each of the totals of shares beneficially owned by them. See Footnotes 2 and 5. (4) Assumes exercise of currently exercisable options to buy shares of OnGard Common Stock granted as follows: (i) Mr. Weiss, 372,500 shares; (ii) Dr. Steiner, 62,500 shares; (iii) Mr. Cannady, 42,500 shares; (iv) Mr. Kart, 47,500 shares; and (v) Mr. Cabeceiras, 26,250 shares and Mr. Kearns, 25,000 shares. See "Management--Executive Compensation," -- " Compensation of Directors," and "Employment Agreements." (5) Includes 113,667 shares owned of record by Blue River Irrevocable Trust. Mr. Weiss serves as trustee of this trust for the benefit of Dr. Steiner and his family. Under the terms of the trust, Mr. Weiss has the power to vote and direct the disposition of these shares and may be considered the beneficial owner thereof. Also includes 226,313 shares owned of record by LEC Irrevocable Trust (see Footnote 2) of which Dr. Steiner is trustee and 10,000 shares owned of record by C.A.C. 401(k) Profit Sharing Plan for the benefit of Dr. Eric L. Steiner, 10,268 shares acquired in payment of indebtedness owed to Dr. Steiner, and 14,500 shares acquired in the September 1995 Private Placement. Also assumes exercise of options to buy 50,000 shares granted to Dr. Steiner which are currently exercisable and which expire in December, 2001, and 12,500 which are exercisable and which expire December 2002. (6) This beneficial owner purchased the Company's common shares during the September 1995 Private Placement. (7) Includes shares held by Quota Fund and Hausmann Funding, for which Montgomery Asset Management maintains voting and dispositive power. (8) Includes 10,000 shares purchased by Barbara Treschitta, Mr. Treschitta's wife, in the September, 1995 Private Placement. (9) Mellon Bank aquired shares in the public market for the Dreyfus Corporation and mutual funds for which Dreyfus Corporation acts as investment manager. Mellon Bank maintains voting and depositive power over these shares. (10) Assumes the excercise of currently excercisable options granted under consulting agreements as follows; (i) Mr. Rizzo, 25,000 shares (ii) Mr. Treschitta, 100,000 shares. 50 CERTAIN TRANSACTIONS In September 1992, OnGard completed an initial public offering of its common stock whereby 920,000 Units, consisting of one share of Common Stock and one Warrant, were sold at $5.00 per Unit resulting in net proceeds to OnGard of approximately $3,718,000. Each Warrant entitles the holder to purchase one share of Common Stock at an adjusted exercise price of $5.34 per share and was exercisable through August 11, 1995, until the Company extended the expiration date through April 30, 1996. An anti-dilution provision contained in these warrants expired on August 11, 1995. See "Description of Securities--Redeemable Common Stock Purchase Warrants." The Warrants are subject to redemption by OnGard, subject to certain conditions, upon 30 days written notice. As of April 10, 1996, 759059 Warrants had been exercised and converted into 960,210 shares. Pursuant to the terms of the underwriting agreement relating to the initial public offering, OnGard has entered into a five-year agreement providing for the payment of a fee to Royce in the event Royce is responsible for a merger or acquisition transaction to which OnGard is a party. OnGard will pay Royce an amount equal to the following percentages of the consideration paid by or to OnGard; 5% of the first $1,000,000 or portion thereof; 4% of the second $1,000,000 or portion thereof; and 3% of the excess. The fee payable to Royce will be in the same form of consideration as that paid by OnGard or to OnGard, as the case may be. In connection with the Merger, Royce is receiving a fee of approximately 16,000 shares of OnGard Common Stock. Effective October 1, 1994, Pharmetics was merged into the Company's wholly-owned subsidiary, OGPI, now OST. See ""Business -- Acquisition of Pharmetics." On June 28, 1995, the Company issued 10,268 shares of Common Stock to Dr. Eric L. Steiner, a director of the Company, in repayment of a loan from Dr. Steiner to the Company. For purposes of the repayment, the shares were valued at $4.375 per share. In September, 1995, the Company completed a private placement of 2,204,021 shares of the Company's Common Stock at a price of $3.50 per share and receive an aggregate of $7,714,075 in gross proceeds. Pursuant to such private placement, a group of investors under the control of Montgomery Asset Management, L.P. acquired 1,148,000 shares of 21.4 percent of the shares outstanding of the Company. At the same time, the same group of investors purchased 100 shares of the Company's Series B Redeemable Preferred Limited Voting Stock for an aggregate of $10. The Series B Preferred Stockholders, provided they own in the aggregate at least five percent of the Company's Common Stock, can nominate and elect one member to the Company's Board of Directors. The Series B Preferred Stock is not entitled to any dividends unless so declared by the Company's Board of Directors. If ant any time the holders of the Series B Preferred Stock in the aggregate own less than five percent of the Company's common Stock, the Company may, upon ten days' notice, redeem the Series B Preferred Stock at a price of $.10 per share. There is no liquidation preference for the Series B shares unless the Board elects to redeem these shares prior to liquidation. Also in connection with the private placement discussed above, Dr. Eric L. Steiner, a director of the Company, purchased 14,500 shares of the Company's Common Stock, Thomas F. Kearns, Jr., a director of the Company, purchased 50,000 shares of the Company's Common Stock and Domenick Treschitta, a nominee to the Board of Directors and his wife, Barbara Treschitta, purchased an aggregate of 39,000 shares of the Company's Common Stock. 51 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of OnGard consists of 10,000,000 shares of OnGard Common Stock $.001 par value per share and 3,000,000 shares of OnGard Preferred Stock $.001 par value purchase. At the date of this memorandum, OnGard has outstanding 6,312,834 shares of OnGard Common Stock, and 378,292 of OnGard Preferred Stock PREFERRED STOCK Holders of the 378,292 shares of OnGard Series A Preferred Stock are entitled to one vote for each Common Stock into which it is then convertible, on all matters to be voted on by the stockholders. Each share of Series A Preferred Stock is convertible into one share of common stock. The Series A Preferred stockholders will vote with the Common stockholders as a single class. An affirmative vote of the majority of Series A Preferred Stock will be necessary to alter the rights and preferences of the shares of Series A Preferred Stock. Holders of the Series A Preferred Stock may convert their shares into Common Stock at any time at their option. Dividends will be paid only upon declaration by the Board of Directors, otherwise none are due or payable on the Series A Preferred Stock. Holders will not be entitled to any preemptive subscription or redemption rights. The Series A Preferred Stock will have a preference in liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, equal to $4.00 per share plus any accrued and unpaid dividends if declared by the Company's Board of Directors. If the assets available for distribution are insufficient to pay the holders of Series A Preferred Stock and the holders of all preferred stock that is pari passu with the Series A Preferred Stock the full amount to which they are entitled, then such holders shall share ratably in any distribution of the assets of the Company in proportion to the amounts that would have been payable with respect to their shares if all amounts payable with respect to such shares were paid in full. Acquirors of preferred shares were also granted Class B warrants described below. Pursuant to the September 1995 Private Placement, the Company also sold 100 shares of its non-interest bearing Series B Redeemable Preferred Limited Voting Stock Provided that the holders of the Series B preferred stock own in the aggregate at least 5% of the Company's Common Stock, the holders of the Series B preferred stock can nominate and elect one member to the Company's Board of Directors. The Series B preferred stock is not entitled to any dividends unless so declared by the Company's Board of Directors. If at any time holders of the Series B preferred stock own less than five percent of the Company's Common Stock, the Company may, upon ten days' written notice, redeem the Series B preferred stock at a price of $.10 per share. There is no liquidation preference for the Series B shares unless the Board elects to redeem these shares prior to liquidation. COMMON STOCK Holders of OnGard Common Stock are entitled to one vote for each share held of record on all matters to be voted on by the stockholders. Holders of OnGard Common Stock are entitled to receive dividends when and as declared by the Board of Directors out of funds legally available therefor. See, however, "Market for OnGard Common Stock and Dividend Policy." Upon liquidation or dissolution of OnGard, holders of OnGard Common Stock are entitled to share ratably in the remaining assets of OnGard which may be available for distribution after payment of OnGard's creditors. Holders of OnGard Common Stock have no preemptive, subscription or redemption rights. OnGard Common Stock has no cumulative voting rights; provided, however, that the holders of the Company's Common Stock purchased on August 30, 1995 as part of the September 1995 Private Placement have preemptive rights to purchase their proportionate share of new securities that the Company may issue. All outstanding shares of OnGard Common Stock are fully paid and nonassessable. 52 REDEEMABLE COMMON STOCK PURCHASE WARRANTS OnGard issued Warrants to purchase 920,000 shares of OnGard Common Stock at $6.75 per share as part of its initial public offering in 1992. The total of 920,000 shares has been adjusted to 1,163,956 shares pursuant to an anti-dilution provision. Each Warrant entitles the holder to purchase one share of OnGard Common Stock at an adjusted exercise price of $5.34 per share until 5:00 p m. Mountain Time, on April 30, 1996. The Warrants do not confer upon the Warrant holder any voting or other rights of a stockholder of OnGard. Upon notice to the Warrant holders, OnGard has the right to reduce the exercise price or extend the expiration date of the Warrants. The Company extended the expiration date of the warrants from August 11, 1995 originally to December, 31,1995 and then to March 29, 1996 and April 30, 1996. The outstanding Warrants had an anti-dilution provision which was triggered by the Company's Dilutive Transactions completed since the issuance of these warrants and through the original expiration date of August 11, 1995. See "RISK FACTORS - Outstanding Warrants." Effective August 11, 1995, the anti-dilution provision expired, although the Company extended the exercise period to April 30, 1996. The Warrants had been issued pursuant to a warrant agreement (the "Warrant Agreement") between OnGard and Continental Stock Transfer & Trust Company, New York, New York, as Warrant Agent, and are evidenced by Warrant Certificates in registered form. The Warrants provide for adjustment of the exercise price and for a change in the number of shares issuable upon exercise to protect holders against dilution in the event of a stock dividend, stock split, combination or reclassification of the OnGard Common Stock or upon issuance of shares of OnGard Common Stock at prices lower than the greater of the Warrant exercise price then in effect or the then market price. The exercise price of the Warrants was subject to adjustment as follows: If OnGard issues any OnGard Common Stock, or any securities exercisable for or convertible into Common Stock, for a consideration per share less than the higher of either (a) the exercise price in effect immediately prior to the issuance of such OnGard Common Stock or securities, or (b) the then current market price per share of the OnGard Common Stock, then, the exercise price in effect immediately prior to each such issuance shall (except as otherwise provided in this clause) be adjusted by multiplying such exercise price by a fraction, the numerator of which shall be the number of shares of OnGard Common Stock outstanding (as defined in the Warrant Agreement) prior to such issuance plus the number of shares of OnGard Common Stock which the aggregate offering price of the total number of shares of OnGard Common Stock to be issued (or deemed issued) would purchase at the higher of (a) the exercise price then in effect or (b) the then current market price per share the OnGard Common Stock, and of which the denominator shall be the number of shares of OnGard Common Stock then outstanding (as defined in the Warrant Agreement) plus the number of shares of OnGard Common Stock to be issued (or deemed issued). The Warrants do not confer upon the Warrant holder any voting or other rights of a stockholder of OnGard. Upon notice to the Warrant holders, OnGard has the right to reduce the exercise price and exercise its right extend the expiration date of the Warrants until March 29, 1996. See "CERTAIN TRANSACTIONS." Through April 30, 1996, the Company received $6.0 million (gross proceeds) from the exercise of approximately 890,000 Warrants converting to 1,128,000 shares. UNDERWRITER'S UNIT PURCHASE WARRANTS OnGard sold to the Underwriter of its initial public offering, for a price of $10 in the aggregate, 80,000 warrants (the "Underwriter's Warrants"). The total number of Underwriter's Warrants has been adjusted to approximately 120,391 pursuant to an anti-dilution provision. Each Underwriter's Warrant entitles the holder to purchase one unit, at an adjusted price of $4.65 per unit, through August 11, 1997. The units underlying the Underwriter's Warrants are substantially identical to the units sold to the public, except that the Warrants 53 contained in such units are not callable at any time and the Underwriter's Warrants may be exercised by delivering cash and/or securities of OnGard equal in value of the exercise price, based upon the market value of the securities being delivered to OnGard. OnGard has also granted certain redemption rights to the Underwriter with respect to the Underwriter's Warrants and the units issuable thereunder. The Warrants contained in such units are exercisable at $6.26 per share. The Underwriter's Warrants contain an anti-dilution provision that was triggered in connection with the Dilutive Transactions in which the Company has engaged. See "RISK FACTORS--Underwriter's Warrants and Exercise Thereof." These adjustments do not reflect shares OnGard anticipates issuing to Royce in connection with the Merger. See "VOTING AND MANAGEMENT INFORMATION--Management and Principal Shareholders of OnGard--Certain Transactions." The Placement Agent has also been granted warrants to purchase a total of 30,000 Units (each Unit consisting of two shares of common stock and one purchase warrant) at $7 per unit in connection with the Company's private placement completed in July, 1994. The 30,000 warrants underlying the Underwriter's private placement warrants are identical in terms to the Class A Warrants discussed above except that they are not subject to redemption. The 60,000 shares underlying these units, were initially granted at a price of $3.50 and the 30,000 warrants at a price of $6.00 per warrant. The Company believes that, based upon the anti-dilution provision that has been triggered by the Dilutive Transactions since the issuance of these units, the shares have been adjusted to 69,652 and the exercise price to $3.01. The warrants have been adjusted to 34,826 and the price to $5.17. GUARANTORS' WARRANTS In consideration for a $1.5 million guarantee of debt financing facilitated by a third party Guarantor, from a commercial lender, Norwest Bank, Colorado ("Bank") the Company issued the Guarantor or its assigns a five year warrant to purchase 400,000 shares of the Company's common stock at an exercise price of $4 per share until 5:00 p.m. New York Time on October 24, 1999. The Warrant does not confer upon the holder any voting or other rights of a stockholder of OnGard. In the event the Company files a new registration statement under the Securities Act of 1933 with the Securities and Exchange Commission covering securities of the Company, the holder of the Warrant will have the right to have the shares issuable upon exercise of the Warrant included in such registration to permit the public sale of the Warrant Shares. The Warrant contains an anti-dilution provision to provide for adjustment of the exercise price and for a change in the number of shares issuable upon exercise to protect the holder against dilution in the event of a stock dividend, stock split, combination or reclassification of the OnGard Common Stock. The Company believes the adjusted exercise price of the warrants is $3.41 and number of shares is 468,700. In addition, the guarantor, in conjunction with another investor in the Company, guaranteed an additional $1.0 million of additional borrowings for which an additional 200,000 warrants were granted at an exercise price of $4.00 per share. These warrants are identical in terms to those previously provided but expire on May 31, 2000. The Company believes the adjusted exercise price of these warrants is $3.57 and the number of shares is 224,080. CLASS A WARRANTS The Private Placement of the Company's Common Stock completed in July, 1994 contained warrants (the "Class A Warrants") to purchase one share of the Company's Common Stock for $6. The Class A Warrants are exercisable until 5:00 p.m., Mountain Time, three years from the final closing date of the Private Placement. The Class A Warrants contain an anti-dilution provision which is triggered by (i) a sale of any shares of the Company's Common Stock for a consideration per share less than the then current fair market value per share of Common Stock or the purchase price pursuant to the Class A Warrants on the date of sale, (ii) the issuance of any shares of Common Stock as a stock dividend to the holders of Common Stock, and (iii) a subdivision or combination of the outstanding shares of Common Stock into a greater or lesser number of shares. The Warrant agreement specifically provided that anti-dilution provisions was not triggered by the Pharmetics' Merger or the Guarantor's Warrants. The Class A Warrants are redeemable by the Company in the event the closing price of the Company's Common Stock is at least $10 per share per day for twenty consecutive trading days immediately preceding the date of the notice of redemption. The Holders of the Class A Warrants and securities issuable upon exercise thereof are granted both demand and "piggyback" registration rights under certain conditions. Three hundred thousand (300,000) Class A Warrants were issued, 54 71,429 were exercised during the first quarter 1995. The Company believes that based on its securities transactions since the date of the issuance of Class A warrants, the price per share has been adjusted to $5.20 and shares issuable revised to 268,341. CLASS B WARRANTS The Class B Redeemable Common Stock Warrants sold in connection with preferred shares described above are exercisable for a period of three years from the closing date of the offering, until 5:00 p.m. Mountain Time on such date. Each of 375,000 Warrant entitles the holder thereof to purchase one share of Common Stock at a price of $6.00 per share. The Warrants are redeemable by the Company in the event the closing price of the Company's Common Stock is at least $10 per share per day for twenty consecutive trading days immediately preceding the date of the notice of redemption. The Warrants will be protected against dilution upon the occurrence of certain events including sales of Common Stock for less than fair market value, stock dividends, split-ups, reclassifications, mergers and asset sales. The Company believes that based on its securities transactions since the date of the issuance of the Class B warrants, the price per share has been adjusted to $5.23, for 287,471 shares and $5.31 for 141,060 shares and the shares issuable revised to 428,531. CERTAIN STATUTORY PROVISIONS The Company is subject to section 203 of the Delaware General Corporation Law, which imposes restrictions on business combinations (as defined therein) with interested persons (being any person who acquired 15% or more of the Company's outstanding voting stock). In general, the Company is prohibited from engaging in business combinations with an interested person for a period of three years from the date a person becomes an interested person, subject to certain exceptions. By restricting the ability of the Company to engage in business combinations with an interested person, the application of section 203 of the Company may provide a restriction on hostile or unwanted takeovers even if such proposals are at a premium to current market prices of the common stock and are favored by the majority of stockholders. LIABILITY LIMITATIONS ON DIRECTORS AND OFFICERS As permitted by the provisions of the Delaware General Corporation Law, the Company's Certificate of Incorporation eliminates in certain circumstances the monetary liability of directors of the Company of certain breaches of their fiduciary duties as directors. However, these provisions do not eliminate the liability of a director (i) for a breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions by a director not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) for liability arising under section 174 of the Delaware General Corporation Law (relating to the declaration of dividends and purchase or redemption of shares in violation of the Delaware General Corporation Law); or (iv) for any transaction from which the director derived an improper personal benefit. In addition, these provisions do not limit the rights of the Company or its stockholders, in appropriate circumstances, to seek equitable remedies such as injunctive or other forms of non-monetary relief. Such remedies may not be effective in all cases. Pursuant to the Company's By-Laws, and consistent with section 145 of the Delaware Business Corporation Law, directors and officers of the Company are entitled to mandatory indemnification from the Company against certain liabilities and expenses (i) to the extent such officers or directors are successful in the defense of a proceeding and (ii) in proceedings in which the director or officer is not successful in the defense thereof, unless (in the latter case only) it is determined that the director or officer breached or failed to perform his duties to the Company and such breach or failure constituted: (a) a willful failure to deal fairly with the Company or its shareholders in connection with a matter in which the director or officer had a material conflict of interest; (b) a violation of the criminal law unless the director of officer had reasonable cause to believe his or her conduct was lawful or had no reasonable cause to believe his or her conduct was unlawful; (c) a transaction from which the director or officer derived an improper personal profit; or (d) willful misconduct. 55 Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officer and controlling persons of the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. TRANSFER AND WARRANT AGENT The Company's transfer agent is Continental Stock Transfer and Trust Co., New York, New York. Continental Stock Transfer and Trust Co. will also serve as Warrant Agent in connection with the exercise of the Warrants. SHARES ELIGIBLE FOR FUTURE SALE At April 30, 1996, OnGard had 6,488,721 shares of OnGard Common Stock outstanding and 378,392 preferred shares outstanding which are convertible to common stock. Of these shares, the 920,000 shares sold in the initial public offering, 212,947 exchanged in the Pharmetics acquisition, 1,129,940 converted from exercise of Common stock purchase warrants, 300,000 shares issued under Regulation S and approximately 195,000 other shares may be freely traded without restriction under the Securities Act of 1993 (the "Act"). An additional 125,000 preferred shares were also issued under Regulation S and are traded without restriction. The Company is registering 2,639,023 common shares by this Prospectus making them available for public sale. The remaining 1,091,811 shares of OnGard Common Stock (the "restricted shares") have been issued and sold by OnGard in private transactions in reliance upon various exemptions under the Act. Such shares will be eligible for public sale if registered under the Act or sold in accordance with Rule 144 thereunder. In general, under Rule 144, beginning 90 days after August 11, 1992, the date of the initial public offering, a person (or persons whose shares are aggregated) who has beneficially owned his shares for at least two years, including persons who may be deemed "affiliates" (as defined in the Securities Act of 1933, as amended) of OnGard, is entitled to sell within any three-month period a number of shares that does not exceed the greater of (a) 1% of the then outstanding shares of OnGard Common Stock (approximately 63,000 shares) or (b) the average weekly trading volume in the over-the-counter market during the four calendar weeks preceding the date on which notice of such sale is filed with the Securities and Exchange Commission. In addition, sales under Rule 144 are subject to the certain other restrictions regarding the manner of sale, required notice and availability of public information concerning OnGard. A person (or persons whose shares are aggregated) who is not deemed an "affiliate" of OnGard and who has beneficially owned his shares for at least three years would be entitled to sell such shares under Rule 144 without regard to the volume limitations and certain other restrictions. The holders of 1,150,000 shares of registered shares agreed not to sell any of their shares of OnGard Common Stock to the public for a period of 24 months after August 11, 1992 without the prior written consent of the Underwriter. Based upon available information, OnGard believes that, following the expiration of such 24 month period, a substantial portion of such shares became eligible for public sale pursuant to Rule 144 as described above. The holders of such shares have agreed that, for three years following such 24 months period, all sales of such shares shall be effected through or with the Underwriter, in the following manner. Each such holder shall offer the Underwriter the exclusive opportunity to purchase or sell such shares on terms at least as favorable as such holder can obtain elsewhere. If the Underwriter fails to accept such proposal within three business days, the Underwriter shall have no rights with respect to the proposed transaction. If the proposal is thereafter modified in any material respect, the Underwriter will have an additional right of refusal on the terms described above. In connection with its acquisition of assets of MDPI in March 1993, OnGard privately issued 50,000 shares of common stock. These shares constitute "restricted securities" for purposes of the Act. The purchaser of these securities agreed that, in addition to applicable securities law restrictions, it would not transfer the shares for a period of twelve months from the date of purchase. 56 In connection with its acquisition of OST in October, 1994, OnGard issued 130,655 shares to the former majority holder of OST stock. The purchaser agreed it would not transfer the shares for a period of twelve months from the date of purchase. 57 EXPERTS The consolidated financial statements of OnGard Systems, Inc. as of December 31, 1995 and for each of the two years in the period then ended included in this prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. 58 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ONGARD SYSTEMS, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Page ---- Report of Independent Public Accountants........................... F-1 Consolidated Balance Sheet as of December 31, 1995................. F-2 Consolidated Statements of Operations for the years ended December 31,1995 and 1994......................................... F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995 and 1994.................... F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1994........................................ F-5 Notes to Consolidated Financial Statements......................... F-6 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 Consolidated Balance Sheets as of March 31, 1996 and December 31, 1995 (Unaudited)..................................... F-22 Consolidated Statements of Operations for the three months ended March 31, 1996 and 1995 (Unaudited)............................... F-24 Consolidated Statements of Cash Flows for the three months ended March 31, 1996 and 1995 (Unaudited)............................... F-25 Notes to Consolidated Financial Statements......................... F-27
59 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To OnGard Systems, Inc.: We have audited the accompanying consolidated balance sheet of OnGard Systems, Inc. (a Delaware corporation) and subsidiary as of December 31, 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of OnGard Systems, Inc. and subsidiary as of December 31, 1995, and the results of their operations and their cash flows for each of the two years then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Melville, New York March 29, 1996 F-1 ONGARD SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,693,303 Restricted cash 97,363 Trade accounts receivable, net of allowance of $119,000 656,274 Inventory, net 1,481,847 Prepaid expenses and other current assets 77,881 ----------- Total current assets 6,006,668 ----------- PROPERTY AND EQUIPMENT, net 1,152,573 ----------- EQUIPMENT UNDER OPERATING LEASE, net 134,440 ----------- OTHER ASSETS: Excess cost over net tangible assets acquired, net 2,396,608 Intangible and other assets, net 238,258 Deposits 51,151 Debt guarantee fee, net 140,740 ----------- Total other assets 2,826,757 ----------- $10,120,438 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable to bank $ 1,764,270 Trade accounts payable 839,187 Accrued liabilities 1,251,050 Capital leases payable 88,362 Customer deposits 89,994 ----------- Total current liabilities 4,032,863 NONCURRENT TRADE ACCOUNTS PAYABLE 50,735 ----------- Total liabilities 4,083,598 ----------- COMMITMENTS AND CONTINGENCIES (Notes 6 and 8) STOCKHOLDERS' EQUITY: Convertible Series A Preferred stock, $.001 par value, 3,000,000 shares authorized; 378,292 issued and outstanding; aggregate liquidation preference of $1,513,168 1,228,167 Series B Redeemable Preferred stock, no par value; 100 shares issued and outstanding 10 Common stock, $.001 par value, 10,000,000 shares authorized; 5,355,281 shares issued and outstanding 5,355 Additional paid-in capital 23,983,803 Deferred compensation (1,189,500) Accumulated deficit (17,990,995) ----------- Total stockholders' equity 6,036,840 ----------- $10,120,438 ----------- ----------- The accompanying notes are an integral part of this balance sheet. F-2 ONGARD SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 1995 1994 ----------- ----------- REVENUES $4,975,069 $ 3,928,345 COST OF SALES 5,286,358 3,470,709 ---------- ----------- Operating margin (deficit) (311,289) 457,636 ---------- ----------- COSTS AND EXPENSES: General and administrative 4,339,822 2,440,935 Sales and marketing 1,468,319 568,488 Depreciation and amortization 307,813 150,930 Research and development 369,859 223,652 Writedown of excess cost over net tangible assets acquired (Notes 1 and 12) - 1,988,561 Provision for losses on advances to Pharmetics (Notes 1 and 12) - 801,824 ---------- ----------- Total costs and expenses 6,485,813 6,174,390 ---------- ----------- LOSS FROM OPERATIONS (6,797,102) (5,716,754) INTEREST EXPENSE (549,332) (239,761) INTEREST AND OTHER INCOME, net 358,434 66,507 ---------- ----------- LOSS BEFORE PROVISION FOR INCOME TAXES (6,988,000) (5,890,008) PROVISION FOR INCOME TAXES - - ----------- ----------- NET LOSS $(6,988,000) $(5,890,008) ----------- ----------- ----------- ----------- NET LOSS PER SHARE $ (1.76) $ (2.32) ---------- ----------- ---------- ----------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 3,961,700 2,534,900 ---------- ----------- ---------- ----------- The accompanying notes are an integral part of these statements. F-3 ONGARD SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Series A Series B Preferred Stock Preferred Common Stock -------------------- -------------- -------------------- Shares Amount Shares Amount Shares Amount -------------------- -------------- -------------------- BALANCE, December 31, 1993 - $ - - $ - 2,070,000 $2,070 - - Issuance of 600,000 common shares in connection with equity private placement, net of issuance costs and underwriter's commissions of $427,823 - - - - 600,000 600 Issuance of 400,000 warrants in connection with guarantee of the Company's note payable to bank - - - - - - Issuance of 359,602 common shares in connection with merger with Pharmetics - - - - 359,602 360 Issuance of 250,000 warrants in connection with convertible debenture private placement - - - - - - Deferred compensation related to stock options granted - - - - - - Compensation related to stock options granted - - - - - - Net loss - - - - - - ------- ---------- --- --- --------- ------ BALANCE, December 31, 1994 - - - - 3,029,602 3,030 Conversion of convertible debentures to Class A preferred stock, net of debt discount 250,000 765,000 - - - - Issuance of 3,292 Class A preferred shares for accrued interest on convertible debentures 3,292 13,167 - - - - Sale of 125,000 Class A preferred shares, net of underwriters' commissions of $50,000 125,000 450,000 - - - - Issuance of 100 shares of Class B redeemable preferred limited voting stock - - 100 10 - - Conversion of 71,429 Class A warrants to common stock, net of underwriters commissions of $25,000 - - - - 71,429 71 Conversion of related party notes payable and interest to common stock - - - - 12,373 12 Issuance of 200,000 warrants in connection with guarantee of the Company's notes payable to bank - - - - - - Issuance of 2,204,021 common shares in connection with equity private placement, net of issuance costs of $80,000 - - - - 2,204,021 2,204 Deferred compensation related to stock options granted - - - - - - Compensation related to stock options granted - - - - - - Amortization of deferred compensation - - - - - - Conversion of vendor payables to common stock - - - - 35,200 35 Exercise of common stock warrants - - - - 2,656 3 Net loss - - - - - - ------- ---------- --- --- --------- ------ BALANCE, December 31, 1995 378,292 $1,228,167 100 $10 5,355,281 $5,355 ------- ---------- --- --- --------- ------ ------- ---------- --- --- --------- ------ Additional Total Paid-In Deferred Accumulated Stockholders' Capital Compensation Deficit Equity ----------- ------------ ------------ ------------ BALANCE, December 31, 1993 $ 7,389,481 $ - $ (5,112,987) $2,278,564 Issuance of 600,000 common shares in connection with equity private placement, net of issuance costs and underwriter's commissions of $427,823 1,671,577 - - 1,672,177 Issuance of 400,000 warrants in connection with guarantee of the Company's note payable to bank 400,000 - - 400,000 Issuance of 359,602 common shares in connection with merger with Pharmetics 2,595,515 - - 2,595,875 Issuance of 250,000 warrants in connection with convertible debenture private placement 250,000 - - 250,000 Deferred compensation related to stock options granted 150,000 (150,000) - - Compensation related to stock options granted 309,375 - - 309,375 Net loss - - (5,890,008) (5,890,008) ----------- ----------- ------------ ---------- BALANCE, December 31, 1994 12,765,948 (150,000) (11,002,995) 1,615,983 Conversion of convertible debentures to Class A preferred stock, net of debt discount - - - 765,000 Issuance of 3,292 Class A preferred shares for accrued interest on convertible debentures - - - 13,167 Sale of 125,000 Class A preferred shares, net of underwriters' commissions of $50,000 - - - 450,000 Issuance of 100 shares of Class B redeemable preferred limited voting stock - - - 10 Conversion of 71,429 Class A warrants to common stock, net of underwriters commissions of $25,000 296,359 - - 296,430 Conversion of related party notes payable and interest to common stock 59,910 - - 59,922 Issuance of 200,000 warrants in connection with guarantee of the Company's notes payable to bank 200,000 - - 200,000 Issuance of 2,204,021 common shares in connection with equity private placement, net of issuance costs of $80,000 7,631,844 - - 7,634,048 Deferred compensation related to stock options granted 1,087,500 (1,087,500) - - Compensation related to stock options granted 1,700,000 - - 1,700,000 Amortization of deferred compensation - 48,000 - 48,000 Conversion of vendor payables to common stock 228,062 - - 228,097 Exercise of common stock warrants 14,180 - - 14,183 Net loss - - (6,988,000) (6,988,000) ------------------------------------------- ---------- BALANCE, December 31, 1995 $23,983,803 $(1,189,500) $(17,990,995) $6,036,840 ------------------------------------------- ---------- ------------------------------------------- ----------
The accompanying notes are an integral part of these statements. F-4 ONGARD SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(6,988,000) $(5,890,008) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization and noncash interest 835,715 575,373 Compensation expense related to stock options granted 1,748,000 309,375 Gain on sale of packaging assets (233,500) - Provision for doubtful accounts 52,000 1,285 Provision for losses on advances to Pharmetics - 801,824 Writedown of excess cost over net tangible assets acquired - 1,988,561 Write-off of equipment - 50,856 Write-off of selected intangible packaging line assets 110,000 - Changes in assets and liabilities: Increase in restricted cash (47,363) - Decrease (increase) in trade accounts receivable 625,846 (445,047) (Increase) decrease in inventory (404,363) 36,991 (Increase) decrease in prepaid expenses and other (71,556) 33,332 (Decrease) increase in trade accounts payable and accrued liabilities (1,045,803) 313,186 Increase (decrease) in deposit liability 59,535 (3,287) ----------- ----------- Net cash used in operating activities (5,359,489) (2,227,559) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (298,076) (294,676) Proceeds from sale of packaging assets 620,500 - Decrease (increase) in other assets 68,134 (30,802) Increase in notes and advances receivable from Pharmetics prior to merger - (1,612,091) Redemption of certificate of deposit - 190,000 Payment of Pharmetics merger expenses - (232,561) ----------- ----------- Net cash provided by (used in) investing activities 390,558 (1,980,130) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of preferred stock 450,010 - Proceeds from issuance of common stock 7,944,641 1,795,376 Proceeds from convertible debentures - 1,000,000 Payment of notes payable to related parties (55,500) (51,000) Proceeds from notes payable to bank 1,000,000 1,500,000 Payment of note payable to bank (666,109) (69,632) Payment of capital leases payable (79,523) (22,859) ----------- ----------- Net cash provided by financing activities 8,593,519 4,151,885 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,624,588 (55,804) CASH AND CASH EQUIVALENTS, beginning of the year 68,715 124,519 ----------- ----------- CASH AND CASH EQUIVALENTS, end of the year $ 3,693,303 $ 68,715 ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 131,274 $ 34,150 ----------- ----------- ----------- ----------- SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: Acquisition of Pharmetics (Note 1) - - Conversion of convertible debentures to Preferred stock 765,000 - Conversion of related party notes payable and interest to common stock 59,922 - Conversion of vendor payables to common stock 228,097 - Acquisition of equipment through capital leases 145,517 - Fair value of warrants issued to guarantor for bank debt (Notes 9 and 10) 200,000 400,000 Reclassification of inventory to equipment under operating lease 134,440 -
The accompanying notes are an integral part of these statements. F-5 ONGARD SYSTEMS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 1. ORGANIZATION AND BUSINESS: OnGard Systems, Inc. ("OnGard" or the "Company") manufactures and markets both equipment and disposable sterility assurance products for the control of infectious diseases. These products serve a broad spectrum of healthcare providers in a variety of markets. The Company sells products for the safe, efficient and economic handling, storage, transportation and disposal of infectious medical waste, and is also engaged in the production and distribution of sterile packaging. Through its 1994 acquisition of Pharmetics, Inc. ("Pharmetics"), now known as OnGard Sterilization Technologies, Inc. ("OST"), a wholly owned subsidiary of the Company, described below, the Company manufactures sterilizers, washers and dryers used for the control of infection in hospital, pharmaceutical, laboratory and research facilities. During 1993, the Company and Med-Device Packaging, Inc. ("MDPI") entered into an Asset Purchase Agreement (the "Purchase Agreement"), effective January 1, 1993, whereby the Company purchased substantially all of MDPI's assets and assumed certain MDPI liabilities, as defined in the Purchase Agreement, for a purchase price of $673,524. Effective December 7, 1995, the Company sold selected MPDI assets to another company in order to focus on its proprietary product line, Autopak-TM-. Sales proceeds for the packaging equipment and inventory aggregated $620,500. The gain on the sale of these assets was $233,500. In connection with the disposal, the Company wrote-off related goodwill and a non- compete agreement aggregating $68,000 during 1995. The Company also retained related accounts receivable. The Company and Pharmetics completed an Agreement and Plan of Merger (the "Merger Agreement") effective October 1, 1994. The Company issued 359,602 of its common shares in exchange for all of the outstanding common and preferred stock of Pharmetics. The acquisition was accounted for as a purchase. The purchase price related to the Pharmetics merger is as follows: Issuance of common stock $2,595,875 Merger expenses 232,561 Advances to Pharmetics 1,082,434 ---------- Purchase price $3,910,870 ---------- ---------- F-6 The purchase price was allocated as follows: 1994 ----------- Cash $ - Trade accounts receivable 590,998 Inventory 900,840 Property and equipment 114,530 Other assets 81,164 Excess cost over net tangible assets acquired 4,544,942 ----------- Total assets 6,232,474 Assumption of liabilities (2,321,604) ----------- $ 3,910,870 ----------- ----------- The Company has consolidated the results of this acquisition since the effective date of the merger. See Note 12, where the Company's decision to write down the excess of cost over net tangible assets acquired related to this transaction is described in further detail. The following unaudited pro forma consolidated results of operations of the Company for the year ended December 31, 1994 assumes that the acquisition of Pharmetics had occurred on January 1, 1994. The pro forma results presented below are not necessarily indicative of the actual results of operations had Pharmetics been acquired as of the earlier date, nor are they necessarily indicative of future results of operations. 1994 -------------- (unaudited) Revenues $ 4,915,638 Net loss $ (7,566,433) Net loss per share $ (2.98) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. 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 reporting period. Actual results could differ from those estimates. F-7 CASH EQUIVALENTS The Company considers all highly liquid cash investments with an original maturity of three months or less to be cash equivalents. RESTRICTED CASH The Company has a standby letter of credit for $50,000 for the transportation of medical waste by the U.S. Postal Service. The letter of credit had no balance outstanding at December 31, 1995, and is backed by the restriction of a $50,000 certificate of deposit, which is classified as restricted cash in the accompanying consolidated balance sheet. Also included in restricted cash is approximately $47,000 in escrow related to the sale of MPDI assets described in Note 1. INVENTORY Inventory is stated at the lower of cost (first-in, first-out method) or market. Work in process and finished goods inventory includes direct manufacturing costs and an allocation of overhead. Inventory, net consists of the following at December 31, 1995: Raw materials $ 905,886 Work-in-process 477,901 Finished goods 98,060 ----------- $ 1,481,847 ----------- ----------- PROPERTY AND EQUIPMENT Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization is provided on a straight-line basis over the following estimated useful lives: Machinery and equipment 3 - 7 years Furniture and fixtures 5 - 7 years Leasehold improvements remaining term of lease or estimated useful life, whichever is less Expenditures for maintenance and repairs which do not materially prolong the normal useful life of an asset are charged to operations as incurred. Additions and improvements which substantially extend the useful lives of the properties are capitalized. The cost and related accumulated depreciation and amortization of property and equipment are removed from the accounts upon retirement or other disposition, and any resulting gain or loss is reflected in earnings. EXCESS COST OVER NET TANGIBLE ASSETS ACQUIRED Excess cost over net tangible assets acquired is being amortized over 20 years. The balance at December 31, 1995 of $2,396,608 is net of $159,774 of accumulated amortization. The Company recorded a writedown of excess cost over net tangible assets acquired as of December 31, 1994 which is described in Note 12. The Company evaluated the impairment of its excess cost over net tangible assets acquired based on a fair value methodology using discounted projected future net cash flows. F-8 INTANGIBLE AND OTHER ASSETS The costs of the Company's patents and trademark are being amortized on a straight-line basis over 17 years from the date the patents and trademark were obtained. DEBT GUARANTEE FEE Debt guarantee fee reflects the fair value of warrants issued to the guarantors of the Company's $2.5 million bank loans in exchange for the guarantee (Note 9). The costs are being amortized over the life of the loan as interest expense. The Company obtained an investment banking opinion on the fair value assigned to these warrants. REVENUE RECOGNITION The Company generally recognizes revenue from product sales upon shipment to the customer. If a product shipment is delayed at the customer's request, the Company recognizes revenue upon completion and acceptance by the customer. WARRANTY RESERVE The Company provides a warranty on its equipment sales. Estimated warranty costs are accrued at the time the equipment is sold. The Company has a warranty reserve of approximately $91,000 as of December 31, 1995, which is included in accrued liabilities in the accompanying consolidated balance sheet. ACCRUED LIABILITIES Accrued incineration and postage expenses represent the expected costs associated with the ultimate disposal of the Company's mail-back products. Mail-back products are disposable containers used to collect medical waste by customers who then mail the filled containers through the U.S. Postal Service (Note 8) to an incinerator. An accrual is made for each mail-back product sold and, as the containers are received by the incinerator, charges for incineration and postage are billed to and paid by the Company. Accrued liabilities consists of the following at December 31, 1995: Legal $ 125,343 Incineration and postage 370,089 Commissions 154,144 Payroll and related taxes 123,253 Other 478,221 ---------- $1,251,050 ---------- ---------- F-9 INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. In addition, SFAS 109 requires recognition of deferred tax assets for the expected future tax effects of tax loss carryforwards and tax credit carryforwards. Net deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefits which, more likely than not based on current circumstances, are not expected to be realized (Note 7). RESEARCH AND DEVELOPMENT Research and development costs incurred by the Company associated with the development of preproduction prototypes are expensed as incurred. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company calculates the fair value of financial instruments and includes this additional information in the notes to financial statements when the fair value is different than the book value of those financial instruments. When the fair value approximates book value, no additional disclosure is made. The Company uses quoted market prices whenever available to calculate these fair values. When quoted market prices are not available, the Company uses standard pricing models for various types of financial instruments which take into account the present value of estimated future cash flows. At December 31, 1995, the carrying value of all financial instruments approximated fair value. MAJOR CUSTOMERS The Company had one customer which accounted for 10% of total revenues during 1995, and three customers that accounted for 16%, 13%, and 12%, respectively, of the Company's revenues during 1994. During 1995, one of the Company's major customers divested a division to another entity resulting in the Company selling to both companies. However, due to the divestiture, neither customer was characterized as a major customer in 1995, although the sales were retained by the Company. In addition, through its sale of selected medical packaging assets in December 1995 (Note 1), the Company no longer sells these products to customers, which included its only major customer in 1995. Net profitability from this and other packaging line accounts was nominal. Accordingly, management believes the loss of this account will not have a material impact on the results of operations. In 1993, the Company and Sherwood Medical Company ("Sherwood"), a company engaged in the distribution of medical products, and a subsidiary of American Home Products Corporation, entered into a five-year supply, distribution, disposal and license agreement (the "Distribution Agreement"). The Company appointed Sherwood as exclusive distributor in the mail-back field. However, the Company and Sherwood were continuously revising the existing agreement in instances where the parties agreed that a direct selling approach by the Company was appropriate. Ultimately, the exclusive relationship was terminated during the third quarter of 1995. Loss of the Sherwood contract has required the Company to modestly increase its expenditures in sales promotion and to make direct arrangements with the distribution channels. Sherwood accounted for 2% of the Company's sales during 1995. F-1O NET LOSS PER SHARE Net loss per share is based on the weighted average number of common shares outstanding during each year. Due to the Company's net loss in 1995 and 1994, common share equivalents of the Company are not included in the net loss per share calculation, as the inclusion of such common share equivalents would be antidilutive. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the current year presentation. RECENTLY ISSUED ACCOUNTING STANDARDS During March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". This statement establishes financial accounting and reporting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. This statement is effective for financial statements for fiscal years beginning after December 15, 1995, although earlier application is encouraged. The Company believes that the adoption of this statement will not have a material impact on its financial statements. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation". This statement establishes a fair value based method of accounting for an employee stock option or similar equity instrument but allows companies to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees". Companies electing to continue to use the accounting under APB Opinion No. 25 must, however, make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in SFAS No. 123 had been applied. These disclosure requirements are effective for years beginning after December 15, 1995. Management intends to continue accounting for its stock- based compensation plans under the accounting prescribed by APB Opinion No. 25. 3. PROPERTY AND EQUIPMENT: Property and equipment consists of the following as of December 31, 1995: Furniture and fixtures $ 62,256 Leasehold improvements 415,142 Machinery and equipment 1,418,999 ----------- 1,896,397 Less- Accumulated depreciation and amortization (743,824) ----------- $ 1,152,573 ----------- ----------- F-11 4. INTANGIBLE AND OTHER ASSETS: Intangible and other assets consists of the following as of December 31, 1995: Patents and trademark $245,132 Non-compete agreement 36,662 Other 20,000 -------- 301,794 Less- Accumulated amortization (63,536) -------- $238,258 -------- -------- 5. NOTES PAYABLE TO RELATED PARTIES: At December 31, 1994, the Company had a note payable outstanding to an employee of the Company for $48,000, which was paid in 1995. In 1989, the Company issued a $30,000 unsecured note to one of the founding stockholders of the Company as consideration for funding start-up losses. The note provided for interest payable at prime plus 1%, and matured June 28, 1993. This note, including accrued interest, was settled in 1995 with the issuance of 10,268 shares of the Company's common stock. Through its acquisition of Pharmetics, the Company also had a $30,000 unsecured note payable to one of its employees which had been classified as a current liability at December 31, 1994. The note has been repaid in part with 2,105 shares of the Company's common stock and $7,500 in cash; $7,500 remains outstanding at December 31, 1995. 6. LEASES: The Company leases its Denver and New York office and warehouse facilities, and has other minor noncancelable operating leases including office and factory equipment which range from three to five years. The Denver office and warehouse lease expires in May 1998, and the Company has the option to renew the lease for an additional six years. In connection with the consolidation of its Denver and New York facilities, the Company has a final draft of an agreement in which it has assigned the lease for its Denver facility effective April 1, 1996. Through this assignment, the Company will be granted complete release from its obligations under the lease and will also receive premium payments from the assignee in excess of its monthly rental payments through May 1998. The New York facility lease expires in January 2000. Total rental expense for 1995 and 1994 was $258,651 and $141,288, respectively. Future minimum lease payments are as follows, which include payments in the event the agreement described above to assign the Denver lease is not completed: 1996 $404,778 1997 364,544 1998 287,446 1999 167,840 2000 171,173 Thereafter $ 14,333 The Company must also pay its proportionate share of all operating costs of the leased buildings as defined in the lease agreements. The Company also leases certain fixed assets that are capitalized as of December 31, 1995. Future obligations on these leases are $88,362, plus accrued interest of $6,032. F-12 7. INCOME TAXES: Net deferred tax assets and liabilities consist of the following at December 31, 1995: Current: Accounts receivable $ 45,291 Inventory 102,661 Other 37,048 ----------- 185,000 ----------- Noncurrent: Fixed assets (48,715) Stock compensation 646,000 Net operating loss carryforwards 6,167,156 ----------- 6,764,441 ----------- Total net deferred tax asset 6,949,441 Valuation allowance (6,949,441) ----------- Net deferred tax asset $ - ----------- ----------- The Company's effective income tax rate was different than the statutory federal income tax rate as follows: 1995 1994 ----------- ----------- Federal income tax (benefit) at statutory rates $(2,338,000) $(1,848,000) State income tax (benefit), net of federal effect (227,000) (215,000) SFAS 109 valuation allowance on operating losses 2,565,000 2,063,000 ----------- ----------- $ - $ - ----------- ----------- ----------- ----------- The Company has no state or federal income taxes currently payable at December 31, 1995. The differences between the fiscal 1995 losses reported for financial reporting and income tax purposes relate primarily to differences in the timing of certain reported items including depreciation and amortization expense and provision for losses. At December 31, 1995, the Company has net operating loss ("NOL") carryforwards of approximately $16,229,000 currently available for federal income tax purposes which expire through 2010. The Company's initial public offering ("IPO") and certain other ownership changes have limited the Company's ability to utilize its NOL carryforwards existing at the dates of the respective ownership changes. The Pharmetics preacquisition NOL of approximately $3,990,000, which is included in the above amount, will be significantly limited due to the change in control resulting from the acquisition by OnGard. The Company has determined that its net deferred tax asset as of December 31, 1995 does not satisfy the realization criteria set forth in SFAS 109. Recognition of these benefits requires future taxable income, the attainment of which is uncertain. Accordingly, a valuation allowance has been recorded to offset the entire net deferred tax asset. F-13 8. CONTINGENCIES: MAIL-BACK MEDICAL WASTE SERVICE The Company provides a mail-back medical waste service to small quantity generators of medical waste. The Company uses the U.S. Postal Service for its mailings of medical waste. As such, the Company is subject to the U.S. Postal Service's existing and evolving regulations pertaining to the transportation of medical waste. Transportation, handling and storage of medical waste may also be subject to rules and regulations promulgated by various agencies such as the Occupational Safety and Health Administration, the Department of Transportation and various state and local municipalities. Changes in regulations could have a significant impact on the Company's ability to market and transport its medical waste products and waste disposal services. LEGAL PROCEEDINGS Although the Company does not have any pending legal proceedings other than ordinary, routine litigation incidental to its business, as a seller of medical infection control and waste handling systems, the Company could face product liability claims or other claims potentially based on accidental infections, loss of waste disposal packages in the mail or other unforeseen circumstances. The Company maintains product liability insurance in an aggregate amount of $1,000,000, an amount it believes to be adequate. However, there can be no assurance that such coverage will be adequate to cover future product liability claims, if any, or that such product liability insurance coverage will continue to be available at reasonable prices. 9. NOTES PAYABLE TO BANK: In 1994, the Company obtained a $1.5 million bank loan facilitated by a third- party guarantor. The total $1.5 million was received in two equal parts; the first half was a revolving credit facility and the second was contingent upon completion of the Pharmetics merger, which was consummated effective October 1, 1994 (Notes 1 and 12). Upon issuance of the second $750,000, the total revolving credit facility converted to a $1.5 million term loan, dated November 1994, which bears interest at the prime rate plus 2% (10.5% at December 31, 1995). The loan calls for monthly payments based on a 36-month amortization schedule and matures on April 15, 1996. As of December 31, 1995, there was $764,270 outstanding under this term loan. During 1995, the guarantor of the original loan and another investor in the Company facilitated an additional $1,000,000 in bank borrowings due concurrently with the original loan. These loans bear interest at 11% at December 31, 1995. 10. STOCKHOLDERS' EQUITY: PRIVATE EQUITY TRANSACTIONS During August and September 1995, the Company received net proceeds of approximately $7.6 million from the private placement of 2,204,021 shares of its common stock at a price of $3.50 per share. The Company also issued 100 shares of its Series B preferred stock to the largest investor in the private placement at an aggregate cost of $10.00. The Series B preferred shares carry no dividend or voting rights but convey the right to elect one member of the Company's Board of Directors so long as at least 5% of the Company's common stock is owned by the investor. The Series B holders exercised this right effective December 1995. The stock purchase agreement also provides this investor a preemptive right to purchase its pro rata share of ownership in the Company subsequent to this private placement, allowing for up to $7.0 million in gross proceeds from this placement. F-14 In January 1995, the Company's shareholders approved, by a majority vote, the authorization of up to 3,000,000 Series A preferred shares. Series A preferred shares have a par value of $.001 per share, carry no dividend rights unless declared by the Company's Board of Directors in their sole discretion, and have a preference in liquidation of $4.00 per share plus any accrued dividends, if such dividends have been declared. Each preferred share is convertible into one share of the Company's common stock at the option of the holder. The Series A preferred shareholders are entitled to vote with the common shareholders as a single class. Each preferred share conveys votes equal to the number of common shares into which it is convertible. Upon authorization of the preferred stock issuance by the Company's shareholders, the Company converted, at its option, $1,000,000 of convertible debentures, which were outstanding at December 31, 1994, into 250,000 shares of convertible Series A preferred stock. Class B Preferred Stock Warrants to acquire 250,000 shares of the Company's common stock at $6.00 per share, which were issued in connection with the convertible debentures, remain outstanding after the conversion. During February 1995, the Company sold an additional $500,000 of preferred stock units. Each unit consists of one share of Series A preferred stock at a price of $4.00 per share and one warrant to acquire the Company's common stock at an exercise price of $6.00 per share. A total of 125,000 Series A preferred shares were sold, accompanied by 125,000 Class B Preferred Stock Warrants. PUBLIC OFFERING AND COMMON STOCK PURCHASE WARRANTS In August 1992, the Company completed an IPO of its common stock whereby 920,000 units, consisting of one share of common stock and one purchase warrant (the "Common Stock Purchase Warrant"), were sold at $5.00 per unit, resulting in net proceeds to the Company of approximately $3,718,000. During 1995, 2,100 of these Common Stock Purchase Warrants were exercised (2,656 shares were issued pursuant to antidilution provisions of these warrants). Each Common Stock Purchase Warrant entitled the holder to purchase one share of common stock at an exercise price of $6.75 per share. The Common Stock Purchase Warrants were subject to redemption by the Company in the event its closing stock price equaled or exceeded $10.00 per share on the NASDAQ exchange for 20 consecutive days and upon 30 days written notice. The redemption provision expired in August 1995. The Common Stock Purchase Warrants contain an antidilution provision which affects both the exercise price of the warrant and the number of shares underlying the warrants, and which has been triggered by various equity and debt financing transactions which have occurred since that date. During 1995, the Company extended the expiration date, but no other provisions, to December 31, 1995, and then to March 29, 1996. Through March 29, 1996, the Company received approximately $4.6 million in proceeds from the exercise of these warrants (Note 13). On March 29, 1996, the Company extended the expiration date of the remaining warrants through April 30, 1996. EQUITY PRIVATE PLACEMENT AND CLASS A WARRANTS In July 1994, the Company completed a private placement of 300,000 equity units, each unit consisting of two shares of the Company's common stock and one warrant which was sold at $7.00 per unit. Each warrant (the "Class A Warrants") entitles a holder to purchase one share of the Company's common stock for $6.00. The Class A Warrants also contain an antidilution provision which affects the number of shares and the price of each warrant. The warrant agreement specifically provides that the antidilution provisions were not triggered by either the Pharmetics merger (Notes 1 and 12) or the Guarantor's Warrants (Note 9 and below). The Class A Warrants are subject to redemption on the same terms as the Common Stock Purchase Warrants described above. In February 1995, 71,429 warrants were converted to common stock; the Company had provided one-time pricing of $4.50 per share to incent this exercise. F-15 GUARANTOR'S WARRANTS In connection with the guarantee of the Company's $1.5 million bank loan (Note 9), the Company granted a total of 400,000 warrants (the "Guarantor's Warrants") to purchase its common stock at a price of $4.00 per share to a guarantor. The Guarantor's Warrants were granted in phases: 250,000 warrants were granted upon the guarantee of the first $750,000 loan amount and, thereafter, an additional 150,000 warrants were granted upon issuance of the aggregate $1.5 million note. The warrant agreement with the guarantor contains antidilution provisions which specifically exclude the Pharmetics merger (Notes 1 and 12) and the equity private placement described above. During 1995, in connection with the guarantee of an additional $1.0 million in bank loans, the Company granted a total of 200,000 additional warrants to the original guarantor and another investor in the Company under similar terms as the original warrants. UNDERWRITER'S WARRANTS Underwriter's warrants to purchase a total of 80,000 units at an exercise price of $7.00 per unit, each unit consisting of one share of common stock and one purchase warrant with an exercise price of $9.45, were issued to the underwriter ("Underwriter") as part of the Company's IPO. The Underwriter's warrants contain an antidilution provision that has been triggered by various equity and debt financing transactions which have occurred since that date. The warrants underlying the Underwriter's warrants have also been adjusted based on similar antidilution provisions. The Underwriter has also been granted warrants to purchase a total of 30,000 units (each unit consisting of two shares of common stock and one purchase warrant) at $7.00 per unit in connection with the Company's equity private placement. The 30,000 warrants underlying the Underwriter's equity private placement warrants are identical in terms to the Class A Warrants discussed above except that they are not subject to redemption. CLASS B PREFERRED STOCK WARRANTS (SEE "PRIVATE EQUITY TRANSACTIONS" ABOVE) In November 1994, the Company issued 250,000 Class B Preferred Stock Warrants in connection with the sale of $1.0 million in convertible debentures. The Class B Preferred Stock Warrants are identical in terms to the Class A Warrants described above, and are subject to redemption by the Company under the same terms and conditions as the Common Stock Purchase Warrants described above. As part of a single transaction in February 1995, the Company converted the debentures to preferred stock and sold an additional $500,000 of preferred stock with identical warrants; 125,000 Class B Preferred Stock Warrants were issued. F-16 A summary of the warrant terms, the Company's calculation of dilution adjusted prices and shares at December 31, 1995, and potential maximum gross proceeds to the Company are as follows:
Common Class B Stock Preferred Purchase Class A Guarantor's Underwriter's Stock Warrants Warrants Warrants Warrants Warrants Total -------- --------- ----------- ------------- --------- --------- Original number of shares (a) 917,900 228,571 600,000 250,000 375,000 2,371,471 Original price $6.75 $6.00 $4.00 $3.50-$9.45 $6.00 Dilution adjusted shares 1,161,300 268,341 692,780 345,260 428,531 2,896,182 Dilution adjusted price $5.34 $5.20 $3.41-3.57 $3.01-$6.25 $5.23-5.31 Maximum potential gross proceeds ($ millions) (b) $6.2 $1.4 $2.4 $1.6 $2.3 $13.9 Expiration date 4-30-96 4-20-97, 10-24-99 8-11-97, 2-28-98 7-18-97 7-20-97 Redemption provision Yes Yes No No Yes
(a) 71,429 Class A Warrants and 2,100 Common Stock Purchase Warrants were exercised during 1995. (b) There is no assurance that the full amount of these proceeds will be received by the Company in the future. However, subsequent to year end, the Company has received approximately $4.6 million in connection with the exercise of 680,000 Common Stock Purchase Warrants through March 29, 1996. STOCK OPTION PLAN Effective May 1, 1992, the Company adopted a stock option plan (the "1992 Plan"). The Board of Directors (the "Board") has reserved 550,000 shares of common stock for issuance under the 1992 Plan. The 1992 Plan is administered by the Compensation Committee (the "Committee"). The Board (or the Committee) has discretion to select optionees, designate the number of shares and the exercise price of each option and to specify certain other terms. Officers, key employees, directors and consultants of the Company are eligible to participate. During 1994, the Company's stock option plan activities resulted in a charge to operations of $309,375 for compensation expense related to the granting of fully vested options at a price less than the fair market value of OnGard common stock on the date of the grant. Under a similar grant, but for options which vest over four years, the Company recorded deferred compensation expense of $150,000, which will be expensed ratably over the four-year vesting period. Other than those options which were vested immediately, granted options vest ratably over a four-year period, and all options can be exercised through the seventh anniversary after the first options vest. In January 1995, the Company's shareholders approved a new plan (the "1994 Plan") for the issuance of up to 600,000 shares of common stock of either or both nonqualified or incentive stock options. The option grants vest ratably over four years and may be exercised for a term of 10 years but not before six months following the date of grant. The option price for incentive stock options granted shall be at least 100% of the fair market value of the common stock at the date of grant. Nonqualified options may be issued at less than the fair market value at the discretion of the Committee. The 1994 Plan generally supersedes the 1992 Plan. F-17 In December 1995, the Board of Directors granted 700,000 stock options (600,000 at $3.50 and 100,000 at $1.00) to certain officers, directors and consultants of the Company. In the fourth quarter of 1995, the Company recorded compensation expense of $1,700,000 related to fully vested options for an amount representing the difference between the exercise price and fair market value of OnGard common stock on the date of the grant. The Company also recorded deferred compensation expense of $1,087,500 for options which vest ratably over two years, and related compensation will be charged to operations over that time. The following table reflects activity under the plans for the two-year period ended December 31, 1995: Options Shares Granted Option Share Price - -------------------------------- -------------- ------------------ Outstanding at December 31, 1993 62,500 $5.00 Granted 465,000 $5.00 - $6.50 Exercised - - -------------- ------------------ Outstanding at December 31, 1994 527,500 $5.00 - $6.50 Granted 908,750 $1.00 - $8.00 Terminated (90,500) - Exercised - - ------------- ------------------ Outstanding at December 31, 1995 1,345,750 $1.00 - $8.00 -------------- ------------------ -------------- ------------------ Exercisable at December 31, 1995 732,500 $1.00 - $8.00 -------------- ------------------ -------------- ------------------ 11. TRANSACTIONS WITH MANAGEMENT: In May 1992, the Company entered into employment agreement with its President, which expired on December 31, 1995. In December 1995, the Board of Directors voted to extend this agreement for three years. The President's employment agreement provides that if he is terminated without cause, he will receive a one-time payment equal to five times the amount of his base salary in effect at that time. In September 1994, the Company entered into an employment agreement with its Executive Vice President at OST for a three-year term. Upon his resignation, the agreement terminated. The agreements specify minimum base salary amounts, certain fringe benefits and incentive compensation, including annual bonuses contingent on achievement of specific objectives established by the Board of Directors. 12. MERGER WITH PHARMETICS, INC. AND IMPAIRMENT OF INVESTMENT: As described in Note 1, the Company completed its merger with Pharmetics on October 1, 1994. During the period preceding the Company's acquisition of Pharmetics (now OST), the Company extended secured loans to Pharmetics totaling $1,884,258 in order to fund Pharmetics' operating requirements. Since the date of the acquisition, the Company has continued to fund the cash operating requirements of OST, net of cash receipts from collection of receivables. F-18 During the third quarter of 1994, the Company evaluated the fair value of its potential investment in Pharmetics. The aggregation of advances to Pharmetics coupled with the shares of OnGard stock to be issued in connection with the acquisition began to exceed the Company's expectation of the fair value of Pharmetics. Accordingly, during the third quarter, the Company charged to operations $801,824 of advances provided to Pharmetics during the third quarter. During the fourth quarter, the Company continued the analysis of its investment. Because the funding needs of Pharmetics had escalated, based not only on the then-current operating requirements but also for significant payments on past due trade credit, the Company's determination of the carrying value of its investment was indeterminable until the fourth quarter of 1994. Further, Pharmetics' financial condition, which had deteriorated considerably in the first three quarters of 1994, and which became more evident during the fourth quarter, had also impacted the market position of its traditional product line, weakening near-term sales expectations. Accordingly, the Company recorded an impairment adjustment to the value of its investment as of December 31, 1994. In its determination of the impairment, the Company forecasted future sales, working capital requirements and discounted future cash flows. The Company projected approximately 25% revenue growth for the period 1996 through 2000. It also projected increased gross margins, over this time horizon, from Pharmetics' traditional levels. The projected income growth is the result of a greater concentration on higher margin products and proprietary products, which are the focus of direct selling efforts. In addition, margins are projected to improve by the allocation of semi-fixed factory overhead expenses to a greater number of units sold. The projected cash flows were discounted at a rate of approximately 30%. Based on its determination of the impairment, the Company wrote off $1,988,561 of excess cost over net tangible assets acquired as of December 31, 1994 related to the excess cost over net tangible Pharmetics assets acquired. In conjunction with its quarterly review of the carrying value of its purchased intangible assets associated with this acquisition, the Company evaluated whether further changes occurred in 1995 which negatively impacted the long-term prospects of recovering its investment. The Company revised its calculations through December 31, 1995 employing the same methodology and discount factors, applying them to the projected cash flows. Based on a comparison of the unamortized goodwill at December 31, 1995 with the value of discounted cash flows, the Company believes no future impairment adjustment is necessary at this time. 13. LIQUIDITY AND CAPITAL RESOURCES - SUBSEQUENT EVENTS: The Company has an accumulated deficit of $17,990,995 at December 31, 1995 and expects losses to continue for the foreseeable future. Additional expenditures for equipment and marketing will also be required in order to commercialize OnGard's proprietary sterilization supply product line and tabletop sterilizer. The Company needs additional capital in to order support its operations until its generates sufficient cash flow from operations. In August and September 1995, the Company completed a private placement (the "September 1995 Private Placement") of the sale of 2,204,021 shares of the Company's common stock at a price of $3.50 per share aggregating gross proceeds of approximately $7.7 million and net proceeds of approximately $7.6 million. The September 1995 Private Placement required that the Company register such common shares issued in this placement six months after the closing date, by March 29, 1996. In addition, during February 1995, the Company sold shares, through the exercise of Class A warrants from existing warrant holders, totaling $320,000 in gross proceeds and $296,430 in net proceeds. The Company provided an incentive to Class A warrant holders by reducing the exercise price to $4.50 for a period of 30 days. In April and May 1995, the guarantor of the Company's bank debt (Note 9) and another investor in OnGard, facilitated $1,000,000 of additional bank borrowings. The two new $500,000 notes bear interest at the rate of 11% per annum and mature on April 15, 1996. In February F-19 1995, the Company sold $500,000 of convertible Series A preferred stock units at $4.00 per preferred unit, which included one share of preferred stock and one warrant to acquire common stock at $6.00 per common share. The Company also has 1,161,300 Common Stock Purchase Warrants outstanding that, if exercised by warrant holders, could provide a maximum of $6.2 million of estimated net proceeds to the Company by or before their expiration date, April 30, 1996 (Note 10). Through March 29, 1996, the Company had received cash proceeds from such warrants of approximately $4.6 million. Furthermore, additional exercise activity is in process for an additional potential amount of approximately $500,000. The Company projects these funds and its existing cash position to be sufficient to fund its operations through December 31, 1996. Although the Company has been successful to date in obtaining sources of financing sufficient to meet current trade obligations and other expenses and to enable it to pursue its business plans generally, there is no assurance it will be successful in this regard in the future. Furthermore, there can be no assurance that the Company will be successful in receiving additional proceeds from the exercise of the Common Stock Purchase Warrants, or other warrants outstanding, or that if successful, such funds will be adequate to fund the Company's operations until it is able to generate cash from operations sufficient to fund its operations to sustain its ongoing operations without additional external sources of capital. On March 6, 1996, the Company announced it had completed an agreement with Baxter V. Mueller ("Baxter"), a division of the Baxter Healthcare Corporation of Deerfield Illinois, for the exclusive marketing and distribution of a series of sterilization packaging products developed by OnGard. Baxter Healthcare Corporation is the principal domestic operating subsidiary of Baxter International, Inc. Through its subsidiaries, Baxter is a leader in the manufacture and marketing of healthcare products, systems and services worldwide offering products to healthcare providers in 100 countries. The Baxter V. Mueller group markets a complete line of high-quality specialized surgical instruments and surgical-use products to healthcare companies and hospitals. The initial sterilization product covered by the scope of this agreement is OnGard's Autopak-TM-. The agreement also calls for other sterile packaging products developed by OnGard to be marketed exclusively by Baxter and for the two companies to jointly address market opportunities in rapid reprocessing and management of surgical instruments. The territory covered by the exclusive agreement encompasses the United States and Canada. The agreement is a buy-sell distribution arrangement whereby Baxter will purchase directly from OnGard for resale to the market. F-20 ONGARD SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS March 31, December 31 1996 1995 ---- ---- (Unaudited) (Audited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 5,803,382 $ 3,693,303 Restricted Cash 99,133 97,363 Trade accounts receivable, net of allowance of $119,000 at December 31, 1995 and $114,000 at March 31, 1996 673,042 656,274 Inventory 1,806,886 1,481,847 Prepaid expenses and other 255,866 77,881 ----------- ----------- Total current assets 8,638,309 6,006,668 PROPERTY AND EQUIPMENT, net 1,977,740 1,152,573 EQUIPMENT UNDER OPERATING LEASES, net 248,000 134,440 OTHER ASSETS: Excess cost over net tangible assets acquired, net 2,364,653 2,396,608 Intangible and other assets, net 249,938 238,258 Deposits 111,897 51,151 Debt guarantee fee, net 16,551 140,740 ----------- ----------- Total other assets 2,743,039 2,826,757 ----------- ----------- TOTAL ASSETS $13,607,088 $10,120,438 ----------- ----------- ----------- ----------- The accompanying notes are an integral part of these financial statement F-21 ONGARD SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS March 31 December 31 1996 1995 ---- ---- (Unaudited) (Audited) LIABILITIES AND STOCKHOLDERS' EQUITY ----------- ----------- CURRENT LIABILITIES: Current portion of notes payable to bank $ 1,622,322 $ 1,764,270 Trade accounts payable 696,382 839,187 Accrued liabilities 1,468,304 1,251,050 Capital leases payable 145,244 88,362 Customer deposits 78,757 89,994 ----------- ----------- Total current liabilities 4,011,009 4,032,863 ----------- ----------- LONG TERM LIABILITIES: Capital leases payable, net of current portion 333,568 - Noncurrent trade accounts payable 293,386 50,735 ----------- ----------- Total long term liabilities 626,954 50,735 ----------- ----------- Total liabilities $ 4,637,963 $ 4,083,598 ----------- ----------- ----------- ----------- STOCKHOLDERS' EQUITY: Convertible Series A Preferred stock; $.001 par value, 3,000,000 shares authorized, 378,292 issued and outstanding at December 31, 1995 and March 31, 1996; aggregate liquidation preference of $1,513,168 $ 1,228,167 $ 1,228,167 Series B Redeemable Preferred Stock, no per value; 100 shares issued and outstanding 10 10 Common stock; $.001 par value, 10,000,000 shares authorized, 5,355,281 shares issued and outstanding at December 31, 1995 and 6,314,733 shares issued and outstanding at March 31, 1996 6,315 5,355 Additional paid-in capital, common stock 28,531,648 23,983,803 Deferred compensation (1,044,188) (1,189,500) Accumulated deficit (19,752,827) (17,990,995) ----------- ----------- Total stockholders' equity $ 8,969,125 $ 6,036,840 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,607,088 $10,120,438 ----------- ----------- ----------- ----------- The accompanying notes are an integral part of these financial statements. F-22 ONGARD SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended March 31 ------------------- 1996 1995 ---- ---- (Unaudited) (Unaudited) REVENUES $ 727,750 $ 1,292,218 COST OF SALES 887,289 1,388,173 Operating margin (deficit) (159,539) (95,955) COSTS AND EXPENSES: General and administrative 879,480 623,518 Sales and Marketing 425,756 251,078 Depreciation and amortization 73,946 77,963 Research and development 68,396 131,142 ----------- ----------- Total expenses 1,447,578 1,083,701 ----------- ----------- LOSS FROM OPERATIONS (1,607,117) (1,179,656) INTEREST INCOME 41,628 574 OTHER INCOME 1,292 5,635 INTEREST EXPENSE (186,448) (83,639) OTHER EXPENSES (12,735) (80) ----------- ----------- NET LOSS $(1,761,439) $(1,257,166) ----------- ----------- ----------- ----------- NET LOSS PER SHARE $ (.32) $ (.41) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 5,515,190 3,065,318 The accompanying notes are an integral part of these financial statements. F-23 ONGARD SYSTEMS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended March 31 --------------------- 1996 1995 ---- ---- (Unaudited) (Unaudited) CASH FLOWS USED IN OPERATING ACTIVITIES: Net Loss $(1,761,439) $(1,257,166) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization and non-cash interest 260,268 190,130 Compensation expense related to stock options 145,312 9,375 Allowance for doubtful accounts (5,118) - Changes in assets and liabilities: Increase in restricted cash (1,770) - (Increase) decrease in accounts receivable (11,649) 568,041 (Increase) in inventory (441,624) (337,272) (Increase) decrease in prepaid expenses (177,985) (34,560) (Increase) decrease in deposits (60,746) - Increase (decrease) in customer deposits (11,237) 42,641 (Decrease) increase in accounts payable and accrued liabilities (32,882) (71,818) Net cash flows used in operating activities (2,098,870) (890,629) CASH FLOWS USED IN INVESTING ACTIVITIES: Purchase of property and equipment (139,265) (18,142) Increase in patent, patents pending and trademark (17,568) (3,971) ----------- ----------- Net cash flows used in investing activities $ (156,833) $ (22,113) ----------- ----------- ----------- ----------- The accompanying notes are an integral part of these financial statements. F-24 ONGARD SYSTEMS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended March 31 ---------------------- 1996 1995 ---- ---- (Unaudited) (Unaudited) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of notes payable to bank $ (141,948) $ (106,884) Payment of lease obligations (41,072) (15,900) Net proceeds from issuance of common stock 4,548,802 296,431 Net proceeds from issuance of preferred stock - 450,000 Net cash flows from financing activities 4,365,782 623,647 NET INCREASE (DECREASE) IN CASH 2,110,079 (289,095) CASH and cash equivalents, beginning of year 3,693,303 68,714 ----------- ----------- CASH and cash equivalents, end of the period $ 5,803,382 $ (220,381) ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 30,583 $ 40,884 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES: Stock subscription receivable $ 513,719 - Conversion of convertible debentures to preferred stock - $ 769,997 Conversion of vendor payables to common stock - $ 170,248 Leasehold improvements financed by others $ 350,000 - Acquisition of equipment through capital leases $ 431,112 $ 82,000 Reclassification of finished goods inventory to equipment, currently under lease $ 116,584 - The accompanying notes are an integral part of these financial statements. F-25 ONGARD SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The information in this Form 10-QSB includes the results of the Company and its wholly owned subsidiary, OnGard Sterilization Technology ("OST"), for the periods ended March 31, 1996 and 1995. The data is unaudited, but includes all adjustments including the elimination of intercompany accounts and transactions which are, in the opinion of management, necessary for a fair presentation of the interim periods presented. The accounting policies utilized in the preparation of financial information are the same as set forth in the Company's annual financial statements and should be read in conjunction with the Company's Form 10-KSB. Certain prior period balances have been reclassified to conform to the current period classification. Results of operations for the three months ended March 31, 1996 may not necessarily be indicative of the full year results. On October 1, 1994 the Company completed a merger with Pharmetics, Inc. (Pharmetics), now known as OST. The transaction was effected through the exchange of the Company's common stock for all of the outstanding common and preferred stock of OST. The aggregate purchase price, including the value of shares exchanged, merger expenses plus advances made to fund OST's operations prior to the acquisition, which ultimately became part of OnGard's investment, was $3,910,870. The Company has consolidated the results of this acquisition since the effective date. In December, 1995, the Company sold selected assets of its packaging line to Oliver Products including its customer accounts; proceeds from the sale aggregated $620,500. As a result of this sale, through the three months ended March 31, 1996, no material operating data is reflected in the financial statements from the packaging assets, while such data is included for the comparable quarter ended March 31, 1995. 2. EQUITY TRANSACTIONS During August and September, 1995 the Company obtained $7.7 million from the private placement of 2,204,021 shares of its common stock at a price of $3.50 per share. The Company also issued 100 shares of its Series B preferred stock to the largest investor in the private placement, at a cost of $10.00. The Series B preferred shares carry no dividend or voting rights but provides for the right to elect one member of the Company's board of directors so long as at least 5% of the Company's common stock is owned by the investor. The investor exercised this right in December, 1995. During March, 1995 holders of the Company's Common Stock Purchase Warrants, which were then due to expire on March 29, 1996, exercised 755,694 warrants converting into 957,952 shares of the Company's common stock providing $5.1 million (gross proceeds) from their exercise. The Company then extended the expiration date (but no other terms of these Common Stock Purchase Warrants) until April 30, 1996. An additional, 134,541 warrants, converting to 170,193 shares were exercised generating an additional $.9 million (gross proceeds), for an aggregate total of $6.0 million in gross proceeds. The warrants expired on April 30, 1996 (Note 7). The impact of outstanding warrants has not been included in earnings per share as such inclusion would be antidilutive. 3. INVENTORY Inventory consists of the following as of March 31, 1996: Raw materials $1,044,958 Work in process 692,608 Finished goods 69,320 ---------- $1,806,886 ---------- ---------- The December 31, 1995 inventory balance consisted of the following: Raw materials $ 905,886 Work in process 477,901 Finished goods 98,060 ---------- $1,481,847 ---------- ---------- F-26 4. PROPERTY AND EQUIPMENT AND INTANGIBLE AND OTHER ASSETS Property and equipment, at cost, consist of the following as of March 31, 1996: Furniture and fixtures $ 74,131 Leasehold improvements 840,451 Machinery and equipment 1,902,192 ---------- 2,816,774 Less accumulated depreciation and amortization (839,034) ---------- $1,977,740 ---------- ---------- Intangible and other assets, at cost, consist of the following as of March 31, 1996: Patents and trademarks $ 262,700 Other intangible assets 56,662 ---------- 319,362 Less accumulated amortization (69,424) ---------- $ 249,938 ---------- ---------- 5. DEBT GUARANTEE FEE Debt guarantee fees reflect the estimated fair value of 600,000 warrants issued to the guarantor of the Company's $2.5 million bank indebtedness in exchange for the guaranty. The amount is being amortized over the term of the note, as a non-cash charge against earnings and is included in interest expense (Note 6). The Company obtained an investment banking opinion for the fair value assigned to the first 400,000 warrants granted, and applied the same value for the subsequent 200,000 warrants which were granted under the same terms and conditions. The guarantee fee was fully amortized upon the repayment of the debt in April, 1996 (Note 6). 6. DEBT In October 1994, the Company entered into a $1.5 million term loan with a bank which was facilitated by a third party guarantor. The loan bears interest at the prime rate plus 2% (11% at March 31, 1996) and provides for a 36 month amortization schedule with a balloon payment at the end of one and a half years from inception. In April and May 1995, the guarantor of the $1.5 million note and another guarantor ("the guarantors"), facilitated an additional $1.0 million in indebtedness with the same bank. Two notes of $500,000 each were executed with the principal amount due in April 1996; interest was payable monthly. In exchange for their guarantees, the Company granted the guarantors options to acquire a total of 200,000 shares at an exercise price of $4.00 per share(Note 5). These two notes bear interest at 11 %. At March 31, 1996 the aggregate indebtedness on these notes was $1,622,000. The three notes were paid in full in April, 1996, in accordance with the maturity payment terms described above. F-27 7. WARRANTS The Company has issued warrants in connection with the securities transactions which have financed its operations since its initial public offering, other than the September 1995 private placement described in Note 2. Warrant prices and expiration periods vary but key terms, shown below, are included in each transaction. A summary of the key warrant terms, Company calculation of dilution adjusted prices and shares at March 31, 1996 and potential maximum gross proceeds to the Company are as follows:
Class B Common Purchase Class A Guarantor's Underwriter's Debenture Stock Warrants Warrants Warrants Warrants Warrants Total ------ -------- -------- -------- -------- -------- ----- Number of shares (a) 160,940 228,571 600,000 250,000 375,000 1,614,511 Original price $6.75 $6.00 $4.00 $3.50-$9.45 $6.00 - Dilution adjusted shares 203,589 268,341 692,780 345,260 428,531 1,938,501 Dilution adjusted price $5.34 $5.20 $3.41-$3.57 $3.01-$6.25 $5.23-$5.31 - Maximum potential gross proceeds ($ millions) (b) $1.1 $1.4 $2.4 $1.6 $2.3 $8.8 Expiration date (c) 04-30-96 4-20-97, 7-18-97 10-24-99, 5-31-00 08-11-97, 07-20-97 2-28-98 Redemption provision Yes Yes No No Yes
_____________ (a) Through March 31, 1996, 757,794 Common Stock Purchase Warrants and 71,429 Class A Warrants were exercised. (b) There is no assurance that the full amount, if any, of these proceeds will be received by the Company in the future. However, prior to their expiration on April 30, 1996, an additional 134,541 Common Stock Purchase Warrants were exercised generating $.9 million (Note 9). (c) On March 31, 1995, the Company extended until April 30, 1996, the expiration date of its Common Stock Purchase Warrants, which were previously set to expire on December 31, 1995 and prior to that on August 15, 1995. Other than the extended expiration period, no other terms, including anti-dilution provisions, were extended. 8. DISTRIBUTION AGREEMENT On March 6, 1996, the Company announced it had completed an agreement with Baxter V. Mueller ("Baxter"), a division of the Baxter Healthcare Corporation of Deerfield Illinois, for the exclusive marketing and distribution of a series of sterilization packaging products developed by OnGard. Baxter Healthcare Corporation is the principal domestic operating subsidiary of Baxter International, Inc. Through its subsidiaries, Baxter is a leader in the manufacture and marketing of healthcare products, systems and services worldwide offering products to healthcare providers in 100 countries. The Baxter V. Mueller group markets a complete line of high-quality specialized surgical instruments and surgical-use products to healthcare companies and hospitals. The initial sterilization product covered by the scope of this agreement is OnGard's Autopak. The agreement also calls for other sterile packaging products developed by OnGard to be marketed exclusively by Baxter and for the two companies to jointly address market opportunities in rapid reprocessing and management of surgical instruments. The territory covered by the exclusive agreement encompasses the United States and Canada. The agreement is a buy-sell distribution arrangement whereby Baxter will purchase directly from OnGard for resale to the market. F-28 II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS Consistent with section 145 of the Delaware General Corporation Law ("Delaware Law"), Article VII of the Company's By-Laws provides that the Company shall indemnify any person in connection with legal proceedings threatened or brought against him by reason of his present or past status as an officer or director of the Company, provided that the person acted in good faith and in a manner he reasonably believes to be in or not opposed to the best interests of the Company, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The Company shall also indemnify any such person in connection with any action by or in the right of the Company provided the person acted in good faith an in a manner he reasonably believed to be in or not opposed to the best interests of the Company except that no indemnification may be made if such person is adjudged to be liable to the Company unless the court in which such action was brought determines, upon application, that despite such adjudication, the person is fairly and reasonably entitled to such indemnification as the court deems proper. In addition, to the extent that any officer or director is successful in the defense of any such legal proceeding, the Company is required to indemnify him against expenses, including attorneys' fees, that are actually and reasonably incurred by him in connection therewith. The By-Laws also contain a nonexclusivity clause which provides in substance that the indemnification rights under the By-Laws shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any agreement with the Company, any By-Law, any vote of stockholders or disinterested directors of the Company or otherwise. Consistent with section 102(b) of the Delaware Law, Article VIII of the Company's Certificate of Incorporation provides that a director of the Company shall not be liable to the Company or its stockholders for damages for breach of fiduciary duties as director, subject to certain limitations. Article VIII does not eliminate or limit the liability of a director for (a) any breach of the director's duty of loyalty to the Company or its stockholders; (b) any acts of omissions not in good faith or which involved intentional misconduct or a knowing violation of law; (c) any conduct that is the subject of section 174 of the Delaware Law; or d) any transaction from which the director derived an improper personal benefit. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION None of the expenses of issuances and distribution are being paid by the Selling Stockholders. The expenses of issuance and distribution which are to be paid by the Company are estimated as follows: Item Amounts ---- --------- Blue Sky Expenses $ 6,250.00 Legal Fees and Expenses 15,625.00 Accounting Fees and Expenses 9,375.00 Fees and Expenses of Transfer Agent 3,125.00 Printing and Engraving Expenses 9,375.00 Miscellaneous 6,250.00 ---------- Total $50,000.00 II-1 ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES During the past three years, the Company issued securities which were not registered under the Securities Act of 1933 (the "Act"), as described below. On April 20, 1994, the Company issued a total of 150,000 units, each unit consisting of two shares of the Company's Common Stock and one warrant to purchase one share of the Company's Common Stock at an exercise price of $6.00 per share, to two offshore investors at an issue price of $7.00 per unit. The sales and issuances of securities in these transactions were deemed by the Company to be exempt from registration under the Act by virtue of Regulation S under the Act. The sales occurred outside of the United States in an offshore transaction and each purchaser signed a representation that he was not a U.S. person within the meaning of Rule 902(o) under the Act and that until the expiration of six months from the date the securities were issued any offer or sale of the securities (including the warrants and common stock issuable upon exercise thereof) shall not be made by him in the United States or to a U.S. person or for the account of a U.S. person. The purchasers further acknowledged with respect to the warrants: (a) that the common stock to be issued upon exercise of the warrants has not been registered under the Act; (b) the warrants sold offshore in the offering may not be exercised by or on behalf of any U.S. person unless registered under the Act or an exemption from such registration is available; (c) any person attempting to exercise a warrant sold offshore in the offering will be required to provide (i) written certification that he is not a U.S. person and that the warrant is not being exercised on behalf of a U.S. person, or (ii) a written opinion of counsel, satisfactory to the Company, to the effect that the warrant and the common stock to be delivered upon exercise thereof have been registered under the Act or are exempt from registration thereunder; and (d) the warrants will bear a legend reflecting the foregoing restrictions. All securities issued to these persons contained legends restricting their transfer pursuant to the foregoing restrictions. Royce Investment Group, Inc., the placement agent, received: (i) a placement fee equal to 10% of the proceeds from these sales; (ii) a non-accountable expense allowance equal to 3% of the proceeds from these sales and (iii) a unit purchase option to purchase, at $7.00 per unit, 10% of the units sold in this offering. On July 18, 1994 the Company issued a total of 150,00 units, each unit consisting of two shares of the Company's common stock and one warrant to purchase one share of the Company's common stock at an exercise price of $6.00 per share, to a group of 15 accredited investors, as that term is defined in Rule 501 of Regulation D promulgated under the Act at an issue price of $7.00 per unit. The sales and issuances of securities in these transactions were deemed by the Company to be exempt from registration under the Act by virtue of Regulation D under the Act. The recipients represented and acknowledged that they are "accredited investors" within the meaning of Rule 501 under the Act; in the normal course of their business, they invest in or purchase securities similar to the units, and they have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of purchasing the units. They further represented that they had access to such financial and other information concerning the Company and the units as they deemed necessary in connection with their decision to purchase the units, including an opportunity to ask questions of, and request information from, the Company and that there were purchasing the units for their own account, and not with a view to, or offer or sale in connection with, any distribution thereof. All securities issued to these persons contained legends restricting their transfer without compliance with applicable securities laws. Royce Investment Group, Inc., the placement agent, received: (i) a placement fee equal to 10% of the proceeds from these sales; (ii) a non-accountable expense allowance equal to 3% of the proceeds from these sales and (iii) a unit purchase option to purchase, at $7.00 per unit, 10% of the units sold in this offering. On November 4, 1994 and February 16, 1995 the Company issued a total of 15 units to two accredited investors at a price of $100,000 per unit. The initial 10 units issued on November 4, 1994 consisted of $100,000 of 6% Convertible Debentures due February 28, 1998 and 25,000 Redeemable Common Stock Purchase Warrants to acquire an equivalent number of shares of Common Stock at $6.00 per share. Pursuant to shareholder authorization received on January 24, 1995 and the terms of the Debentures, the Debentures comprising a part of such 10 units were converted into Series A Convertible II-2 Preferred Stock at the rate of one share of Series A Convertible Preferred Stock for each $4.00 in principal amount of the Debentures. Interest on the Debentures from the date of issuance to the date of conversion was paid by the issuance of an additional 3,292 shares of Series A Convertible Preferred Stock. Each of the additional five units issued on February 16, 1995 consisted of 25,000 shares of Series A. Convertible Preferred Stock and 25,000 Redeemable Common Stock Purchase Warrants to acquire an equivalent number of shares of Common Stock at $6.00 per share. The sale and issuance of securities in these transactions were deemed by the Company to be exempt from registration under the Act by virtue of Regulation D under the Act. The recipients represented their intention to acquire the securities for investment only and not with a view to distribution thereof, that they were not formed for the specific purpose of acquiring the securities and that they had total assets in excess of $5,000,000. Legends setting forth the restrictions on transfer without compliance with applicable securities laws were placed on each certificate representing the shares issued in these transactions. On December 15, 1994 the Company issued 22,700 shares of Common Stock to EEC Corp. The issuance of these securities was pursuant to an agreement between the Company and the recipient with respect to the payment of lease payments in arrears. For purposes of the transaction the issue price was agreed to be $7.50 per share. The issuance was deemed by the Company to be exempt from registration under the Act by virtue of section 4(2) thereof. The recipient represented to the Company that he was an accredited investor. A legend setting forth the restrictions on transfer without compliance with applicable securities laws was placed on each certificate representing the shares issued in this transaction. On February 15, 1995 the Company issued 2,105 shares of Common Stock to Louis Wertman. The shares were issued pursuant to an agreement between the Company and the recipient in partial payment of a loan from the recipient to Pharmetics Incorporated, which loan remained unpaid at the time the Company acquired Pharmetics Incorporated. For purposes of the transaction the issue price was agreed to be $7.125 per share. The Company deemed the issuance to be exempt from registration under the Act by virtue of section 4(2) thereof as a transaction not involving any public offering. The recipient represented his intention to acquire the shares for his own account for long term investment and not with a view to the distribution thereof and that he has such knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the investment. The certificate representing the shares issued to the recipient contained a legend restricting transfer of the shares without compliance with applicable securities laws. The recipient acknowledged receipt of adequate information regarding the Company prior to entering in the agreement pursuant to which the shares were issued. On February 15, 1995 the Company issued 71,429 shares of Common Stock to an offshore investor, Planate Business, S.A. at an issue price of $4.50 per share. The shares were issued pursuant to the exercise by a recipient of Class A Common Stock Purchase Warrants received as part of the units issued on April 20, 1994, as described above. The Company had reduced the exercise price of the warrants from $6.00 to $4.50 for a period of 30 days to induce warrant holders to exercise their warrants. The Company deemed the issuance to be exempt from registration under the Act by virtue of Regulation S promulgated thereunder. The recipient provided written certification that it is not a U.S. person and that the warrants were not being exercised on behalf of a U.S. person. On June 28, 1995 the Company issued 10,268 shares of Common Stock to Dr. Eric L. Steiner, a director of the Company, in repayment of a loan from Dr. Steiner to the Company. For purposes of the repayment the shares were valued at $4.375 per share. The Company deemed the issuance to be exempt from registration under the Act by virtue of section 4(2) thereof as a transaction not involving any public offering. The recipient represented his intention to acquire the shares for his own account for long term investment and not with a view to the distribution thereof and that he has such knowledge and experience in financial and business matters, and knowledge and access to information regarding the Company, to be capable of evaluating the merits and risks of the investment. The certificate representing the shares issued to the recipient contained a legend restricting transfer of the shares without compliance with applicable securities laws. II-3 On August 30, 1995 the Company issued a total of 1,148,000 shares of Common Stock to a group of six accredited investors at an issue price of $3.50 per share. The sales and issuances of securities in these transactions were deemed by the Company to be exempt from registration under the Act by virtue of Regulation D under the Act. The recipients represented and warranted that: (i) they were acquiring the shares for investment for their own account and not with a view to, or for resale in connection with, a distribution or other disposition thereof; (ii) they have been given the opportunity to obtain any information or documents relating to, and to ask questions and receive answers about, the Company and the business and prospects of the Company which they deemed necessary to evaluate the merits and risks related to their investment in the securities and to verify the information received; (iii) their financial condition is such that they can afford to bear the economic risk of holding the securities for an indefinite period of time and have adequate means for providing for their current needs and contingencies; (iv) they can afford to suffer a complete loss of their investment; (v) their knowledge and experience in financial and business matters are such that they are capable of evaluating the merits and risks of their acquisition of the securities; and (vi) they are accredited investors as that term is defined in Rule 501 of Regulation D. On August 30, 1995, in connection with the sales and issuances described in the preceding paragraph, the Company issued a total of 100 shares of Series B Redeemable Preferred Limited Voting Stock to the same six accredited investors at an issue price of $.10 per share. These sales and issuances were also deemed by the Company to be exempt from registration under the Act by virtue of Regulation D. The recipients made the same representations and warranties with respect to their acquisition of the Series B Redeemable Preferred Limited Voting Stock as they made with respect to their acquisition of Common Stock, as set forth in the preceding paragraph. Between September 8, 1995 and September 29, 1995 the Company sold an aggregate of 1,056,020 shares of Common Stock at an issue price of $3.50 to a group of 41 persons; of such 41 persons, 37 were accredited investors and 4 were qualified, non-accredited investors and included a director of the Company, two relatives of officers of the Company and an employee. The Company deemed the sales to be exempt from registration under the Act pursuant to Rule 506 of Regulation D promulgated under the Act. Each recipient made representations to the Company consistent with their status as an accredited investor or qualified purchaser and were provided with disclosures consistent with Rule 502(b)(2) of Regulation D. The Company placed a legend restricting transfer without compliance with applicable securities laws on each certificate representing the shares issued to these recipients. No underwriting discounts or commissions were paid to any party in connection with any of the foregoing transactions except for the sales occurring on April 20, 1994 and July 18, 1994 as set forth above. II-4 ITEM 27. EXHIBITS
Exhibit Number Description ------- ----------- 3.1 Certificate of Incorporation, as amended (i) 3.2 Bylaws of OnGard, as amended (i) 4.1 Certificate of Incorporation, as amended (i) 4.2 Bylaws of OnGard, as amended (i) 4.3 Specimen Common Stock Certificate(i) 5 Form of Opinion of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C. 10.1 Employment Agreement of Mark E. Weiss (i) 10.2 Consulting Agreement of Donald M. Marotta (v) 10.3 Letter of Intent to Acquire all of the Issued and Outstanding Common Stock and Preferred Stock of Pharmetics, Incorporated (ii) 10.4 Agreement Between OnGard and American Can (iii); omitted in connection with a request for confidential treatment pursuant to Rule 406 of Regulation C 10.5 Merger Agreement Among OnGard, OGPI, Pharmetics and Shlisky (iv) 10.5.1 Amendment to Merger Agreement (iv) 10.5.2 Amendment No. 2 to Merger Agreement (vi) 10.5.3 Amendment No. 3 to Merger Agreement (vi) 10.6 Employment Agreement of Theodore M. Shlisky (iv) 10.7 Guaranty of Guarantor and OnGard Note to Bank (vi) 10.7.1 Guaranty of Guarantors and OnGard Note to Bank (viii) 10.8 Joint Marketing and Distribution Agreement between OnGard and Devon Industries, Inc. (vii) 10.9 Mailback Agreement between OnGard and Option Care, Inc. (vii) 10.10 Agreement between OGPI and ECC Corp. (vii) 10.10.1 Agreement between OnGard, OGPI and ECC Corp. (vii) 10.10.2 Agreement between OnGard, OGPI and ECC Corp. (vii) 10.11 Waste Disposal Contract with Waste Management, Inc. (viii) 10.12 Stock Purchase Agreement and Registration Rights Agreement between OnGard and purchasers in the September 1995 Private Placement (ix) 10.13 Agreement between OnGard and Baxter Healthcare (Certain portions omitted in connection with a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended) (xi) 22 List of Subsidiaries of OnGard (ii) 24.1 Consent of Arthur Andersen LLP 24.2 Consent of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C. See Exhibit 5 24.3 Consent of Deloitte & Touche LLP 24.4 Consent of Thomas F. Kearns (x) 25 Powers of Attorney (i) 99 Deferred Payment Arrangements for payment of Unemployment Insurance by Pharmetics Incorporated (vii)
_____________________ (i) Previously filed with Registration Statement No. 33-48372, and incorporated herein by reference. (ii) Previously filed with Post-Effective Amendment No. 1 to Registration Statement No. 33-48372, and incorporated herein by reference. (iii) Filed with Post-Effective Amendment No. 2 to Registration Statement No. 33-48372, and incorporated herein by reference. (iv) Previously filed with Registration Statement No. 33-75282, and incorporated herein by reference. II-5 (v) Previously filed with OnGard's Form 10-KSB for the fiscal year ended December 31, 1993, and incorporated herein by reference. (vi) Previously filed with Amendment No. 1 to Registration Statement No. 33-75282, and incorporated herein by reference. (vii) Filed with Post Effective Amendment No. 4 to Registration Statement No. 33-48372, and incorporated herein by reference. (viii) Filed with Post Effective Amendment No. 6 to Registration Statement No. 33-48372, and incorporated herein by reference. (ix) Filed with Post Effective Amendment No. 7 to Registration Statement No. 33-48372, and incorporated herein by reference. (x) Filed with Post Effective Amendment No. 8 to Registration Statement No. 8 (xi) Previously filed with OnGard's Form 10-KSB/A for the fiscal year ended December 31, 1995, and incorporated herein by reference. ITEM 28. UNDERTAKINGS The undersigned small business issuer undertakes as follows: (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities Exchange Commission, such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in aggregate, represent a fundamental change in the information set forth in the registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (c) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (d) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-6 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the small business issuer certifies that it has reasonable grounds to believe it meets all of the requirements for filing on Form SB-2 and authorized this amendment to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hauppauge, State of New York on June 26, 1996. ONGARD SYSTEMS, INC. By: /s/ Mark E. Weiss ------------------------------- Mark E. Weiss, President In accordance with the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Mark E. Weiss President and Director (Principal June 26, 1996 - --------------------------- Executive) Mark E. Weiss /s/ Philip B. Kart Vice President (Principal Financial June 26, 1996 - --------------------------- Officer and Accounting Officer) Philip B. Kart /s/ Eric L. Steiner* Director - --------------------------- ------------- Eric L. Steiner* - --------------------------- Director ------------- Thomas F. Kearns /s/ Mark E. Weiss June 26, 1996 - ------------------------------------- *By: Mark E. Weiss, Attorney-in-Fact
II-7 EX-24.1 2 EXHIBIT 24.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated March 29, 1996, and to all references to our Firm included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Melville, New York June 21, 1996 EX-24.2 3 EXHIBIT 5 June 27, 1996 [LETTERHEAD] OnGard Systems, Inc. 40 Commerce Drive Hauppauge, New York 11788 Gentlemen: We have acted as counsel for OnGard Systems, Inc. (the "Company") in connection with the registration, under the Securities Act of 1933, as amended (the "Act"), by the Company of 4,637,227 shares of common stock issued and issuable, upon the exercise of certain warrants to purchase common stock, (the "Shares") by the Company to certain stockholders of the Company (the "Selling Stockholders"). The Shares were registered by the Company pursuant to a Registration Statement (the "Registration Statement") which became effective with the Securities and Exchange Commission (the "Commission") on or about June 27, 1996 and may be offered by the Selling Stockholders to the public. The Shares were, or with respect to a portion of the Shares issuable upon exercise of warrants issued to the Selling Stockholders may be, issued by the Company to the Selling Stockholders in various private transactions, as described in the Registration Statement, in which transactions the Selling Stockholders were given registration rights. In rendering this opinion, we have examined and relied upon originals or copies, certified or otherwise identified to our satisfaction, of various documents including, but not limited to, the following: 1. The Registration Statement, including the exhibits attached thereto. 2. The Prospectus, dated June 27, 1996 in the form filed with the Commission (the "Prospectus"). 3. The Certificate of Incorporation of the Company, as amended. 4. The By-Laws of the Company, as amended. 5. Minutes of the meetings of the Board of Directors and Stockholders of the Company. 6. Consent resolutions of the Board of Directors of the Company. 7. A specimen certificate for the common stock of the Company. 8. The certificate of officers of the Company as to certain factual matters. 9. The various agreements pursuant to which the Shares were and may be issued to the Selling Stockholders. 10. Such other instruments and documents as we have deemed necessary or advisable for the purpose of rendering this opinion. As to various questions of fact material to our opinion, we have relied upon certificates of officers of the Company and of state officials. In rendering this opinion we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to original documents of all documents submitted to us as copies or drafts of documents to be executed. We believe that reliance upon such certificates is reasonable. We have made no other inquiry or investigation as to factual matters. Based on the foregoing, and upon such additional investigation as we have deemed necessary, it is our opinion that: The portion of the Shares that have been issued have been duly authorized and, upon issuance, delivery and payment therefor, were validly issued, fully paid and nonassessable. The Company has duly authorized, reserved and set aside the portion of the Shares issuable upon exercise of the warrants issued to the Selling Stockholders, and such Shares, when issued and paid for upon exercise of such warrants in accordance with the provisions thereof, will be duly and validly authorized and issued, fully-paid and non-assessable. With certain exceptions, we are qualified to practice law only in the State of Colorado and we do not purport to be experts on, or to express any opinion herein concerning, any law other than the State of Colorado, the corporate law of the State of Delaware and the federal law of the United States. This opinion has been delivered to you solely for your own use and may not be used for any other purpose or communicated to a third party without our prior written consent. We hereby consent to the use of this opinion in the Registration Statement. Yours very truly, REINHART, BOERNER, VAN DEUREN, NORRIS & RIESELBACH, P.C. BY Arnold R. Kaplan -----END PRIVACY-ENHANCED MESSAGE-----