SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-24128
BIO-PLEXUS, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 06-1211921
(State or other jurisdiction (I.R.S. Employer
of Incorporation or organization) Identification No.)
129 Reservoir Road, Vernon Connecticut 06066
(Address of principal executive offices including zip code)
(860) 870-6112
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]. No [ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
SHARES OUTSTANDING
CLASS OF COMMON STOCK AS OF NOVEMBER 13, 2001
--------------------- -----------------------
Common Stock, $0.001 par
value 11,577,991
BIO-PLEXUS, INC.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at September
30, 2001 (unaudited) and December 31, 2000 3
Condensed Statements of Operations
(unaudited) for the three months ended
September 30, 2001 and 2000 4
Condensed Statements of Operations
(unaudited) for the nine months ended
September 30, 2001 and 2000 5
Condensed Statements of Cash Flows
(unaudited) for the nine months ended
September 30, 2001 and 2000 6
Notes to Condensed Financial
Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities 17
Item 3. Default Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 22
BIO-PLEXUS, INC.
CONDENSED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2001 2000
(UNAUDITED)
ASSETS
Current assets:
Cash $ 1,219,000 $ 4,003,000
Accounts receivable, net 677,000 516,000
Inventories:
Raw materials 1,258,000 1,379,000
Work-in-process 506,000 36,000
Finished goods 494,000 1,634,000
------------ ------------
Total inventory 2,258,000 3,049,000
------------ ------------
Other current assets 205,000 124,000
------------ ------------
Total current assets 4,359,000 7,692,000
------------ ------------
Fixed assets, net 8,129,000 7,845,000
Deferred debt financing expenses, net of amortization -- 1,017,000
Patents, net of amortization 440,000 415,000
Other assets 3,000 3,000
------------ ------------
TOTAL ASSETS $ 12,931,000 $ 16,972,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 54,000 $ 52,000
Accounts payable and accrued expenses 410,000 1,129,000
Accrued vacation 80,000 122,000
Other accrued employee costs 109,000 282,000
Deferred revenue 128,000 --
------------ ------------
Total current liabilities 781,000 1,585,000
------------ ------------
Long-term debt, net of current portion 1,197,000 17,806,000
Shareholders' equity (deficit):
Common stock, no par value, 4,000,000 authorized,
1,488,723 shares issued and outstanding -- 76,412,000
Common stock, $0.001 par value, 25,000,000 authorized,
11,577,991 shares issued and outstanding 12,000 --
Paid in capital 99,321,000 --
Deferred compensation, net (557,000) --
Accumulated deficit (87,823,000) (78,831,000)
------------ ------------
Total shareholders' equity (deficit) 10,953,000 (2,419,000)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 12,931,000 $ 16,972,000
============ ============
The accompanying notes are an integral part of these condensed financial
statements.
3
BIO-PLEXUS, INC
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2001 2000
----------- -----------
Revenue:
Product $ 1,336,000 $ 1,151,000
Services 61,000 12,000
Royalties 181,000 --
----------- -----------
Total revenue 1,578,000 1,163,000
----------- -----------
Costs and expenses:
Product 864,000 578,000
Services 48,000 --
Research and development 774,000 523,000
Selling, general and administrative 887,000 1,868,000
----------- -----------
Total operating costs and expenses 2,573,000 2,969,000
----------- -----------
Operating loss (995,000) (1,806,000)
Financing expenses:
Amortization of deferred debt financing (58,000) 85,000
Interest expense (522,000) 704,000
Other income (19,000) (76,000)
----------- -----------
Total financing (income) expenses (599,000) 713,000
----------- -----------
Loss before reorganization costs (396,000) (2,519,000)
Reorganization costs 3,362,000 --
----------- -----------
Net loss $(3,758,000) $(2,519,000)
=========== ===========
Net loss per share of common stock:
Basic and diluted $ (0.39) $ (1.69)
=========== ===========
Weighted average common shares outstanding (Note 3) 9,606,270 1,490,491
The accompanying notes are an integral part of these condensed financial
statements.
4
BIO-PLEXUS, INC
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2001 2000
----------- -----------
Revenue:
Product $ 3,922,000 $ 3,335,000
Services 261,000 146,000
Royalties 302,000 --
----------- -----------
Total revenue 4,485,000 3,481,000
----------- -----------
Costs and expenses:
Product 2,772,000 1,668,000
Services 151,000 29,000
Research and development 1,386,000 1,080,000
Selling, general and administrative 5,002,000 5,458,000
----------- -----------
Total operating costs and expenses 9,311,000 8,235,000
----------- -----------
Operating loss (4,826,000) (4,754,000)
Financing expenses:
Amortization of deferred debt financing 63,000 274,000
Interest expense 807,000 3,485,000
Other income (65,000) (214,000)
----------- -----------
Total financing expenses 805,000 3,545,000
----------- -----------
Loss before reorganization costs (5,631,000) (8,299,000)
Reorganization costs 3,362,000 --
----------- -----------
Net loss $(8,993,000) $(8,299,000)
=========== ===========
Per share of common stock:
Basic and diluted $ (2.13) $ (5.68)
=========== ===========
Weighted average common shares outstanding (Note 3) 4,229,754 1,461,177
The accompanying notes are an integral part of these condensed financial
statements.
5
BIO-PLEXUS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
FOR NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss before reorganization costs $ (5,631,000) $ (8,299,000)
Adjustments to reconcile net loss to cash used
by operating activities:
Depreciation and amortization 648,000 402,000
Amortization of deferred debt financing expenses 63,000 274,000
Amortization of debt discount 114,000 2,255,000
Reorganization cost payments (621,000) --
Decrease (increase) in assets:
Accounts receivable, net (161,000) 216,000
Inventories 791,000 (1,275,000)
Other current assets (81,000) 67,000
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (719,000) (87,000)
Accrued vacation and other accrued employee costs (215,000) (1,000)
Deferred revenue 128,000 --
Other, net 19,000 278,000
------------ ------------
Net cash used in operating activities (5,665,000) (6,170,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases and construction of fixed assets, net (866,000) (2,620,000)
Cost of patents (49,000) (100,000)
------------ ------------
Net cash used in investing activities (915,000) (2,720,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock 2,895,000 750,000
Proceeds from exercise of common stock options -- 83,000
Accretion of accrued interest 937,000 845,000
Increase in notes payable -- 3,850,000
Proceeds from long-term debt -- 9,900,000
Payments of deferred financing costs -- (885,000)
Repayments of long-term debt (36,000) (893,000)
------------ ------------
Net cash provided by financing activities 3,796,000 13,650,000
------------ ------------
Net (decrease) increase in cash (2,784,000) 4,760,000
Cash, beginning of period 4,003,000 867,000
------------ ------------
Cash, end of period $ 1,219,000 $ 5,627,000
============ ============
Supplemental cash flow disclosures:
Cash payments of interest $ 100,000 $ 429,000
Cash payments of income taxes $ 3,000 $ --
Surrender of debt upon conversion to equity $ 19,408,000 $ 1,333,000
Non-cash reorganization costs $ 2,741,000 $ --
The accompanying notes are an integral part of these condensed
financial statements.
6
BIO-PLEXUS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and, in the opinion of
the management of the Company, include all adjustments which are of a normal
recurring nature, necessary for a fair presentation of financial position and
the results of operations and cash flows for the periods presented. However, the
financial statements do not include all information and footnotes required for a
presentation in accordance with generally accepted accounting principles. These
condensed financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's 2000 Annual Report on
Form 10-K. The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year.
Reclassifications - certain prior year amounts have been reclassified
to conform to the current year presentation.
Reorganization and Emergence from Chapter 11
On April 4, 2001 (the "Petition Date") the Company filed a voluntary
petition for relief under Chapter 11 of the United States Code (the "Bankruptcy
Code") with the United States Bankruptcy Court for the District of Connecticut
(the "Bankruptcy Court"). As of the Petition Date, the Company commenced
operating its business and managed its properties as a debtor-in-possession. On
April 4, 2001, the Company filed a Disclosure Statement (the "Disclosure
Statement") and a Plan of Reorganization (the "Plan of Reorganization") with the
Bankruptcy Court. The Disclosure Statement set forth certain information
regarding, among other things, significant events that had occurred during the
Company's Chapter 11 case and the anticipated organization, operation and
financing of the Reorganized Company ("Reorganized Company"). The Company
subsequently filed certain amendments to the Plan of Reorganization to add and
clarify certain terms of the Plan of Reorganization and to establish conditions
to confirmation and effectiveness of the Plan of Reorganization. Among other
things, the Plan of Reorganization (1) divided the Company's creditors into
eight classes; (2) provided that certain classes of creditors would be paid in
full, and would be otherwise rendered unimpaired; (3) provided that, in exchange
for their secured claim, Appaloosa Management L.P. ("Appaloosa Management") and
certain of its affiliates would receive shares of common stock of the
Reorganized Company representing 85% of the Reorganized Company outstanding
common stock; and (4) provided that holders of common stock issued prior to the
confirmation of the Plan of Reorganization would receive, in exchange for their
existing shares, new shares of common stock of the Reorganized Company, which
would constitute 15% of the Reorganized Company's outstanding common stock. In
addition, all outstanding common stock warrants and options (including those
issued under the 1991 Long-Term Incentive Plan and the 1995 Non-Employee
Directors Stock Option Plan) were cancelled and deemed extinguished (see
Note 4).
On June 12, 2001 a confirmation order was entered by the United States
Bankruptcy Court that confirmed the Plan of Reorganization pursuant to
Bankruptcy Code section 1129, and the Debtor Company emerged from its
debtor-in-possession status as the Reorganized Company. The conditions precedent
to the effectiveness of the Plan of Reorganization included, among other things,
reincorporation of the Reorganized Company in the State of Delaware, there being
no material adverse change in the development and launch of the Company's Winged
Set product, and the consummation of the Appaloosa Private Placement (as
described below).
The conditions precedent to the effectiveness of the Plan of
Reorganization were met on July 18, 2001 with the reincorporation of the
Reorganized Company in the State of Delaware and the consummation of the
Appaloosa Private Placement.
When used herein, the registrant prior to the Petition Date is referred
to as the "pre-petition Company"; the registrant prior to its reorganization
pursuant to the Plan of Reorganization is referred to as the "Debtor Company";
the registrant after its reorganization under the Plan of Reorganization is
referred to as the "Reorganized Company"; and the registrant after its
reincorporation in the State of Delaware is referred to as the "Company."
Reverse Split and Reincorporation
Effective July 18, 2001, the Reorganized Company reincorporated in the
State of Delaware as the Company. The reincorporation was effected pursuant to a
merger agreement entered into pursuant to the Plan of Reorganization (the
"Merger Agreement"). Immediately prior to the reincorporation, the Reorganized
Company effected a reverse stock split pursuant to the Plan of
7
Reorganization. As a result of the reverse stock split, each ten shares of the
Reorganized Company's common stock was converted into one share of Reorganized
Company common stock. Thereafter, the reincorporation was effected in accordance
with the Merger Agreement by merging the Reorganized Company with and into the
Company. As a result of that merger, the separate corporate existence of the
Reorganized Company ceased, the certificate of incorporation and bylaws of the
Company became and continue in effect as the registrant's certificate of
incorporation and bylaws, and each ten shares of common stock of the Reorganized
Company was immediately converted into one share of Common Stock of the Company.
All share and per share information has been restated to reflect the effect of
the reverse split. A copy of the certificate of incorporation and by-laws of the
Company as currently in effect are filed as Exhibits 3.1 and 3.2 hereto and are
incorporated herein by reference.
After giving effect to the reverse stock split and the Company's
reincorporation in the State of Delaware, effective July 27, 2001, the
registrant's common stock began trading on the National Association of
Securities Dealers' OTC Bulletin Board under the symbol BPXS.
Conversion of Convertible Notes
Effective July 18, 2001, and in accordance with the terms of the Plan
of Reorganization, the Purchasers (defined below) converted $19,408,000 of debt
(made up of the Convertible Notes) in the Reorganized Company, into 8,501,224
shares of common stock in the Company (the Debt Conversion), at an effective
conversion price of $2.283 per share, giving the Purchasers 85% of the ownership
of the Company. In conjunction with the Debt Conversion, all warrants associated
with the Permanent Financing, the Bridge Financing, and the Convertible
Debentures (all described below) were cancelled.
The Appaloosa Private Placement
On July 18, 2001 (the "Effective Date"), the Company completed a
private placement of 1,314,060 shares of its common stock to Appaloosa
Investment Limited Partnership I ("Appaloosa Investment") and Palomino Fund Ltd.
("Palomino") (Appaloosa Investment, and Palomino being collectively referred to
herein as the "Purchasers"). The purchase price paid for the stock was $3
million, which was reduced in an amount equal to the Purchaser's costs and
incurred in connection with the transaction and the amount of the Company's
outstanding indebtedness for borrowings pursuant to the financing provided by
the Purchasers during the Chapter 11 case. The private placement was made
pursuant to a Stock Purchase Agreement, which contained customary provisions,
including representations and warranties. A copy of the Stock Purchase Agreement
is filed as Exhibit 10.54 hereto and is incorporated herein by reference. As
part of the private placement, on the Effective Date, the Company also issued to
the Purchasers warrants to purchase 1,314,060 shares of its common stock (the
"Warrants"). The Warrants have an exercise price of $2.283 per share. The
Warrants contains customary provisions, including anti-dilution protection. Upon
the Company achieving certain performance targets, (a) the Company shall have
the right to redeem these Warrants at a price of $.01 per share at any time 45
days after the Purchasers receive notice of the achievement of the performance
target by the Company and (b) the Warrants shall be exercisable by the
Purchasers for 30 days after the Purchasers receive notice of the achievement of
the performance target by the Company. The exercise of these Warrants, assuming
they are exercised in full, is expected to yield proceeds of approximately $3.0
million to the Company. A copy of the Warrant is filed as Exhibit 10.55 hereto
and is incorporated herein by reference. Additionally, in consideration for the
equity investment made by the Purchasers, the Company and the Purchasers have
entered into a Registration Rights Agreement, dated as of the Effective Date
(the "Registration Rights Agreement"). The Registration Rights Agreement
contains customary provisions, including adjustments for stock splits, stock
dividends and reverse stock splits. Pursuant to the Registration Rights
Agreement, the Purchasers have "demand" registrations which, if exercised, would
obligate the Company, subject to certain exceptions, to file and have declared
effective, a registration statement relating to resales of Common Stock owned by
the Purchasers or received from the Company in respect of the foregoing by
reason of stock dividends or similar matters. These demand registration rights
may be exercised no more than six times. Pursuant to the Registration Rights
Agreement, the Purchasers also have "piggyback" registration rights in
connection with other public offerings by the Company. A copy of the
Registration Rights Agreement is filed as Exhibit 10.56 hereto and is
incorporated herein by reference. The summary set forth herein of certain
provisions of the Plan of Reorganization, the Company's certificate of
incorporation and bylaws, the Stock Purchase Agreement, the Warrant Agreement,
and the Registration Rights Agreement does not purport to be a complete
description of the documents and is qualified in its entirety by reference to
the full provisions of each document as filed as Exhibits to this Form 10-Q and
incorporated herein by reference.
8
Description of Reorganization Accounting
In connection with the reorganization, the Company reviewed the
recommended accounting principles for entities emerging from Chapter 11 ("fresh
start reporting") set forth in the American Institute of Certified Public
Accountants Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code." SOP 90-7 provides guidance with
regard to disclosures while an entity is in reorganization, and requires that
fresh start reporting (purchase accounting) be adopted when the reorganization
value of the assets of the emerging entity (immediately before the date of
confirmation) is less than the total of all post-petition liabilities and
allowed claims, and the holders of existing voting shares immediately before
confirmation receive less than fifty percent (50%) of the voting shares of the
emerging entity. If fresh start reporting were applicable, it would require,
among other things, an allocation of the reorganization value to the assets of
the company, creating a new set of financial statements for the reorganized
entity. These statements would not be comparable with those prepared before the
reorganization plan because they would be those of a new entity.
In connection with the Plan of Reorganization, the holders of the
existing shares received only 15% of the voting shares of the Company; however,
the reorganization value of the Company was not deemed to be less than the total
of all post-petition liabilities and allowed claims. Accordingly, the adoption
of the fresh start requirements was not applicable, and therefore the
transaction was accounted for at historical values within the third quarter
financial statements, which allows comparison of the third quarter 2001 results
to those of prior periods.
In determining the reorganization value, the Company utilized prior
independent appraisals, discounted cash flow analysis, and comparable industry
standards. The Company, subsequent to its reorganization on July 18, 2001, has
paid all allowed unsecured claims and pre-petition value. All other allowed
secured and priority claims were not subject to compromise, and with the
exception of the Convertible Notes, were carried forward at historical values.
Accordingly, there was no discounting or forgiveness of debt associated with the
reorganization. Costs of the reorganization were separately identified within
the Statement of Operations (see Note 2).
NOTE 2 - REORGANIZATION COSTS
As part of the Plan of Reorganization, certain costs were incurred and
certain asset carrying values were impaired, causing a write-off of such assets.
The total reorganization charge in the accompanying condensed statements of
operations was $3,362,000. Of that amount, $2,741,000 represents write-offs of
unamortized debt financing costs and unamortized debt discounts. Both of these
assets had originally been established with the placement of the Appaloosa
Convertible Notes, and because of the conversion to common stock of this debt,
the associated unamortized debt financing and debt discount carrying values were
written off. The remaining $621,000 represents professional fees paid in cash
during the reorganization period.
NOTE 3 - EARNINGS PER SHARE
Basic Earnings Per Share ("EPS") is based on the weighted average
number of common shares outstanding for the period, excluding any dilutive
common share equivalents. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted. In determining net loss per common share, common stock equivalents
are excluded from the computation, as their effect is anti-dilutive. Immediately
prior to the reincorporation, the Reorganized Company effected a reverse stock
split pursuant to the Plan of Reorganization. As a result of the reverse stock
split, each ten shares of the Reorganized Company's common stock was converted
into one share of Reorganized Company common stock All share and per share
information has been restated to reflect the effect of the reverse split.
NOTE 4 - SIGNIFICANT CAPITAL TRANSACTIONS
NASDAQ Delisting
The Nasdaq SmallCap Stock Market notified the Company that its Common
Stock was delisted from The Nasdaq Stock Market effective with the opening of
business on March 6, 2001. The delisting was as a result of the Company's
failure to meet Nasdaq's requirements for continued listing. The Company did not
appeal the delisting on the Nasdaq National Market and is not currently eligible
for listing on The New York Stock Exchange or the American Stock Exchange.
Trading in the Company's Common Stock was conducted on the National
Association of Securities Dealers' Pink Sheets until July 27, 2001. On that
date, after giving effect to the reverse stock split and the reincorporation,
the Company's Common Stock began trading on the National Association of
Securities Dealers' OTC Bulletin Board under the symbol BPXS.
9
The Company's Common Stock may become subject to regulation as a "penny
stock." The Securities and Exchange Commission has adopted regulations, which
generally define "penny stock" to be any equity security that has a market price
or exercise price less than $5.00 per share, subject to certain exceptions,
including listing on the Nasdaq National Market. If the Company's Common Stock
is not listed on the Nasdaq National Market and no other exception applies, the
Company's Common Stock may be subject to the SEC's Penny Stock Rules, Rules
15g-1 through Rule 15g-9 under the Exchange Act. For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of such securities and have received the purchaser's written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a risk disclosure document mandated by
the SEC relating to the penny stock market. The broker-dealer must also disclose
the commission payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. Consequently, the
penny stock rules may restrict the ability of broker-dealers to sell the
Company's securities and may affect the ability of holders to sell the Company's
securities in the secondary market and the price at which such holders can sell
any such securities. Rule 15g-9 under the Exchange Act imposes additional sales
practice requirements on broker-dealers who sell such securities except in
transactions exempted from such rule. Such exempt transactions include those
meeting the requirements of Rule 505 or 506 of Regulation D promulgated under
the Securities Act and transactions in which the purchaser is an institutional
accredited investor or an established customer of the broker-dealer.
Common Stock and Stock Options
On July 18, 2001 the Company adopted a new employee stock option plan
and a restricted stock plan (collectively, the "2001 Stock Incentive Plan") The
total number of stock options and restricted stock shares reserved under the
2001 Stock Incentive Plan is 2,000,000, of which a total of 1,135,500 were
issued and outstanding as of September 30, 2001. The total outstanding at
September 30, 2001 consisted of 873,100 stock options and 262,400 restricted
stock shares. All grants were made on July 19, 2001 and the vesting period for
both stock options and restricted stock shares is three years with one third
vesting on each grant date anniversary. The exercise strike price for the stock
options as well as the fair market value of the restricted stock issuances was
$2.283 per option \ share. With regard to the restricted stock issuances,
compensation expense, determined at the date of grant, is being recognized
ratably in accordance with the vesting schedule. Compensation expense recognized
was $42,000 for the three months ended September 30, 2001. At September 30,
2001, $557,000 of future compensation expense associated with the restricted
stock shares has been deferred and is included in deferred compensation in the
accompanying condensed balance sheets.
On March 13, 2001, the pre-petition Company issued to Fresenius Medical
Holdings Inc. 10,174 restricted common stock shares as part of a licensing and
development agreement.
On March 9, 2000, an officer of the pre-petition Company effected a net
exercise of stock options to purchase 3,200 shares of Common Stock in exchange
for 1,495 shares of Common Stock.
During the first quarter of 2000, an employee exercised stock options
to purchase 3,000 shares of Common Stock.
Convertible Note Financing
On September 21, 1999, the pre-petition Company received a commitment
from Appaloosa Management for a total financing package of $17.5 million,
comprised of (i) $16.75 million of zero-coupon, secured convertible notes due
2005 (the "Convertible Notes"), (ii) 25,000 shares of Common Stock issued at a
purchase price of $30 per share (the "Permanent Financing Shares") and (iii)
nine-year warrants to purchase up to 150,000 shares of Common Stock at an
initial exercise price of $70 per share (the "$70 Warrants", and collectively
with the Convertible Notes and the Permanent Financing Shares, the "Permanent
Financing"). The Permanent Financing was consummated on April 28, 2000 after
receipt of stockholder approval of the terms of the Permanent Financing and
certain related matters.
Bridge Transactions
Pending consummation of the Permanent Financing, on October 21, 1999,
the pre-petition Company issued to Appaloosa Management and entities affiliated
therewith (the "Appaloosa Entities") a 7.5% non-convertible secured note in the
aggregate principal amount of $3 million (the "First Bridge Note"). In January
2000, the interest rate on the First Bridge Note was increased to 12% per annum.
In connection with the issuance of the First Bridge Note, the pre-petition
Company also issued to the Appaloosa Entities (i) a five-year warrant to
10
purchase up to 100,000 shares of Common Stock, at an initial exercise price of
$30 per share (the " $30 Warrants") and (ii) a nine-year warrant to purchase up
to 150,000 shares of Common Stock at an initial exercise price of $50 per share
(the "$50 Warrants") (the $30 Warrants and $50 Warrants are collectively
referred to herein as the "First Bridge Warrants"). At the Purchaser's election
and upon the closing of the Permanent Financing, the exercise price of the $30
Warrants increased to $40 per share of Common Stock. The exercise price of the
$50 Warrants increased to $70 per share of Common Stock upon the closing of the
Permanent Financing. The $50 Warrants contained a net-exercise provision. The
fair value of the warrants at the date of issuance was recorded as a discount on
the debt and was amortized over the term of the First Bridge Note.
On January 5, 2000, the pre-petition Company issued to the Appaloosa
Entities a 15% non-convertible secured note in the aggregate principal amount of
$1.65 million (the "Second Bridge Note"). In connection with the issuance of the
Second Bridge Note, the Company also agreed to issue and sell on the earlier of
(i) April 30, 2000 and (ii) the closing of the Permanent Financing, five-year
warrants to acquire up to 20,000 shares of Common Stock at an initial exercise
price of $30 per share (the "Second Bridge Warrants"). The Second Bridge
Warrants contained a net-exercise provision.
On April 3, 2000, the pre-petition Company issued to the Appaloosa
Entities a 15% non-convertible secured note in the aggregate principal amount of
$2.2 million (the "Third Bridge Note"). No warrants or convertible securities
were issued in connection with the Third Bridge Note. The First Bridge Note, the
Second Bridge Note and the Third Bridge Note are collectively referred to as the
"Bridge Notes". The issuance of the Bridge Notes, the First Bridge Warrants and
the Second Bridge Warrants are collectively referred to as the "Bridge
Transactions".
The Bridge Notes were not convertible into shares of Common Stock and
were paid-in-full at the closing of the Permanent Financing on April 28, 2000.
Permanent Financing
In order to consummate the Permanent Financing, the pre-petition
Company was required by the rules of the NASDAQ Stock Market to obtain the
approval of a majority of the pre-petition Company's stockholders of the terms
and conditions of the Permanent Financing. In addition, the Connecticut Business
Corporation Act required that the pre-petition Company obtain stockholder
approval of (i) an amendment to the pre-petition Company's certificate of
incorporation (the "Charter Amendment") and (ii) an amendment to the
pre-petition Company's 1991 Long-Term Incentive Plan (the "Incentive Plan
Amendment"). The Charter Amendment and the Incentive Plan Amendment were
required by the terms of the Permanent Financing. The approval of the
pre-petition Company's stockholders of the terms of the Permanent Financing, the
Charter Amendment and the Incentive Plan Amendment is collectively referred to
as "Stockholder Approval".
Coinciding with Stockholder Approval obtained on April 28, 2000, the
pre-petition Company issued to the Appaloosa Entities the Convertible Notes, the
Permanent Financing Shares and the $70 Warrants. The Convertible Notes were
convertible into shares of Common Stock at an initial conversion price of $30.
The $70 Warrants contained a net-exercise provision. The fair value of the
warrants at the date of issuance was recorded as a discount on the debt, which
was to be amortized over the term of the debt.
The Permanent Financing generated aggregate proceeds to the
pre-petition Company of $17.5 million. After repayment of the Bridge Notes and
costs and expenses associated with the financing, the pre-petition Company
realized net proceeds of approximately $9.6 million, which was available along
with existing resources for general working capital purposes, subject to the
terms and conditions of the Permanent Financing transaction agreements.
The convertible notes contained certain restrictive covenants including
but not limited to, minimum (maximum) operating profit (loss), minimum product
sales revenues, and maximum permitted capital expenditures, all as defined.
Prior to the effectiveness of the Plan of Reorganization, the Company was in
violation of the operating profit (loss) and minimum product sales revenues
covenants. Under the terms of the agreement, the Appaloosa Entities were
entitled to call the Convertible Notes if the pre-petition Company was in
violation of any restrictive covenant. The covenant violations were not waived
by the Appaloosa Entities; however, such notes were converted under the
provisions of the Plan of Reorganization (see Note 1). Accordingly, the full
amount of the convertible debt had been classified as a current liability as of
June 30, 2001, up until July 18, 2001, when the debt was converted to equity.
All Convertible Notes were converted into Company common stock on July
18, 2001, as part of the consummation of the Plan of Reorganization explained in
Note 1.
11
Convertible Debentures
On April 27, 1999, the Company sold an aggregate principal amount of
$2,500,000 of its 6% Convertible Debentures due June 30, 2004 (the "6%
Debentures") to several purchasers (the "Debenture Holders") (the "Convertible
Debenture Financing"). The 6% Debentures were convertible at any time at the
option of the Debenture Holders into shares of the Company's Common Stock at the
lesser of a fixed conversion price of $30.60 per share (as may have been
adjusted from time to time) or a floating conversion price at the time of the
conversion if the floating conversion price was less than $30.06 per share (as
may have been adjusted from time to time). The 6% Debentures could have been
wholly or partially redeemed at the option of the Company for an amount not to
exceed 130% of the face value thereof plus accrued and unpaid interest at any
time after the date of issuance. As of September 30, 2000, the Debenture Holders
had converted all of the $2,500,000 outstanding principal balance of the 6%
Debentures into 88,073 shares of Common Stock. The Company and the Debenture
Holders had limited put and call options, respectively, for additional 6%
Debentures. In connection with the subsequent financing by the Appaloosa
Entities, the Company agreed not to exercise its put right under the 6%
Debentures. As of July 26, 2000, the Debenture Holders' call options expired and
were not exercised. In connection with the Convertible Debenture Financing, the
Company issued a warrant to purchase up to 50,000 shares of the Company's Common
Stock at an exercise price of $33.80 per share. Such warrant was cancelled and
deem extinguished as part of the Plan of Reorganization explained in Note 1.
NOTE 5 - SEGMENT FINANCIAL DATA
The Company's operations consist of two worldwide business segments:
(i) Safety Medical Products and Accessories and (ii) Joint Venture Design &
Development. The Safety Medical Products and Accessories segment includes
operations associated with the manufacture of blood collection needles, needle
holders and needle disposal containers. The Joint Venture Design & Development
segment includes operations associated with product design and development,
product licensing, and the design, development and construction for machinery
and tooling in connection with joint venture partners.
Distinct reporting by such segments was deemed necessary by management
based on the significance of reported revenues and expenses and the Company's
intention to focus operating resources in both of these areas.
Information with respect to each of the Company's business segments is as
follows:
Segment Revenue
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------- ---------------------------------------
2001 2000 1999 2001 2000 1999
---------- ---------- ---------- ---------- ---------- ----------
Safety Medical Products and
Accessories $1,336,000 $1,151,000 $1,122,000 $3,922,000 $3,335,000 $3,668,000
Joint Venture Design & Development 242,000 12,000 169,000 563,000 146,000 1,370,000
---------- ---------- ---------- ---------- ---------- ----------
Total Consolidated Revenue $1,578,000 $1,163,000 $1,291,000 $4,485,000 $3,481,000 $5,038,000
========== ========== ========== ========== ========== ==========
Major Customers
There were two customers, domestic distributors of the Company's
products, Allegiance Healthcare and Fisher HealthCare, that exceeded 10% of the
Company's Safety Medical Products and Accessories segment revenue for the
periods presented. The loss of business of any of the foregoing customers could
potentially have a material adverse effect on the business and prospects of the
Company. In the Joint Venture Design & Development segment, Johnson and Johnson
Medical, Inc. ("JJM") of Arlington, Texas, TFX Medical ("TFX"), a division of
Teleflex Incorporated and Fresenius Medical Care Holdings, Inc. ("Fresenius")
contributed to more than 10% of the revenues for the periods presented. The
following table represents the revenue associated with these major customers by
segment:
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------------- ----------------------------------------
2001 2000 1999 2001 2000 1999
---------- ---------- ---------- ---------- ---------- ----------
TOTAL REVENUE MAJOR CUSTOMERS:
Safety Medical Products and
Accessories $ 848,000 $ 942,000 $1,029,000 $2,739,000 $2,750,000 $2,847,000
Joint Venture Design & Development 242,000 12,000 68,000 563,000 146,000 1,178,000
12
OTHER DOMESTIC SALES 466,000 209,000 173,000 1,161,000 585,000 484,000
EXPORT SALES:
Safety Medical Products and
Accessories 22,000 -- 21,000 22,000 -- 529,000
Joint Venture Design & Development -- -- -- -- -- --
-------------------------------------------------------------------------------------
TOTAL CONSOLIDATED REVENUE $1,578,000 $1,163,000 $1,291,000 $4,485,000 $3,481,000 $5,038,000
=====================================================================================
During the periods presented, there were no material intersegment revenues.
Segment Operating Profit
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------------- --------------------------------------------
2001 2000 1999 2001 2000 1999
----------- ----------- ----------- ----------- ----------- -----------
Safety Medical Products and Accessories $ 472,000 $ 573,000 $ 559,000 $ 1,150,000 $ 1,610,000 $ 1,593,000
Joint Venture Design & Development 194,000 12,000 116,000 412,000 174,000 962,000
--------------------------------------------------------------------------------------
Total Consolidated Gross Margin 666,000 585,000 675,000 1,562,000 1,784,000 2,555,000
--------------------------------------------------------------------------------------
Selling,General and Administrative
Expenses (887,000) (1,868,000) (1,211,000) (5,002,000) (5,458,000) (3,472,000)
Research and development (774,000) (523,000) (298,000) (1,386,000) (1,080,000) (592,000)
Reorganization costs (3,362,000) -- -- (3,362,000) -- --
Financing (Expenses) Income 599,000 (713,000) (212,000) (805,000) (3,545,000) (573,000)
--------------------------------------------------------------------------------------
Net Loss $(3,758,000) $(2,519,000) $(1,046,000) $(8,993,000) $(8,299,000) $(2,082,000)
======================================================================================
For the Safety Medical Products and Accessories segment, operating
profit consists of total revenues less product costs and expenses. In the Joint
Venture Design and Development segment, operating profit consists of total
revenues less certain operating costs and expenses and research and development
expenses.
Segment Capital Expenditures, Net
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- -------------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Safety Medical Products and
Accessories $(232,000) $1,767,000 $146,000 $866,000 $2,620,000 $250,000
Joint Venture Design & Development -- -- -- -- -- --
-------------------------------------------------------------------------------
Total Consolidated Capital
Expenditures, Net $(232,000) $1,767,000 $146,000 $866,000 $2,620,000 $250,000
===============================================================================
There has been no material change in identifiable assets related to
reportable segments since the 2000 Annual Report.
NOTE 6 -ROYALTY AND SERVICES AGREEMENTS
On January 28, 1997 the Company entered into a Development and License
Agreement and a Supply Agreement with JJM. Under the terms of the agreements,
the Company would develop and manufacture safety needle assemblies for JJM
utilizing its self-blunting technology, which would be used by JJM, under an
exclusive worldwide license granted by the Company, to manufacture and sell a
new safety I.V. catheter. On April 9, 1998, the Company amended the Development
and License Agreement and canceled the Supply Agreement with JJM. The amended
terms include certain changes in the licensing and royalty agreements as well as
the transfer of manufacturing of the safety needle assemblies to JJM, in
13
exchange for an initial milestone payment of $3,500,000, with an additional
$500,000 payable upon the completion of certain milestones. The revised
agreement also provided for an additional $300,000 payable to the Company for
initial capital equipment purchases and the payment of certain minimum annual
royalties. During the first quarter of 2001, the Company received the final
product development milestone payment of $100,000 in connection with this
agreement. In addition, the Company began to receive royalty payments in
connection with this agreement during the first quarter of 2001.
On October 23, 1998, the Company entered into an exclusive License
Agreement and Design, Development and Asset Transfer Agreement for a safety
Peripherally Inserted Central Catheter ("PICC") introducer with TFX. The License
Agreement includes certain minimum annual volume requirements and ongoing
royalties on the sale of PICC introducer catheters featuring the Company's
proprietary Punctur-Guard(R) technology. Under the Design, Development and Asset
Transfer Agreement, the Company would design and develop safety needle
assemblies to be used with the TFX peelable catheter, and would modify existing
manufacturing equipment to be transferred to TFX pursuant to the terms and
conditions of the agreement. On July 26, 1999, an agreement was entered into
with TFX to modify the License Agreement dated October 23, 1998. The amended
agreement included additional licensing fees and changes in royalty revenue in
exchange for TFX's right to exclusively market to one of its customers. In the
first quarter of 2000, the Company completed its obligations under the Design,
Development and Asset Transfer Agreement, and recognized service revenue of
$100,000. In addition, the Company began to receive royalty payments in
connection with this agreement during the fourth quarter of 2000.
On December 19, 2000, the Company entered into a Development and
Manufacturing and Distribution Agreement with Fresenius. Pursuant to this
agreement, during the first two phases, the Company and Fresenius will develop
Extracorporeal Therapy Needles and in the second phase, Fresenius will
manufacture, market, and distribute the needles. In connection with this
agreement, the Company also granted to Fresenius an exclusive worldwide license
to manufacture, have manufactured, use, sell, have sold or offer for sale such
needles utilized in dialysis applications covered by the PUNCTUR-GUARD(R)
technology. The Fresenius agreement provides for the payment of royalties to the
Company once products developed under the agreement are sold. For the nine
months ended September 30, 2001, a total of $161,000 of services revenue related
to phase one has been recognized in the accompanying condensed statements of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
THE DISCUSSIONS SET FORTH BELOW AND ELSEWHERE HEREIN CONTAIN CERTAIN STATEMENTS
WHICH ARE NOT HISTORICAL FACTS AND ARE CONSIDERED FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. FORWARD LOOKING
STATEMENTS ARE IDENTIFIED BY THE USE OF SUCH TERMINOLOGY AS "BELIEVES,"
"EXPECTS," "MAY," "SHOULD," "ANTICIPATES," "PLANS," "ESTIMATES," AND "INTENDS,"
OR DERIVATIONS OR NEGATIVES THEREOF OR COMPARABLE TERMINOLOGY. ACCORDINGLY,
SUCH STATEMENTS INVOLVE RISKS (KNOWN AND UNKNOWN) AND UNCERTAINTIES. THESE RISKS
AND UNCERTAINTIES INCLUDE THE CONTINUED WILLINGNESS OF THE COMPANY'S CUSTOMERS,
VENDORS AND EMPLOYEES TO MAINTAIN THEIR RELATIONSHIPS WITH THE COMPANY DURING
THIS PERIOD; THE ACCEPTANCE OF THE COMPANY'S PRODUCTS BY HEALTH CARE
PROFESSIONALS; THE COMPANY'S ABILITY TO PROTECT ITS PROPRIETARY TECHNOLOGY;
AVAILABILITY OF QUALIFIED PERSONNEL; CHANGES IN, OR FAILURE TO COMPLY WITH
GOVERNMENT REGULATIONS; THE RISKS ASSOCIATED WITH EXPANDING THE COMPANY'S
BUSINESS INTERNATIONALLY; THE ABILITY OF THE COMPANY TO MEET CERTAIN PERFORMANCE
OBJECTIVES AND REQUIREMENTS RELATED TO THE PUBLIC TRADING OF ITS STOCK; THE
ABILITY OF THE COMPANY TO OBTAIN ADDITIONAL FINANCING; GENERAL ECONOMIC AND
BUSINESS CONDITIONS; AND OTHER RISK FACTORS AND UNCERTAINTIES DETAILED IN THIS
REPORT, DESCRIBED FROM TIME TO TIME IN THE COMPANY'S OTHER SECURITIES AND
EXCHANGE COMMISSION FILINGS, OR DISCUSSED IN THE COMPANY'S PRESS RELEASES. THE
COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR ADVISE UPON ANY SUCH
FORWARD-LOOKING STATEMENT. All forward-looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements.
14
Overview
The Company's principal focus is the design, development, testing and
evaluation of its blood collection safety needle and accessory products, the
design and development of the molds, needle assembly machines and production
processes needed for manufacturing the blood collection safety needle, and the
design, development and marketing of safety needle products. Since its inception
in September 1987 through September 30, 2001, the Company has incurred
cumulative losses totaling approximately $87,823,000. For the Company to achieve
profitability, further reductions in manufacturing costs and increases in sales
are necessary, as well as the addition of new product lines such as the Winged
Set product line launched in July 2001. The Company has also focused its efforts
on developing royalty producing strategic partnerships with major healthcare
companies in order to bring other products to market featuring its patented
internal blunting technology.
The Company believes that similar distribution agreements or royalty
producing strategic partnerships may be possible with one or more major
healthcare companies for its other products. Such arrangements could assist the
Company in raising additional capital and help fund research and development of
new products, as well as accelerate the rate of sales growth. However, such
arrangements could also decrease the revenue per unit for the Company, as a
result of sharing revenue with its distribution or strategic partners. The
Company believes the overall benefits and potential for greater market share
outweigh the disadvantages that may result from such arrangements.
Results of Operations
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
The Company had product sales of $1,336,000 for the three months ended
September 30, 2001 compared to $1,151,000 for the same period in 2000. The
increase was primarily attributable to the introduction of the Winged Set
product line at the end of the second quarter, producing third quarter sales of
$162,000. Costs relating to product sales increased to $864,000 or 65% of
product sales for the three months ended September 30, 2001, compared to
$578,000 or 50% of product sales for the same period in 2000. Such costs
increased due to increased sales volumes and increased manufacturing costs
associated with the new Winged Set intravenous product line.
The Company had revenues from services totaling $61,000 for the three
months ended September 30, 2001, compared to $12,000 for the comparable period
in the prior year. The increase is attributable to the Fresenius agreement.
The Company had royalty revenue of $181,000 for the three months ended
September 30, 2001, compared to $0 for the comparable period in the prior year.
This increase is attributable to the JJM and TFX agreements.
Research and development expenses were $774,000 for the three months
ended September 30, 2001 compared to $523,000 for the same period in 2000. The
increase in these costs resulted from an increase in engineering labor and
operating expenses in 2001 as compared to 2000 related to the new Winged Set
intravenous product line.
Selling, general and administrative expenses were $887,000 for the
three months ended September 30, 2001 compared to $1,868,000 for the same period
in 2000. The decrease in these costs resulted from decreases of $240,000 in
legal fees in the third quarter of 2001, decreases in selling expenses,
primarily salaries, travel, and advertising, in the third quarter of 2001, and a
reclassification of certain reorganization costs from SG&A to a separate line
(Reorganization costs) in the accompanying condensed statements of operations of
approximately $600,000.
Reorganization costs were $3,362,000 for the three months ended
September 30, 2001 and consisted of $2,741,000 representing write-offs of
unamortized debt financing costs and unamortized debt discounts. Both of these
assets had originally been established with the placement of the Convertible
Notes , and because of the conversion of this debt to common stock of, the
associated unamortized debt financing and debt discount carrying values were
written off. The remaining $621,000 of reorganization costs represents
predominantly professional fees.
15
Financing (income) expenses were ($599,000) for the three months ended
September 30, 2001 compared to $713,000 for the same period in 2000. The
decrease in these costs resulted primarily from adjustments related to reversals
of accrued interest and the amortization of deferred debt financing.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
2000
The Company had product sales of $3,922,000 for the nine months ended
September 30, 2001 compared to $3,335,000 for the same period in 2000. The 18%
increase was primarily attributable to sales incentives offered to major
customers during the second quarter of 2001 along with the introduction of the
new Winged Set product line in the third quarter of 2001. Product costs were
$2,772,000 or 71% of product sales for the nine months ended September 30, 2001
compared to $1,668,000 50% of product sales for the same period in 2000. Such
costs increased due to increased sales volumes and increased manufacturing costs
associated with the new Winged Set intravenous product line.
The Company had services revenue of $261,000 for the nine months ended
September 30, 2001 compared to $146,000 for the same period in 2000. The
increase is attributable to the Fresenius agreement.
The Company had royalty revenue of $302,000 for the nine months ended
September 30, 2001, compared to $0 for the comparable period in the prior year.
This increase is attributable to the JJM and TFX agreements.
Research and development expenses were $1,386,000 for the nine months
ended September 30, 2001 compared to $1,080,000 for the same period in 2000. The
increase in these costs resulted from an increase in engineering labor and
operating expenses in 2001 as compared to 2000 due to costs related to the new
Winged Set intravenous product line.
Selling, general and administrative expenses were $5,002,000 for the
nine months ended September 30, 2001 compared to $5,458,000 for the same period
in 2000. The decrease resulted primarily from reductions in selling expenses,
primarily salaries, travel, and advertising expense.
Reorganization costs were $3,362,000 for the nine months ended
September 30, 2001 and consisted of $2,741,000 representing write-offs of
unamortized debt financing costs and unamortized debt discounts. Both of these
assets had originally been established with the placement of the Convertible
Notes, and because of the conversion to common stock of the Company, the
associated unamortized debt financing and debt discount carrying values were
written off. The remaining $621,000 of reorganization costs represents
predominantly professional fees.
Financing expenses were $805,000 for the nine months ended September
30, 2001 compared to $3,545,000 for the same period in 2000. The $2,740,000
decrease in these costs resulted primarily from reduction of expenses associated
with the closing of the Permanent Financing of approximately $1,092,000 in 2000,
the capitalization of $336,000 of interest in 2001, and adjustments related to
reversals of accrued interest and the amortization of deferred debt financing.
Liquidity and Capital Resources
The Company's need for additional funds has continued from period to
period, as a result of its ongoing losses from operations and its continued
efforts to develop new products. To date, the Company has financed its
operations primarily through borrowings and the sale of equity securities.
Through September 30, 2001, the Company has received net proceeds of
approximately $48,756,000 through borrowings and the sale of debt securities and
$54,758,000 through the sale of equity securities.
The Company believes that the net proceeds of the Appaloosa Private
Placement, its existing cash, cash generated from operations, and funds
available through trade credit financing will be sufficient to satisfy its cash
requirements through approximately year-end. The Company is currently searching
for additional equity or debt financing to finance its expected cash needs
though 2002. Appaloosa has not committed to participate in any such additional
financing. There is no assurance that the Company will be successful in raising
additional capital, and therefore the Company is also exploring other options.
The options being considered include further reductions in personnel and
expenses, sales of certain assets of the Company, a sale of the Company, and
other alternatives. Therefore, the Company's ability to continue meeting its
obligations as they become due beyond year-end will depend on its ability to
successfully raise additional capital, to implement its business plans, on
general economic and business conditions, and other factors
16
noted in the disclaimer entitled "Forward Looking Statements."
Cash used in operating activities for the nine months ended September
30, 2001 totaled $5,665,000 and was primarily due to a net loss for the period
of $8,993,000, which includes reorganization costs totaling $3,362,000.
Net cash used in investing activities amounted to $915,000 for the nine
month period primarily due to additions to fixed assets totaling $866,000
consisting substantially of capitalized costs associated with the construction
of its Winged Set intravenous production line.
Net cash provided by financing activities amounted to $3,796,000 for
the nine months ended September 30, 2001 due to accretion of interest, the sale
of common stock.
The Company's shareholders' equity (deficit) increased from
($2,419,000) at December 31, 2000 to a positive equity balance of $10,953,000 at
September 30, 2001. This net increase of $13,372,000 was due to the conversion
of the Convertible Notes to equity and the new investment by Appaloosa, (refer
to the Conversion of Convertible Notes and the Appaloosa Private Placement notes
above) less the year-to-date net loss of $8,993,000.
FINANCING DURING THE CHAPTER 11 CASE
On May 17, 2001, the Bankruptcy Court entered an order authorizing the
Debtor Company to borrow from the Appaloosa Entities term loans in an amount not
to exceed the aggregate principal amount of $300,000 pursuant to the terms of a
Credit Agreement (the "DIP Credit Agreement") between the Debtor Company and the
Appaloosa Entities. The term loans were used for the purposes of funding general
working capital needs in the ordinary course of the Debtor Company's business in
excess of the net income generated by the Debtor Company's business. As security
for the prompt payment of the term loans and performance of any and all
obligations, liabilities and indebtedness of the Debtor Company to the Appaloosa
Entities under the Credit Agreement or otherwise, the Appaloosa Entities were
granted valid and perfected first priority security interests and liens,
superior to all other creditors of the estate of the Debtor Company (subject to
certain exceptions), in and upon all now existing and hereafter acquired or
arising property of the Debtor Company which constitutes collateral under the
DIP Credit Agreement, wherever located, of any kind or nature, and the proceeds
(including insurance proceeds) and products thereof. The term loans were repaid
from the proceeds of the Appaloosa Private Placement described above.
As more fully described in Note 1 to the financial statements, the
Appaloosa Entities invested an additional $3 million in the Company on July 18,
2001(the "Appaloosa Private Placement"). The Company believes that the net
proceeds of the Appaloosa Private Placement, its existing cash, cash generated
from operations, and funds available through trade credit financing will be
sufficient to satisfy its cash requirements through approximately year-end.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 4, 2001 (the "Petition Date") the Company filed a voluntary
petition for relief under chapter 11 of the United States Code (the "Bankruptcy
Code") with the United States Bankruptcy Court for the District of Connecticut
(the "Bankruptcy Court"). As of the Petition Date, the Company commenced
operating its business and manages its properties as a debtor-in-possession. On
April 4, 2001, the Company filed a Disclosure Statement (the "Disclosure
Statement") and a Plan of Reorganization (the "Plan of Reorganization") with the
Bankruptcy Court. The Disclosure Statement set forth certain information
regarding, among other things, significant events that had occurred during the
Company's chapter 11 case and the anticipated organization, operation and
financing of reorganized Bio-Plexus ("Reorganized Company"). The Disclosure
Statement also described the Plan of Reorganization, certain effects of Plan
confirmation, certain risk factors associated with securities to be issued under
the Plan, and the manner in which distributions would be made to the Company's
creditors under the Plan of Reorganization for all amounts that were owed to
such parties on the Petition Date. In addition, the Disclosure Statement
discussed the confirmation process and the voting procedures that holders of
claims in impaired classes must follow for their votes to be counted. The Plan
of Reorganization divided the Company's creditors into eight classes: Allowed
Secured Claim of Victor and Margaret DeMattia (Class 1); Allowed Secured Claim
of Spafford Leasing (Class 2); Allowed Priority Claims under Bankruptcy Code
section 507(a)(3) (Class 3); Allowed Priority Claims under Bankruptcy Code
section 507(a)(4) (Class 4);
17
Allowed Secured Claim of the Appaloosa Entities (Class 5); Allowed Unsecured
Claims (Class 6); Allowed Interests of Holders of Old Common Stock (Class 7);
Allowed Interests of Holders of Other Interests (Class 8). In general, the Plan
of Reorganization provided that holders of Administrative Claims, Allowed Tax
Claims, Allowed Priority Claims and Allowed Unsecured Claims would be paid in
full, and would be otherwise rendered unimpaired. Allowed Secured Claims other
than the Allowed Secured Claim of Appaloosa Management and certain of its
affiliates (the "Appaloosa Entities") would be reinstated and paid in accordance
with their terms. In exchange for their Allowed Secured Claim, the Appaloosa
Entities (the Company's largest secured creditor) would receive common stock of
the Reorganized Company, which would constitute 85% of outstanding common stock
of the Reorganized Company. Holders of common stock issued prior to the
confirmation of the Plan of Reorganization would receive, in exchange for
their existing shares, new shares of common stock of the Reorganized Company,
which will constitute 15% of Reorganized Company outstanding common stock. The
Plan of Reorganization also set forth certain information, means for
implementation of the Plan of Reorganization, the effect of rejection of the
Plan of Reorganization by one or more classes of claims or interests, provisions
for how distributions would be made to the Company's creditors, the treatment of
executory contracts and leases and conditions precedent to confirmation of the
Plan of Reorganization and the occurrence of the Effective Date of the Plan of
Reorganization. The Company filed with the United States Bankruptcy Court the
First Amended Plan of Reorganization on April 19, 2001 and the Modified First
Amended Plan of Reorganization on June 12, 2001 to add and clarify certain terms
of the Plan of Reorganization and to establish conditions to confirmation and
effectiveness of the Plan of Reorganization. On April 19, 2001 an order was
entered by the Bankruptcy Court (i) approving the Disclosure Statement (ii)
establishing solicitation, voting, and tabulation procedures and deadlines, and
(iii) scheduling a hearing to consider confirmation of the Plan of
Reorganization, and establishing deadlines and procedures for filing objections
to confirmation of the Plan of Reorganization. On June 12, 2001 a confirmation
order was entered by the Bankruptcy Court that confirmed the Plan of
Reorganization pursuant to Bankruptcy Code section 1129. Conditions precedent to
the Effective Date of the Plan of Reorganization included, among other things,
reincorporation of Reorganized Company in the State of Delaware, the commercial
launch of the Company's Winged Set product, and the Appaloosa private placement
described above. On July 18, 2001, the Company completed its reincorporation in
the State of Delaware, it consummated the Appaloosa Private Placement and the
Plan of Reorganization become effective.
ITEM 2. CHANGES IN SECURITIES
On March 13, 2001, the Company issued to Fresenius Medical Holdings
Inc. 10,174 restricted common stock as part of a licensing and development
agreement in reliance on the provisions provided under Section 4(2) of the
Securities Act of 1933.
Effective July 18, 2001, the Reorganized Company reincorporated in
the State of Delaware as the Company. The reincorporation was effected pursuant
to a merger agreement entered into pursuant to the Plan of Reorganization (the
"Merger Agreement"). Immediately prior to the reincorporation, the Reorganized
Company effected a reverse stock split pursuant to the Plan of Reorganization.
As a result of the reverse stock split, each ten shares of the Reorganized
Company's common stock was converted into one share of Reorganized Company
common stock. Thereafter, the reincorporation was effected in accordance with
the Merger Agreement by merging the Reorganized Company with and into the
Company. As a result of that merger, the separate corporate existence of the
Reorganized Company ceased, the certificate of incorporation and bylaws of the
Company became and continue in effect as the registrant's certificate of
incorporation and bylaws, and each share of common stock of the Reorganized
Company was immediately converted into one share of Common Stock of the Company.
A copy of the certificate of incorporation and by-laws of the Company as
currently in effect are filed as Exhibits 3.1 and 3.2 hereto and are
incorporated herein by reference.
Effective July 18, 2001, upon confirmation and effectiveness of the
Company's Plan of Reorganization, Appaloosa Management and certain of its
affiliates received shares of common stock of the Reorganized Company
representing 85% of the Reorganized Company's outstanding common stock, and
holders of common stock issued prior to the confirmation of the Plan of
Reorganization (other than Appaloosa Management and such affiliates) received,
in exchange for their existing shares, new shares of common stock of the
Reorganized Company, which constituted 15% of Reorganized Company outstanding
common. The Company relied on the provisions of Section 1145 of the United
States Bankruptcy Code and Section 3(a)(10) of the Securities Act in connection
with these issuances.
Thereafter, as set forth under the heading "The Appaloosa Private
Placement" the Company issued 1,314,060 shares of its common stock and warrants
to purchase an additional 1,314,060 shares of its common stock to the Purchasers
identified therein. The Company relied on the provisions of Section 1145 of the
United States Bankruptcy Code and Section 3(a)(10) of the Securities Act in
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connection with these issuances.
As a result of the foregoing transactions Appaloosa Management and
David A. Tepper, the sole stockholder and President of Appaloosa Partners, Inc.,
the general partner of Appaloosa Management now beneficially own shares of the
Company's common stock constituting approximately 85% of its outstanding common
stock. As a result, they will be able to control the outcome of stockholder
votes. Examples of stockholder votes include the election of directors, changes
in the Company's certificate of incorporation and bylaws and approval of
certain mergers or other similar transactions, such as a sale of all or
substantially all of the Company's assets. Moreover, under Delaware law,
these actions can be taken by written consent without an actual meeting of the
Company's stockholders.
The Company's board of directors now consists of four directors, three
of which have been designated by Appaloosa Management and certain of its
affiliates: James Bolin who is the non-executive Chairman of the Company's Board
of Directors; Scott M. Tepper, the Vice Chairman of the Company's Board of
Directors and the brother of David A. Tepper; and Kenneth Maiman. The fourth
director is John S. Metz, who is the president and chief executive officer of
the Company
ITEM 3. DEFAULT UPON SENIOR SECURITIES
The convertible notes payable issued on April 28, 2000 to the Appaloosa
Entities (see Note 1 to the financial statements) contain certain restrictive
covenants, including but not limited to, minimum (maximum) operating profit
(loss), minimum product sales revenue and maximum permitted capital
expenditures. At June 30, 2001, the Company was in violation of the operating
profit (loss) and the minimum product sales revenues covenants. Under the terms
of the agreement, the Appaloosa Entities were entitled to call the Convertible
Notes as a result of this violation. The covenant violations were not waived by
the Appaloosa Entities; however, such notes were converted to common stock upon
the effectiveness of the Plan of Reorganization.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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Exhibit No. Description Method of Filing
- ---------- ----------- ----------------
3.1 Certificate of Incorporation of the Incorporated by reference to Exhibit 3.1 of the Company's
Reorganized Delaware Bio-Plexus Form 8-K filed July 31, 2001
3.2 By-Laws of the Reorganized Delaware Bio-Plexus Incorporated by reference to Exhibit 3.1 of the Company's
Form 8-K filed July 31, 2001
10.18 Supply Agreement dated January 28, 1997 by and Incorporated by reference to 10.18 to the Company's
between the Company and Johnson & Johnson Quarterly Report on Form 10-Q for the quarter ended on
Medical, Inc. September 30, 1998 (File No. 0-24128).
10.51 Development and Manufacturing and Distribution Incorporated by reference to Exhibit 10.51 of the Company's
Agreement dated December 19, 2000 between the Form 10-K filed July 17, 2001
Company and Fresenius Medical Care Holdings,
Inc. (d/b/a Fresenius Medical Care North
America)
10.53 Debtor's Modified First Amended Plan of Incorporated by reference to Exhibit 10.53 of the Company's
Reorganization dated June 12, 2001 Form 10-K filed July 17, 2001
10.54 Stock Purchase Agreement, dated as of July 18, Incorporated by reference to Exhibit 3.1 of the Company's
2001, by and among Bio-Plexus, Inc. and each Form 8-K filed July 31, 2001
of the purchasers listed on Exhibit A thereto
10.55 Warrant, dated July 18, 2001, by and among Incorporated by reference to Exhibit 3.1 of the Company's
Bio-Plexus, Inc. and each of the holders Form 8-K filed July 31, 2001
listed on Exhibit A thereto
10.56 Registration Rights Agreement, dated as of Incorporated by reference to Exhibit 3.1 of the Company's
July 18, 2001, by and among Bio-Plexus, Inc. Form 8-K filed July 31, 2001
and each of the stockholders listed on Exhibit
A thereto
(b) Reports on Form 8-K
A report on Form 8-K was filed on April 4, 2001 announcing the Company's release
of its financial results for the year ended December 31, 2000.
A report on Form 8-K was filed on April 5, 2001 reporting that on April
4, 2001, the Company filed a voluntary petition under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the District of
Connecticut in Hartford, Connecticut.
A report on Form 8-K was filed on June 5, 2001 announcing that quotes
for the Company's common stock could be obtained via the Pink Sheets.
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A report on Form 8-K was filed on July 31, 2001 announcing the
confirmation of the Company's Plan of Reorganization, the Company's
reincorporation in the State of Delaware, a reverse split with respect to the
Company's common stock, the consummation of the Appaloosa Private Placement of
stock and a change in control of the Company.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Bio-Plexus, Inc. (Registrant)
November 14, 2001 /s/ John S. Metz
----------------- --------------------------------------
(Date) John S. Metz
President and Chief Executive Officer
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