As filed with the Securities and Exchange Commission on November 10, 2003
Registration No. 333-
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MILESTONE SCIENTIFIC INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3545623
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
220 SOUTH ORANGE AVENUE
LIVINGSTON CORPORATE PARK
LIVINGSTON, NJ 07039
(973) 535-2717
(Address, including zip code, and telephone number, including area code,
of Registrant's executive offices)
-----------------------------------------
LEONARD OSSER
CHIEF EXECUTIVE OFFICER
MILESTONE SCIENTIFIC INC.
220 SOUTH ORANGE AVENUE
LIVINGSTON CORPORATE PARK
LIVINGSTON, NJ 07039
(973) 535-2717
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
STEPHEN A. ZELNICK, ESQ. MARK A. VON BERGEN, ESQ.
MORSE, ZELNICK, ROSE & LANDER, LLP DAVID C. WANG, ESQ.
405 PARK AVENUE HOLLAND & KNIGHT LLP
NEW YORK, NY 10022 2300 U.S. BANCORP TOWER
(212) 838-8040 111 S.W. FIFTH AVENUE
(212) 838-9190 FACSIMILE PORTLAND, OR 97204
(503) 243-2300
(503) 241-8014 FACSIMILE
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [X]
If the registrant elects to deliver its annual report to security holders,
or a complete and legible facsimile thereof, pursuant to item 11(a)(1) of this
form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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
=========================================================================================================
AMOUNT TO PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF BE MAXIMUM AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE PRICE (1)(2) REGISTRATION FEE
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Units, consisting of two
shares of common stock,
$.001 par value, and one
warrant to purchase one
share of common stock 1,150,000 $8.00 $9,200,000 $846.40
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Common stock included in
the units 2,300,000 -- --
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Warrants to purchase common
stock included in the units 1,150,000 -- --
---------------------------------------------------------------------------------------------------------
Common stock underlying the
warrants included in the
units(3) 1,150,000 $6.00 $6,900,000 $634.80
---------------------------------------------------------------------------------------------------------
Representative's
warrants(4) 100,000
---------------------------------------------------------------------------------------------------------
Units issuable upon exercise
of the representative's
warrants 100,000 $9.60 $960,000 $88.32
---------------------------------------------------------------------------------------------------------
Common stock included in the
units underlying the
representative's warrants(3) 200,000 -- --
---------------------------------------------------------------------------------------------------------
Warrants to purchase common
stock included in units
issuable upon exercise of
the representative's
warrants 100,000 -- --
---------------------------------------------------------------------------------------------------------
Common stock underlying the
warrants to purchase common
stock included in units
issuable upon exercise of
the representative's
warrants (3) 100,000 $6.00 $600,000 $55.20
---------------------------------------------------------------------------------------------------------
Total $17,660,000 $1,624.72
=========================================================================================================
(1) Estimated solely for purposes of calculating the amount of the registration
fee paid pursuant to Rule 457(g) under the Securities Act.
(2) Includes 150,000 units issuable upon exercise of underwriters'
over-allotment option.
(3) Pursuant to Rule 416 under the Securities Act, there are also being
registered hereby such additional indeterminate number of shares as may
become issuable pursuant to the antidilution provisions of the warrants.
(4) In connection with the sale of the units, Milestone will issue to the
representative of the underwriters warrants to purchase up to 100,000 units
in the aggregate.
-----------------------
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
PROSPECTUS (SUBJECT TO COMPLETION)
DATED November 10, 2003
[MILESTONE SCIENTIFIC LOGO]
UNITS
EACH UNIT CONSISTING OF TWO SHARES OF COMMON STOCK AND ONE REDEEMABLE WARRANT TO
PURCHASE ONE SHARE OF COMMON STOCK
This is a public offering on a firm commitment basis of [1,000,000]
units, each unit consisting of two shares of common stock and one warrant. Each
warrant entitles its holder to purchase one share of common stock at an exercise
price of $___[150% of the closing market price of our common stock on the
pricing date of this offering]. The warrants are exercisable at any time after
they become separately tradable until their expiration date, five years after
the effective date of this prospectus. Beginning six months from the effective
date of this offering, we may redeem some or all of the warrants at a price of
$.25 per warrant, by giving not less than 30 days' notice to the holders of the
warrants, which we may do at any time after the closing price for our stock on
the principal exchange on which the stock trades, equals or exceeds $___ [200%
of the price of our common stock on the effective date of this offering] for any
five consecutive trading days. The common stock and the warrants will trade only
as a unit for 30 days following this offering, unless the representative of the
underwriters determines that separate trading of the public warrants should
occur earlier. After that date, the common stock and the warrants will trade
separately and trading in the units will cease.
We expect to offer units at an aggregate offering price of $8,000,000,
excluding units that may be sold on exercise of the representative's
over-allotment option. The price of the units that we will offer will be
negotiated after taking into account the price at which our stock will be
trading on the American Stock Exchange immediately prior to this offering after
giving effect to a reverse stock split, contemplated to take effect prior to
this offering, and designed to arrive at a market price for our stock of between
$4.00 and $5.00 per share.
Our common stock is currently traded on American Stock Exchange under
the symbol "MS." On _____, 2003, the last reported sale price of our common
stock on the American Stock Exchange was $___ per share. We are applying to the
American Stock Exchange to also list the units and warrants under the symbols
"MSU" and "MSW," respectively.
INVESTING IN THESE UNITS INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE __ TO READ ABOUT RISKS YOU SHOULD CONSIDER BEFORE BUYING THESE
UNITS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY
OR ACCURACY OF THE DISCLOSURES IN THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
PER UNIT TOTAL
----------------- ----------------
Public offering price $ $
Underwriting discount $ $
Proceeds to us, before expenses $ $
Paulson Investment Company, Inc. is the representative of the
underwriters of this offering. We have granted the representative a 45-day
option to purchase up to additional 150,000 units to cover over-allotments.
PAULSON INVESTMENT COMPANY, INC.
The date of this Prospectus is _________, 2003
INSIDE FRONT COVER
CompuDent Unit with existing The Wand handpiece
[Picture of CompuDent Unit with existing The Wand handpiece)
-----------------------------
We have rights to the following trademarks: CompuDent(R), CompuMed(R),
The Wand(R), The WandPlus(R), CompuFlo(TM), SafetyWand(TM), CoolBlue Wand(TM)
and QuickBrite(TM). We have also used trademarks, tradenames and service marks
owned by others in this prospectus.
All references in this prospectus to Milestone, "we," "us," or "our" refer
to Milestone Scientific Inc., its wholly owned subsidiary, Sagacity I, Inc. and
its 88.65% owned subsidiary, Spintech, Inc. ("Spintech"), unless the context
otherwise indicates.
Our web address is www.milesci.com. Information contained on our website
is not part of this prospectus.
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PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus and
may not contain all of the information that is important to you. For a more
complete understanding of this offering, we encourage you to read this entire
prospectus, including our financial statements and the notes to those
statements. Unless indicated to the contrary, all information in this
prospectus has been retroactively adjusted to reflect a 1-for-__ reverse stock
split effective on _________, 2003.
MILESTONE SCIENTIFIC INC.
OVERVIEW
Milestone is a leader in advanced subcutaneous injection technology for
dental and medical applications. Its principal product, CompuDent, a computer
controlled, precision metered, local anesthetic injection system, together with
its ergonomically designed, single patient use, disposable handpiece, The Wand,
enables a dentist to consistently administer safe, effective and less painful
injections. Since January 1998, Milestone has sold more than 24,000 CompuDent
units and over 13 million single use handpieces in the United States and in over
25 other countries. CompuDent has been favorably evaluated in more than 44
clinical research reports. The system provides these specific benefits:
o CompuDent minimizes the pain associated with palatal and other
injections, resulting in a more comfortable injection experience for
the patient;
o the pencil grip used with CompuDent's handpieces provides enhanced
tactile sense and more accurate control;
o new injections made possible with CompuDent eliminate collateral
numbness of the tongue, lips and facial muscles;
o bidirectional rotation of The Wand handpiece results in greater
precision and more rapid onset of anesthesia by eliminating needle
deflection in mandibular block injections;
o the single patient use, disposable handpiece minimizes the risk of
cross contamination;
o the ergonomic design of The Wand makes an injection easier and less
stressful to administer and lowers the risk of carpal tunnel syndrome
to the dentist or hygienist; and
o CompuDent can increase productivity in many dental procedures by
eliminating the need for preliminary pain blocking injections, and
reducing the waiting time required to see if the injection has taken
effect.
SAFETYWAND
In September 2003, Milestone received FDA approval for a newly developed
and patented disposable handpiece, the SafetyWand, that incorporates safety
engineered sharps protection features to aid in the prevention of inadvertent
needlesticks. Milestone believes that the SafetyWand is one of the first safety
engineered injection devices that is fully compliant with the regulations of the
Occupational Safety and Health Administration of the U.S. Department of Labor
("OSHA") promulgated under the federal Needlestick Safety and Prevention Act
("the Needlestick Safety Act"), while also meeting the clinical needs of
dentists. To date, these OSHA regulations have generally not been enforced
against dentists by OSHA and similar local and state authorities due to lack of
commercially available products that meet the special needs of dentistry.
Milestone believes that the commercial availability of the SafetyWand will
enable OSHA, and similar local and state authorities, to begin enforcement, or
stricter enforcement, of the Needlestick Safety Act against dentists. Since the
SafetyWand can only be used with the CompuDent system, enforcement by OSHA could
promote increased handpiece sales to current CompuDent users, while also
providing impetus for the purchase of these systems by new users. In
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October 2003, we launched the SafetyWand at the American Dental Association
Annual Meeting in California. The SafetyWand will be commercially available
before the end of 2003.
NEW MARKETING APPROACH
In early 2003, Milestone began building a national sales force of
highly trained independent representatives to provide sales coverage in urban
areas in 12 states. To increase its ability to retain this sales force and to
enhance its performance, Milestone:
o increased its base price of CompuDent to new customers to provide
sufficient gross profit to recruit and adequately compensate its sales
force;
o established a sales support staff to generate leads, set appointments,
provide technical support and customer service and foster increased
handpiece use; and
o began distributing a new product used in repairing and whitening teeth,
the CoolBlue Wand, which also eases access to dental offices for sales
of CompuDent.
With a growing new sales force and the acquisition of rights to new
products to facilitate access to dental offices, Milestone intends to direct its
marketing efforts to capturing new customers, particularly from specialty
practitioners, including periodontists, pedodontists, endodontists and
cosmetic/restorative dentists.
OTHER PRODUCTS AND TECHNOLOGIES
To broaden the use of its anesthetic injection technology, in 2001
Milestone launched CompuMed, a system similar to CompuDent, for the medical
market. To date, sales and marketing of CompuMed have been limited by financial
constraints. Milestone is currently seeking distribution partners in a variety
of discrete medical disciplines.
Milestone has also developed CompuFlo, a prototype product embodying an
advanced pressure sensing technology for subcutaneous injection of liquid
medications and local anesthetics. CompuFlo enables health care practitioners to
monitor and precisely control pressure, rate and volume during subcutaneous
injections. Due to cash constraints, to date Milestone has conducted only
limited research as to potential medical applications for this technology and
has not yet begun development of commercial devices embodying this technology.
Recently, a major medical center proposed the initiation of clinical trials to
ascertain the efficacy, safety and suitability of CompuFlo in administering
epidural injections for adults and children. No assurances can be given that
these trials will be conducted or, if conducted, will be successful.
CORPORATE INFORMATION
Milestone was organized in August 1989 as a Delaware corporation under
the name U.S. Opportunity Search, Inc. In 1996 we changed our name to Milestone
Scientific Inc. Our executive office is located at 220 South Orange Avenue,
Livingston Corporate Park, Livingston, New Jersey 07039. Our telephone number is
(973) 535-2717.
4
THE OFFERING
Securities offered...................................... [1,000,000 - estimated] units, each unit consisting of
two shares of common stock and one redeemable warrant to
purchase one share of common stock. The common stock and
the warrants will not trade separately until the 31st day
following the effective date of this prospectus unless
the representative of the underwriters determines that
separate trading of the of the public warrants should
occur earlier.
Shares of common stock to be outstanding after this
offering........................................... _____________ (1)
Warrants:
Number to be outstanding after this offering....... [1,000,000]
Exercise terms..................................... The warrants are exercisable at any time after they
become separately tradable, which will be the 31st day
following the date of this prospectus, until the
expiration date. Each warrant entitles its holder to
purchase one share of common stock at an exercise price
equal to 150% of the closing market price of the common
stock on the pricing date of this offering.
Expiration date.................................... __________, 2008
Beginning six months from the effective date of this
Redemption......................................... offering, we may redeem some or all of the warrants, at a
price of $0.25 per warrant, on 30 days notice to the
holders. However, we may only redeem the warrants if the
closing price for our stock, as reported on the principal
exchange on which our stock trades, for any five
consecutive trading days has equaled or exceeded 200% of
the closing price of the common stock on the effective
date of this offering.
AMEX symbols:
Existing Common Stock..................MS
Proposed Units.........................MSU
Warrants......................MSW
--------------
(1) Including an estimated 490,250 shares constituting part of the units to be
issued at the price of the units offered hereby to satisfy $1,960,996 of
indebtedness, accrued interest and accrued compensation on the later of the
date of this Prospectus or January 2, 2004.
5
Risk factors............................................ Please refer to "Risk Factors" for a description of the
risk factors you should consider.
Unless otherwise stated, the information contained in this prospectus
assumes no exercise of:
o the warrants;
o the over-allotment option to purchase up to 150,000 units;
o warrants to purchase 100,000 units granted to the representative in
connection with this offering;
o outstanding compensatory options for 1,338,844 shares of common stock,
exercisable at a weighted average price of $1.49 per share and
outstanding investment options for 1,949,970 shares of common stock
exercisable at a weighted average exercise price of $1.15 per share; or
o conversion rights relating to convertible notes in the aggregate
principal amount of $100,000 convertible into 224,224 shares of common
stock and into shares of series A convertible preferred stock
convertible into 13,142 shares of common stock.
SUMMARY FINANCIAL INFORMATION
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------- ---------------------------------
2002 2001 2003 2002
------------- -------------- --------------- --------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
-------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Revenues................................... $ 4,074 $ 4,094 $ 2,135 $ 2,182
Gross profit............................... $ 2,093 $ 2,120 $ 1,086 $ 1,200
Operating expenses......................... $ 3,763 $ 5,321 $ 1,749 $ 1,880
Net loss................................... $(2,440) $(3,991) $ (1,159) $(1,022)
Net loss per share-basic and diluted(1).... $ (0.20) $ (0.36) $ (.09) $ (.08)
Weighted average number of shares
outstanding-basic and diluted(1)........ 12,469,673 11,142,590 12,633,370 12,171,450
(1) The effect of options, warrants and convertible debt instruments has been
excluded, as their effect is anti-dilutive.
The table below sets forth a summary of our balance sheet data as of
December 31, 2002 and as of June 30, 2003 on an actual basis, pro forma and pro
forma as adjusted for this offering.
Pro forma balance sheet data takes into account the following events
occurring after June 30, 2003:
o The issuance of an aggregate of 4,939,256 shares of common stock and
25,365 preferred shares in repayment of $5,014,014 of outstanding debt,
including principal and interest amounts to various noteholders, out of
which 400,454 common shares were issued to Leonard Osser, our Chairman
and Chief Executive Officer;
o The issuance of additional 282,982 shares of common stock to the
various noteholders mentioned above, as consideration for previously
extending the maturity date on the notes;
o The issuance of 306,585 shares of common stock to vendors in payment of
outstanding trade payables in the amount of approximately $503,000;
o The issuance of 7,000 shares of common stock upon the exercise of
options for an aggregate exercise price of $7,750;
o The issuance of 101,829 shares of common stock for a consideration of
$189,000 under an equity put agreement;
o The expected issuance, on the later of January 2, 2004 or the date this
offering becomes effective, of an estimated 203,125 units, in payment
of $1,624,996 of debt, including interest, to Leonard Osser, our
Chairman and Chief Executive Officer and to a major
6
stockholder; and
o The expected issuance, on the later of January 2, 2004 or the date this
offering becomes effective, of an estimated 42,000 units, in payment of
$336,000 of accrued compensation to Leonard Osser, our Chairman and
Chief Executive Officer.
Pro forma as adjusted for this offering takes into account the pro
forma data as well as the receipt of $6,500,000 of estimated net proceeds from
this offering, the deduction of underwriting discounts and commissions and other
estimated offering expenses to be paid by us.
DECEMBER 31,
2002 JUNE 30, 2003
(IN THOUSANDS) (UNAUDITED, IN THOUSANDS)
---------------- --------------------------------------------------------
PRO FORMA, AS
BALANCE SHEET DATA: ACTUAL PRO FORMA ADJUSTED
------------------ --------------- ---------------
Current assets...................... $893 $1,111 $1,308 $7,808
Working capital (deficiency)........ (5,214) (6,143) 165 6,665
Total assets........................ 1,241 1,359 1,548 8,048
Total liabilities................... 7,347 8,609 1,329 1,329
Stockholders' equity (deficiency)... (6,106) (7,250) 227 6,727
7
RISK FACTORS
This offering involves a high degree of risk. You should carefully
consider the risks described below and the other information in this prospectus,
including our financial statements and the notes to those statements, before you
purchase any units.
RISKS RELATED TO OUR BUSINESS
WE HAVE NO HISTORY OF PROFITABLE OPERATIONS. CONTINUING LOSSES COULD
EXHAUST OUR CAPITAL RESOURCES AND FORCE US TO DISCONTINUE OPERATIONS. Although
our operations commenced in November 1995, until 1998 we had limited revenues.
For the years ended December 31, 1998, 1999, 2000, 2001 and 2002, our revenues
were approximately $8.8 million, $2.9 million, $5.7 million, $4.1 million and
$4.1 million, respectively. In addition, we have had losses for each year since
the commencement of operations, including net losses of approximately $2.5
million for 2002 and $1.1 million for the six-months ended June 30, 2003. At
June 30, 2003, we had an accumulated deficit of approximately $42.9 million.
Unless we can significantly increase sales of our CompuDent units, handpieces or
other injection devices, we expect to incur losses for the foreseeable future.
WE HAVE A SIGNIFICANT WORKING CAPITAL DEFICIT. AS A RESULT, WE HAVE NOT
BEEN ABLE TO SUFFICIENTLY EXPAND OUR SALES AND MARKETING FORCE AND INCREASE OUR
REVENUES. Our working capital deficit at June 30, 2003, after adjustment to
reflect the subsequent repayment of approximately $5 million of debt and
$503,000 of trade payables through the issuance of common stock in October 2003,
was approximately $626,000. This has impaired our ability to expand marketing
and sales promotion and develop an adequate sales force, which in turn, had a
negative impact on revenue growth.
WE HAVE LIMITED FINANCIAL RESOURCES AND WE MAY NEED ADDITIONAL CAPITAL
IN THE FUTURE. Our capital requirements have been and may continue to be
significant. In the future, we may need to borrow funds or sell equity
securities, or else curtail or reduce our activities. We have no current
arrangements for future additional financing, except as disclosed herein. We
cannot assure you that any sources of additional financing will be available on
acceptable terms, or at all. To the extent that any future financing involves
the sale of our equity securities, the ownership interest of our stockholders
could be substantially diluted.
WE CANNOT BECOME SUCCESSFUL UNLESS WE GAIN GREATER MARKET ACCEPTANCE
FOR OUR PRODUCTS AND TECHNOLOGY. As with any new technology, there is
substantial risk that the marketplace will not accept the potential benefits of
this technology or be unwilling to pay for any cost differential with the
existing technologies. Market acceptance of CompuDent, the SafetyWand, CompuMed
and CompuFlo depends, in large part, upon our ability to educate potential
customers of their distinctive characteristics and benefits and will require
substantial marketing efforts and expense. More than 24,000 units of the
CompuDent or its predecessor have been sold worldwide since 1998. Sales of
disposable handpieces in 2002 reflect a moderate increase in usage of our dental
and medical systems. We cannot assure you that our current or proposed products
will be accepted by practitioners or that any of the current or proposed
products will be able to compete effectively against current and alternative
products.
OUR LIMITED DISTRIBUTION CHANNELS MUST BE EXPANDED FOR US TO BECOME
SUCCESSFUL. Our future revenues depend on our ability to market and distribute
our anesthetic injection technology successfully. In the United States, we rely
on a limited number of independent
8
representatives and in-house sales people. Abroad, we lack distributors in many
markets. To be successful we will need to retain and hire additional sales
personnel, provide for their proper training and ensure adequate customer
support. We cannot assure you that we will be able to hire and retain an
adequate sales force or engage suitable distributors, or that our sales force or
distributors will be able to successfully market and sell our products.
WE DEPEND ON TWO PRINCIPAL MANUFACTURERS. IF WE CANNOT MAINTAIN OUR
EXISTING RELATIONSHIPS OR DEVELOP NEW ONES, WE MAY HAVE TO CEASE OUR OPERATIONS.
We have informal arrangements with certain manufacturers with respect to the
manufacture of our products. Termination of the manufacturing relationship with
any of these manufacturers could significantly and adversely affect our ability
to produce and sell our products. Though we have established an alternate source
of supply for our handpieces in China and other alternate sources of supply
exist, we would need to recover our existing tools or have new tools produced to
establish relationships with new suppliers. Establishing new manufacturing
relationships could involve significant expense and delay. Any curtailment or
interruptions of the supply, whether or not as a result or termination of the
relationship, would adversely affect us.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT ARE NOT FULLY
COVERED BY OUR INSURANCE AND THAT COULD PUT US UNDER A TREMENDOUS FINANCIAL
STRAIN. We could be subject to claims for personal injury from the alleged
malfunction or misuse of our dental and medical products. While we carry
liability insurance that we believe is adequate, we cannot assure you that the
insurance coverage will be sufficient to pay such claims should they be
successful. A partially or completely uninsured claim, if successful and of
significant magnitude, could have a material adverse effect on us.
WE RELY ON THE CONTINUING SERVICES OF OUR CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, PRESIDENT AND DIRECTOR OF CLINICAL AFFAIRS. We depend on the personal
efforts and abilities of our Chairman and Chief Executive Officer, our President
and our Director of Clinical Affairs. We maintain a key man life insurance
policy in the amount of $1,000,000 on the life of our Chairman and Chief
Executive Officer. However, the loss of his services or the services of each of
our President or Director of Clinical Affairs, on whom we maintain no insurance,
could have a materially adverse effect on our business.
RISKS RELATED TO THIS OFFERING
IF WE ARE UNABLE TO SATISFY THE AMERICAN STOCK EXCHANGE MAINTENANCE
REQUIREMENTS, OUR COMMON STOCK MAY BE DELISTED FROM THE AMERICAN STOCK EXCHANGE
AND, AS A RESULT, OUR LIQUIDITY AND THE VALUE OF OUR COMMON STOCK MAY BE
IMPAIRED. Shares of our common stock are currently listed on the American Stock
Exchange. Continued listing on the American Stock Exchange requires that we
maintain at least $6,000,000 in stockholders' equity since we have sustained
losses in our five most recent fiscal years. At December 31, 2002, Milestone had
a total stockholders' deficit of approximately $6.1 million. On May 2, 2002, we
received a letter from the American Stock Exchange advising us that we had
fallen below the stockholders' equity criterion and requesting that we submit a
recovery plan detailing any actions taken, or planned to be taken within the
next 18 months, to bring us into compliance. On June 10, 2002, we submitted a
detailed recovery plan to the American Stock Exchange, which, as supplemented on
August 14, 2002, showed how we expect to achieve stockholders' equity of
$6,000,000 by December 31, 2003. On August 23, 2002, the American Stock Exchange
advised us that they had determined that the plan makes a reasonable
demonstration of Milestone's
9
ability to regain compliance with the continued listing standards by the
conclusion of the plan period at the end of 2003. The continued listing of our
securities on the American Stock Exchange during this period is subject to
periodic reviews by the Exchange. Failure to show progress consistent with the
plan or to regain compliance by the end of the plan period could still result in
the Milestone being delisted. If our securities are delisted from the American
Stock Exchange, trading, if any, in the common stock and warrants would be
conducted in the over the counter market in the so-called "pink sheets" or on
the NASD's "OTC Bulletin Board." Consequently, the liquidity of our securities
could be impaired, not only in the number of securities that could be bought and
sold, but also through delays in the timing of transactions, reduction in
security analysts and new media coverage of Milestone, and lower prices for our
securities than might otherwise be obtained.
IF OUR SHARES OF COMMON STOCK ARE REMOVED OR DELISTED FROM THE AMERICAN
STOCK EXCHANGE, THE ABILITY OF STOCKHOLDERS TO SELL OUR COMMON STOCK AND
WARRANTS IN THE SECONDARY MARKET COULD BE RESTRICTED. The Securities and
Exchange Commission has adopted regulations which generally define "penny stock"
to be an equity security that has a market price, as defined, of less than $5.00
per share or an exercise price of less than $5.00 per share, subject to certain
exceptions, including an exception of an equity security that is quoted on the
American Stock Exchange. If our shares of common stock are removed or delisted
from the American Stock Exchange, they may become subject to rules that impose
additional sales practice requirements on broker-dealers who sell these
securities. For transactions covered by these rules, the broker-dealer must make
a special suitability determination for the purchaser of such securities and
have received the purchaser's written consent to the transactions 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
disclosure schedule prepared by the Securities and Exchange Commission relating
to the penny stock market. The broker-dealer also must disclose the commissions
payable to both the broker-dealer and the registered underwriter, and 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, among other requirements, 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. As
such, the "penny stock" rules, if our securities are delisted from the American
Stock Exchange, may restrict the ability to sell our common stock and warrants
in the secondary market.
THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE AND MAY CONTINUE
TO FLUCTUATE SIGNIFICANTLY BECAUSE OF VARIOUS FACTORS, SOME OF WHICH ARE BEYOND
OUR CONTROL. Our stock price has been extremely volatile, fluctuating over the
last three years between closing prices of $.14 and $2.59. These fluctuations
have been unrelated to or disproportionately affected by our operating
performance. The market price of our common shares could continue to fluctuate
significantly after this offering in response to a variety of factors, some of
which may be beyond our control.
THE EXISTENCE OF OUTSTANDING OPTIONS, WARRANTS AND CONVERTIBLE
SECURITIES MAY PRECLUDE US FROM OBTAINING ADDITIONAL EQUITY FINANCING. We
currently have outstanding options, warrants,convertible debentures and series A
convertible preferred stock to purchase 3,301,956 shares of our common stock at
prices ranging from $.29 to $6.00 per share with a weighted average exercise or
conversion price of $1.29. Holders of these warrants and options are given the
opportunity to profit from a rise in the market price of our common stock and
are
10
likely to exercise their securities at a time when we would be able to
obtain additional equity capital on more favorable terms. Thus, the terms upon
which we will be able to obtain additional equity capital may be adversely
affected, since the holders of outstanding options and warrants can be expected
to exercise them at a time when we would, in all likelihood, be able to obtain
any needed capital on terms more favorable to us than the exercise terms
provided by such outstanding securities. We have granted registration rights
with respect to shares of our common stock covered by the warrants. The market
price of our common shares has been volatile and may continue to fluctuate
significantly because of various factors, some of which are beyond our control.
OUR STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION AND THE PRICE OF
OUR COMMON STOCK MAY BE ADVERSELY AFFECTED BY THE ISSUANCE OF SHARES OF OUR
COMMON STOCK UNDER AN EQUITY PUT AGREEMENT. After taking into account 101,829
shares sold in October and November 2003, under an equity put agreement
expiring on May 10, 2004, we may sell up to an additional 1,998,171 shares of
our common stock under that agreement. The price of our common stock may
decrease as a result of the actual or potential sale of these shares into the
market. We may sell shares of our common stock under the equity put agreement at
a price that is below the market price of our stock at the time of the sale.
These sales will dilute the interests of our existing stockholders. In that
event, not only would you lose a portion of your investment, but we would
probably find it more difficult to obtain additional financing. The more shares
that are issued under the equity put, the more our shares will be diluted and
the more our stock price may decrease. This may encourage short sales, which
could place further downward pressure on the price of our common stock.
WE ARE CONTROLLED BY A LIMITED NUMBER OF SHAREHOLDERS. Immediately
after this offering (including an estimated 490,250 shares forming part of units
to be issued to them in satisfaction of debt and accrued compensation), our
principal shareholders, Leonard Osser and K. Tucker Andersen, will own 40.6% of
the issued and outstanding shares of our common stock (40% if the over-allotment
option is exercised in full). As a result, they will have the ability to
exercise substantial control over our affairs and corporate actions requiring
shareholder approval, including electing directors, selling all or substantially
all of our assets, merging with another entity or amending our certificate of
incorporation. This de facto control could delay, deter or prevent a change in
control and could adversely affect the price that investors might be willing to
pay in the future for our securities.
IF WE DO NOT MAINTAIN AN EFFECTIVE REGISTRATION STATEMENT COVERING THE
WARRANTS OR COMPLY WITH APPLICABLE STATE SECURITIES LAWS, YOU MAY NOT BE ABLE TO
EXERCISE THEM. In order for you to be able to exercise the warrants, they must
be covered by an effective registration statement and qualify for an exemption
under the securities laws of the state in which you live. We cannot assure you
that we will continue to maintain a current registration statement relating to
the offer and sale of the warrants and the common stock underlying these
warrants or that an exemption from registration or qualification will be
available throughout their term. This may have an adverse effect on the demand
for the warrants and the prices that can be obtained from reselling them.
THE WARRANTS MAY BE REDEEMED ON SHORT NOTICE. THIS MAY HAVE AN ADVERSE
IMPACT ON THEIR PRICE. Beginning six months from the effective date of the
offering, we may redeem the warrants for $0.25 per warrant on 30 days notice at
any time after the closing price for our stock, as reported on its principal
trading market, has, for any five consecutive trading days, equaled or
11
exceeded 200% of the closing price of the common stock on the effective date of
this offering. If we give notice of redemption, you will be forced to sell or
exercise your warrants or accept the redemption price. The notice of redemption
could come at a time when, under your personal circumstances, it is not
advisable or possible for you to exercise the warrants or a current prospectus
or exemption does not exist.
FUTURE SALES OR THE POTENTIAL FOR SALE OF A SUBSTANTIAL NUMBER OF
SHARES OF OUR COMMON STOCK COULD CAUSE THE TRADING PRICE OF OUR COMMON STOCK AND
WARRANTS TO DECLINE AND COULD IMPAIR OUR ABILITY TO RAISE CAPITAL THROUGH
SUBSEQUENT EQUITY OFFERINGS. Sales of a substantial number of shares of our
common stock in the public markets, or the perception that these sales may
occur, could cause the market price of our stock to decline and could materially
impair our ability to raise capital through the sale of additional equity
securities. Once this offering is completed, in addition to the 20,716,982
shares of common stock actually issued and outstanding, there will be another
7,601,007 shares of common stock reserved for future issuance as follows:
o up to [1,000,000] shares underlying the warrants;
o up to [450,000] shares underlying the over-allotment option, including
the shares underlying the warrants included in that option;
o up to [300,000] shares underlying the representative's warrants,
including the shares underlying the warrants included in the
representative's warrants;
o up to 993,000 shares underlying stock options previously granted, or to
be granted, under our Stock Option Plan;
o up to 2,622,470 shares underlying other stock options and warrants that
were granted and remained outstanding as of October 31, 2003;
o up to 224,224 shares underlying 6% convertible notes in the aggregate
principal amount of $100,000 and up to 13,142 shares of common stock
underlying our series A convertible preferred stock; and
o up to 1,998,171 shares reserved for issuance, at our option, under an
equity put agreement.
The common stock included in the units as well as the common stock
underlying the warrants will be freely tradable without restriction. Before this
offering, we had 18,226,732 shares of common stock outstanding, of which
_________ are freely tradable. The remaining _________ shares are either held by
"affiliates", as defined by the rules and regulations promulgated under the
Securities Act of 1933, or are "restricted securities" as defined in Rule 144
promulgated under the Securities Act of 1933. Of this amount, ________
restricted shares not held by affiliates and __________restricted or non-
restricted shares held by "affiliates,"can only be sold in compliance with the
timing and volume limitations of Rule 144 promulgated under the Securities Act
of 1933. The other __________ restricted shares may be sold without limitation
under Rule 144(k). We have granted demand registration rights to holders of
466,841 shares of common stock including shares underlying warrants and
piggyback registration rights to holders of convertible notes covering an
aggregate of 224,224 shares of common stock. The holders of these shares can
require us to register the shares for resale. While we, our executive officers
and directors and
12
stockholders holding 5% or more of our outstanding shares have agreed not to
sell any shares of stock for a period of 90 days after this offering without the
consent of the representative of the underwriters, the representative may waive
that restriction at its sole discretion.
MANAGEMENT HAS BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS
OFFERING. WE MAY USE THE PROCEEDS OF THIS OFFERING IN WAYS THAT DO NOT IMPROVE
OUR OPERATING RESULTS OR THE MARKET VALUE OF OUR SECURITIES. While we have
general expectations as to the allocation of the net proceeds of this offering,
that allocation may change in response to a variety of unanticipated events,
such as differences between our expected and actual revenues from operations or
availability of commercial financing opportunities, unexpected expenses or
expense overruns or unanticipated opportunities requiring cash expenditures. We
have significant flexibility as to the timing and the use of the proceeds. You
will rely on our judgment with only limited information about our specific
intentions regarding the use of proceeds. We may spend most of the net proceeds
of this offering in ways with which you may not agree. If we fail to apply these
funds effectively, our business, results of operations and financial condition
may be materially and adversely affected.
FORWARD-LOOKING STATEMENTS
Some of the statements made in this prospectus discuss future events
and developments, including our future business strategy and our ability to
generate revenue, income and cash flow and possible stricter enforcement of the
Needlestick Safety Act. In some cases, you can identify forward-looking
statements by words or phrases such as "may," "will," "should," "expects,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential,"
"continue," "our future success depends," "seek to continue," or the negative of
these words or phrases, or comparable words or phrases. These statements are
only predictions that are based, in part, on assumptions involving judgments
about future economic, competitive and market conditions, regulatory enforcement
and future business decisions, all of which are difficult or impossible to
predict accurately and many of which are beyond our control. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various facts, including the risks outlined in this "Risk
Factors" section. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. You are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date on which they are made. We do not undertake to update any of the
forward-looking statements after the date of this prospectus to conform these
statements to actual results.
13
RECENT DEVELOPMENTS
Since July 1, 2003, we have entered into the following financing
transactions:
On September 25, 2003 we received $50,000 in consideration for a 6%
Secured Convertible Note in the same amount and three-year warrants to purchase
15,000 shares of our common stock at an exercise price of $2.00. The entire
principal amount of the note and all accrued interest is due and payable on
March 24, 2005, or at an earlier date, at our option.
On October 2, 2003 we issued 4,939,256 shares of common stock in
satisfaction of 6% / 12% Secured and Senior Secured Notes and other secured
notes in the aggregate amount of approximately $5 million. We also committed to
issue 25,365 shares of 8% convertible preferred stock in satisfaction of $25,365
of principal and accrued interest. The preferred stock will be convertible into
common stock at the average closing price of our common stock in October 2003.
Subsequently, we issued 282,982 additional shares of common stock to these
former noteholders as consideration for their previous consent to extend the
maturity date of these notes.
On October 9, 2003 we reached an agreement to satisfy $1,176,640 of
debt and accrued interest due to a major investor, K. Tucker Andersen and
$448,356 of debt and accrued interest and $336,000 of deferred compensation due
to our Chief Executive Officer and Chairman, Leonard Osser, through the issuance
of units, similar to the units offered in this offering, on the later of January
2, 2004 or the effective date of this offering. The units will be issued at the
same price as offered in this offering.
On October 21, 2003 we received $7,750 upon the exercise of options for
7,000 shares of common stock.
On October 31, 2003 we issued 306,585 shares of our common stock to
principal vendors, in satisfaction of trade payables in the aggregate amount of
approximately $503,000.
During October and November 2003 we issued an aggregate of 101,829
shares of common stock in consideration for a total of $189,000, after brokerage
commissions and closing costs, under an equity put agreement.
USE OF PROCEEDS
The principal purpose of this offering is to raise a sufficient amount
of capital that will allow us to:
o expand significantly our independent sales force and our sales support
staff and provide for their proper training;
o implement marketing and advertising campaigns directed at the dental
market;
o support the launch of the SafetyWand, including manufacturing and
marketing costs;
o expand our international sales including the hiring of three sales
managers for Asia, Europe and South America;
o develop and commercialize our Periodontal Ligament or PDL Injector
project;
o to reestablish our dental and hygiene school program;
14
o respond quickly to new competitive and business developments in the
industries and markets in which we operate and compete;
o qualify for continued listing on the American Stock Exchange;
o repay a portion of the outstanding debt to two of our major
shareholders; and
o pay a portion of the accrued compensation to our Chief Executive
Officer
Based on gross proceeds of $8 million, and after deducting $800,000
reflecting the estimated underwriting discount, a non-accountable expense
allowance of $240,000, and other estimated offering expenses of $460,000 payable
by us, the net proceeds to us from this offering will be approximately $6.5
million, or $7.7 million if the representative exercises the over-allotment
option in full.
The table below lists the specific uses of proceeds:
APPROXIMATE APPROXIMATE
USE OF CAPITAL AMOUNT PERCENTAGE
------------------------------------------ -------------------------- ------------------------
Sales and marketing $2,770,000 42.6%
Product development.......... $1,095,000 16.8%
Non-sales personnel expense $ 235,000 3.6%
Repayment of debt and accrued
compensation $ 525,000 8.0%
Miscellaneous working capital $1,875,000 29.0%
-------------------------- ------------------------
Total......................... $6,500,000 100.0%
========================== ========================
Sales and marketing expenses. This amount consists of the costs we
expect to incur to expand our independent and sales supportstaff, in the U.S.
and internationally. It includes expenses relating to hiring and training
additional sales and marketing personnel, consultant fees, and expenses relating
to attending trade shows and conventions and producing marketing materials.
Product development. This amount is required for further development of
our PDL Injector Device and to develop additional clinical applications of the
CompuFlo technology including epidural injections.
Non-sales personnel expense. Prior to this offering, we have been
operating with cash conservation as a dominant business objective. We expect
that additional personnel will be required, primarily in financial,
administrative and customer service areas, both to provide adequate support to
operations on an ongoing basis and to support growth.
Repayment of debt and accrued compensation. This amount includes
repayment in cash of $301,854 out of $1,702,850 outstanding debt to two of our
major shareholders, Leonard Osser, our Chairman and Chief Executive Officer, and
K. Tucker Andersen, the beneficial owner of 21.67% of our outstanding shares of
common stock, and the payment of $224,000 out of $560,000 of accrued
compensation to our Chairman and Chief Executive Officer. The balance of the
debt and accrued compensation will be paid by issuance of units on the effective
date of this offering, valued at the same price as is offered to the public. The
cash amounts represent estimated tax amounts due by these individuals for
accrued interest on the debt and on payment of the accrued compensation.
15
Miscellaneous working capital. These costs include general and
administrative costs, including the cost of increasing our inventory, acquiring
and enhancing our operating, support and management systems and capital
expenditures for computers and other equipment. We may use the portion of the
amount currently allocated to working capital and general corporate purposes to
reduce our current liabilities. We may also use a portion of the net proceeds to
license or acquire new products, technologies or intellectual property or to
acquire or invest in businesses complementary to ours. If the representative
exercises the over-allotment option, the additional net proceeds, approximately
$1.2 million, will be added to working capital.
The above information represents our best estimate of our capital
requirements based upon the current status of our business. We will retain broad
discretion in the allocation of the net proceeds within the categories listed
above. The amounts actually expended for these purposes may vary significantly
and will depend on a number of factors, including our rate of revenue growth,
cash generated by operations, evolving business needs and the other factors
described in "Risk Factors."
Pending their use, we intend to invest the net proceeds of this
offering in interest bearing, investment grade securities.
We expect that the net proceeds from this offering, when combined with
the proceeds of other financing transactions and revenue from operations, will
be sufficient to fund our operations and capital requirements for at least 12
months following this offering. We may be required to raise additional capital
through the sale of equity or other securities sooner if our operating
assumptions change or prove to be inaccurate. We cannot assure you that any
financing of this type would be available. In the event of a capital inadequacy,
we would be required to limit our growth and the expenditures described above.
DIVIDEND POLICY
We have not declared or paid any dividends and do not intend to pay any
dividends in the foreseeable future. We intend to retain any future earnings for
use in the operation and expansion of our business. Any future decision to pay
dividends on common stock will be at the discretion of our board of directors
and will be dependent upon our fiscal condition, results of operations capital
requirements and other factors our board of directors may deem relevant.
16
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2003
on an actual basis, pro forma and pro forma as adjusted for this offering. Pro
forma data takes into account the following events occurring after June 30,
2003:
o The issuance of an aggregate of 4,939,256 shares of common stock in
repayment of $4,988,649 of outstanding debt, including principal and
interest amounts to various noteholders, out of which 400,454 were
issued to Leonard Osser, our Chairman and Chief Executive Officer;
o The issuance of 282,982 additional shares of common stock to these
debtholders as agreed remuneration for previously extending the
maturity date of the notes;
o The issuance of 25,365 preferred shares in repayment of $25,365 of
outstanding debt, including principal and interest amounts to a
noteholder;
o The issuance of 306,585 shares of common stock as payment of
approximately $503,000 due to principal vendors;
o The issuance of 101,829 shares of common stock for a consideration of
$189,000, after commissions and closing costs, under an equity put
agreement;
o The issuance of 7,000 shares of common stock upon the exercise of
options for a total consideration of $7,750;
o The expected issuance, on the later of January 2, 2004 or the date this
offering becomes effective, of 203,125 units, in payment of $1,624,996
of debt, including interest, to Leonard Osser, our Chairman and Chief
Executive Officer and to a major stockholder; and
o The expected issuance, on the later of January 2, 2004 or the date this
offering becomes effective, of 42,000 units, in payment of $336,000 of
accrued compensation to Leonard Osser, our Chairman and Chief Executive
Officer.
Pro forma as adjusted for this offering takes into account the pro
forma data as well as the receipt of $6.5 million of estimated net proceeds from
this offering, the deduction of underwriting discounts and commissions and other
estimated offering expenses to be paid by us.
June 30, 2003
--------------------------------------
Pro forma
Actual Pro forma as adjusted
------ --------- -----------
(in thousands)
Accounts payable and accrued expenses............................ $1,638 $1,135 $1,135
Notes payable including interest................................. 6,491 50 50
Accrued compensation 480 144 144
----- ----- -----
Total debt..................................................... 8,609 1,329 1,329
Stockholders' equity (deficiency):
Common stock, $0.001 par value,
50,000,000 shares authorized, 12,733,370 shares issued and
12,633,370 outstanding, actual; 20,331,988 shares issued and
20,231,988 outstanding, pro forma; and 22,231,988 shares issued
and outstanding, pro forma as adjusted............................ 13 20 22
17
June 30, 2003
--------------------------------------
Pro forma
Actual Pro forma as adjusted
------ --------- -----------
(in thousands)
Preferred Stock, $.001 par value 5,000,000 shares authorized, no
shares issued and outstanding, actual; 25,365 shares issued and
outstanding, pro forma; and 25,365 shares issued and outstanding,
pro forma as adjusted............................................
Additional paid-in capital....................................... 36,614 44,084 50,577
Retained earnings (deficit)...................................... (42,945) (42,945) (42,945)
Unearned compensation (20) (20) (20)
Treasury stock, at cost, 100 shares (912) (912) (912)
======= ======= =======
Total stockholders' equity (deficiency)........................ (7,250) 227 6,727
======= ======= =======
Total capitalization........................................... (1,359) (1,556) 8,056
======= ======= =======
18
PRICE RANGES OF OUR COMMON STOCK
The principal market on which our common stock is traded is the American Stock
Exchange. The ticker symbol for our common stock is MS. The following table sets
forth the high and low closing sales prices of our common stock, as quoted by
the American Stock Exchange.
HIGH LOW
------- ------
2001
First Quarter $2.00 $ .85
Second Quarter $1.00 $ .62
Third Quarter $1.75 $ .68
Fourth Quarter $ .73 $ .50
2002
First Quarter $ .68 $ .52
Second Quarter $1.00 $ .58
Third Quarter $ .68 $ .29
Fourth Quarter $ .40 $ .21
2003
First Quarter $ .34 $ .14
Second Quarter $ .40 $ .18
Third Quarter $1.66 $ .27
Fourth Quarter (through October 31, 2003) $2.59 $1.05
According to the records of our transfer agent, there were
approximately 3,000 holders of record of our common stock as of October 1, 2003.
We have applied to the American Stock Exchange to list the units
offered by this prospectus, as well as the warrants and common stock underlying
those units.
19
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read
together with "Management's Discussion and Analysis or Plan of Operations"
included elsewhere in this prospectus. The statement of operations data for each
of the years in the two-year period ended December 31, 2002 and the balance
sheet data at December 31, 2002 are derived from our financial statements, which
have been audited by J.H. Cohn LLP, independent public accountants, and are
included elsewhere in this prospectus. The statement of operations data for the
six-month periods ended June 30, 2003 and 2002 and the balance sheet data for
June 30, 2003 are derived from our unaudited financial statements. The unaudited
financial statements have been prepared on substantially the same basis as the
audited financial statements and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of the results of operations for these periods. Historical
results are not necessarily indicative of the results to be expected in the
future, and the results of interim periods are not necessarily indicative of
results for the entire year.
STATEMENT OF OPERATIONS DATA:
------------------------------------------------
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2001 2002 2002 2003
------------ ------------ ------------ ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
------------------------------------------------------------
Revenues ............................. $ 4,094 $ 4,074 $ 2,182 $ 2,135
Cost of sales ........................ 1,973 1,980 983 1,049
------------ ------------ ------------ ------------
Gross profit ......................... 2,121 2, 094 1,199 $ 1,086
Selling, general and administrative .. 5,271 3,589 1,835 1,600
expenses
Research and development ............. 50 148 45 83
Closing of Deerfield, IL facility .... -- 26 -- 66
------------ ------------ ------------ ------------
Loss from operations ................. (3,200) (1,669) (681) (663)
Sale of prophy angle business and .... 64 80 -- --
related consulting income
Other income ......................... -- 48
Interest expense net ................. (855) (851) (389) (496)
Net loss ............................. $ (3,991) $ (2,440) $ (1,022) $ (1,159)
============ ============ ============ ============
Net loss per share - basic and diluted $ (.36) $ (.20) $ (.08) $ (.09)
============ ============ ============ ============
Weighted average number of shares
outstanding - basic and diluted ... 11,142,590 12,469,673 12,171,450 12,633,370
============ ============ ============ ============
BALANCE SHEET DATA:
DECEMBER 31, JUNE 30,
2002 2003
------------ --------
Current assets.................... $ 893 $ 1,111
Working capital................... $ (5,214) $ (6,143)
Total assets...................... $ 1,241 $ 1,359
Total liabilities................. $ 7,347 $ 8,609
Stockholders' equity (deficit).... $ (6,106) $ (7,250)
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS
You should read the following discussions of our financial condition
and results of operations in conjunction with the financial statements and the
notes to those statements included elsewhere in this prospectus. This discussion
may contain forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, such as those set
forth under "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
We have generated most of our revenues during our last two fiscal years
and the interim period this year through sale of our CompuDent system and The
Wand disposable handpiece used with that system. Revenues have been earned
domestically and internationally through sales in more than 25 countries. During
this period handpiece sales have provided a growing portion of our revenues,
reflecting a growing base of new customers for our systems internationally and
more intensive use of their systems by a relatively stagnant base of customers
domestically. Though we have continued to sell new systems domestically, a large
part of our domestic sales during this period represented the sale of upgraded
units or additional units to our existing customer base. Our limited domestic
sale of new systems reflects our limited sales and marketing efforts as a result
of cash constraints. We expect to use a portion of the proceeds of this offering
to increase sales and marketing expense and believe these increases should
generate additional revenue. The following table shows a breakdown of our
revenues, domestically and internationally, by product category, and the
percentage of total revenue by each product category.
21
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------------------------------------- -----------------------------------------------
2003 2002 2002 2001
---------------------- --------------------- ---------------------- ----------------------
DOMESTIC
COMPU DENT ................. $ 366,906 26.4% $ 569,901 34.6% $ 956,275 30.1% $1,309,712 39.0%
HANDPIECES ................. 916,861 66.0% 961,237 58.3% 1,999,050 63.0% 1,756,498 52.4%
OTHER ...................... 104,952 7.6% 117,180 7.1% 219,605 6.9% 288,092 8.6%
---------- ------- ---------- ------- ---------- ------- ---------- -------
TOTAL DOMESTIC ............. $1,388,719 100.0% $1,648,318 100.0% $3,174,930 100.0% $3,354,302 100.0%
========== ======= ========== ======= ========== ======= ========== =======
International
COMPUDENT .................. $ 411,225 55.1% $ 312,588 58.6% $ 495,730 55.1% $ 519,089 70.2%
HANDPIECES ................. 332,172 44.5% 218,731 41.0% 403,346 44.9% 192,271 26.0%
OTHER ...................... 2,574 0.4% 2,080 0.4% 0 0.0% 28,048 3.8%
---------- ------- ---------- ------- ---------- ------- ---------- -------
TOTAL INTERNATIONAL ........ $ 745,971 100.0% $ 533,399 100.0% $ 899,076 100.0% $ 739,408 100.0%
========== ======= ========== ======= ========== ======= ========== =======
Domestic/International
Analysis
DOMESTIC ................... $1,388,719 65.1% $1,648,318 75.6% $3,174,930 77.9% $3,354,302 81.9%
INTERNATIONAL .............. 745,971 34.9% 533,399 24.4% 899,076 22.1% 739,408 18.1%
---------- ------- ---------- ------- ---------- ------- ---------- -------
$2,134,690 100.0% $2,181,717 100.0% $4,074,006 100.0% $4,093,710 100.0%
========== ======= ========== ======= ========== ======= ========== =======
22
We have earned gross profits of 51.8% and 51.4% in the years ended
December 31, 2001 and 2002, respectively, and 55.0% and 50.9% in the six-month
periods ended June 30, 2002 and 2003, respectively. However, our revenues have
been too low to support our overhead, research and development expense and
interest on our debt. We have therefore reported substantial, though declining,
losses for each of those periods. We have taken steps to cut our overhead,
increase sales and reduce our interest expense.
We took the following steps to reduce our operating overhead and
improve our utilization of cash:
o We reconfigured our sales force, commencing in 2001 and continuing
through 2003, from a large internal force to independent sales
representatives,distributors and a small sales support staff;
o We closed our Deerfield, Illinois facility on January 31, 2003,
resulting in a reduction of ten employees. Customer support, technical
service and other back-office functions previously conducted at this
location were consolidated into our New Jersey location;
o We outsourced to an independent warehouse located in Pennsylvania
receiving, shipping and storage functions previously conducted at
Deerfield; and
o We cut marketing expense and limited our participation in trade shows,
even though this had a further negative effect on sales.
Next, we took steps to reduce our debt burden. We cut the interest rate
on our Senior Secured and Secured Notes (after negotiation with our noteholders)
from 20% per year to 12% per year (6% if we paid interest in cash) and extended
the previously extended maturity date until July and August 2003. Then, in
October 2003, we paid $5,014,014 of debt by issuing 4,939,256 shares of common
stock and 25,365 shares of convertible preferred stock and satisfied
approximately $503,000 of trade payable by issuing 306,585 shares of common
stock. In October we also reached an agreement to satisfy, on the later of
January 2, 2004 or the closing of this offering, an additional $1,960,996 of
debt, accrued interest and accrued compensation through issuance of 245,125
units.
Finally, at the beginning of 2003, we took steps to increase our
revenues. In early 2003 we completed development of the SafetyWand, which
incorporates safety engineered sharps protection features to aid in the
prevention of inadvertent needlesticks. The SafetyWand is one of the first
safety engineered injection devices compliant with OSHA regulations under the
federal Needlestick Safety Act, while also meeting the clinical needs of
dentists. To date, these regulations have generally not been enforced against
dentists by OSHA and similar local and state authorities due to lack of
commercially available products that meet the special needs of dentistry.
Milestone believes that the commercial availability of the SafetyWand will
enable OSHA, and similar local and state authorities to begin enforcement, or
stricter enforcement, of the Needlestick Safety Act against dentists. Since the
SafetyWand can only be used with the CompuDent system, enforcement by OSHA could
promote increased handpiece sales to current CompuDent users, while also
providing impetus for the purchase of these systems by new users. In September
2003, we obtained FDA approval for SafetyWand. In October 2003, we launched the
SafetyWand at the American Dental Association Annual Meeting in California.
SafetyWand
23
will be commercially available before the end of 2003.
In early 2003, we adopted a new marketing approach and began building a
national sales force of highly trained independent representatives to provide
sales coverage in urban areas in 12 states. To increase our ability to retain
this sales force and to enhance its performance, we:
o increased the base price of our CompuDent unit to new customers to
provide sufficient gross profit to recruit and adequately compensate
our sales force;
o established a sales support staff to generate leads, set appointments,
provide technical support and customer service and foster increased
handpiece use; and
o began distributing a new product used in repairing and whitening teeth,
the CoolBlue Wand, which also helps gaining access to dental offices.
With a growing new sales force and the acquisition of rights to new
products to facilitate access to dental offices, we intend to direct our
marketing efforts to capturing new customers, particularly from specialty
practitioners, including periodontists, pedodontists, endodontists and
cosmetic/restorative dentists
The technology underlying our SafetyWand and the technology underlying
the CompuFlo were developed by our Director of Clinical Affairs and assigned to
us. Upon sale of products using either technology we will owe him a 5% royalty
on the total sales price, or, if technology covered by other patents is also
used by the product, on an allocated part of the sales price. In addition, he is
granted, pursuant to the agreement, an option to purchase, at fair market value
on the date of the grant, 25,000 of our common stock upon the issuance of each
additional patent relating to these technologies.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to accounts receivable, inventories, advances
to our contract manufacturer, stock based compensation and contingencies. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from those estimates under different assumptions or conditions.
Inventory
Inventories principally consist of finished goods and component parts
stated at the lower of cost (first-in, first-out method) or market.
24
Impairment of Long-Lived Assets
We review long-lived assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying amounts may
not be recovered.
Revenue Recognition
Revenue is recognized when title passes at the time of shipment and
collectibility is deemed probable.
RESULTS OF OPERATIONS
The results of operations for the year ended December 31, 2002, and six
months ended June 30, 2003, reflect our concentrated effort to reduce our
overhead while slowly growing our user base in the dental market domestically
and abroad. The loss for the year 2002, approximately $2.5 million, represents a
39% reduction from the same period in 2001. However, the net loss for the six
months ended June 30, 2003 was approximately $136,000 greater than the loss
reported for the six months ended June 30, 2002 as a result of a decline in
sales volume and gross profit, coupled with increases in research and
development expenses and interest expense.
The following table sets forth for the periods presented, statement of
operations data as a percentage of revenues. The trends suggested by this table
may not be indicative of future operating results.
25
PERIOD ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------------------------ ------------------------------------------------
2003 2002 2002 2001
----------------------- ----------------------- ------------------------- ---------------------
NET SALES .............. $ 2,134,690 100.0% $ 2,181,717 100.0% $ 4,074,006 100.0% $ 4,093,710 100.0%
COST OF SALES .......... 1,048,421 49.1% 981,771 45.0% 1,980,949 48.6% 1,973,156 48.2%
GROSS PROFIT ........... 1,086,269 50.9% 1,199,946 55.0% 2,093,057 51.4% 2,120,554 51.8%
SELLING, GENERAL &
ADMINISTRATIVE
EXPENSE .............. 1,600,415 75.0% 1,835,208 84.1% 3,588,836 88.1% 5,271,032 128.8%
CLOSING OF DEERFIELD, IL
FACILITY ............... 65,873 3.1% 0.0% 26,067 0.6% 0.0%
RESEARCH AND DEVELOPMENT 83,092 3.9% 45,379 2.1% 147,709 3.6% 49,943 1.2%
LOSS FROM OPERATIONS ... (663,111) (31.1)% (680,641) (31.2)% (1,669,555) (41.0)% (3,200,421) (78.2)%
26
Fiscal year ended December 31, 2002 compared to fiscal year ended December 31,
2001
Net sales for the years ended December 31, 2002 and 2001 were
$4,074,006 and $4,093,710, respectively. The $23,988 decrease is attributable
primarily to a decrease in domestic sales of CompuDent, $71,592 generated from
prophy angle sales in 2001 before the sale of this product line in November
2001, and our decision to consolidate a $94,500 shipment to our South African
distributor with its January 2003 order to lower freight charges. The decrease
was partially offset by a 13% or $229,183 increase in domestic dental sales of
The Wand handpieces, $207,000 increase in The Wand handpiece sales to foreign
distributors, and CompuMed sales of approximately $163,000. The reduction in
CompuDent sales domestically are the direct result of the downsizing of our
sales and marketing effort in the U.S.
Cost of sales for the years ended December 31, 2002 and 2001 were
$1,980,949 and $1,973,156 respectively. The $7,793 increase is attributable
primarily to product mix.
For the year ended December 31, 2002, we generated a gross profit of
$2,093,057 or 51.4% as compared to a gross profit of $2,120,554 or 51.8% for the
year ended December 31, 2001. The decrease in gross profit is mainly
attributable to an increase in sales revenue generated from sales to foreign
distributors. The gross profit from these sales is lower than the aggregate
gross profit generated from domestic sales.
Selling, general and administrative expenses for the years ended
December 31, 2002 and 2001 were $3,588,836 and $5,271,032, respectively. The
$1,682,196 decrease is attributable primarily to an approximate $858,000
decrease in expenses associated with the sale and marketing of CompuDent units
and The Wand handpieces due to the transitioning of its sales force to
independent representatives and an approximate $293,700 decrease in legal fees.
In addition, during 2001, we issued 242,308 shares as payment for services
rendered in the amount of $247,649. We had incurred higher legal expenses in
2001 related to advertising agreements and patent registrations.
In 2002, we incurred costs totaling $26,067 associated with the closing
down of our Illinois facility.
Research and development expenses for the years ended December 31, 2002
and 2001 were $147,709 and $49,943, respectively. The $97,766 increase is
attributed to the development of the SafetyWand.
Other income for the years ended December 31, 2002 and 2001, $80,000
and $64,487, respectively reflect the sale of our prophy angle business in 2001
and consulting services we provided during 2002, in connection with this sale.
The loss from operations for the years ended December 31, 2002 and 2001
were $1,669,555 and $3,200,421, respectively. The $1,530,866 decrease in loss
from operations is explained above.
We incurred interest expense of $850,642 for the year ended December
31, 2002 as compared to $858,582 for the year ended December 31, 2001. The
decrease of $7,940 is attributable to a lower average interest rate, which was
partially offset by an increase in outstanding principal debt obligations.
The net loss for the years ended December 31, 2002 was $2,440,197 as
compared to a net loss of $3,991,580 for 2001. The $1,551,383 decrease in
net loss is primarily attributable to a sharp decrease in selling and
administrative expenses, including reduction in personnel.
27
Six months ended June 30, 2003 compared to six months ended June 30, 2002
Net sales for the six months ended June 30, 2003 and 2002 were
$2,134,690 and $2,181,717, respectively. The $47,027 or 2.2% decrease is
primarily related to an approximate $69,000 decrease in CompuMed sales, a
$35,000 decrease in CompuDent sales and a $44,000 decrease in domestic sales of
The Wand handpieces. These decreases were partially offset by an $113,000
increase in foreign sales of The Wand handpiece. The decrease in domestic sales
of The Wand handpiece is the result of changing the primary manufacturer of The
Wand handpiece, resulting in inconsistent inventory levels. Subsequently, the
transition issues have been resolved and are resulting in improved supply chain
management.
Cost of sales for the six months ended June 30, 2003 and 2002 were
$1,048,421 and $981,771 respectively. The $66,650 increase is attributable
primarily to higher sales volume to foreign distributors. For the six months
ended June 30, 2003, we generated a gross profit of $1,086,269 or 50.9% as
compared to a gross profit of $1,199,946 or 55% for the six months ended June
30, 2002. The decrease in gross profit percentage is primarily attributable to
increased sales to foreign distributors, which are characterized by higher
volume but a reduced margin.
Selling, general and administrative expenses for the six months ended
June 30, 2003 and 2002 were $1,600,415 and $1,835,208 respectively. The $234,793
decrease is attributable primarily to an approximate $227,000 decrease in
expenses associated with the sale and marketing of CompuDent.
During the six months ended June 30, 2003, we incurred costs totaling
$65,873 in connection with the closure of our Deerfield, Illinois facility.
Research and development expenses for the six months ended June 30,
2003 and 2002 were $83,092 and $45,379 respectively. The increase in 2003 for
these costs related to the development of the SafetyWand.
The loss from operations for the six months ended June 30, 2003 and
2002 were $663,111 and $680,641 respectively. The $17,530 decrease in loss from
operations is explained above.
We generated $48,000 in other income for the six months ended June 30,
2002 as a result of a consulting contract, which expired in October 2002.
Interest expense of $495,691 was incurred for the six months ended June
30, 2003 as compared to $389,780 for the six months ended June 30, 2002. The
increase is attributable to higher average borrowings in 2003.
The net loss for the six months ended June 30, 2003 was $1,158,802 as
compared to a net loss of $1,022,421 for the six months ended June 30, 2002. The
$136,381 increase in net loss is explained above.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, as shown in the accompanying consolidated
financial statements, we incurred net losses of approximately $2,440,000 and
$3,992,000 and negative cash flows from operating activities of approximately
$676,000 and $1,385,000 during 2002 and 2001, respectively. As a result, we had
a cash balance of approximately $10,000, a working capital deficiency of
approximately $5,214,000
28
and a stockholders' deficiency of approximately $6,106,000 as of December 31,
2002. These matters raise substantial doubt about our ability to continue as a
going concern.
At June 30, 2002 the accompanying condensed consolidated financial
statements have been prepared assuming Milestone will continue as a going
concern. However, as shown in the accompanying condensed consolidated financial
statements, Milestone incurred net losses of approximately $1,159,000 and
$1,022,421 and negative cash flows from operating activities of $451,000 and
$216,000 during the six months ended June 30, 2003 and 2002, respectively. As a
result, Milestone had a cash balance of approximately $28,000, a working capital
deficiency of approximately $6,143,000 and a stockholders' deficiency of
approximately $7,250,000 as of June 30, 2003. These matters raised substantial
doubt about Milestone's ability to continue as a going concern. Management
believes that its initial concerns about our ability to continue as a going
concern were alleviated through the subsequent satisfaction of a substantial
portion of its outstanding obligations, the introduction of new products and
continuing efforts to reduce operating overhead. Nevertheless, management
believes that it is probable that Milestone will continue to incur losses and
negative cash flows from operating activities through at least June 30, 2004.
During the year ended December 31, 2002, we reduced our average monthly
cash used in operations to less than $60,000, completed a $4.1 million debt
restructuring program, and obtained $785,000 in additional financing. This
program included debt to equity conversions, deferring payment on a portion of
our payables, restructuring our debt and outsourcing our sales force.
Satisfaction of certain liabilities
Agreements reached by Milestone in October 2003 will effectively
eliminate the current stockholders' deficiency upon the later of completion of
this offering or January 2, 2004. During the month, Milestone satisfied
$5,014,000 of secured debt including interest, through the issuance of 4,939,256
shares of common stock and $25,365 face amount of 8% cumulative convertible
preferred stock. Also, approximately $503,000 of trade payables to principal
vendors was satisfied through issuance of 306,585 shares of common stock valued
at $1.64 per share, the approximate fair market value.
Additionally, we reached agreements to satisfy, an aggregate amount of
$1,961,000 of debt, accrued interest, and accrued compensation through the
issuance of equity securities. Satisfaction of the secured debt for borrowed
money to a major investor and to our Chairman and CEO and accrued compensation
to our CEO will be on the later of January 2, 2004 or the effective date of the
next public offering of our securities through the issuance of common stock and
warrants at the same price as offered to the public. This settlement is
contingent upon there being a public offering. Payment of this debt, following
the conversion to equity in September 2003 of additional $5 million of debt will
eliminate most of Milestone's funded debt and will remove almost all liens on
its assets.
Reduction of operating overhead
To date, we have taken certain steps in order to reduce our operating
overhead and use of cash. These steps includethe following:
o Commencing in 2001 and continuing through 2003, we reconfigured our
sales force from a large internal sales force to independent sales
representatives, distributors and a small sales support staff;
29
o On January 31, 2003, we completed the closing of the Deerfield,
Illinois facility, resulting in the layoff of ten employees. The
customer support, technical service and other back-office functions
previously conducted, in whole or in part, at this location were
consolidated into our New Jersey location. The receiving, shipping and
storage functions, which were also previously done at this location,
are now outsourced to an independent warehouse located in Pennsylvania.
On June 4, 2003, we borrowed $50,000 pursuant to a 6% secured
convertible promissory note due November 27, 2004. At the option of the
noteholder, the principal and interest are payable on the maturity date in
common stock at a rate of one share of common stock for every $.312 of
indebtedness. Additionally, we granted the investor warrants to purchase 160,256
of our common stock at a per share price of $.52 with an estimated fair value of
$14,423 at any time or from time to time during the period commencing June 4,
2003 and ending June 3, 2005. This resulted in an initial increase to debt
discount and to additional paid-in capital.
Cash flow results
For the six months ended June 30, 2003, our net cash used in operating
activities was $451,760. This was attributable primarily to a net loss of
$1,158,802 adjusted for noncash items of $242,962 (of which $213,640 was for
amortization of debt discount and deferred financing costs); a $369,518 increase
in accounts receivable; an $38,092 increase in inventories; a $103,883 decrease
in advances to contract manufacturer; a $43,555 decrease in prepaid expenses; an
increase in accounts payable of $270,807; a $282,051 increase in accrued
interest; a $11,396 increase in accrued expenses; and an $160,000 increase in
deferred compensation.
For the six months ended June 30, 2003, we used $14,950 in investing
activities for capital expenditures.
For the six months ended June 30, 2003, we generated $485,494 from
financing activities as it issued promissory notes to existing investors
totaling $450,000, incurred $58,215 of net borrowings from its Chief Executive
Officer, and recorded $22,721 in deferred financing expenses.
At June 30, 2003, we had one foreign customer that accounted for
approximately 22% of sales for the six months ended June 30, 2003 and
approximately 17% for the six months ended June 30, 2002. At June 30, 2003,
receivables from this customer were approximately 68% of total accounts
receivables.
RECENT ACCOUNTING PRONOUNCEMENT
In December 2002, SFAS No.148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an Amendment of SFAS No. 123" was
issued. SFAS No. 148 amends SFAS No. 123, to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effects of the method used on
reporting results. Milestone adopted SFAS No. 148, effective January 1, 2003 and
it did not have any material impact on its consolidated financial statements.
In May 2003, SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" was issued. The
statement requires that an issuer classify financial
30
instruments that are within its scope as a liability. Many of those instruments
were classified as equity under previous guidance. Most of the guidance in SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise effective at the beginning of the first
interim period beginning after June 15, 2003. We are currently evaluating the
provisions of this statement, and do not believe that it will have an impact on
our consolidated financial statements.
BUSINESS
BACKGROUND
Milestone is a leader in advanced subcutaneous injection technology for
dental and medical applications. Its products improve the quality of patient
care and comfort, while also addressing the health and safety needs of the
practitioner. Milestone's principal product, CompuDent, was developed to replace
the hypodermic syringe in dentistry. The hypodermic syringe has been little
changed since its invention more than 150 years ago. A dentist using a syringe
can generally administer an adequate volume of anesthetic to the intended target
area to achieve the desired level of anesthesia. However, use of a syringe for
this purpose, may result in a number of unintended consequences or collateral
problems including:
o high levels of patient pain in some procedures;
o post-operative pain as a result of tissue tearing or distension;
o necrosis as a consequence of tissue tearing and other damage;
o failure to hit the intended nerve target because of needle deflection
and the awkward manner in which the syringe must be held;
o temporary paralysis of adjacent tissue such as the tongue, lips, and
facial muscles;
o fear reactions by the patient to the syringe;
o carpal tunnel syndrome to the dentist or hygienist;
o inability to inject sufficient anesthetic into dense tissue or tight
spaces; and
o use of unnecessarily high levels of anesthetic.
DENTAL PRODUCTS
COMPUDENT AND THE WAND
Milestone's principal product, CompuDent, is a computer controlled,
precision metered, local anesthetic injection system. The system, including its
ergonomically designed, single patient use, disposable handpiece, The Wand,
enables a dentist to consistently administer safe, effective and less painful
injections. Since January 1998, Milestone has sold more than 24,000 CompuDent
units and over 13 million single use handpieces in the United States and in over
25 other countries. CompuDent has been favorably evaluated in more than 44
clinical research reports. The system provides these benefits:
o minimizes the pain associated with palatal and other injections,
resulting in a more comfortable injection experience for the patient;
o the pencil grip used with The Wand handpiece provides enhanced tactile
sense and more accurate control;
o new injections made possible with CompuDent minimize collateral
numbness of the tongue, lips and facial muscles;
o bidirectional rotation of The Wand handpiece results in greater
precission and more rapid onset of anesthesia by eliminating needle
deflection in mandibular block injections;
o the single patient use disposable handpiece minimizes the risk of cross
contamination;
31
o the ergonomic design of The Wand makes an injection easier, less
stressful to administer and reduces the risk of carpal tunnel syndrome
to the dentist or hygienist; and
o CompuDent can increase productivity in many dental procedures by
eliminating the need for preliminary pain blocking injections, and
reducing the waiting time required to see if the injection has taken
effect.
The system design allows a drop of anesthetic to always precede the
needle tip, thus creating a pathway of already anesthetized tissue for the
needle to penetrate. The system also eliminates the "bee-sting" effect, that is,
the painful effect associated with a surge of fluid into a confined tissue area.
Syringes do not allow sufficient control of the flow rate to achieve these
benefits. With a syringe, the needle often enters tissue that has not yet been
anesthetized. Further, dentists using a syringe do not have a solid resting
point against which they may guide their hand while administering the injection,
often resulting in uncontrolled and movement of the needle that causes pain for
the patient.
The slim, pencil-like, shape of The Wand handpiece is also more
functional for the user and less ominous in appearance to the patient. The
pencil grip provides enhanced tactile sense, more accurate control, and a
greater level of stability for the user by preventing antagonistic movements.
As a single patient use device, the handpiece also offers protection against
patient cross-contamination.
The design of The Wand handpiece allows the practitioner to use a new
needle insertion technique called bidirectional rotational insertion that
minimizes needle deflection. Contemporary dental anesthesia textbooks indicate
that needle deflection is a source of anesthetic failures in mandibular blocks,
the most common dental injection. Anesthetic blocks are missed 30% to 35% of the
time because of needle deflection associated with hypodermic syringes. The
bi-directional rotational insertion technique associated with The Wand handpiece
addresses these failures. Further, the new technique also requires two to three
times less force to penetrate tissue, which may lead to a less painful injection
experience for the patient.
We sell CompuDent units, together with an initial supply of 50
handpieces, in the U.S. for $1,995. However, discounts are offered for purchases
of multiple units and on sales of additional units to existing customers. We
sell The Wand and The Wand with bonded needle handpieces for $62.50 for a box of
50 handpieces, but offer discounts for participants in the Milestone Savings
Plan and other periodic buying programs.
Our international master distributors and direct distributors to whom
we sell in a number of countries purchase units at a range of generally lower
prices, depending upon the extent of the marketing, promotional, training and
repair obligations which they assume.
THE SAFETYWAND
In September 2003, we received FDA approval for the SafetyWand, an
injection handpiece device that incorporates safety engineered sharps protection
features. The SafetyWand was developed to address requirements of the
Needlestick Safety Act, mandating the use of a safety engineered sharps device
to eliminate inadvertent needle sticks. The Act was adopted in 2000 after it was
found that U.S. healthcare workers suffer from an estimated 590,000 needle-stick
injuries each year, some of which resulted in cases of HIV, Hepatitis B,
Hepatitis C and other illnesses, costing taxpayers in excess of $2 billion
annually, in testing and treatment.
32
OSHA promulgates regulations under the Needlestick Safety Act. OSHA and
corresponding authorities in some states are responsible for enforcing the Act
and its regulations. OSHA and similar state and local authorities conduct
enforcement actions on a state-by-state basis. While OSHA and these state and
local authorities are empowered to levy substantial fines for failure to use
these devices, we believe that they have largely been unable to enforce the law
against dentists because of the inadequacy of existing devices to meet both the
requirements of the law and the unique clinical needs of dentists. The
SafetyWand is one of the first safety engineered injection devices that is fully
compliant with more than 30 parameters published by OSHA to be met by safety
engineered products while also meeting the clinical needs of dental
practitioners. It provides the practitioner with a safer retractable needle
device, with single hand activation, which is reusable multiple times during a
single patient visit, yet small and sleek enough not to obscure the dentist's
often limited field of view.
We believe that the commercial availability of the SafetyWand will
enable OSHA and similar state and local authorities to begin enforcement, or
stricter enforcement, of the Needlestick Safety Act against dentists. Since the
SafetyWand can only be used with CompuDent, enforcement by OSHA could promote
increased handpiece sales to current CompuDent users, while also providing
significant impetus for the purchase of these systems by new users. However,
there are no assurances that the Act or related regulations will be strictly or
consistently enforced or that this enforcement will result in increased sales of
our products. We launched the SafetyWand at the American Dental Association
Annual Meeting in California in October 2003. We expect to begin initial
shipments of the SafetyWand before the end of 2003.
THE WAND HANDPIECE WITH NEEDLE
This handpiece was designed to eliminate the re-use of handpieces on
multiple patients, a problem occurring primarily outside the United States. This
product is The Wand handpiece with a needle permanently attached. The benefits
of this product are three-fold: for the patient, the risk of contamination from
a previously used needle is eliminated, for the practitioner, there is less
preparation time needed, and for Milestone, it should increase overall handpiece
sales as customers will now stock handpieces with different sized needles. In
June 2003 we received our CE mark to sell The Wand handpiece with needle in
Europe and have since generated $________ in Wand handpiece with needle sales.
COOLBLUE WAND DENTAL ENHANCEMENT SYSTEM
In August 2003, we entered into an agreement with DaVinci Systems,
granting us non-exclusive distribution rights for the CoolBlue Wand,
manufactured by DaVinci. The CoolBlue Wand is a dental enhancement system that
uses advanced blue light emitting diodes for faster curing of dental repair
amalgams, trans-illumination of teeth and activation of whitening gels and
pastes. The agreement also granted us exclusive worldwide distribution rights
for a whitening head. We began selling the CoolBlue Wand at a dental trade show
in late October 2003. Sales to date have been inconsequential although we
received $15,055 of orders at, and since, the show.
Curing. Technological advances have allowed the introduction of a
composite material that is soft and malleable and generally matches the color of
teeth. Once applied, this composite is hardened through the use of a curing
light. The first generation of curing lights used halogen lamps, which require
several minutes of curing time and emitted a great deal of heat in the mouth.
Newer curing lights use light emitting diodes ("LEDs") that reduce curing time
and emit less heat. DaVinci's curing light uses shorter wavelength blue LEDs
that cure faster, deeper and cooler than products using halogen lamps. Further,
the design is versatile and allows optional attachments for trans-illumination
to identify cracks in a tooth and for activating whitening gels and pastes.
33
Whitening. The curing light may also be used as the base device for a
whitening system employing a proprietary whitening head developed by DaVinci for
Milestone, a dental office treatment kit, a take home kit provided by the
dentist for follow-up, and a unique whitening rinse for long term maintenance.
DaVinci will supply all components of the system to Milestone. Milestone is the
exclusive worldwide distributor of the whitening head. All gels, pastes and
rinse to be used with the whitening head will be supplied to Milestone by
DaVinci at the lowest price provided to its customers.
We are currently working with a manufacturer to complete development of
packaging for the system. Concurrently, Milestone has engaged a creative firm to
assist in the development of the launch materials, including naming, logo
creation and promotional materials. We expect to launch the QuickBrite whitening
system at the Greater New York Dental Meeting in late November 2003 and to begin
shipments of the product in the first quarter of 2004. We believe this product
has an array of practitioner and patient benefits including lower cost and
safety and which will allow the dentist to market take home consumables.
For its assistance in arranging our distribution agreement with
DaVinci, we agreed to pay Strider_______, a commission of 5% of our gross
revenues on all products purchased from DaVinci and resold to the professional
dental market, and a commission of 2% of our gross revenues on all products
purchased from DaVinci and resold to markets other than the professional dental
market.
THE PROPOSED PDL INJECTOR DEVICE
The Periodontal Ligament, or PDL, Injection is a site specific
injection which is highly effective for single tooth anesthesia. During a PDL
procedure, a dentist anesthetizes a single tooth without causing collateral
anesthesia to the tongue, lip and cheek. However, due to the pain elicited from
the high volume of drug required and the associated pressure, a PDL can only be
used as a secondary injection once the patient has already been anesthetized.
The traditional PDL injection is typically administered using a spring
loaded, high pressure, trigger-activated injector, known as a PDL Injector.
Using this device, anesthetic must be delivered into the PDL under extremely
high pressure and force over a short period of time, resulting in rapid flow
rates and high interstitial pressures in the PDL. A successful injection is only
possible if the needle placement allows the proper flow of anesthetic into the
PDL. If the needle is obstructed in any way, proper flow of the drug cannot
occur and excessive pressure will result, possibly leading to persistent post
operative pain and potential tissue necrosis.
An independent clinical study conducted by the NYU College of Dentistry
in 2000, demonstrated that when lower pressures are used over a longer period of
time, larger volumes of anesthetic can be effectively delivered into the PDL
space. These lower pressures are very difficult to produce with any handheld
syringe and impossible to consistently produce with a PDL Injector. Our modified
PDL injection, administered with the CompuDent, can be used on any tooth and
differs significantly from the traditional PDL injection as administered with
the PDL Injector or syringe. Using these devices requires the delivery of a
relatively small volume of anesthetic solution under tremendous pressure while
the CompuDent allows the operator to deliver a larger volume, under controlled
pressure using a slow, controlled flow rate. The modified PDL injection
can be used for primary anesthesia as well as the traditional supplementary
injection to a mandibular block. Successful administration of the PDL also
reduced the number of visits and time required for many procedures.
34
While CompuDent has enhanced the practitioners' ability to perform a
successful PDL injection, there is still one component missing - the ability to
know for certain that the needle is in the PDL. By using pressure/force feedback
to control the flow rate, one could predictably produce successful PDL
injections.
We have reduced to practice the use of pressure/force feedback and
control in our CompuFlo device discussed below. The proposed PDL Injector
combines our computer controlled injection system from CompuDent with our
patented pressure sensing technology to scientifically ensure a successful PDL
injection. . This pressure sensing technology provides real-time measurement
during an injection that we believe will allow the practitioner to properly
position the needle and inject a sufficient volume of anesthetic. We have begun
discussions with a major international manufacturer of dental equipment for
their distribution, on an exclusive worldwide basis of our proposed PDL
Injector. Marketing of the proposed PDL Injector Device can begin once we obtain
a 510(k) clearance the FDA, which we expect to apply for during the first half
of 2004.
MEDICAL PRODUCTS
COMPUMED
In 2001 Milestone introduced CompuMed, an anesthetic injection system
designed to meet the needs of the medical market. CompuMed provides benefits
similar to CompuDent. CompuMed allows a number of medical procedures, now
requiring IV sedation, to be performed with only local anesthesia because of the
significantly reduced pain. Also, dosages of local anesthetic can often be
significantly reduced, thus reducing side effects, accelerating recovery times,
lowering costs and minimizing complications. CompuMed is now gaining acceptance
in a variety of discrete medical applications including colorectal surgery,
podiatry, dermatology, including Moh's surgery for the removal of basal cell
carcinomas and other oncological dermatologic procedures, nasal and sinus
surgery, including rhinoplasty, hair transplantation and plastic surgery.
An independent clinical study conducted by researchers at the
University of Southern California and published in May 2001, in colorectal
surgery, confirmed that patients experienced significantly less pain when the
CompuMed system was used. The study was terminated before accruing its initial
target number of patients because the researchers considered it unethical not to
use CompuMed exclusively. In another clinical study conducted in 2001 by
researchers at Scholl College of Podiatric Medicine in Chicago Illinois, which
was presented as an abstract in the field of podiatry, CompuMed was compared
with the traditional hypodermic syringe for obtaining regional anesthetics in
the hallux. The results stated that the moderate pain associated with the
traditional syringe decreased to nearly non-existent when using the CompuMed.
Also, in 2002, we sold 21 units of CompuMed to a national hair
restoration provider.
PROPOSED PRODUCTS
COMPUFLO
Milestone has developed CompuFlo, a prototype injection, perfusion and
aspiration device, that embodies a new technology that Milestone believes, will
provide it with entry into new markets, specifically the large hospital sector.
CompuFlo provides a real time readout of pressures, fluid densities and flow
rates in the delivery and removal of a wide array of liquid drugs and other
fluids, including
35
bodily fluids. Due to cash constraints, Milestone has not yet developed devices
embodying this technology for specific applications. A major medical center has
proposed the initiation of clinical trials, at the beginning of 2004, to
ascertain the efficacy, safety and suitability of CompuFlo in administering
epidural injections for adults and children. We can give no assurances that
these trials will be conducted or, if conducted, will be successful.
SAFETYINFUSE WAND
Milestone has also developed SafetyInfuse Wand, a safety engineered IV
catheter introducer. This product is designed to allow a practitioner to
introduce an IV catheter into a vein using a single-handed, automatic safety
engineered device. Protraction and retraction can be accomplished with a single
hand, further enhancing the safety feature. It is a fail-safe device; that is,
if the safety components break or fail to operate, then the needle moves into
its protected state thus ensuring optimal safety to the end user. A major
advantage of the SafetyInfuse Wand is that it can be used multiple times on a
single patient, following a failure to introduce the catheter into the vein. We
expect to apply for 510(k) FDA marketing clearance for the SafetyInfuse Wand in
2004. Due to cash constraints, Milestone has not commercially introduced
SafetyInfuse Wand.
MANUFACTURING
CompuDent and CompuMed units are manufactured for us by Tricor Systems,
Inc. ("Tricor") pursuant to specific purchase orders. In order to fund certain
expenses of Tricor, we have advanced funds to Tricor. These advances are reduced
as Tricor makes shipments to us. Net advances to Tricor as of December 31, 2001
and 2002 and October 31, 2003 were approximately $690,000, $398,000, and
$300,000, respectively. The Wand disposable handpiece is manufactured for us in
Mexico by Nypro Precision Assemblies, a subsidiary of Nypro. ("NPA") pursuant to
scheduled production requirements. NPA utilizes molds, semi-automated assembly
equipment and packaging equipment purchased by us. These products are sterilized
in California and shipped to our fulfillment center in Pennsylvania. The Wand
Handpiece with Needle is manufactured for us in China by United Systems. We may
expand our relationship with this manufacturer to include production of other
types of handpieces. All of our suppliers are ISO compliant.
MARKETING
MARKETING BACKGROUND
When we launched CompuDent in 1997, we relied on four major dental
dealers to distribute our products. While this achieved broad access to dental
offices, the nature of a typical sales visit by these dealers' representatives
proved to be counterproductive to the training requirements of CompuDent. Though
more than 15,000 units were sold in the first quarter following launch, this
distribution method distanced us from our customers and made it impossible to
provide customer support and adequate clinical training. These factors, coupled
with introduction problems typically associated with new technology and early
product design problems, now resolved, led to disgruntled customers and limited
handpiece use. Therefore, in 2000 we began selling directly to customers. We
hired a sales manager and eleven direct sales representatives to cover major
metropolitan areas. However, the then sales price for CompuDent was inadequate
to cover our direct expenses, including compensation to our representatives. We
also experienced difficulty gaining access to dental offices because the
representatives had a single product and the technology was still new to the
market.
36
NEW MARKETING PLAN - DENTISTRY - DOMESTIC
In January 2003, we developed a new sales and marketing plan, which
reflected five years of lessons learned in the marketplace. We increased the
base price of CompuDent from $1,495 to $1,995 that allowed us to recruit and
adequately compensate our sales force and support staff. We developed a
comprehensive training plan to enable our reps to provide orientation and
training to new customers, and to foster increased usage of disposable
handpieces. By September 30, 2003, we had a force of 12 sales representatives
providing sales coverage in urban areas in 12 states. The typical independent
rep manages a territory of approximately 3,500 to 5,000 dentists within a large
metropolitan area. We support these independent sales reps in several important
ways:
o our sales support staff set appointments to help the reps gain access
to dental offices;
o we generate sales leads for them through our attendance at an average
of 20 trade shows a year and through limited advertising and direct
mail campaigns;
o we provide technical and service support;
o we provide them with access to our existing customer base for the
purpose of increasing utilization of handpieces as well as converting
customers to a subscription program, the Milestone Saving Plan, under
which they commit to the monthly purchase of handpieces at a discount
from our regular prices; and
o in September 2003, we began distributing the CoolBlue Wand which helps
us gain access to dental offices for sales of CompuDent.
Also, in 2002 we entered into a non-exclusive distribution agreement
with Benco Dental, granting them rights to distribute CompuDent and its
handpieces in designated portions of the eastern U.S. Benco failed to achieve
specified minimum purchase requirements and we now have the right to terminate
the agreement upon notice to Benco. However, we continue to sell limited amounts
of units and handpieces to Benco at a discount to our direct customers.
With a growing new sales force and the acquisition of rights to new
products to facilitate access to dental offices, we intend to direct our
marketing efforts to capturing new customers from specialty practitioners,
including periodontists, pedodontists, endodontists and cosmetic/restorative
dentists.
DENTISTRY - INTERNATIONAL MARKETING
We manage the sales and marketing support for Canada, Mexico, Brazil
and Japan. Throughout the rest of the world, we distribute our products through
two master distributors who manage an extensive network of independent dealers.
The role of these principal distributors, Milestone Medical Technologies ("MMT")
and United Systems, Inc ("United"), includes identification of suitable local
distributors, establishment of distribution arrangements, supporting local
marketing efforts and acting as liaison with the parent company. International
sales represented 18%, 22% and 35% of sales in 2001 and 2002, and the first six
months of 2003, respectively.
MMT is our principal distributor for Europe, Africa and the Middle
East. MMT is our largest customer, representing 55%, 63% and 77% of our
international revenues in 2001, 2002 and the first six months of 2003,
respectively, and 10%, 14% and 27% of total sales in those periods,
respectively.
United Systems is our principal distributor in China, Taiwan, and South
Korea. Handpiece use
37
for these territories is less than in Europe and the US. In 2001, 2002 and the
first six months of 2003, respectively, sales to these territories represented
fewer than 1% of our total revenues, for all those periods.
In addition, sales to Yoshida Dental Manufacturing Company of Japan,
Synca (our distributor in Canada) and Moyco (our distributor in Mexico) in 2001,
2002 and the first six months of 2003, represented collectively, 7%, 8% and 7%,
respectively.
After this offering, we plan to hire a dedicated sales manager for each
of the three major regions - Europe, Asia and Latin America, to oversee the
implementation of this sales and marketing strategy and to ensure that the
distributors are provided with adequate training and technical support. We also
plan to assist our master distributors to engage new distributors in major
markets, to train existing and new distributors and to replace poor performing
distributors.
PROPOSED EXPANDED MARKETING PROGRAM FOR DENTAL AND HYGIENE SCHOOLS
More than 5,000 students graduate annually from dental school in the
US. We believe this presents a key opportunity for us to cultivate use of
CompuDent early in the dentists' training. We expect to use a portion of the
proceeds of this offering to offer special educational assistance programs to
dental and hygiene schools in the U.S. and Canada. Our hope is that training in
the use of CompuDent will be incorporated into the curriculum of the schools and
that students will use the products throughout their training.
As of September 30, 2003, CompuDent has been added to the curriculum of
8 U.S. and Canadian dental schools and 13 schools providing degrees in dental
hygiene. Through our international distribution partners, training in the use of
CompuDent systems has also become part of the curriculum in several
international dental programs. To properly implement a program of this magnitude
and potential importance, we may need to hire a dedicated Academic Director.
This Academic Director, ideally either a retired dentist or hygienist, would be
responsible for working with the staffs of the chosen institutions on
incorporating the product into their curricula.
COMPETITION
Our anesthetic delivery systems compete with disposable and reusable
syringes that generally sell at lower prices and that use established and
well-understood methodologies and other local anesthetic delivery systems, in
both the dental and medical marketplaces.
Our systems compete on the basis of their performance characteristics
and the benefits provided to both the practitioner and the patient. Clinical
studies have shown that our systems reduce fear, pain and anxiety for some
patients, and we believe that they can also reduce practitioner stress levels.
CompuDent can be used for all local anesthesia techniques that can be performed
with a syringe. CompuDent can also be used for new and modified techniques that
cannot be performed with traditional syringes. These new techniques allow faster
procedures, shorten chair time, while minimizing numbing of the lips and facial
muscles, enhance productivity, reduce stress and virtually eliminate pain and
anxiety.
The Luer Lock needle, sold by Milestone, competes with dental needles
produced and distributed by a number of major manufacturers and distributors and
other producers or distributors of dental products, many of whom have
significant competitive advantages because of their size, strength in the
marketplace, financial and other resources and broad product lines. Milestone
competes on the basis of convenience since it can package the product with an
order for disposable handpieces.
38
We face intense competition from many companies in the medical and
dental device industry, including well-established academic institutions,
possessing substantially greater financial, marketing, personnel, and other
resources. Most of our competitors have established reputations, stemming from
their success in the development, sale, and service of competing dental
products. Further, rapid technological change and research may affect our
products. Current or new competitors could, at any time, introduce new or
enhanced products with features that render our products less marketable or even
obsolete. Therefore, we must devote substantial efforts and financial resources
to improve our existing products, bring our products to market quickly, and
develop new products for related markets. In addition, our ability to compete
successfully requires that we establish an effective distribution network. New
products must be approved by regulatory authorities before they may be marketed.
We cannot assure you that we can compete successfully, that our competitors will
not develop technologies or products that render our products less marketable or
obsolete, or that we will succeed in improving our existing products,
effectively develop new products, or obtain required regulatory approval for
those products.
PATENTS AND INTELLECTUAL PROPERTY
We hold the following U.S. utility and design patents:
U.S. PATENT DATE OF
DESCRIPTION NUMBER ISSUE
--------- -------- ------
CompuDent
Hypodermic Anesthetic Injection Method 4,747,824 5/31/88
Hypodermic Anesthetic Injection Apparatus & Method 5,180,371 1/19/93
(CompuFlo, CompuMed, and CompuDent)
Dental Anesthetic and Delivery Injection Unit 6,022,337 2/8/00
Dental Anesthetic Delivery Injection Unit (continuation of No. 6,022,337) 6,152,734 11/28/00
Dental Anesthetic Delivery Injection Unit (continuation of No. 6,022,337) 6,132,414 10/17/00
Pressure/Force Computer Controlled Drug Delivery System 6,200,289 3/13/01
Design for a Dental Anesthetic Delivery System Handle D427,314 6/27/00
Design for a Dental Anesthetic Delivery System Holder D422,361 4/4/00
Design for a Dental Anesthetic Delivery System Housing D423,665 4/25/00
Handpiece for Injection Device with a Retractable and Rotating Needle 6,428,517 8/6/02
Other
Hypodermic Syringe and Method 4,877,934 12/19/88
Apparatus and Method for Sterilizing, Destroying and
Encapsulating Medical Implement Wastes 4,992,217 2/12/91
Apparatus and Method for Verifiably Sterilizing
Destroying and Encapsulating Regulated Medical Wastes 5,078,924 1/7/92
Apparatus and Method for Verifiably Sterilizing,
Destroying and Encapsulating Regulated Medical Wastes 5,401,444 3/28/95
Self-Sterilizing Hypodermic Syringe and Method 5,512,730 4/30/96
Self-Sterilizing Hypodermic Syringe and Method 5,693,026 12/2/97
---------------------
39
We also have several patent applications pending before the U.S. Patent
and Trademark Office, and hold a number of corresponding patents in Europe and
other major markets.
During the 2002 and 2001 fiscal years, we expensed $147,709 and
$49,943, respectively, on research and development activities. The higher costs
incurred during 2002 were primarily associated with the development of the
SafetyWand.
We rely on a combination of patent, copyright, trade secret, and
trademark laws and employee and third party nondisclosure agreements to protect
our intellectual property rights. Despite the precautions taken by us to protect
our products, unauthorized parties may attempt to reverse engineer, copy, or
obtain and use products and information that we regard as proprietary, or may
design products serving similar purposes that do not infringe on our patents.
Litigation may be necessary to protect our intellectual property rights and
could result in substantial cost to us and diversion of our efforts by with no
guarantee of success. Our failure to protect our proprietary information and the
expenses of doing so could have a material adverse effect on our operating
results and financial condition.
While there are no current claims that our products infringe on the
proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against us in the future with
respect to current or future products or that any such assertion may not require
us to cease selling such products, or to enter into arrangements that require us
to pay royalties, or to engage in costly litigation. Although we have received
no claims of infringement, it is possible that infringement of existing or
future patents or proprietary rights of others may occur. In the event that our
products infringe upon patent or proprietary rights of others, we may be
required to modify our processes or to obtain a license. There can be no
assurance that we would be able to do so in a timely manner, upon acceptable
terms and conditions, or at all. The failure to do so would have a material
adverse effect on us.
GOVERNMENT REGULATION
The FDA cleared CompuDent system and its disposable handpiece for
marketing in the U.S., for dental applications in July 1996, the CompuMed system
for marketing in the U.S. for medical applications in May 2001 and the
SafetyWand for marketing in the U.S. for dental applications in September 2003.
For us to commercialize our other products in the United States, we will have to
submit additional 510(k) applications with the FDA.
The manufacture and sale of medical devices and other medical products
are subject to extensive regulation by the FDA pursuant to the FDC Act, and by
other federal, state and foreign authorities. Under the FDC Act, medical devices
must receive FDA clearance before they can be marketed commercially in the
United States. Some medical products must undergo rigorous pre-clinical and
clinical testing and an extensive FDA approval process before they can be
marketed. These processes can take a number of years and require the expenditure
of substantial resources. The time required for completing such testing and
obtaining such approvals is uncertain, and FDA clearance may never be obtained.
Delays or rejections may be encountered based upon changes in FDA policy during
the period of product development and FDA regulatory review of each product
submitted. Similar delays also may be encountered in other countries. Following
the enactment of the Medical Device Amendments to the FDC Act in May 1976, the
FDA classified medical devices in commercial distribution into one of three
classes. This classification is based on the controls necessary to reasonably
ensure the safety and effectiveness of the medical device. Class I devices are
those devices whose safety and effectiveness can reasonably be ensured through
general controls, such as adequate labeling, premarket notification, and
adherence to the FDA's Quality System Regulation ("QSR"), also referred to as
"Good Manufacturing
40
Practices" ("GMP") regulations. Some Class I devices are further exempted from
some of the general controls. Class II devices are those devices whose safety
and effectiveness reasonably can be ensured through the use of special controls,
such as performance standards, post-market surveillance, patient registries, and
FDA guidelines. Class III devices are those which must receive premarket
approval by the FDA to ensure their safety and effectiveness. Generally, Class
III devices are limited to life-sustaining, life-supporting or implantable
devices.
If a manufacturer or distributor can establish that a proposed device
is "substantially equivalent" to a legally marketed Class I or Class II medical
device or to a Class III medical device for which the FDA has not required
premarket approval, the manufacturer or distributor may seek FDA marketing
clearance for the device by filing a 510(k) Premarket Notification. The 510(k)
Premarket Notification and the claim of substantial equivalence may have to be
supported by various types of data and materials, including test results
indicating that the device is as safe and effective for its intended use as a
legally marketed predicate device. Following submission of the 510(k) Premarket
Notification, the manufacturer or distributor may not place the device into
commercial distribution until an order is issued by the FDA. By regulation, the
FDA has no specific time limit by which it must respond to a 510(k) Premarket
Notification. At this time, the FDA typically responds to the submission of a
510(k) Premarket Notification within 90 days. The FDA response may declare that
the device is substantially equivalent to another legally marketed device and
allow the proposed device to be marketed in the United States. However, the FDA
may determine that the proposed device is not substantially equivalent or may
require further information, such as additional test data, before the FDA is
able to make a determination regarding substantial equivalence. Such
determination or request for additional information could delay market
introduction of our products and could have a material adverse effect on us. If
a device that has obtained 510(k) Premarket Notification clearance is changed or
modified in design, components, method of manufacture, or intended use, such
that the safety or effectiveness of the device could be significantly affected,
separate 510(k) Premarket Notification clearance must be obtained before the
modified device can be marketed in the United States. If a manufacturer or
distributor cannot establish that a proposed device is substantially equivalent
to a legally marketed device, the manufacturer or distributor will have to seek
premarket approval of the proposed device a more difficult procedure requiring
extensive data, including pre-clinical and human clinical trial data, as well as
extensive literature, to prove the safety and efficacy of the device.
Though CompuDent, the SafetyWand and CompuMed have received FDA
marketing clearance, there can be no assurance that any of our other products
under development will obtain the required regulatory clearance on a timely
basis, or at all. If regulatory clearance of a product is granted, such
clearance may entail limitations on the indicated uses for which the product may
be marketed. In addition, modifications may be made to our products to
incorporate and enhance their functionality and performance based upon new data
and design review. There can be no assurance that the FDA will not request
additional information relating to product improvements, that any such
improvements would not require further regulatory review thereby delaying the
testing, approval and commercialization of our development products or that
ultimately any such improvements will receive FDA clearance.
Compliance with applicable regulatory requirements is subject to
continual review and will be monitored through periodic inspections by the FDA.
Later discovery of previously unknown problems with a product, manufacturer, or
facility may result in restrictions on such product or manufacturer, including
fines, delays or suspensions of regulatory clearances, seizures or recalls of
products, operating restrictions and criminal prosecution and could have a
material adverse effect on us.
We are subject to pervasive and continuing regulation by the FDA, whose
regulations require manufacturers of medical devices to adhere to certain QSR
requirements as defined by the FDC Act.
41
QSR compliance requires testing, quality control and documentation procedures.
Failure to comply with QSR requirements can result in the suspension or
termination of production, product recall or fines and penalties. Products also
must be manufactured in registered establishments. In addition, labeling and
promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. The export of devices is also
subject to regulation in certain instances.
The Medical Device Reporting ("MDR") regulation obligates us to provide
information to the FDA on product malfunctions or injuries alleged to have been
associated with the use of the product or in connection with certain product
failures that could cause serious injury. If, as a result of FDA inspections,
MDR reports or other information, the FDA believes that we are not in compliance
with the law, the FDA can institute proceedings to detain or seize products,
enjoin future violations, or assess civil and/or criminal penalties against us,
its officers or employees. Any action by the FDA could result in disruption of
our operations for an undetermined time.
In June 2003 we received CE mark in the European Common Market for
marketing in Europe of the SafetyWand and the Wand Handpiece with Needle. In
July 2003, we obtained regulatory approval to sell CompuDent and its handpieces
in Australia and New Zealand.
PRODUCT LIABILITY
Failure to use any of our products in accordance with recommended
operating procedures potentially could result in subjecting users to health
hazards or injury. Failures of our products to function properly could subject
us to claims of liability. We maintain liability insurance in an amount that we
believe is adequate. However, there can be no assurance that our insurance
coverage will be sufficient to pay product liability claims brought against us.
A partially or completely uninsured claim, if successful and of significant
magnitude, could have a material adverse effect on us.
EMPLOYEES
On September 30, 2003 Milestone had 11 full-time employees, including
three executive officers, two customer service people, a national sales manager,
four sales support staff and an administrative assistant and one part time
employee. In addition, our Director of Clinical Affairs and 11 independent sales
representatives provide us with their services on an independent basis.
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FACILITIES
Our offices are located in Livingston Corporate Park in Livingston, New
Jersey. We lease approximately 2,693 square feet of office space under a lease
through March 2007, at a cost that we believe to be competitive. We may have to
increase our office space in the future, and we believe that we will be able to
find adequate premises at reasonable terms. A third party distribution and
logistics center in Pennsylvania handles shipping and order fulfillment.
43
MANAGEMENT
The current executive officers, directors and key personnel of
Milestone and their respective ages as of September 30, 2003 are as follows:
DIRECTOR
NAME AGE POSITION SINCE
---- --- -------- -----
Leonard A. Osser 56 Chairman and Chief Executive Officer 1991
Stuart J. Wildhorn 46 President
Thomas M. Stuckey 49 Vice President and Chief Financial Officer
Mark Hochman, D.D.S. 45 Director of Clinical Affairs
Eugene Casagrande, D.D.S., 60 Director of Professional Relations
Paul Gregory (2) 68 Director 1997
Leonard M. Schiller(1)(2) 62 Director 1997
Jeffrey Fuller(1) 57 Director 2003
Leslie Bernhard(1) 59 Director 2003
----------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Leonard A. Osser has been our Chairman and Chief Executive Officer
since July 1991. From 1980 until the consummation of Milestone's public offering
in November 1995, he was engaged primarily as the principal owner and Chief
Executive of U.S. Asian Consulting Group, Inc., a New Jersey based provider of
consulting services in "work-out" and "turnaround" situations for publicly and
privately owned companies in financial difficulty.
Stuart J. Wildhorn has been our President since September 2003 and
prior to that he had been our Senior Vice President since April 2001. From 1990
until April 2001, Mr. Wildhorn held progressive senior management positions with
Datex-Ohmeda, a leading manufacturer of anesthesia and patient monitoring
products.
Thomas M. Stuckey has been our Vice President and Chief Financial
Officer since May 1998. Mr. Stuckey is a CPA, and CMA and holds a MS degree in
Accounting from Syracuse University.
Dr. Mark Hochman has been a clinical consultant to Milestone since 1997
and has served as the Director of Clinical Affairs and Director of Research and
Development since 1999. He has a doctorate of dental surgery with advanced
training in the specialties of periodontics and orthodontics from New York
University College of Dentistry and has been practicing dentistry since 1984. He
holds a faculty appointment as a clinical associate professor at NYU School of
Dental Surgery. Dr. Hochman is a recognized world authority on advanced
subcutaneous drug delivery systems, has published numerous articles in this area
and is personally responsible for inventing much of the technology currently
available from Milestone.
Dr. Eugene Casagrande has been the Director of Professional Relations
for Milestone since September 1998. In his capacity, Dr. Casagrande represents
Milestone in a variety of clinical and industry related opportunities. Dr.
Casagrande is the President and founder of Casagrande Consulting Services, an
entity devoted to quality management to the dental industry.
Paul Gregory has been a director of Milestone since April 1997. Mr.
Gregory has been a business and insurance consultant at Innovative Programs
Associates Inc. and Paul Gregory Associates Inc. since
44
January 1995 and January 1986, respectively, where he services, among other
entities, foreign and domestic insurance groups, law and accounting firms and
international corporations.
Leonard M. Schiller has been a director of Milestone since April 1997.
Mr. Schiller has been a partner in the Chicago law firm of Schiller, Klein &
McElroy, P.C. since 1977. He has also been President of The Dearborn Group, a
residential property management and real estate acquisition company since 1980.
Jeffrey Fuller has been a director of Milestone since January 2003. Mr.
Fuller has been president and owner of two municipal water supply systems,
Hudson Valley Water Co. and Lake Lenape Water Co. since 1983 and in addition has
been an executive recruiter since 1995.
Leslie Bernhard has been a director of Milestone since May 2003. Ms.
Bernhard co-founded AdStar, Inc., and since 1986 has been its president, chief
executive officer and a director. AdStar is an application service provider for
the newspaper classified advertising industry.
All directors hold office until the next annual meeting of stockholders
and until their successors are duly elected and qualified. Officers are elected
to serve, subject to the discretion of the Board of Directors, until their
successors are appointed.
Milestone's Board of Directors has established compensation and audit
committees. The Compensation Committee reviews and recommends to the Board of
Directors the compensation and benefits of all the officers of Milestone,
reviews general policy matters relating to compensation and benefits of
employees of Milestone, and administers the issuance of stock options to
Milestone's officers, employees, directors and consultants. All compensation
arrangements between Milestone and its directors, officers and affiliates are
reviewed by the compensation committee, the majority of which is made up of
independent directors. The Audit Committee meets with management and Milestone's
independent auditors to determine the adequacy of internal controls and other
financial reporting matters.
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LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
Our certificate of incorporation provides that a director will not be
personally liable to us or to our stockholders for monetary damages for breach
of the fiduciary duty of care as a director, including breaches which constitute
gross negligence. This provision does not eliminate or limit the liability of a
director:
o for breach of his or her duty of loyalty to us or to our stockholders;
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o under Section 174 of the Delaware General Corporation Law (relating to
unlawful payments or dividends or unlawful stock repurchases or
redemptions);
o for any improper benefit; or
o for breaches of a director's responsibilities under the Federal
securities laws.
Our certificate of incorporation also provides that we indemnify and
hold harmless each of our directors and officers to the fullest extent
authorized by the Delaware General Corporation Law, against all expense,
liability and loss (including attorney's fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by such person in connection therewith.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons pursuant to
our certificate of incorporation, Bylaws and the Delaware General Corporation
Law, we have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy and is, therefore,
unenforceable.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons under our
certificate of incorporation, we have been informed that, in the opinion of the
SEC, indemnification is against public policy as expressed in the Securities Act
and is unenforceable.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth all compensation
earned, in all capacities, during the fiscal years ended December 31, 2002,
2001, and 2000 by (i) Milestone's Chief Executive Officer and (ii) the most
highly compensated executive officers, other than the CEO, who were serving as
executive officers at the end of the 2002 fiscal year and whose salary as
determined by Regulation S-B, Item 402, exceeded $100,000 (the individuals
falling within categories (i) and (ii) are collectively referred to as the
"Named Executives").
SUMMARY COMPENSATION TABLE
AWARDS
ANNUAL COMMON STOCK
COMPENSATION UNDERLYING
NAME AND SALARY OPTIONS
PRINCIPAL POSITION YEAR ($) (#)
---------------------------------------------------------------------------------
Leonard A. Osser 2002 351,800(1) 50,000
Chief Executive 2001 350,967(2) 50,000
Officer and 2000 265,407(3) 50,000
Chairman
46
Stuart J. Wildhorn 2002 155,400 7,000
President 2001 93,750 50,000
Thomas A. Stuckey 2002 136,267(4) 7,000
Chief Financial 2001 116,905 10,000
Officer and Vice President 2000 114,051 25,000
----------
(1) Includes $320,000 in deferred compensation. It excludes $19,049 paid by
Milestone to Marilyn Elson, a certified public account, who was employed by
Milestone to render professional tax services. Ms. Elson is the wife of Mr.
Osser.
(2) Includes $350,000 in deferred compensation. The deferred compensation was
paid subsequent to year end through the issuance of 625,000 units, each
consisting of one share and one six-year warrant to purchase one share at
prices ranging from $.80-$2.00. It excludes $20,850 paid by Milestone to
Marilyn Elson.
(3) Includes $141,346 in deferred compensation. The deferred compensation was
paid subsequent to year end through the issuance of 176,683 units, each
consisting of one share and one six-year warrant to purchase one share at
prices ranging from $.80-$2.00.Reflects voluntary reduction of base salary,
which commenced in July.
(4) Includes a $20,000 bonus paid in 2002.
----------
47
STOCK OPTIONS
The following tables show certain information with respect to incentive
and non-qualified stock options granted in 2002 to Named Executives under
Milestone's 1997 Stock Option Plan and the aggregate value at December 31, 2003
of such options. In general, the per share exercise price of all options is
equal to the fair market value of a share of Common Stock on the date of grant.
No options granted to Named Executives have been exercised.
OPTION GRANTS IN 2002
INDIVIDUAL GRANTS OF OPTIONS
NUMBER OF PERCENT OF TOTAL
SHARES OF COMMON OPTIONS GRANTED
STOCK UNDERLYING TO EMPLOYEES EXERCISE PRICE
NAME OPTIONS IN 2002 ($/SH) EXPIRATION DATE
-------------------------------------------------------------------------------------------------------------
Leonard A. Osser 50,000 (1) 28.9% $ .55 01-01-07
Stuart J. Wildhorn 7,000 (2) 4.0% $ .75 07-27-07
Thomas M. Stuckey 7,000 (2) 4.0% $ .75 07-27-07
----------
(1) Options vested 01-01-03
(2) Two thirds have vested and one third will vest on 07-27-04.
AGGREGATED 2002 YEAR END OPTIONS VALUES
FOR OPTIONS GRANTED PRIOR TO AND DURING 2002
NUMBER OF SHARES OF COMMON VALUE OF UNEXERCISED
STOCK UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 12-31-2002 AT 12-31-2002(1)
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
--------------------------------------------------------------------------------------
Leonard A. Osser 0 / 200,000 $0 / $0
Stuart J. Wildhorn 19,000 / 38,000 $0 / $0
Thomas M. Stuckey 71,667 / 16,333 $0 / $0
----------
(1) Based on the closing price on December 31, 2003 of $.30 as quoted on the
American Stock Exchange.
EMPLOYMENT CONTRACTS
As of January 1, 1998 Milestone entered into an Employment Agreement
with Mr. Osser, which provides for an initial term expiring on December 31,
2002, with a two-year non-competition period at the end of the term. The term is
automatically extended for successive one-year periods, unless prior to December
1 of any year either party notifies the other of its election not to extend the
term. Neither party has given notice to the other. Under the Agreement Mr. Osser
serves as our full-time Chief Executive Officer and receives annual base pay of
$350,000, increasing to reflect cost of living adjustments commencing on January
1, 2001. In addition, during January 1998 and each of the next four Januarys
Milestone shall grant Mr. Osser an option to purchase 50,000 shares of Common
Stock exercisable only during the last 30 days of the five-year option term
unless Milestone achieves certain financial goals to
48
be specified annually by the Compensation Committee. Additionally, as soon as
financial statements for each year commencing with 1998 are completed, Milestone
shall grant the executive an additional option to purchase up to 50,000 shares
depending upon the achievement of specified performance goals. Further, Mr.
Osser shall receive the opportunity to earn cash bonuses of up to $200,000 per
year depending upon the achievement of performance targets to be specified by
the Option Committee.
On July 7, 1998, at his sole discretion, Mr. Osser implemented a
voluntary reduction of his annual base salary, reducing his annual base pay from
$350,000 to $188,462. The voluntary reduction has been described by Mr. Osser as
being both temporary and having no effect upon his rights under his employment
agreement with Milestone. Such reduction remained in effect until August 5,
2000. At that time, Mr. Osser began to defer his salary at the $350,000 annual
base. At December 31, 2000, his deferred compensation was $141,346. In December
2001, Milestone reached an agreement with Mr. Osser to satisfy the $491,346 of
unpaid salary. The agreement calls for the issuance of 614,183 units. Each unit
consists of one share of Milestone common stock and one warrant to purchase an
additional share of such common stock. The warrants will be exercisable at $.80
per share through January 31, 2003, thereafter at $1.00 per share through
January 31, 2004, and thereafter at $2.00 per share through January 31, 2007, at
which time they will expire. On March 31, 2003, Mr. Osser signed an agreement
deferring $640,000 of his annual salary until April 1, 2004. On October 9, 2003
Mr. Osser signed an agreement according to which he will receive, on the later
of January 2, 2004 or the date this offering becomes effective, an estimated
42,000 units, in payment of $336,000 of accrued compensation.
COMPENSATION OF DIRECTORS
In 2003, each non-employee director was granted a five-year option to
purchase 20,000 shares of our Common Stock at an exercise price of $.50, a price
above the fair market value of a share of our Common Stock on the date of grant.
Directors receive no cash compensation.
EQUITY COMPENSATION PLANS
NUMBER OF NUMBER OF
SECURITIES TO BE SECURITIES
ISSUED UPON WEIGHTED AVERAGE REMAINING AVAILABLE
EXERCISE OF EXERCISE PRICE OF FOR FUTURE ISSUANCE
OUTSTANDING OUTSTANDING UNDER EQUITY
OPTIONS AND OPTIONS AND COMPENSATION PLANS
WARRANTS WARRANTS
------------------ ------------------- ---------------------
Equity compensation plans
approved by stockholders (1):
Grants under our 1997 Stock
Option Plan 656,344 $.93 336,656
Equity compensation plans not
approved by stockholders(2)
Aggregate Individual 687,500 $2.00 Not Applicable
Option Grants
Total 1,350,844 $1.47
49
(1) Consisting of our 1997 stock option plan covering a total of 1,000,000
common shares underlying options issuable to officers and other key
employees and excluding 7,000 options which were exercised in October
2003. The plan has a term of 10 years and is administered by a
committee appointed by the board of directors. The committee, in its
sole discretion, determines who is eligible to receive these incentive
stock options, how many options they will receive, the term of the
options, the exercise price and other conditions relating to the
exercise of the options. Stock options granted under the plan must be
exercised within a maximum of 10 years from the date of grant at an
exercise price that is not less than the fair market value of the
common shares on the date of the grant. Options granted to shareholders
owning more than 10% of our outstanding common shares must be exercised
within five years from the date of grant and the exercise price must be
at least 110% of the fair market value of the common shares on the date
of the grant.
(2) The aggregate individual option grants outside the Stock Option Plan
referred to in the table above include options issued as payment for
services rendered to us by outside consultants and providers of certain
services. The aggregate individual warrant grants referred to in the
table above include warrants granted to investors in Milestone as part
of private placements and credit line arrangements.
50
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In December 2001, we reached an agreement with Mr. Osser to satisfy
$491,346 of his deferred compensation through the issuance of 614,183 units,
each unit consisted of one share of Milestone common stock and one warrant to
purchase an additional share of common stock. These units were issued to
Mr. Osser in January 2002.
On October 2, 2003, Milestone issued 400,454 shares of common stock to
Mr. Osser, his share of approximately $5 million of indebtedness satisfied on
the same basis in repayment of 6%/12% notes in the aggregate principal and
interest amount of $404,638.
In April 2000, Mr. Osser provided Milestone with a $200,000 line of
credit which was payable on January 2, 2003. On October 9, 2003 we reached an
agreement with him to satisfy this $200,000 and $248,356 of other debt and
accrued interest and $336,000 of deferred compensation through the issuance of
units, similar to the units offered in this offering, on the later of January 2,
2004 or the effective date of this offering. The units will be issued at the
same price as offered in this offering.
We have adopted a policy that, in the future, the audit committee must
review all transactions with any officer, director or 5% shareholder.
51
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common shares as of the date of this prospectus by:
o each person, or group of affiliated persons, known by us to be the
beneficial owner of more than 5% of our outstanding common shares;
o each of our directors;
o each Named Executive above;
and
o all of our directors and executive officers as a group.
The following table does not take into account any common shares sold
as a result of the exercise of the over-allotment option granted to the
representative. Except as otherwise indicated, the persons listed below have
sole voting and investment power with respect to all of the common shares owned
by them. The individual shareholders have furnished all information concerning
their respective beneficial ownership to us.
SHARES OF
COMMON STOCK
BENEFICIALLY PERCENTAGE OF
NAME OF BENEFICIAL OWNER (1) OWNED (2) OWNERSHIP
------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS AND DIRECTORS
------------------------------------------------
Leonard Osser........................................ 3,970,174(3) 20.98%
Stuart J. Wildhorn................................... 40,333(4) *
Thomas M. Stuckey.................................... 62,967(5) *
Paul Gregory......................................... 32,422(6) *
Leonard M. Schiller.................................. 32,572(7) *
Jeffrey Fuller....................................... 20,000(8) *
Leslie Bernhard...................................... 20,000(9) *
All directors & executive officers as a group
(7 persons)....................................... 4,178,468(10) 21.84%
5% AND GREATER STOCKHOLDERS
------------------------------------------------
K. Tucker Andersen .................................. 3,950,152 (11) 21.67%
Cumberland Associates, LLC .......................... 1,980,775 (12) 10.87%
Gintel Asset Management, Inc. ....................... 1,347,000(13) 7.39%
----------
* Less than 1%
(1) The addresses of the persons named in this table are as follows: Leonard A.
Osser, Stuart Wildhorn and Thomas M. Stuckey are all at 220 South Orange
Avenue, Livingston Corporate Park, Livingston, NJ 07039., Paul
52
Gregory, Innovative Programs Associates Inc., 370 E. 76th Street, New York,
New York 10021; Leonard M. Schiller, Schiller, Klein & McElroy, P.C., 33
North Dearborn Street, Suite 1030, Chicago, Illinois 60602, Jeffrey Fuller,
Eagle Chase, Woodbury, NY 11797; Leslie Bernhard, AdStar, Inc., 4553
Glencoe Avenue, Suite 325, Marina del Rey, California 90292; K. Tucker
Anderson, c/o Cumberland Associates LLC, 1114 Avenue of the Americas, New
York, New York 10036; Cumberland Associates, LLC, 1114 Avenue of the
Americas, New York, New York 10036 and Gintel Asset Management, Inc. 6
Greenwich Office Park, Greenwich, CT 06831.
(2) A person is deemed to be a beneficial owner of securities that can be
acquired by such person within 60 days from the filing of this proxy
statement upon the exercise of options and warrants or conversion of
convertible securities. Each beneficial owner's percentage ownership is
determined by assuming that options, warrants and convertible securities
that are held by such person (but not held by any other person) and that
are exercisable or convertible within 60 days from the filing of this
report have been exercise or converted. Except as otherwise indicated, and
subject to applicable community property and similar laws, each of the
persons named has sole voting and investment power with respect to the
shares shown as beneficially owned. All percentages are determined based on
the number of all shares, including those underlying options exercisable
within 60 days from the filing of this proxy statement held by the named
individual, divided by 18,226,732 outstanding shares on October 31, 2003
and those shares underlying options exercisable within 60 days from the
filing of this proxy statement, held by the named individual.
(3) Includes (i) 614,183 shares issuable upon exercise of stock options within
60 days of the date hereof, which until January 31 are exercisable at
$1.00,and beginning February 1, 2004 will be exercisable at $2.00, (ii)
warrants immediately exercisable to purchase 35,714 shares at $1.75 per
share and (iii) option for 50,000 shares exercisable at $1.00 per share
within 60 days .
(4) Includes 33,333 shares subject to stock options, exercisable within 60 days
of the date hereof at $2.50 per share and 7,000 shares subject to stock
options, exercisable within 60 days of the date hereof at $.75 per share.
(5) Includes 21,000 shares subject to stock options, exercisable within 60 days
of the date hereof at $3.00 per share and 25,000 shares subject to stock
options, exercisable within 60 days of the date hereof at $2.1875 per
share, 6,667 shares subject to stock options exercisable within 60 days of
the date hereof at $2.50 per share and 7,000 shares subject to stock
options exercisable within 60 days of the date hereof at $.75 per share.
Mr. Stuckey disclaims beneficial ownership of (i) 10,000 shares, which are
held by his wife as custodian for their children, and (ii) 1,700 shares
which are owned by his wife in her IRA.
(6) Includes 150 shares held by Mr. Gregory's wife, 12,422 shares subject to
stock options, exercisable within 60 days of the date hereof at $2.1875 per
share and 20,000 subject to stock options, exercisable within 60 days of
the date hereof at $.50 per share.
(7) Includes 12,422 shares subject to stock options, exercisable within 60 days
of the date hereof at $2.1875 per share and 20,000 subject to stock
options, exercisable within 60 days of the date hereof at $.50 per share.
(8) Includes 20,000 shares subject to stock options, exercisable within 60 days
of the date hereof at $.50 per share.
(9) Includes 20,000 shares subject to stock options, exercisable within 60 days
of the date hereof at $.50 per share
(10) Includes 734,361 shares subject to stock options, 35,714 shares subject to
warrants all of which are exercisable within sixty (60) days of the date
hereof and 92,000 shares to which he has shared voting and dispositive
power.
(11) Based solely upon an amendment to Schedule 13G filed by K. Tucker Andersen
with the Securities and Exchange Commission on___________, 2003.
(12) Based solely upon Form 4 filed by Cumberland Associates, LLC with the
Securities and Exchange Commission on November 5, 2003.
(13) Includes 555,000 shares held by Gintel Asset Management and 792,000 shares
held by Robert Gintel Florida Intangible Tax Trust. Excludes 110,000 shares
owned by Barbara Gintel (Robert Gintel's spouse) and 150,000 shares owned
by Gintel Partners Fund.
All of the common shares set forth in the above table are covered by
lock-up agreements prohibiting their sale, assignment or transfer for 90 days
following the date of this prospectus without the prior written consent of the
representative.
53
DESCRIPTION OF SECURITIES
As of the date of this prospectus, our authorized capital stock
consists of 55,000,000 shares consisting of 50,000,000 of common stock, par
value $.001 per share and 5,000,000 shares of preferred stock par value $.001
per share. After this offering, we will have 20,716,982 shares of common stock
issued and outstanding, 21,016,982 if the over-allotment option is exercised in
full. As of the date of this prospectus, we have 18,226,732 shares of common
stock outstanding.
UNITS
Each unit consists of two shares of common stock and one warrant to
purchase one share of common stock. The shares and the warrants included in the
units will not trade separately until the 31st day following the effective date
of this offering, unless the representative of the underwriters determines that
separate trading of the public warrants shall occur earlier. At closing, we will
deliver only unit certificates. An investor can request physical delivery of the
certificate and can immediately request that the unit certificate can be
exchanged for stock and unit certificates. If the investor does so before the
stock and warrants trade separately, trades based on the stock and warrant
certificates will mot clear until trading in those securities commences.
COMMON STOCK
The holders of outstanding shares of common stock are entitled to
receive dividends out of legally available assets when and to the extent
determined by our board of directors from time to time. Each stockholder is
entitled to one vote for each share held by him on each matter submitted to a
vote of stockholders. At an election of directors, each director is elected by a
plurality of the voting shares of common stock. The shares of common stock are
not entitled to preemptive rights and are not convertible or redeemable. In the
case of a liquidation, dissolution or other termination of our business, the
holders of common stock are entitled to share ratably in the distribution of all
of our assets remaining available for distribution after all of our liabilities
have been satisfied. Each outstanding share of common stock is, and all shares
of common stock to be outstanding after this offering is completed will be,
fully paid and nonassessable.
WARRANTS
General. The warrants issued in this offering may be exercised at any
time beginning 30 days after this offering and ending on _____________ ___,
2008. Each warrant entitles the holder to purchase one share of common stock at
an exercise price of $_______ per share [150%] of the closing market price of
our common stock on the pricing date of this offering]. This exercise price will
be adjusted if specific events, summarized below, occur. A holder of warrants
will not be deemed a holder of the underlying stock for any purpose until the
warrant is exercised.
Redemption. Beginning six months after the effective date of this
offering, we will have the right to redeem the warrants at a price of $0.25 per
warrant, after providing 30 days' prior written notice to the warrantholders, at
any time after the closing price for our common stock, as reported on the
principal exchange on which our stock trades, was at or above [200% of the price
of our common stock on the effective date of this offering.] for any five
consecutive trading days. We will send a written notice of redemption by first
class mail to holders of the warrants at their last known addresses appearing on
the registration records maintained by the transfer agent. No other form of
notice or publication or otherwise will be required. If we call the warrants for
redemption, the holders of the warrants will then
54
have to decide whether to sell the warrants, exercise them before the close of
business on the business day preceding the specified redemption date or hold
them for redemption. If the warrants are not covered by a current registration
statement or are not qualified for sale under the laws of the state in which you
reside, you may not be able to exercise them.
Exercise. The holders of the warrants may exercise them only if an
appropriate registration statement is then in effect and if the common stock
issuable upon their exercise are qualified for sale under the securities laws of
the state in which the holder resides. To exercise a unit warrant, the holder
must deliver to our transfer agent the unit warrant certificate on or before the
expiration date or the redemption date, as applicable, with the form on the
reverse side of the certificate executed as indicated, accompanied by payment of
the full exercise price for the number of warrants being exercised. Fractional
shares of common stock will not be issued upon exercise of the warrants.
Adjustments of exercise price. The exercise price of the warrants will
be adjusted if we declare any stock dividend to stockholders or effect any split
or share combination with regard to our common stock. If we effect any stock
split or stock combination with regard to our common stock, the exercise price
in effect immediately before the stock split or combination will be
proportionately reduced or increased, as the case may be. Any adjustment of the
exercise price will also result in an adjustment of the number of shares
underlying a unit warrant or, if we elect, an adjustment of the number of
warrants outstanding.
OPTIONS AND WARRANTS
As of the date of this prospectus, we had outstanding 656,344
compensatory stock options granted to employees and directors. These options
have exercise prices ranging from $.29 to $6.00 per share and expire between
February 2005 and January 2008. Of these options, 483,011 are currently
exercisable.
As of the date of this prospectus, we had outstanding 687,500
compensatory stock options granted to non-employees. These options have exercise
prices ranging from $.52 to $4.50 per share and expire between July 2005 and May
2008. Of these options, 528,333 are currently exercisable.
As of the date of this prospectus, we had outstanding 1,934,970
investment options. These options have exercise prices ranging from $.52 to
$3.00 per share and expire between February 2005 and January 2007. All of these
options are currently exercisable.
REGISTRATION RIGHTS
As of the date of this prospectus, 691,065 shares of common stock,
including shares underlying warrants and convertible debentures are covered by
registration rights agreements with the holders of these securities. Regarding
306,585 shares of common stock, there is an informal understanding that we will
file a registration statement in connection with these shares. Regarding 160,256
shares, we have agreed to use our reasonable best efforts to file a registration
statement covering these shares. The remain 224,224 are covered by agreements
according to which we will include them in the next Registration Statement on
Form S-3 that we file with the SEC, provided they have not yet become eligible
to sell their shares under Rule 144.
AUTHORIZED BUT UNISSUED SHARES
The authorized but unissued shares of common and preferred stock are
available for future
55
issuance without stockholder approval. These additional shares may be utilized
for a variety of corporate purposes, including future public offerings to raise
additional capital, corporate acquisitions and employee benefit plans. The
existence of authorized but unissued shares could render more difficult or
discourage an attempt to obtain control of us by means of a proxy contest,
tender offer, merger or otherwise.
The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or bylaws, unless
the corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage. Our certificate of incorporation does not impose
any supermajority vote requirements.
TRANSFER AGENT, WARRANT AGENT AND REGISTRAR
The transfer agent and registrar for our common stock and the warrant
agent for the warrants is Continental Stock Transfer & Trust Company, located in
New York, New York.
56
UNDERWRITING
The underwriters named below have severally agreed, subject to the
terms and conditions contained in an underwriting agreement with us, to purchase
[1,000,000] units, each unit consisting of two shares of common stock and one
public warrant to purchase one share of common stock from us at the price set
forth on the cover page of this prospectus, in accordance with the following
table:
Number of
Underwriter Shares
-------------------------------------- ---------------
Paulson Investment Company, Inc.
---------------
Total
===============
Nature of Underwriting Commitment. The underwriting agreement provides
that the underwriters are committed to purchase all the units offered by this
prospectus if any units are purchased. This commitment does not apply to 150,000
units subject to the over-allotment option granted by us to the representative
to purchase additional units in this offering.
Conduct of the Offering. We have been advised by Paulson Investment
Company, Inc., that the underwriters propose to offer the units to be sold in
this offering directly to the public at the public offering price set forth on
the cover page of this prospectus, and to certain securities dealers at that
price less a concession of not more than $0.__ per share. The underwriters may
allow, and those dealers may reallow, a concession not in excess of $0.__ per
share to certain other dealers. After the shares are released for sale to the
public, the underwriters may change the offering price and other selling terms
from time to time. No change in those terms will change the amount of proceeds
to be received by us as set forth on the cover page of this prospectus.
The underwriters have informed us that they do not expect to confirm
sales of units offered by this prospectus to accounts over which they exercise
discretionary authority without obtaining the specific approval of the account
holder.
Over-allotment Option. We have granted the underwriters an option,
expiring 45 days after the date of this prospectus, to purchase up to 150,000
additional units from us on the same terms as set forth in this prospectus with
respect to the [1,000,000] units. The underwriters may exercise this option, in
whole or in part, only to cover over-allotments, if any, in the sale of the
units offered by this prospectus.
Offering Discounts. The following table shows the per unit and total
underwriting discounts to be paid by us to the underwriters. These amounts are
shown assuming no exercise and full exercise, respectively, of the underwriters'
over-allotment option described above:
57
TOTAL WITHOUT TOTAL WITH
PER OVER-ALLOTMENT OVER-ALLOTMENT
UNIT OPTION OPTION
------------ ------------------ ----------------
Total underwriting discount to be paid by us $ $ $
Expense Allowance. We have agreed to pay to Paulson Investment Company,
Inc., a non-accountable expense allowance equal to three percent of the
aggregate public offering price of the units sold by us in this offering
(including units sold on exercise of the underwriters' over-allotment option).
Underwriters' Warrants. On completion of this offering, we will issue
to certain of the underwriters warrants to purchase from us up to 100,000 units,
for a price of $_____ per unit (120%). These warrants are exercisable during the
four-year period beginning one year from the date of this prospectus. These
warrants are not transferable for one year following the date of this
prospectus, except to an individual who is an officer or partner of an
underwriter, by will or by the laws of descent and distribution, and are not
redeemable.
The holder of these warrants will have, in that capacity, no voting,
dividend or other shareholder rights. Any profit realized on the sale of the
units issuable upon exercise of these warrants may be deemed to be additional
underwriting compensation. The securities underlying these warrants are being
registered pursuant to the registration statement of which this prospectus is a
part. During the term of these warrants, the holder thereof is given the
opportunity to profit from a rise in the market price of our common stock. We
may find it more difficult to raise additional equity capital while these
warrants are outstanding. At any time at which these warrants are likely to be
exercised, we may be able to obtain additional equity capital on more favorable
terms.
Indemnification. We have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the Securities Act, or to
contribute to payments that the underwriters may be required to make in respect
thereof.
Lock-up Agreements. Our officers and directors have agreed not to sell
or transfer any shares of our common stock or equity securities for ninety days
after the date of this public offering, without first obtaining the written
consent of Paulson Investment Company, Inc. Specifically, these officers and
directors have agreed not to, directly or indirectly:
o sell or offer to sell any shares of our common stock or equity
securities;
o grant any option to sell any shares of our common stock or equity
securities;
o engage in any short sale of our common stock or equity securities;
o pledge or otherwise transfer or dispose of any shares of our common
stock or equity securities; or
o publicly announce an intention to do any of the foregoing.
These lock-up agreements apply to shares of our common stock and also
to any options or warrants to acquire shares of our common stock. These lock-up
agreements apply to all such securities that are currently owned or later
acquired either of record or beneficially by the persons executing the
agreements. However, Paulson Investment Company, Inc. may, in its sole
discretion and without notice, release some or all of the securities subject to
these agreements at any time during the ninety-day period.
58
Currently, there are no agreements by Paulson Investment Company, Inc. to
release any of the securities from the lock-up agreements.
Our officers and directors have agreed that, for a period of one year
from the date of this prospectus, they will notify Paulson Investment Company,
Inc. before they sell our common stock under Rule 144.
Online Activities. A prospectus in electronic format is available at
www.paulsoninvestment.com and at ____________ and may be made available on
Internet sites or through other online services maintained by one or more of the
underwriters of this offering, members of the selling group or by persons with
whom they may contract for such services. In those cases, prospective investors
may view offering terms online and, depending upon the particular underwriter,
prospective investors may be allowed to place orders online. The underwriters
may agree with us to allocate a specific number of shares for sale to online
brokerage account holders. The representatives will make allocations for online
distributions on the same basis as other allocations.
Stabilization and Other Transactions. The rules of the SEC generally
prohibit the underwriters from trading in our securities on the open market
during this offering. However, the underwriters are allowed to engage in some
open market transactions and other activities during this offering that may
cause the market price of our securities to be above or below that which would
otherwise prevail in the open market. These activities may include
stabilization, short sales and over-allotments, syndicate covering transactions
and penalty bids.
o Stabilizing transactions consist of bids or purchases made by the
managing underwriter for the purpose of preventing or slowing a decline
in the market price of our securities while this offering is in
progress.
o Short sales and over-allotments occur when the managing underwriter, on
behalf of the underwriting syndicate, sells more of our shares than
they purchase from us in this offering. In order to cover the resulting
short position, the managing underwriter may exercise the
over-allotment option described above and/or may engage in syndicate
covering transactions. There is no contractual limit on the size of any
syndicate covering transaction. The underwriters will deliver a
prospectus in connection with any such short sales. Purchasers of
shares sold short by the underwriters are entitled to the same remedies
under the federal securities laws as any other purchaser of units
covered by the registration statement.
o Syndicate covering transactions are bids for or purchases of our
securities on the open market by the managing underwriter on behalf of
the underwriters in order to reduce a short position incurred by the
managing underwriter on behalf of the underwriters.
o A penalty bid is an arrangement permitting the managing underwriter to
reclaim the selling concession that would otherwise accrue to an
underwriter if the common stock originally sold by the underwriter was
later repurchased by the managing underwriter and therefore was not
effectively sold to the public by such underwriter.
If the underwriters commence these activities, they may discontinue
them at any time without notice. The underwriters may carry out these
transactions on the American Stock Exchange, in the over-the-counter market or
otherwise.
59
LEGAL MATTERS
The validity of the common shares offered by this prospectus will be
passed upon for us by Morse, Zelnick, Rose & Lander LLP, New York, New York.
Holland & Knight LLP will pass upon certain matters for the underwriters named
in this prospectus in connection with this offering. Morse, Zelnick, Rose and
Lander, LLP, legal counsel to Milestone and its affiliates are the holders of
[350,596] shares of common stock and options to purchase 301,333 shares of
Common Stock.
EXPERTS
The Consolidated Financial Statements as of December 31, 2002 and for
the years ended December 31, 2001 and 2002, have been audited by J. H. Cohn LLP
independent public accountants as set forth in their report. We have included
these financial statements in the prospectus and elsewhere in the registration
statement in reliance on J. H. Cohn LLP's report, given on their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
In connection with the units offered by this prospectus, we have filed
a registration statement on Form S-2 under the Securities Act with the SEC. This
prospectus, filed as part of the registration statement, does not contain all of
the information included in the registration statement and the accompanying
exhibits and schedules. For further information with respect to our units,
shares and warrants, and us you should refer to the registration statement and
the accompanying exhibits and schedules. Statements contained in this prospectus
regarding the contents of any contract or any other document are not necessarily
complete, and you should refer to the copy of the contract or other document
filed as an exhibit to the registration statement, each statement being
qualified in all respects by the actual contents of the contract or other
document referred to. You may inspect a copy of the registration statement and
the accompanying exhibits and schedules without charge at the Securities and
Exchange Commission's public reference facilities, Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its regional offices located at 233
Broadway, 16th Flr., New York, NY 10279, and you may obtain copies of all or any
part of the registration statement from those offices for a fee. You may obtain
information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The SEC maintains a web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically. The address of the
site is http://www.sec.gov.
We are registered under the Securities and Exchange Act of 1934 and we
file with the SEC annual reports on Form 10-KSB and quarterly reports on Form
10-QSB.
We intend to furnish our shareholders with annual reports containing
financial statements audited by our independent public accountants.
60
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
I N D E X
PAGE
Interim Financial Statements for the Six Months Ended June 30,2003
Unaudited Condensed Consolidated Balance Sheets
June 30, 2003 (Unaudited) and December 31, 2002 F-2
Unaudited Condensed Consolidated Statements of Operations
Six Months Ended June 30, 2003 and 2002 (Unaudited) F-3
Unaudited Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2003 and 2002 (Unaudited) F-4
Notes to Unaudited Condensed Consolidated Financial Statements F-6
Financial Statements for the Year Ended December 31, 2002
Independent Auditors' Report F-13
Consolidated Balance Sheet, at December 31, 2002 F-14
Consolidated Statements of Operations, for the years ended
December 31, 2002 and 2001 F-15
Consolidated Statements of Stockholders' equity (Deficit), for
the years ended December 31, 2002 and 2001 F-16
Consolidated Statements of Cash Flows for the years ended
December 31, 2002 and 2001 F-17
Notes to Consolidated Financial Statements
F-1
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2003 and December 31, 2002
June 30, 2003
(Unaudited) December 31, 2002
ASSETS
CURRENT ASSETS: $ 28,467 $ 9,683
Cash 608,953 239,435
Accounts receivable, net of allowance for doubtful accounts at June 30,
2003 and December 31, 2002 of $40,220 and $46,152, respectively 157,383 119,291
Inventories 284,052 300,000
Advances to contract manufacturer 11,275 159,877
Deferred debt financing costs, net 21,397 64,952
---------- ----------
Prepaid expenses 1,111,527 893,238
212,835 227,207
Total current assets -- 87,935
EQUIPMENT, net 2,385 --
ADVANCES TO CONTRACT MANUFACTURER-- Long term 32,333 32,333
---------- ----------
DEFERRED DEBT FINANCING-Long term $1,359,080 $1,240,713
========== ==========
OTHER ASSETS
Totals
$1,540,330 $1,269,523
LIABILITIES AND STOCKHOLDERS' DEFICIENCY 97,888 86,492
CURRENT LIABILITIES: 313,543 169,519
Account payable, including $11,594 and $32,000 to related parties 4,976,666 4,581,708
at June 30, 2003 and December 31, 2002, respectively 326,215 --
---------- ----------
Accrued expenses 7,254,642 6,107,242
Accrued interest 117,139 139,323
Note payable 480,000 320,000
Notes payable-officer/stockholder 725,622 480,091
32,000 300,000
---------- ----------
Total current liabilities 8,609,403 7,346,656
---------- ----------
Accrued interest
Deferred compensation payable to officer/stockholder
Notes payable
Notes payable -- officer/stockholder
Total liabilities
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Common stock, par value $.001; authorized,
25,000,000 shares; 12,733,370 shares issued 12,733 12,733
Additional paid-in capital 36,614,029 36,599,607
Accumulated deficit (42,945,569) (41,786,767)
Unearned compensation (20,000) (20,000)
Treasury stock, at cost, 100,000 shares (911,516) (911,516)
----------- -----------
Total stockholders' deficiency (7,250,323) (6,105,943)
----------- ===========
Totals $ 1,359,080 $ 1,240,713
=========== ===========
F-2
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIXMONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
Six Months Ended
June 30, June 30,
2003 2002
------------ ------------
Net sales .................................. $ 2,134,690 $ 2,181,717
Cost of sales .............................. 1,048,421 981,771
------------ ------------
Gross Profit ............................... 1,086,269 1,199,946
------------ ------------
Selling, general and administrative expenses 1,600,415 1,835,208
Charge in connection with the closing of the
Deerfield, IL facility ................. 65,873 --
Research and development expenses .......... 83,092 45,379
------------ ------------
Totals ...... 1,749,380 1,880,587
------------ ------------
Loss from operations ....................... (663,111) (680,641)
Other income ............................... -- 48,000
Interest, net .............................. (495,691) (389,780)
------------ ------------
Net loss ................................... $ (1,158,802) $ (1,022,421)
============ ============
Loss per share - basic and diluted ......... $ (.09) $ (.08)
============ ============
Weighted average shares outstanding -basic
and diluted ........................... 12,633,370 12,171,450
============ ============
F-3
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
2003 2002
----------- -----------
Cash flows from operating activities:
Net loss .................................................................. $(1,158,802) $(1,022,421)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation .......................................................... 18,074 28,419
Amortization of debt discount and deferred financing costs ............ 213,640 129,999
Loss on disposal of fixed assets ...................................... 11,248 --
Amortization of advertising cost ...................................... -- 17,616
Changes in operating assets and liabilities:
Increase in accounts receivable .................................. (369,518) (38,735)
(Increase) decrease in inventories ............................... (38,092) 46,652
Decrease in advances to contract manufacturer .................... 103,883 113,490
(Increase) decrease in prepaid expenses .......................... 43,555 (9,987)
Increase in other assets ......................................... -- (19,971)
Increase in accounts payable ..................................... 270,807 126,978
Increase in accrued interest ..................................... 282,049 259,781
Increase (decrease) in accrued expenses .......................... 11,396 (8,033)
Increase in deferred compensation ................................ 160,000 160,000
----------- -----------
Net cash used in operating activities ........................ (451,760) (216,212)
----------- -----------
Cash flows from investing activities-payment for capital expenditures .......... (14,950) (21,440)
----------- -----------
Cash flows from financing activities:
Proceeds from note payable - officer/stockholder .......................... 130,537 (114,960)
Payments to note payable - officer/stockholder ............................ (72,322) --
Proceeds from issuance of notes payable ................................... 450,000 400,000
Payments for deferred financing costs ..................................... (22,721) (40,538)
----------- -----------
Net cash provided by financing activities .................... 485,494 244,502
----------- -----------
NET INCREASE IN CASH ........................................................... 18,784 6,850
Cash, beginning of period ...................................................... 9,683 15,742
----------- -----------
Cash, end of period ............................................................ $ 28,467 $ 22,592
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
F-4
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
Supplemental schedule of noncash financing activities:
In June 2003, we granted warrants to purchase 160,256 shares of common stock
(with an estimated fair value of $14,423) in connection with a $50,000 credit
facility provided by a major existing investor. This resulted in an initial
increase to debt discount and to additional paid-in capital.
During the six months ended June 30, 2003, pursuant to the 6%/12% promissory
note agreements, we converted $160,211 of accrued interest into additional
principal.
In January 2002, we issued 33,840 units consisting of one share of common stock
and one warrant to purchase an additional share of common stock in exchange for
payment of accrued interest totaling $27,072.
In January 2002, in consideration for payment of $491,346 in deferred
compensation, we issued 614,183 units (consisting of one share of common stock
and one warrant to purchase an additional share of common stock).The warrants
are exercisable at $.80 per share through January 31, 2003; at $1.00 per share
through January 31, 2004 and thereafter at $2.00 per share through January 31,
2007.
In January 2002, pursuant to the 20% promissory note agreements, we converted
$63,377 of accrued interest into additional principal.
In April 2002, pursuant to the 20% promissory note agreements, we converted
$65,168 of accrued interest into additional principal.
In April 2002, pursuant to the debt restructuring, we recorded a deferred
financing charge of $329,572. This resulted in an increase to notes payable of
$140,203 and accrued interest of $189,369.
F-5
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Summary of accounting policies:
The unaudited condensed consolidated financial statements of Milestone
Scientific Inc. and Subsidiaries (the "Company" or "Milestone") have
been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial
information. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in
the United States of America for complete financial statements.
These unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and
notes thereto for the year ended December 31, 2002 included in
our Annual Report on Form 10-KSB. The accounting policies used in
preparing these unaudited condensed consolidated financial statements
are the same as those described in the December 31, 2002 consolidated
financial statements.
In the opinion of Milestone, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting
of normal recurring entries) necessary to present fairly the financial
position as of June 30, 2003 and the results of operations for the six
months ended June 30, 2003 and 2002.
The results reported for the six months ended June 30, 2003 and 2002
are not necessarily indicative of the results of operations which may
be expected for a full year.
Note 2 - Basis of presentation:
The accompanying condensed consolidated financial statements have been
prepared assuming Milestone will continue as a going concern. However,
as shown in the accompanying condensed consolidated financial
statements, Milestone incurred net losses of approximately $1,159,000
and $1,022,000 and negative cash flows from operating activities of
approximately $452,000 and $216,000 during the six months ended June
30, 2003 and 2002, respectively. As a result, Milestone had a cash
balance of only approximately $28,000, a working capital deficiency of
approximately $6,143,000 and a stockholders' deficiency of
approximately $7,250,000 as of June 30, 2003. These matters raise
substantial doubt about Milestone's ability to continue as a going
concern. Management believes that its initial concerns about
Milestone's ability to continue as a going concern have been alleviated
by recent actions taken by Milestone as well as management's plans
which are discussed below.
Further, management believes that, in the absence of substantial
increase in revenue, it is probable that Milestone will continue to
incur losses and negative cash flows from operating activities through
at least June 30, 2004 and that Milestone will need to obtain
additional equity or debt financing, as well as to continue its ability
to defer its obligations, to sustain its operations until it can expand
its customer base and achieve profitability, if ever.
F-6
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We have taken certain steps in order to reduce its operating expenses
and utilization of cash. These steps include, amongst others, the
following:
o Commencing in 2001 and continuing through 2003, we reconfigured
our sales force from maintaining a large internal sales force to
utilizing independent sales representatives and distributors.
o We reduced administrative personnel and telemarketers by
approximately ten people.
o On January 31, 2003, we completed the closing of the Deerfield,
Illinois facility. The customer support, service and other
back-office functions previously conducted, in whole or in part,
at this location were consolidated into our New Jersey location.
The receiving, shipping and storage functions, which were also
previously done at this location, are now outsourced to an
independent warehouse located in Pennsylvania.
o Obtained an agreement from its Chief Executive Officer/Stockholder
to defer 2002 and 2003 compensation, aggregating $640,000 until
January 2005.
o Restructured and extended the maturity dates of its debt
obligations. Further, as part of the debt restructuring, we
obtained agreements from certain of its noteholders enabling it to
convert debt and related interest aggregating approximately
$5,239,000 at June 30, 2003 into shares of common stock. On July
1, 2003, we received the necessary approval from convertible debt
holders to extend the maturity date of certain obligations until
September 20, 2003. It is our intention to have this conversion
completed sometime during the third quarter of 2003.
o Obtained an agreement from one of its attorneys to convert an
additional $160,000 of the amount owed into shares of common
stock.
o During February 2003, we received a $200,000 note payable from an
existing investor which was scheduled to mature on August 1, 2003.
The note is convertible into shares of common stock, at ouroption,
which we plan to do during the third quarter of 2003. On July 1,
2003, the noteholder agreed to extend the note payable to
September 20, 2003.
o In April 2003, we received an additional $900,000 8% line of
credit from the same investor, which is scheduled to mature on
January 1, 2005, unless extended. $200,000 was drawn down from the
line during April 2003. Subsequent drawn down were $25,000 and
$75,000 in July and August, respectively.
o On June 2, 2003, we received an additional $50,000 6% note payable
with warrants attached from a stockholder. The note is scheduled
to mature in November 2004 and is convertible to stock at our
option.
The accompanying condensed consolidated financial statements do not
include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and
classifications of liabilities that might be necessary should we be
unable to continue as a going concern.
F-7
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 3 - Loss per share:
Basic loss per common share is computed using the weighted average
number of common shares outstanding.
Options and warrants to purchase 3,265,814 and 4,415,855 shares of
common stock were outstanding as of June 30, 2003 and 2002,
respectively, but were not included in the computation of diluted loss
per share because the effect would have been anti-dilutive.
Note 4 - Significant Customer:
We had one foreign customer who accounted for approximately 22% of our
net sales for the six months ended June 30, 2003 and approximately 17%
for the six months ended June 30, 2002. At June 30, 2003, receivables
from this customer were approximately 68% of our total accounts
receivable.
Note 5 - Notes payable to officer/stockholder:
Notes payable to officer/stockholder represent six obligations payable
to our Chief Executive Officer ("CEO"), consisting of (i) $200,000 note
payable, with interest payable at 9% per annum and having an original
due date of January 2, 2003, (ii) a $100,000 line of credit with
interest payable at 6% per annum having an original due date of April
2, 2003, and (iii) a $33,215 note payable on demand with interest
payable at 6% per annum. On April 1, 2003, the $200,000 and $100,000
notes were extended to April 1, 2004. On April 15, 2003, $32,000 of the
$33,215 notes payable was extended to January 2, 2005.
On January 17, 2003, our CEO provided us with a $57,322 short term loan
for the express purpose of purchasing Wand handpieces from our
supplier. We repaid the loan in full by February 7, 2003. On February
12, 2003, the CEO provided us with a $38,215 loan for the same purposes
as above and $23,215 remains outstanding as of August 15, 2003.
Note 6- Notes payable:
6%/12% Promissory Notes
(A) THE 6%/12% PROMISSORY NOTES CONSIST OF THE FOLLOWING ISSUANCES:
(i) On June 16, 2001, we restructured our obligations to the holders
of its 10% Senior Secured Promissory Notes. Under the terms of the
agreement, each of the noteholders agreed to exchange their 10%
Notes for a new, zero coupon note (the "Zero Coupon Note").
F-8
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As a result of us initially restructuring our obligations, the
unamortized portion of the debt discount and deferred financing
costs were amortized through June 30, 2002. The significant terms
of the Restructuring Debt were (i) modification of the interest
rate (ii) granting us the option to pay the debt with shares of
common stock and (iii) repricing the warrants which were
previously issued to the shareholders back to the initial exercise
price of $1.75 per share.
Subsequently, on April 15, 2002, the holders additionally agreed
to extend the promissory notes to July 1, 2003 and to lower the
interest rate to 6% if paid in cash or to 12% if paid in common
stock. In connection with the extension, we recorded $16,215 in
deferred financing charges relating to professional fees and
$140,203 of deferred financing costs relating to consideration to
the noteholders valued at $120 per share of our common stock for
each $1,000 face amount outstanding at maturity which increased
the aggregate carry value of the notes by $140,203. We areaccruing
interest expense at 12%. These deferred financing costs are being
amortized through July 1, 2003.
Further, on July 1, 2003, the holders additionally agreed to
extend the promissory notes to September 20, 2003.
(ii) In August 2000, we borrowed $1,000,000 which consists of two loans
from two funds managed by Cumberland Associates LLC, and bear
interest at 20% per year and payable in cash or through the
issuance of additional 20% notes on which both interest and
principal are payable. The loans are secured by substantially all
of our assetsand are subordinated to the 6%/12% senior secured
promissory notes that were amended April 15, 2002. We can prepay
the loans in cash at any time. We can prepay the notes and accrued
interest with common stock at its option. Stock issued in lieu of
payment of the debt will be valued at 85% of the then market
price.
For the six months June 30, 2003 and 2002, we converted into
principal, accrued interest of $160,211 and $128,545,
respectively.
On April 12, 2002, Cumberland Associates LLC agreed to extend the
maturity date of these loans through July 1, 2003 and to lower the
interest rate from 20% to 6%, if paid in cash, or 12% if paid in
common stock. We recorded $16,215 of deferred financing charges
relating to professional fees and $189,369 relating to
consideration issued to the noteholders valued at $120 per share
of our common stock for each $1,000 face amount outstanding at
maturity. We arecurrently accruing interest expense at 12%.
Accordingly, the deferred financing costs and the unamortized
financing charges are being amortized through July 1, 2003.
It is currently ourintention to satisfy these obligations with
shares of common stock upon their maturity.
F-9
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(B) 8% PROMISSORY NOTES
The 8% promissory notes consist of the following:
On July 31, 2000, we established a $1,000,000 credit facility with
a major existing investor. Initially, $500,000 was borrowed under
the line, which was due on June 30, 2003. In December 2000, and
January 2001, we borrowed under the credit facility an additional
$400,000 and $100,000, respectively, due on December 31, 2003. In
connection with the initial $500,000, the investor received
five-year warrants to purchase 70,000 shares of our common stock,
exercisable at $3.00 per share. In connection with the $400,000,
the investor received five-year warrants to purchase 80,000 shares
of ourcommon stock exercisable at $1.25 per share. In connection
with the $100,000, the investor received five-year warrants to
purchase 20,000 shares of our common stock at $1.25 per share. On
April 12, 2002, the investor agreed to extend the maturity date of
the $500,000 to August 1, 2003. At our option , this $500,000 can
be convertible into common stock. Accordingly, in connection with
the extension, the unamortized debt discount is being amortized to
August 1, 2003. On April 15, 2003, the investor agreed to extend
the maturity date of the $500,000 and interest originally due
December 31, 2003 to January 2, 2005. Accordingly, only $500,000
of loans have been recorded as long term debt in the accompanying
consolidated financial statements. On July 1, 2003, the investor
agreed to extend the maturity date of notes due August 1, 2003
until September 20, 2003.
During 2002, we issued a total of $1,185,000 promissory notes to
an existing investor. The notes bear interest at 8% if paid in
cash and 10% if paid in stock and mature on September 30, 2003. At
our option , the principal and interest are payable on the
maturity date in common stock. Additionally, the note will
automatically convert into shares of our common stock if we issue
1,000,000 shares or raise at least $1,000,000 from the sale of
equities prior to August 1, 2003, at the market price in that
transaction but not less than $.50 per common share, or more than
$2.00 per share. We are accruing interest at 10%.
(C) 6% CONVERTIBLE PROMISSORY NOTES
During June 2003, we issued a $50,000 promissory note to an
existing investor. The note bears interest at 6% and matures on
November 27, 2004. At our option, the principal and interest are
payable on the maturity date in common stock at a rate of one
share of our common stock for every $.312 of indebtedness.
Additionally, Milestone granted the investor warrants to purchase
160,256 shares of our common stock at a per share price of $.52
with an estimate fair value of $14,423 at any time or from time to
time during the period commencing of June 4, 2003 and ending June
3, 2005. This resulted in an initial increase to debt discount and
to additional paid-in capital.
Note 7- Legal proceedings
On June 10, 2002, a former distributor, Henry Schein, Inc., sued
Milestone in the Supreme Court of the State of New York for
$110,851 claimed to be due them for returned merchandise.
Milestone denies any liability. The parties are currently engaged
in discovery. Milestone believes it has meritorious defense to
this complaint based, in part, on its position that the plaintiff
had no right to return the goods.
F-10
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On May 9, 2003, Milestone was served with a Breach of Contract
Complaint. In the complaint, the plaintiff, Korman/Lender
Management (landlord of the facility in Deerfield, IL) seeks
damages of $17,755 plus costs, including attorney's fees, interest
and continuing rental obligation. We are in the process of
preparing a response.
Note 8 - Employee Stock Option Plan
As of June 30, 2003, there were 663,344 outstanding options
granted under the Milestone 1997 Stock Option Plan. We account for
these plans under the recognition and measurement principles of
APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost
is reflected in net loss, as all options granted under those plans
had an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates
the effect on net loss and loss per share if we had applied the
fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee
compensation.
SIX MONTHS ENDED JUNE 30
2003 2002
---- ----
Net loss, as reported $1,158,802 $1,022,421
Deduct: Total stock-based employee
compensation expenses determined under
fair value based method for all awards
112,108 257,688
---------- ----------
Net loss, pro forma
$1,270,910 $1,280,109
========== ==========
Loss per share: Basic and diluted
As reported
Basic-pro forma $(.09) $(.08)
====== ======
$(.10) $(.08)
====== ======
Note 9 - Closing of Deerfield, IL Facility
In December 2002, Milestone initiated the transition of its
customer service office to its corporate headquarters in
Livingston, New Jersey and its distribution and logistics center
to a third party, Design Centre of York, Pennsylvania. The
resulting closing of the Deerfield location was completed during
January 2003. The net book value of the facility's fixed assets
transferred or disposed during January 2003 was $41,425 and
$11,248, respectively.
F-11
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 - Subsequent Events
Annual Meeting Results
On July 2, 2003, the Stockholders of Company adopted the Amendment
to Milestone's Certificate of Incorporation, increasing the
authorized shares of Common Stock from 25,000,000 to 50,000,000.
An additional amendment to our Certificate of Incorporation was
approved by our stockholders on July 18, 2003. It adds a new class
of the 5,000,000 shares of "blank check" Preferred Stock. Such
rights, preferences and privileges are to be determined by the
Board of Directors when designating each issue.
These amendments will serve to facilitate the conversion of the
debt instruments whose maturity had been extended to September 20,
3003.
F-12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Milestone Scientific, Inc.
We have audited the accompanying consolidated balance sheet of MILESTONE
SCIENTIFIC, INC. AND SUBSIDIARIES as of December 31, 2002, and the related
consolidated statements of operations, changes in stockholders' deficiency and
cash flows for the years ended December 31, 2002 and 2001. These consolidated
financial statements are the responsibility of our management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Milestone
Scientific, Inc. and Subsidiaries as of December 31, 2002, and their results of
operations and cash flows for the years ended December 31, 2002 and 2001, in
conformity with accounting principles generally accepted in the United States of
America.
J.H. Cohn LLP
Roseland, New Jersey
April 1, 2003, except for Notes B and H
which are as of April 15, 2003
F-13
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 2002
ASSETS
CURRENT ASSETS:
Cash $ 9,683
Accounts receivable, net of allowance for doubtful accounts of $46,152 239,435
Inventories 119,291
Advances to contract manufacturer 300,000
Deferred debt financing, net 159,877
Prepaid expenses 64,952
----------
Total current assets 893,238
EQUIPMENT, net 227,207
ADVANCES TO CONTRACT MANUFACTURER-- Long term 87,935
OTHER ASSETS 32,333
----------
Total $ 1,240,713
==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Account payable, including $32,000 to related parties $ 1,269,523
Accrued expenses 86,492
Accrued interest 169,519
Notes payable 4,581,708
----------
Total current liabilities 6,107,242
Accrued interest 139,323
Deferred compensation payable to officer/stockholder 320,000
Notes payable 480,091
Notes payable-- officer/stockholder 300,000
----------
Total liabilities 7,346,656
----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Common stock, par value $.001; authorized,
25,000,000 shares; 12,733,370 shares issued 12,733
Additional paid-in capital 36,599,607
Accumulated deficit (41,786,767)
Unearned compensation (20,000)
Treasury stock, at cost, 100,000 shares (911,516)
----------
Total stockholders' deficiency (6,105,943)
----------
Total $ 1,240,713
==========
The accompanying notes are an integral part of these statements.
F-14
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
2002 2001
------------ ------------
Revenues $ 4,074,006 $ 4,093,710
Cost of Sales 1,980,949 1,973,156
------------ ------------
Gross profit 2,093,057 2,120,554
------------ ------------
Selling, general and administrative expenses 3,588,836 5,271,032
Research and development expenses 147,709 49,943
Closing of Deerfield, IL facility 26,067 --
------------ ------------
TOTALS 3,762,612 5,320,975
------------ ------------
Loss from operations (1,669,555) (3,200,421)
Interest income -- 2,936
Interest expense (850,642) (858,582)
Sale of prophy angle business and related consulting income 80,000 64,487
------------ ------------
NET LOSS $ (2,440,197) $ (3,991,580)
============ ============
Loss per common share-- basic and diluted $ (.20) $ (.36)
============ ============
Weighted-average shares outstanding-- basic and diluted 12,469,673 11,142,590
============ ============
The accompanying notes are an integral part of these statements.
F-15
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 2002 AND 2001
COMMON STOCK ADDITIONAL
PAID IN ACCUMULATED UNEARNED
SHARES AMOUNT CAPITAL DEFICIT ADVERTISING
-------- -------- -------- -------- -----------
Balance, January 1, 2001 10,752,898 $ 10,753 $ 34,584,473 $(35,354,990) $ --
Warrants issued with draw-
down on credit facility 23,400
Common stock issued for
consideration for payment
of accrued interest 27,641 28 36,251
Warrants issued pursuant to
a $500,000 line of credit 40,000
Common stock issued for
services rendered 92,308 92 149,908
Warrants issued for
unearned advertising fees 324,218 (324,218)
Proceeds from sale of
common stock, net of
expenses 500,000 500 491,500
Warrants issued to
consultants 100,000
Stock options issued for
services rendered 97,649
Amortization of unearned
advertising expense 21,398
Amortization of deferred
compensation
Proceeds from sale of
common stock yet to be issued,
net of expenses 243,167
Net loss (3,991,580)
------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 11,372,847 11,373 36,090,566 (39,346,570) (302,820)
------------------------------------------------------------------------------------------------------
Common stock issued from the
sale of common stock in 2001 325,000 325 (325)
Common stock issued for accrued
interest 33,840 34 27,038
Common stock issued for deferred
compensation 614,183 614 490,732
Common stock issued for payment of
accounts payable 187,500 187 149,813
Amortization of unearned
advertising expense 24,803
Expired warrants for
unearned advertising (278,017) 278,017
Stock options issued for
future services 30,000
Common stock issued for payment of
accounts payable 200,000 200 89,800
Net loss (2,440,197)
------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 12,733,370 $ 12,733 $ 36,599,607 $(41,786,767) $ --
------------------------------------------------------------------------------------------------------
DEFERRED UNEARNED TREASURY
COMPENSATION COMPENSATION STOCK TOTAL
------------ ------------ -------- --------
Balance, January 1, 2001 $ (31,055) $ -- $ (911,516) $ (1,702,335)
Warrants issued with draw-
down on credit facility 23,400
Common stock issued for
consideration for payment
of accrued interest 36,279
Warrants issued pursuant to
a $500,000 line of credit 40,000
Common stock issued for
services rendered 150,000
Warrants issued for
unearned advertising fees 0
Proceeds from sale of
common stock, net of
expenses 492,000
Warrants issued to
consultants 100,000
Stock options issued for
services rendered 97,649
Amortization of unearned
advertising expense 21,398
Amortization of deferred
compensation 31,055 31,055
Proceeds from sale of
common stock yet to be issued,
net of expenses 243,167
Net loss (3,991,580)
------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- -- (911,516) (4,458,967)
------------------------------------------------------------------------------------------
Common stock issued from the
sale of common stock in 2001
Common stock issued for accrued
interest 27,072
Common stock issued for deferred
compensation 491,346
Common stock issued for payment of
accounts payable 150,000
Amortization of unearned
advertising expense 24,803
Expired warrants for
unearned advertising 0
Stock options issued for
future services (20,000) 10,000
Common stock issued for payment of
accounts payable 90,000
Net loss (2,440,197)
------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ -- $ (20,000) $ (911,516) $ (6,105,943)
------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
F-16
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
2002 2001
---------- ----------
Cash flows from operating activities:
Net loss $(2,440,197) $(3,991,580)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 53,052 75,990
Amortization of unearned advertising cost 24,803 21,398
Amortization of debt discount and deferred financing costs 340,133 306,734
Common stock issued for services -- 150,000
Amortization of deferred compensation -- 31,055
Stock options and warrants issued to consultants 10,000 197,649
Loss on disposal of fixed asset 1,909 --
Changes in operating assets and liabilities:
Decrease in accounts receivable 124,308 165,801
Decrease in inventories 43,349 13,533
Decrease in advances to contract manufacturer 301,594 315,000
(Increase) decrease in prepaid expenses (33,967) 121,727
Decrease in other assets (19,971) (2,044)
Increase in accounts payable 107,220 253,776
Increase in accrued interest 510,508 551,847
Increase (decrease) in accrued expenses (18,918) 54,178
Increase in deferred compensation 320,000 350,000
--------- ---------
Net cash used in operating activities: (676,177) (1,384,936)
--------- ---------
Cash flows from investing activities-payment for capital expenditures (74,344) (10,672)
--------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock, net of expenses -- 492,000
Proceeds from note payable-- officer/stockholder 100,000 --
Proceeds from line of credit -- 500,000
Proceeds from issuance of notes payable 685,000 100,000
Proceeds from the sale of common stock yet to be issued -- 243,167
Payments for deferred financing costs (40,538) (96,684)
--------- ---------
Net cash provided by financing activities 744,462 1,238,483
--------- ---------
NET DECREASE IN CASH (6,059) (157,125)
Cash at beginning of year 15,742 172,867
--------- ---------
Cash at end of year $ 9,683 $ 15,742
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 0 $ 0
========= =========
Cash paid during the year for taxes $ 0 $ 0
========= =========
----------
F-17
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental schedule of noncash financing activities:
In January 2002, we issued 33,840 units consisting of one share of common stock
and one warrant to purchase an additional share of common stock in exchange for
payment of accrued interest totaling $27,072.
In January 2002, we issued 614,183 units (consisting of one share of common
stock and one warrant to purchase an additional share of common stock) for
payment of $491,346 in deferred compensation. The warrants are exercisable at
$.80 per share through January 31, 2003; at $1.00 per share through January 31,
2004 and thereafter at $2.00 per share through January 31, 2007.
In January 2002, pursuant to the 20% promissory note agreements, we converted
$63,377 of accrued interest into additional principal.
In April 2002, pursuant to the 6%/12% promissory note agreements, we converted
$65,168 of accrued interest into additional principal.
In April 2002, pursuant to the debt restructuring, we recorded a deferred
financing charge of $329,572. This resulted in an increase to notes payable of
$140,203 and accrued interest of $189,369.
In July 2002, we issued 187,500 units consisting of one share of common stock
and one warrant to purchase an additional share of common stock to a vendor in
accordance with the agreement valued at $150,000 for payment of accounts
payable.
In August 2002, we issued 200,000 shares of common stock in exchange for payment
of $90,000 of accounts payable.
In September 2002, pursuant to the 6%/12% promissory note agreements, we
converted $41,512 of accrued interest into additional principal.
In January 2001, pursuant to the 20% promissory note agreements, we converted
$51,111 of accrued interest into additional principal.
In January 2001, we granted warrants to purchase 20,000 shares of common stock
(with an estimated fair value of $23,400) in connection with $100,000 drawn from
a $1,000,000 credit facility provided by a major existing investor. This
resulted in an initial increase to debt discount and to additional paid-in
capital.
In February 2001, we issued 27,641 shares of common stock in exchange for
payment of accrued interest totaling $36,279.
In February 2001, we issued 92,308 shares of common stock with a value of
$150,000 for services rendered.
In March 2001, pursuant to a $500,000 line of credit agreement, we granted
warrants to purchase 100,000 shares of common stock (with an estimated fair
value of $80,000). This resulted in an initial increase to debt discount and in
additional paid-in capital.
F-18
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
In March 2001, we granted warrants to purchase 390,625 shares of common stock
with an estimated fair value of $324,418 for advertising services. This amount
was recorded in stockholders' deficiency as an increase to unearned advertising
and to additional paid-in capital.
In April 2001, pursuant to the 20% promissory note agreements, we converted
$53,472 of accrued interest into additional principal.
F-19
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- ORGANIZATION
Milestone Scientific Inc. (the "Company" or "Milestone") was incorporated
in the State of Delaware in August 1989. Milestone has developed a
proprietary, computer-controlled anesthetic delivery system, through the
use of the Wand(R), a single use disposable handpiece. The system is
marketed in dentistry under the trademark CompuDent(TM) and Wand Plus(R)
and in medicine under the trademark CompuMed(TM). CompuDent(TM) is suitable
for all dental procedures that requires local anesthetic. CompuMed(TM) and
Wand Plus(R) are suitable for many medical procedures regularly performed
in Plastic Surgery, Hair Restoration Surgery, Podiatry, Colorectal Surgery,
Dermatology, Orthopedics and a number of other disciplines. The systems are
sold in the United States and in over 25 countries abroad. Ourproducts are
manufactured by third-party contract manufacturers.
NOTE B -- BASIS OF PRESENTATION:
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. However, as
shown in the accompanying consolidated financial statements, the Company
incurred net losses of approximately $2,440,000 and $3,992,000 and negative
cash flows from operating activities of approximately $676,000 and
$1,385,000 during 2002 and 2001, respectively. As a result, the Company had
a cash balance of approximately $10,000, a working capital deficiency of
approximately $5,214,000 and a stockholders' deficiency of approximately
$6,106,000 as of December 31, 2002. These matters raise substantial doubt
about the Company's ability to continue as a going concern.
Management believes that, in the absence of a substantial increase in
revenue, it is probable that the Company will continue to incur losses and
negative cash flows from operating activities through at least December 31,
2003 and that the Company will need to obtain additional equity or debt
financing, as well as to continue its ability to defer its obligations, to
sustain its operations until it can expand its customer base and achieve
profitability.
To date, the Company has taken certain steps in order to reduce its
operating expenses and utilization of cash. These steps include, amongst
others, the following:
o Commencing in 2001 and continuing through 2002, the Company
reconfigured its sales force. The Company went from maintaining a large
internal sales force to utilizing independent sales representatives and
distributors.
o The Company reduced administrative personnel and telemarketers by
approximately ten people.
o On January 31, 2003, the Company completed the closing of the
Deerfield, IL facility. The customer support, service and other
back-office functions previously conducted, in whole or in part, at
this location were consolidated into the Company's New Jersey location.
The receiving, shipping and storage functions, which were also
previously done at this location, will be outsourced at an independent
warehouse located in Pennsylvania. The closure of the Illinois facility
will result in reductions in overhead and other costs, while improving
operational efficiencies.
o Obtained an agreement from its Chief Executive Officer/Stockholder to
defer 2002 and 2003 compensation, aggregating $640,000 until April
2004.
o Restructured and extended the maturity dates of its debt
obligations ( see Note H). Further, as part of the debt
restructuring, the Company obtained agreements from certain of its
note holders enabling it to convert debt and related interest
aggregating approximately $4,751,000 into shares of common stock.
It is the Company's intention to have this conversion completed
sometime during the third quarter 2003.
F-20
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B (CONTINUED)
o Obtained an agreement from one of its attorneys to convert an
additional $160,000 of the amount owed into shares of common
stock.
In addition, during February 2003, the Company received a $200,000 note
payable from an existing investor. The note is convertible into shares of
common stock, at the Company's option, which it plans to do during the
third quarter of 2003. During April 2003, the Company received an
additional $900,000 line of credit from the same investor, which is
scheduled to mature on January 1, 2005, unless extended.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classifications of liabilities that might
be necessary should the Company be unable to continue as a going concern.
NOTE C -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and of its wholly-owned subsidiaries and its majority-owned subsidiary,
Spintech. All significant intercompany balances and transactions have been
eliminated in consolidation.
2. Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less
to be cash equivalents. At December 31, 2002 and 2001, the Company did not
have any cash equivalents.
3. Inventories
Inventories principally consist of finished goods and component parts
stated at the lower of cost (first-in, first-out method) or market.
4. Equipment
Equipment is recorded at cost, less accumulated depreciation. Depreciation
expense is computed using the straight-line method over the estimated
useful lives of the assets, which range from 3 to 7 years. The costs of
maintenance and repairs are charged to operations as incurred.
5. Debt Issue Cost and Debt Discount
Debt issue costs are deferred and amortized to interest expense over the
term of the related loan on a straight-line method, which approximates the
interest method. Debt discounts are offset against the principal balance
and amortized using the straight-line method over the term of the related
loan.
6. Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever circumstances
and situations change such that there is an indication that the carrying
amounts may not be recovered.
7. Revenue Recognition
Revenue is recognized when title passes at the time of shipment and
collectibility is reasonably assured.
F-21
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C (CONTINUED)
8. Research and Development
Research and development costs are expensed as incurred.
9. Income Taxes
The Company uses the liability method of accounting for income taxes, as
set forth in SFAS No. 109, "Accounting for Income Taxes." Under this
method, deferred income taxes, when required, are provided on the basis of
the difference between the financial reporting and income tax bases of
assets and liabilities at the statutory rates enacted for future periods.
10. Basic and diluted net loss per common share
Basic and diluted net loss per share are computed using the
weighted-average number of shares of common stock outstanding during the
period. Potentially dilutive securities have been excluded from the
computation of diluted earnings per share, as their effect is antidilutive.
If the Company had reported net income, diluted earnings per share would
have included the shares used in the computation of net loss per share plus
common equivalent shares related to 4,844,355 and 3,325,832 outstanding
options and warrants for the years ended December 31, 2002 and 2001,
respectively and the payment of the notes payable with shares of comon
stock.
11. Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions in determining the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. The most significant
estimates relate to the allowance for doubtful accounts, advances to
contract manufacturer, inventory valuation allowances, and valuation
allowances on deferred tax assets. Actual results could differ from those
estimates.
12. Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheet for cash,
accounts receivable, accounts payable and accrued expenses approximate fair
value based on the short-term maturity of these instruments. Notes payable
to officer/stockholder and long-term notes payable approximate fair value
due to the fact that the effective interest rates are comparable among the
various noteholders.
13. Accounting for Stock-Based Compensation
The Company has adopted the disclosure provisions of Statements of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock Based Compensation," and therefore applies the intrinsic value method
of accounting for employee stock options as prescribed under Accounting
Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees." Under APB No. 25, when the exercise price of an
employee stock option granted by the Company is equal to or greater than
the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
14. Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and trade accounts receivable. The
Company places its cash with high quality credit
F-22
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C (CONTINUED)
institutions. At times, such investments may be in excess of the Federal
Deposit Insurance Corporation insurance limit. The Company has not
experienced any losses in such accounts and believes it is not exposed to
any significant credit risks. Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of
trade accounts receivable, as the Company does not require collateral or
other securities to support customer receivables.
NOTE D -- INVENTORIES
Inventories consist of the following:
The Wand(R)units and handpieces $125,214
Component parts and other materials 104,558
--------
229,772
Reserve 110,481
--------
$119,291
========
NOTE E -- ADVANCES TO CONTRACT MANFACTURER
Advances to contract manufacturer represents deposits to the Company's
contract manufacturer to fund future inventory commitments. The aggregate
amount of the advances amounted to $387,935 of which approximately $300,000
is estimated to be used in 2003.
NOTE F --EQUIPMENT
Equipment consists of the following:
Furniture and fixtures $ 194,656
Office equipment 148,797
Tooling equipment 64,079
Trade show displays 81,800
Computer servers and software 125,341
--------
614,673
Less accumulated depreciation (387,466)
--------
$ 227,207
========
NOTE G -- NOTES PAYABLE TO OFFICER/STOCKHOLDER
Notes payable to officer/stockholder represent two obligations payable to
the Company's Chief Executive Officer ("CEO"), consisting of (i) $200,000
note payable, with interest payable at 9% per annum having an original due
date of January 2, 2003 and (ii) a $100,000 line of credit with interest
payable at 6% per annum having an original due date of April 2, 2003. On
April 1, 2003, the notes were extended to April 1, 2004. Interest expense
for the years ended December 31, 2002 and 2001 amounted to $19,701 and
$18,250, respectively.
F-23
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H -- NOTES PAYABLE
Notes payable consist of the following:
Short term
6%/12% Promissory notes, due on August 1, 2003 (A) $2,945,542
8% Line of credit for $500,000, originally due on August 31,
2002, extended to August 1, 2003, net of debt discount
of $7,024 (B) 492,976
8% Promissory notes payable, $500,000 originally due
June 30, 2003, extended to August 1, 2003 and $685,000 due
August 1, 2003, net of debt discount of $41,810 (C) 1,143,190
---------
Total $4,581,708
=========
Long Term (B)
8% Promissory note payable for $500,000 originally due December 31,
2003, extended to January 2, 2005, net of a debt discount of $19,909
totaling $480,091.
(A) 6%/12% PROMISSORY NOTES
The 6%/12% Promissory Notes consist of the following issuances:
(i) On March 16, 2001, the Company restructured its obligations to
the holders of its 10% Senior Secured Promissory Notes. Under the
terms of the agreement, each of the noteholders agreed to
exchange their 10% Notes for a new, zero coupon note (the "Zero
Coupon Note").
As a result of the Company initially restructuring its
obligations, the unamortized portion of the debt discount and
deferred financing costs were amortized through March 31, 2002.
The significant terms of the Restructuring Debt were (i)
modification of the interest rate (ii) granting the company the
option to pay the debt with shares of common stock and (iii)
repricing the warrants which were previously issued to the
shareholders back to the initial exercise price of $1.75 per
share.
Subsequently, on April 15, 2002, the holders additionally agreed
to extend the promissory notes to July 1, 2003 and to lower the
interest rate to 6% if paid in cash or to 12% if paid in common
stock. In connection with the extension, the Company recorded
$16,215 in deferred financing charges relating to professional
fees and $140,203 of deferred financing costs relating to
consideration to the noteholders valued at $120 per share of the
Company's common stock for each $1,000 face amount outstanding at
maturity which increased the aggregate carry value of the notes
by $140,203. The Company is accruing interest expense at 12%.
These deferred financing costs are being amortized through July
1, 2003.
(iii) In August 2000, the Company borrowed $1,000,000 which consists of
two loans from two funds managed by Cumberland Associates LLC,
and bear interest at 20% per year and payable in cash or through
the issuance of additional 20% notes on which both interest and
principal are payable. The loans are secured by substantially all
assets of the Company and are subordinated to the 6%/12% senior
secured promissory notes that were amended April 15, 2002. The
Company can prepay the loans in cash at any time. The Company can
prepay the notes and accrued interest with common stock at its
option after
F-24
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H (CONTINUED)
March 31, 2001. Stock issued in lieu of payment of the debt
will be valued at 85% of the then market price. For the year
ended December 31, 2002, the Company converted $257,865 of
accrued interest into principal. During 2001, the Company had
previously converted $222,417 of accrued interest into
principal. On April 12, 2002, Cumberland Associates LLC agreed
to extend the maturity date of these loans through July 1,
2003 and to lower the interest rate from 20% to 6%, if paid in
cash, or 12% if paid in common stock. The Company recorded
$16,215 of deferred financing charges relating to professional
fees and $189,369 relating to consideration issued to the
noteholders valued at $120 per share of the Company's common
stock for each $1,000 face amount outstanding at maturity. The
Company is currently accruing interest expense at 12%.
Accordingly, the deferred financing costs and the unamortized
financing charges are being amortized through July 1, 2003.
It is currently the Company's intention to satisfy these
obligations with shares of common stock upon their maturity.
(B) 8% PROMISSORY NOTES
The 8% promissory notes consist of the following:
On July 31, 2000, the Company established a $1,000,000 credit facility
with a major existing investor. Initially, $500,000 was borrowed under
the line, which was due on June 30, 2003. In December 2000, and January
2001, the Company borrowed under the credit facility an additional
$400,000 and $100,000, respectively, due on December 31, 2003. In
connection with the initial $500,000, the investor received five-year
warrants to purchase 70,000 shares of the Company's common stock,
exercisable at $3.00 per share. In connection with the $400,000, the
investor received five-year warrants to purchase 80,000 shares of the
Company's common stock exercisable at $1.25 per share. In connection
with the $100,000, the investor received five-year warrants to purchase
20,000 shares of the Company's common stock at $1.25 per share. On
April 12, 2002, the investor agreed to extend the maturity date of the
$500,000 to August 1, 2003. At the option of the Company, this $500,000
can be convertible into common stock. Accordingly, in connection with
the extension, the unamortized debt discount is being amortized to
August 1, 2003. On April 15, 2003, the investor agreed to extend the
maturity date of the $500,000 and interest originally due December 31,
2003 to January 2, 2005. Accordingly, only $500,000 of loans have been
recorded as long term debt in the accompanying consolidated financial
statements.
(c) During 2002, the Company issued a total of $1,185,000 promissory
notes to an existing investor. The notes bear interest at 8% if
paid in cash and 10% if paid in stock and mature on August 1,
2003. At the option of the Company, the principal and interest are
payable on the maturity date in common stock. Additionally, the
note will automatically convert into the Company's common stock if
the Company issues 1,000,000 shares or raises at least $1,000,000
from the sale of equities prior to August 1, 2003, at the market
price in that transaction but not less than $.50 per common share,
or more than $2.00 per share. The Company is accruing interest at
10%.
NOTE I -- STOCK OPTION PLAN
In 1997, the Board of Directors approved the adoption of the 1997 Stock
Option Plan. The 1997 Stock Option Plan provides for the grant of options
to purchase up to 500,000 shares of the Company's common stock. In 1999,
the Plan was amended, providing for the grant of options to purchase up to
1,000,000 shares of the Company's common stock. Options may be granted to
employees, officers, directors and consultants of the Company for the
purchase of common stock of the Company at a price.
F-25
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I (CONTINUED)
not less than the fair market value of the common stock on the date of the
grant. In general, options become exercisable over a three-year period from
the grant date and expire five years after the date of grant.
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans. The Company applies
the intrinsic value method prescribed under Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its
stock-based compensation plans.
If the Company had elected to recognize compensation expense based upon the
fair value at the grant date, consistent with the methodology prescribed by
SFAS No. 123, pro forma net loss and net loss per share to common
stockholders for the years ended December 31, 2002 and 2001 would have
increased to the following pro forma amounts:
DECEMBER 31,
-----------------
2002 2001
---------- ----------
Net loss as reported $ (2,440,197) $ (3,991,580)
========== ==========
Pro forma net loss $ (2,664,814) $ (4,484,067)
========== ==========
Loss per share as reported $ (.20) $ (.36)
========== ==========
Pro forma loss per share $ (.21) $ (.40)
========== ==========
The weighted-average fair value of the individual options granted during
2002 and 2001 was estimated as .22 and $1.79, respectively, on the date of
grant. The fair value for 2002 and 2001 was determined using a
Black-Scholes option-pricing model with the following assumptions:
DECEMBER 31,
-------------
2002 2001
------- -------
Volatility 71% 92.0%
Risk-free interest rate 4.5% 5.7%
Expected life 5 years 5 years
Stock option activity during 2002 and 2001 is summarized below:
SHARES OF WEIGHTED
COMMON STOCK AVERAGE
ATTRIBUTABLE EXERCISE
TO OPTIONS PRICE OF OPTIONS
---------- ------------
Options outstanding at January 1, 2001 929,110 $5.11
Granted 140,000 2.32
Forfeited (139,844) 3.02
--------
Options outstanding at December 31, 2001 929,266 5.16
Granted 173,000 .79
Forfeited (360,422) 4.99
--------
Options outstanding at December 31, 2002 741,844 $4.08
======== =====
F-26
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2002.
REMAINING
NUMBER CONTRACTUAL NUMBER
EXERCISES PRICES OUTSTANDING LIFE (YEARS) EXERCISABLE
----------- --------- --------- --------
$ .5500 50,000 4.0 0
.7500 61,000 4.0 20,333
.8750 50,000 2.0 0
1.0000 50,000 1.0 0
1.2000 25,000 4.5 0
1.2500 5,000 1.7 5,000
1.2500 10,000 4.8 0
1.5625 5,000 0.7 5,000
1.6100 24,844 2.5 16,563
1.8125 7,000 2.1 4,666
2.0000 50,000 3.0 0
2.1875 81,000 2.5 54,000
2.5000 100,000 1.8 100,000
2.5000 80,000 3.6 26,667
3.0000 29,000 1.0 29,000
3.0000 4,500 1.5 4,500
4.0000 1,500 1.5 1,500
5.0000 1,500 1.5 1,500
6.0000 1,500 1.5 1,500
16.0000 50,000 0.0 0
16.5000 25,000 0.3 25,000
23.0000 30,000 0.2 30,000
-------- -------
741,844 325,229
======== =======
The weighted-average exercise price of options exercisable at December 31,
2002 is $5.30.
The Company charged $10,000 to operations during the year ended December
31, 2002, representing the fair market value of 150,000 stock options
issued to a customer. Furthermore, the Company charged $197,649 to
operations during the year ended December 31, 2001, representing the fair
market value of 330,000 common stock purchase warrants issued to
consultants.
F-27
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J -- EMPLOYMENT CONTRACT AND DEFERRED COMPENSATION
In January 1998, the Company entered into a five-year employment contract
with its CEO providing for an annual base compensation of up to $350,000,
plus stock options and cash bonuses based upon attaining certain earnings
levels, which the Company has not yet achieved.
In July 1998, the CEO agreed to a voluntary reduction of his annual base
salary from $350,000 to approximately $188,000 that remained in effect
through August 2000. At that time, the CEO agreed to defer his annual
salary on a discretionary basis. Accordingly, the Company has recorded
deferred compensation payable to the CEO in the amount of $491,346 at
December 31, 2001.
In January 2002, in consideration for payment of the deferred compensation,
the Company issued 625,000 units. Each unit consisted of one share of the
Company's common stock and one warrant to purchase an additional share of
common stock. The warrants are exercisable at $.80 per share through
January 31, 2003 and then at $1.00 per share through January 31, 2004 and
thereafter at $2.00 per share through January 31, 2007. Furthermore, on
April 1, 2003, the CEO has agreed to defer payment on $640,000 of
additional compensation relating to his salary for 2002 and 2003 until
January 2, 2005.
NOTE K -- SALES OF PROPHY ANGLES AND RELATED CONSULTING INCOME
In November 2001, the Company sold certain tangible and intangible assets,
rights and properties (which were fully amortized) relating to the
SplatrFree(TM) prophy angle to Smart Health, Inc. for $55,000. In addition,
the Company entered into a 12 month consulting agreement with Smart Health
for $96,000. The Company recorded consulting income of $80,000 for the year
ended December 31, 2002.
NOTE L -- INCOME TAXES
Deferred tax attributes resulting from differences between financial
accounting amounts and tax bases of assets and liabilities at December 31,
2002 and 2001 are as follows:
Current assets and liabilities 2002 2001
------------ ------------
Allowance for doubtful accounts .......... $ 18,000 $ 22,000
Inventory allowance ...................... 44,000 60,000
Warrants issued to consultants ........... -- --
Other .................................... -- --
Valuation allowance ............................ (62,000) (82,000)
------------ ------------
Current deferred tax asset ..................... $ -- $ --
============ ============
Non-current assets and liabilities
Depreciation ............................. $ (60,000) $ (540,000)
Asset impairment charge .................. -- --
Net operating loss carryforward .......... 14,000,000 13,600,000
Warrants and options issued to consultants 598,000 423,000
Accrued interest ......................... 347,000 177,000
Deferred compensation .................... 128,000 --
------------ ------------
15,013,000 13,660,000
Valuation allowance ............................ (15,013,000) (13,660,000)
------------ ------------
Non-current deferred tax asset (liability) ..... $ -- $ --
============ ============
F-28
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L (CONTINUED)
For the years ended December 31, 2002 and 2001 the valuation allowance
increased by $1,353,000 and $2,038,000 respectively.
As of December 31, 2002, the Company has Federal and State net operating
loss carryforwards of approximately $36,000,000 that will be available to
offset future taxable income, if any through December 2022. The utilization
of the Company's net operating losses may be subject to a substantial
limitation due to the "change of ownership provisions" under Section 382 of
the Internal Revenue Code and similar state provisions. Such limitation may
result in the expiration of the net operating loss carryforwards before
their utilization. The Company has established a 100% valuation allowance
to reserve for all of its net deferred tax assets due to the significant
uncertainty that their benefit will be realized in the future.
NOTE M -- PRODUCT SALES AND SIGNIFICANT CUSTOMERS
The Company's sales by product and by geographical region are as follows:
DECEMBER 31,
-----------------------
2002 2001
---------- ----------
The Wand(R)system kits $1,452,005 $1,828,801
The Wand(R)handpieces . 2,402,396 1,948,769
Prophy angles ......... -- 71,592
Dental needles ........ 181,236 168,169
Other ................. 38,369 76,379
---------- ----------
$4,074,006 $4,093,710
========== ==========
Dental division ....... $3,892,069 $4,093,710
Medical division ...... 181,937 --
---------- ----------
$4,074,006 $4,093,710
========== ==========
United States ......... $3,174,930 $3,354,302
Canada ................ 215,722 173,729
Other foreign countries 683,354 565,679
---------- ----------
$4,074,006 $4,093,710
========== ==========
During the years ended December 31, 2002 and 2001, the Company had sales to
one customer (a worldwide distributor of the Company's products based in
South Africa) of approximately $566,000 and $410,000, respectively. This
represented 14% and 10% the total net sales for 2002 and 2001,
respectively. Accounts receivable from this customer amounted to
approximately $157,000, representing 65% of net accounts receivable at
December 31, 2002.
F-29
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N -- COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases office space and warehouse facilities under
noncancelable operating leases. These leases also provide for escalations
of the Company's share of utilities and operating expenses, which expire
through 2007.
Aggregate minimum rental commitments under noncancelable operating leases
are as follows:
YEAR ENDING DECEMBER 31,
------------------------
2003 $123,000
2004 104,000
2005 72,000
2006 66,000
2007 21,000
--------
$386,000
========
For the years ended December 31, 2002 and 2001, rent expense amounted to
approximately $108,000 and $103,000 respectively.
Contract Manufacturing Agreement
The Company has informal arrangements for the manufacture of The Wand(R)
unit and system kit with Tricor Systems, Inc. ("Tricor") and for the
manufacture of The Wand(R) disposable handpiece by Nypro Inc.
The termination of the manufacturing relationship with any of the above
manufacturers could have a material adverse effect on the Company's ability
to produce and sell its products. Although alternate sources of supply
exist and new manufacturing relationships could be established, the Company
would need to recover its existing tools or have new tools produced.
Establishment of new manufacturing relationships could involve significant
expense and delay. Any curtailment or interruption of the supply, whether
or not as a result of termination of such a relationship, would adversely
affect the Company.
Contingencies
In March 2001, the Company entered into an advertising agreement with News
USA, Inc. and Vested Media Partners, Inc. (the "Agreement") to increase the
awareness of healthcare professionals and the public to the benefits of The
Wand(R)and the CompuFlo(TM) technologies.
Under the Agreement, News USA is required to prepare articles and
advertisements for the Company's products and technologies and place them
in newspapers and on radio stations.
News USA had guaranteed 72,000 media placements during the 18-month term of
the Agreement. In exchange for these services, the Company granted warrants
to purchase 1,171,875 shares of common stock exercisable on the following
dates and prices over the life of the Agreement: (1) $1.28 during the first
18 months, (2) $2.25 during the next year and (3) $3.00 during the next
year.
F-30
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N (CONTINUED)
The Agreement provided for a termination clause in the fourth month if the
Company's average closing stock price does not exceed $2.25 during the
first ten days of the fourth month provided that the Company has received
24,000 publications. Accordingly, the remaining two-thirds of the warrants
to purchase the Company's common stock would not become exercisable.
However, the vendor can recommence producing the publications whenever the
Company's average closing stock price for a ten day period exceeds $2.25.
At the end of the ninth month, the vendors have the option to terminate the
Agreement if the Company's stock price has not averaged $2.25 for a ten day
period.
Upon termination, two-thirds of the warrants remaining to purchase the
Company's common stock will be forfeited unless the vendors resume
fulfilling one-half of their obligation in three months and the remaining
obligation in the next six months.
In March 2001, the Company initially recorded unearned advertising cost of
$324,218 which represents the estimated fair value of the 390,625 of the
warrants for one-third of the total warrants granted based on the 24,000
minimum placements. The unearned advertising cost is being amortized as
publications are received by the Company over the minimum placements. As of
December 31, 2002, unearned advertising cost was $278,017 and during the
year ended December 31, 2002, the Company recorded $24,803 in advertising
expenses relating to placements during the year. The estimated fair value
of the remaining warrants to purchase 781,250 of the Company's common stock
have not been recorded in the Company's consolidated financial statements
due to the likelihood that the Agreement will not be fulfilled.
As of December 31, 2002, News USA did not meet the guaranteed media
placements and accordingly the unearned advertising cost of $278,017 was
reversed.
NOTE O -- RELATED PARTY TRANSACTIONS
The Company paid $137,500 and $72,500 during the years ended December 31,
2002 and December 31, 2001, respectively, to a law firm where one of the
partners was previously on the Company's Board of Directors. At December
31, 2002 and 2001, the Company had accounts payable to the law firm of
$389,181 and $302,866, respectively. On March 29, 2002, the Company entered
into an agreement with the law firm deferring $272,866 of the accounts
payable to January 2, 2003. The law firm and the former Director also
participated in the February 2001 private placement, each purchasing
$50,000 of 10% Senior Secured Promissory Notes and warrants to purchase
7,143 shares of the Company's Common Stock. The notes were extended to July
1, 2003.
For the years ended December 31, 2002 and 2001, the Company paid $19,049
and $20,850 to the wife of Milestone's CEO. She was employed by Milestone
to render professional services. At December 31, 2002, the Company had
accounts payable totaling $32,000 to the Company's CEO and his wife.
F-31
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P -- STOCKHOLDERS' DEFICIENCY
In January 2001, Milestone entered into a three-year private equity line
agreement with Hillgreen Investments Limited ("Hillgreen"), a British
Virgin Islands corporation, pursuant to which Hillgreen is obligated to
purchase, subject to the fulfillment of specified conditions, up to
2,100,000 shares of Milestone common stock over the next 36 months.
Hillgreen has allocated $20,000,000 to fund its purchase obligations. The
transaction was arranged by Jesup & Lamont Securities Corporation, a New
York based investment banking firm. Milestone's right to draw upon this
facility is subject to a number of limitations and conditions, including a
limitation on the amounts sold to Hillgreen within specified periods.
Subject to these and other conditions and limitations, Milestone will have
full control over the timing of any financing under the equity line and is
under no obligation to sell any shares to Hillgreen. Any shares that are
sold will be priced at 87.5% of the volume weighted average market price of
Milestone common stock during a fixed period prior to the sale. Milestone
has discretion to establish a floor price below which shares will not be
sold by Milestone to Hillgreen. At April 11, 2003, without any restrictions
and based on the closing stock price, the maximum proceeds that the Company
could receive would be approximately $478,000.
In August 2002, the Company issued 200,000 shares of common stock in
exchange for payment of $90,000 of outstanding legal fees.
NOTE Q -- SUBSEQUENT EVENTS
On January 17, 2003, the Company's CEO provided the Company with a $57,322
short term loan for the express purpose of purchasing Wand(R) handpieces
from the Company's supplier. The Company repaid the loan in full by
February 7, 2003. On February 12, 2003, the CEO provided the Company with a
$38,215 loan for the same purposes as above. The loan is payable on demand
and $33,215 remains outstanding as of March 31, 2003.
On February 13, 2003, the Company received $200,000 from an existing
investor that matures on August 1, 2003. At the option of the Company, the
note and interest can be paid in common stock.
On April 7, 2003, the CEO provided the Company with an additional $35,000
to use for the express purpose of contributing towards the Company's
increased insurance premium.
F-32
INSIDE BACK COVER
SAFETYWAND WITH NEEDLE PROTRACTED
[PICTURE OF SAFETYWAND WITH NEEDLE PROTRACTED]
SAFETYWAND WITH NEEDLE RETRACTED
[PICTURE OF SAFETYWAND WITH NEEDLE RETRACTED]
YOU MAY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON
SHARES MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE
DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION
OF AN OFFER TO BUY OUR COMMON SHARES IN ANY CIRCUMSTANCES UNDER WHICH THE OFFER
OR SOLICITATION IS UNLAWFUL.
---------------------------
TABLE OF CONTENTS
Page
Prospectus Summary........................... 3
Risk Factors.................................
Forward Looking Statements...................
Use of Proceeds..............................
Dividend Policy..............................
Capitalization...............................
Price Ranges of Our Common Stock.............
Selected Consolidated Financial Data.........
Management's Discussion and Analysis or
Plan of Operations ........................
Business ....................................
Management...................................
Certain Relationships and Related Party
Transactions ..............................
Security Ownership of Certain Beneficial
Owners and Management .....................
Description of Securities....................
Underwriting.................................
Legal Matters................................
Experts......................................
Where You Can Find More Information..........
Index to Financial Statements................ F-1
---------------------------
Until __________, 2003 (the 25th day after the date of this prospectus)
all dealers effecting transactions in our units, whether or not participating in
this distribution, may be required to deliver a prospectus. This is in addition
to the obligation of dealers to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
_______ UNITS
MILESTONE SCIENTIFIC INC.
[LOGO]
------------
PROSPECTUS
------------
PAULSON INVESTMENT COMPANY, INC.
_________ ___, 2003
================================================================================
II-2
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
LIMITATION OF DIRECTOR LIABILITY; INDEMNIFICATION
Our Certificate of Incorporation provides that a director will not be
personally liable to us or to our stockholders for monetary damages for breach
of the fiduciary duty of care as a director, including breaches which constitute
gross negligence. This provision does not eliminate or limit the liability of a
director:
o for breach of his or her duty of loyalty to us or to our
stockholders;
o for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
o under Section 174 of the Delaware General Corporation Law
(relating to unlawful payments or dividends or unlawful stock
repurchases or redemptions),
o for any improper benefit, or
o for breaches of a director's responsibilities under the Federal
securities laws.
Our Certificate of Incorporation also provides that we indemnify and
hold harmless each of our directors and officers to the fullest extent
authorized by the Delaware General Corporation Law, against all expense,
liability and loss (including attorney's fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by such person in connection therewith.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons pursuant to
our Certificate of Incorporation, Bylaws and the Delaware General Corporation
Law, we have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy and is, therefore,
unenforceable.
The Underwriting Agreement provides for reciprocal indemnification
between us and our controlling persons, on the one hand, and the underwriters
and their respective controlling persons, on the other hand, against certain
liabilities in connection with this offering, including liabilities under the
Securities Act of 1933, as amended.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the expenses of the issuance and distribution of the
securities being registered, other than underwriting commissions and expenses,
all of which will be paid by the Company. Other than the SEC registration fee
and the NASD filing fees all of such expenses are estimated.
Registration fee...........................................$ 1,625
NASD fee...................................................$
American Stock Exchange listing fee........................$ 3,000
Printing expenses..........................................$ 75,000
Accounting fees and expenses...............................$ 100,000
Legal fees and expenses....................................$ 250,000
Transfer agent and registrar fees and expenses.............$ 10,000
Miscellaneous..............................................$ 20,000
---------------
Total................................................$ 460,00
===============
II-1
RECENT SALES OF UNREGISTERED SECURITIES.
On January 31, 2000, Milestone issued five-year warrants to purchase an
aggregate of 142,857 shares of Common Stock to holders of Milestone's 10%
Secured Promissory Notes, including Cumberland Associates LLC, Strategic
Restructuring Partnership L.P., a former principal of Cumberland Associates, two
officers of the Corporation, an affiliate of one of its directors and six other
individuals. The warrants were issued as consideration for the loans made by
these investors to Milestone at the time of issuance. Each of the warrants, as
originally issued, contained a provision gradually escalating its exercise price
from $1.75 in 2000 to a maximum of $7.00 in 2004. However, in March 2001, the
exercise price of these warrants was amended by agreement between Milestone and
the warrant holders to provide for an exercise price of $1.75 per share up to
the date of maturity. The warrants were issued pursuant to the exemption from
registration under the Securities Act of 1933, as amended (the "Act"), provided
by Sections 4(2) and 4(6) of the Act.
Morse, Zelnick, Rose and Lander, LLP, legal counsel to Milestone, and
its affiliates, are the holders of warrants to purchase 301,333 shares of Common
Stock. On February 3, 2000, Milestone reduced the exercise price of all these
warrants to $1.25 and extended their exercise period to February 2, 2005.
Consideration for the amendments were legal services rendered to Milestone by
Morse, Zelnick, Rose & Lander, LLP. The warrants originally were issued pursuant
to the exemption from registration under the Act provided by Sections 4(2) and
4(6) of the Act.
On December 7, 2000, and January 26, 2001, Milestone issued to K.
Tucker Andersen, a major existing investor, warrants to purchase 80,000 and
20,000 shares of Common Stock, respectively, at an exercise price of $1.25 and
$1.875 per share, respectively. Each of the aforementioned warrants are
exercisable for five years from the date of issuance and were issued as
consideration for loans of a total of $1,000,000 that the investor made to
Milestone. The loans, which are evidenced by a senior secured promissory note,
bear an 8% interest that is payable quarterly in arrears. Principal payments, in
the amount of $500,000 each, are due on June 30, 2003, and December 31, 2003,
respectively. The warrants were issued pursuant to the exemptions from
registration under the Act provided by Sections 4(2) and 4(6) of the Act.
On January 22, 2001, Milestone entered into an agreement to grant to
Hillgreen Investments Limited ("Hillgreen") warrants to purchase 100,000 shares
of Common Stock as consideration for opening an equity put agreement with
Milestone. In addition, as consideration for the services rendered by Jesup &
Lamont Securities Corporation ("Jesup & Lamont") as placement agent in
connection with the equity put, Milestone granted to Jesup & Lamont warrants to
purchase 75,000 shares of Common Stock. The warrants issued to Hillgreen and
Jesup & Lamont are exercisable at any time prior to January 22, 2004 at a price
of $1.86 per share, and were issued pursuant to the exemptions from registration
under the Act provided by Sections 4(2) and 4(6) of the Act.
On January 30, 2001, Milestone issued to Shaul Koren 92,308 shares of
Common Stock, as payment for consulting services performed by Mr. Koren,
pursuant to exemptions from registration under the Act provided by Sections 4(2)
and 4(6) of the Act.
On February 8, 2001, Milestone issued to Cumberland Associates LLC,
Strategic Restructuring Partnership L.P., a former principal of Cumberland
Associates, two officers of the Corporation, an affiliate of one of its
directors and six other individuals, an aggregate of 27,641 shares of Common
Stock in payment of interest on the 10% Secured Promissory Notes issued to these
investors on January 31, 2000. The stock was issued pursuant to the exemption
from registration under the Act provided by
II-2
Sections 4(2) and 4(6) of the Act.
On March 9, 2001, Milestone issued to K. Tucker Andersen, a major
existing investor a warrant to purchase 100,000 shares of Common Stock,
exercisable at any time for five years from the date of issuance at $1.10 per
share, as consideration for opening a $500,000 line of credit. Milestone pays a
2% facility fee on the line of credit and interest at a rate of 10% per annum on
monies borrowed. On December 28, 2001, Milestone signed an agreement to issue
33,840 units, consisting of one share and one warrant to purchase one share in
payment of the $27,072 accrued interest through December 31, 2001. The warrants
are exercisable at $.80 per share through January 31, 2003, thereafter at $1.00
per share through January 31, 2004, and thereafter at $2.00 per share through
January 31, 2007, at which time they will expire. All of these units and
warrants were issued in February 2002 pursuant to the exemptions from
registration under the Act provided by Sections 4(2) and 4(6) of the Act.
In March 2001, Milestone signed an agreement with News USA, Inc. and
Vested Media Partners, Inc. to increase the awareness of healthcare
professionals and the public to the benefits of CompuDent(TM), CompuMed(TM), The
Wand(R) and CompuFlo(TM) technologies. Under the agreement, News USA, Inc. is
required to prepare, write and seek to place in newspapers and other media,
articles about Milestone's products and technologies. As consideration for their
services, Milestone granted to News USA, Inc. and Vested Media Partners, Inc.
warrants to purchase an aggregate of approximately 1,172,000 shares of
Milestone's Common Stock at prices increasing from $1.28 to $3.00 per share
during the 3-year warrant term. The warrants were issued pursuant to the
exemptions from registration under the Act provided by Sections 4(2) and 4(6) of
the Act.
On December 28, 2001, Milestone entered into an agreement with its CEO,
Leonard Osser, to issue to him 614,183 units in payment of $491,346 in
compensation, specifically, his salary as Chief Executive Officer of Milestone,
which he voluntarily has deferred since August 5, 2000. In January 2002, the
units were issued and each unit consists of one share of Milestone's common
stock and one warrant to purchase an additional share of such common stock. The
warrants are exercisable at $.80 per share through January 31, 2003, thereafter
at $1.00 per share through January 31, 2004, and thereafter at $2.00 per share
through January 31, 2007, at which time they will expire. The warrants were
issued pursuant to the exemptions from registration under the Act provided by
Sections 4(2) and 4(6) of the Act.
In December 2001, Milestone entered into an agreement with K. Tucker
Andersen, an existing investor, to issue 325,000 units. The units, which were
issued in January 2002, consist of one share of Milestone common stock and one
warrant to purchase an additional share of such common stock. The warrants are
exercisable at $.80 per share through January 31, 2003, thereafter at $1.00 per
share through January 31, 2004, and thereafter at $2.00 per share through
January 31, 2007, at which time they will expire. The units were issued in
exchange for $185,000 and the cancellation of a 10% convertible promissory note
issued in October 2001, under which an amount of $75,000 was due at that time.
On January 14, 2002, we issued 33,840 units, consisting of one share of
common stock and one warrant to purchase an additional share of common stock to
K. Tucker Andersen in exchange for payment of accrued interest totaling $27,072.
In July 2002, we issued 187,500 units consisting of one share of common
stock and one warrant to purchase an additional share of common stock to a
vendor in accordance with the agreement valued at $150,000.
In August 2002, we issued 200,000 shares of common stock in exchange
for payment of $90,000 of outstanding legal fees.
II-3
In June 2003 we issued a 6% convertible note in the amount of $50,000
and an 18 months warrant to purchase 160,256 shares of our common stock at $.52
per share, in consideration for a $50,000 loan from an accredited investor.
In September 2003 we issued a 6% convertible note in the amount of
$50,000 and an 18 months warrant to purchase 15,000 shares of our common stock
at $2.00 per share, in consideration for a $50,000 loan from an accredited
investor.
In October 2003 we issued 4,939,256 shares of common stock in
satisfaction of 6% / 12% Secured and Senior Secured Notes in the aggregate
amount of approximately $5 million. We also committed to issue 25,365 shares of
8% convertible preferred stock in satisfaction of $25,365 of principal and
accrued interest. The preferred stock will be convertible into 13,142 common
stock at $1.93. Subsequently, we issued 282,982 additional shares of common
stock to these former noteholders as consideration for their previous consent to
extend the maturity date of these notes.
On October 31, 2003 we issued 306,585 shares of our common stock to
principal vendors, in satisfaction of trade payables in the aggregate amount of
approximately $503,000.
The foregoing securities were issued in reliance upon the exemption
from the registration requirements of the Securities Act of 1933, as amended,
provided in Section 4(2) thereof, as a transaction by an issuer not involving a
public offering. The registrant reasonably believed that each purchaser had such
knowledge and experience in financial and business matters to be capable of
valuating the merits and risks of the investment, each purchaser represented an
intention to acquire the securities for investment only and not with a view to
distribution thereof and appropriate legends were affixed to the stock
certificates or warrants. No commissions were paid in connection with such
issuances.
EXHIBITS
EXHIBIT
NO. DESCRIPTION
------ ------------
1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of Milestone(1)
3.2 Certificate of Amendment filed July 13, 1995(2)
3.3 Certificate of Amendment filed December 6, 1996(3)
3.4 Certificate of Amendment filed December 17, 1997(6)
3.5 Certificate of Amendment filed July 23, 2003
3.6 By-laws of Milestone(1)
4.1 Specimen Stock Certificate(2)
4.2 Form of unit certificate
4.3 Form of warrant agreement, including form of warrant
4.4 Form of representative's warrant
10.1 Lease dated November 25, 1996 between Livingston Corporate Park
Associates, L.L.C. and Milestone. (3)
10.2 Intentionally Left Blank
10.5 Intentionally Left Blank
10.8 Agreement for The Wand(R)Product dated December 1, 1996,
between Spintech and Princeton PMC. (3)
10.10 Agreement between Milestone and Spintech dated December 21,
1994, and Amendment No. 1 thereto. (2)
II-4
10.11 Employment Agreement between Milestone and Leonard Osser dated
January 1, 1998. (6)
10.12 Intentionally Left Blank
10.13 Intentionally Left Blank
10.14 Intentionally Left Blank
10.15 Private Equity Line of Credit Agreement between Milestone and
Hillgreen Investments Limited dated January 22, 2001. (5)
10.16 Registration Rights Agreement, dated January 22, 2001, between
Registrant and Hillgreen Investments Limited. (5)
10.17 Intentionally Left Blank
10.18 Intentionally Left Blank
10.19 Intentionally Left Blank
10.20 Intentionally Left Blank
10.21 Intentionally Left Blank
10.22 Intentionally Left Blank
10.23 Letter from Leonard Osser and Morse, Zelnick, Rose & Lander,
LLP, dated April 9, 2000.(7)
10.24 Letter from Leonard Osser, dated March 29, 2002 deferring
compensation payment.
10.25 Letter from Morse, Zelnick, Rose & Lander LLP, dated March 29,
2002, re deferral of payment.
10.26 Letter from Leonard Osser, dated April 15, 2003 deferring
payment.
10.27 Letter from Morse, Zelnick, Rose & Lander LLP, dated __________
deferring payment.
10.28 Line of Credit for 900,000 and extension of 500,000 line of
credit, dated April 15, 2003.
10.29 Agreement with DaVinci Systems dated _____.
10.30 Agreement with Mark Hochman and amendments thereto dated April
9, 1998, December 16, 1999, November 28, 2001 and October __,
2002
10.31 Agreement with Strider ____dated _______.
21.1 Subsidiaries of the Registrant. (3)
23.1 Consent of J. H. Cohn, LLP
(2) Incorporated by reference to Milestone's Registration Statement on Form
SB-2 No. 333-92324.
(3) Incorporated by reference to Amendment No. 1 to Milestone's Registration
Statement on Form SB-2 No. 333-92324.
(4) Incorporated by reference to Milestone's Form 10-KSB for the year ended
December 31, 1996.
(5) Incorporated by reference to Milestone's Registration Statement on Form S-3
No. 333-39784.
(6) Incorporated by reference to Milestone's Registration Statement on Form S-2
No. 333-54732.
(6) Incorporated by reference to Milestone's Form 10-KSB for the year ended
December 31, 1999.
(7) Incorporated by reference to Milestone's Form 10-KSB for the year ended
December 31, 2000.
(8) Incorporated by reference to Milestone's Form 10-KSB for the year ended
December 31, 2001.
II-5
UNDERTAKINGS
A. The undersigned Registrant hereby undertakes:
(1) 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;
(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 the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement; and
(iii) to include any additional or changed material
information with respect to the plan of distribution disclosed in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, 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.
(3) 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.
(4) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(6) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
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.
B. Insofar as indemnification for liabilities arising under the
Securities 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
and 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 Securities Act and will be governed by the final adjudication
of such issue.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of New York, State of New York on November 7, 2003.
MILESTONE SCIENTIFIC INC.
By: /s/ Leonard Osser
--------------------------------------
Leonard Osser, Chief Executive Officer
ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Leonard Osser his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all pre- or post-effective amendments to this Registration Statement, and to
file the same with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any one of them, or their or his substitutes,
may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities indicated on November 7, 2003.
SIGNATURE TITLE
--------- -----
Chief Executive Officer and Chairman
/s/ Leonard Osser of the Board of Directors
--------------------------
Leonard Osser
/s/ Thomas M. Stuckey Chief Financial Officer
--------------------------
Thomas M. Stuckey
/s/ Leonard Schiller Director
--------------------------
Leonard Schiller
/s/ Paul Gregory Director
--------------------------
Paul Gregory
/s/ Jeffrey Fuller Director
--------------------------
Jeffrey Fuller
/s/ Leslie Bernhard Director
--------------------------
Leslie Bernhard
II-7
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------ ------------
1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of Milestone(1)
3.2 Certificate of Amendment filed July 13, 1995(2)
3.3 Certificate of Amendment filed December 6, 1996(3)
3.4 Certificate of Amendment filed December 17, 1997(6)
3.5 Certificate of Amendment filed July 23, 2003
3.6 By-laws of Milestone(1)
4.1 Specimen Stock Certificate(2)
4.2 Form of unit certificate*
4.3 Form of warrant agreement, including form of warrant
4.4 Form of representative's warrant
10.1 Lease dated November 25, 1996 between Livingston Corporate Park
Associates, L.L.C. and Milestone. (3)
10.2 Intentionally Left Blank
10.5 Intentionally Left Blank
10.8 Agreement for The Wand(R)Product dated December 1, 1996,
between Spintech and Princeton PMC. (3)
10.10 Agreement between Milestone and Spintech dated December 21,
1994, and Amendment No. 1 thereto. (2)
10.11 Employment Agreement between Milestone and Leonard Osser dated
January 1, 1998. (6)
10.12 Intentionally Left Blank
10.13 Intentionally Left Blank
10.14 Intentionally Left Blank
10.15 Private Equity Line of Credit Agreement between Milestone and
Hillgreen Investments Limited dated January 22, 2001. (5)
10.17 Intentionally Left Blank
10.18 Intentionally Left Blank
10.19 Intentionally Left Blank
10.20 Intentionally Left Blank
10.21 Intentionally Left Blank
10.22 Intentionally Left Blank
10.23 Letter from Leonard Osser and Morse, Zelnick, Rose & Lander,
LLP, dated April 9, 2000.(7)
10.24 Letter from Leonard Osser, dated March 29, 2002 deferring
compensation payment.(9)
10.25 Letter from Morse, Zelnick, Rose & Lander LLP, dated March 29,
2002, re deferral of payment.(9)
10.26 Letter from Leonard Osser, dated April 15, 2003 deferring
payment.(9)
10.27 Letter from Morse, Zelnick, Rose & Lander LLP deferring
payment.(9)
10.28 Line of Credit for 900,000 and extension of 500,000 line of
credit, dated April 15, 2003.(9)
10.29 Agreement with DaVinci Systems dated _____.*
10.30 Agreement with Mark Hochman and amendments thereto dated April
9, 1998, December 16, 1999, November 28, 2001 and October __,
2002
10.31 Agreement with Strider Incorporated dated September 3, 2003.*
21.1 Subsidiaries of the Registrant. (3)
23.1 Consent of J. H. Cohn, LLP
(1) Incorporated by reference to Milestone's Registration Statement on Form SB-2
No. 333-92324.
(2) Incorporated by reference to Amendment No. 1 to Milestone's Registration
Statement on Form SB-2 No. 333-92324.
(3) Incorporated by reference to Milestone's Form 10-KSB for the year ended
December 31, 1996.
(4) Incorporated by reference to Milestone's Registration Statement on Form S-3
No. 333-39784.
(5) Incorporated by reference to Milestone's Registration Statement on Form S-2
No. 333-54732.
(6) Incorporated by reference to Milestone's Form 10-KSB for the year ended
December 31, 1999.
(7) Incorporated by reference to Milestone's Form 10-KSB for the year ended
December 31, 2000.
(8) Incorporated by reference to Milestone's Form 10-KSB for the year ended
December 31, 2001.
(9) Incorporated by reference to Milestone's Form 10-KSB for the year ended
December 31, 2002.
* To be provided