AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 13, 2004
REGISTRATION NO. 333-110376
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 5
TO
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)
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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. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO RELAY 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.
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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 FEBRUARY 13, 2004
1,440,000 UNITS
[MILESTONE GRAPHIC OMITTED]
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 1,440,000 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. The exercise of the warrants will
be conditional upon the underlying shares being covered by an effective
registration statement at that time. We cannot assure that an effective
registration statement will be in effect at the time when the investors may
seek to exercise their warrants. 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 closing price of our common stock on The American Stock Exchange on the
pricing date of this offering for any five consecutive trading days. The common
stock and the warrants will trade only as a unit for 30 calendar days following
the date the units begin trading. After that date, the common stock and the
warrants will both trade separately and trading in the units will cease.
We expect to offer units at an aggregate offering price of $9,250,000,
excluding units that may be sold on exercise of the representative's
over-allotment option. The price of the units will be two times the closing
price of our common stock on The American Stock Exchange on the day preceding
the pricing date of this offering, or if the pricing occurs after the close of
trading on the pricing date, the closing price on that day.
Our common stock is currently traded on American Stock Exchange under the
symbol "MS." On February 4, 2004, the last reported sale price of our common
stock on the American Stock Exchange was $3.06 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 9 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.
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PER UNIT TOTAL
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Public offering price .................... $ $
--------------------------------------------------------------------------------
Underwriting discount .................... $ $
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Proceeds to us, before expenses .......... $ $
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* In addition we will issue to the representative of the underwriters,
5-year warrants to purchase 144,000 units, commencing one year after the
effective date of the offering at a price of , 120% of the unit
offering price.
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 216,000 units to cover over-allotments.
PAULSON INVESTMENT COMPANY, INC.
S.W. BACH & COMPANY
The date of this Prospectus is , 2004
[Inside Front Cover]
Computer controlled local anesthetic
delivery system with handpiece
[Picture of CompuDent Unit with The Wand handpiece]
We have rights to the following trademarks: CompuDent (Registered
Trademark) , CompuMed (Registered Trademark) , The Wand (Registered
Trademark) , The WandPlus (Registered Trademark) , CompuFlo (Trade Mark) ,
SafetyWand (Trade Mark) , and CoolBlue Wand (Trade Mark) . 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.
PROSPECTUS SUMMARY
This summary provides a brief overview of the key aspects of the offering.
However, it is a summary 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. All information in this
prospectus has been retroactively adjusted to reflect a 1-for-3 reverse stock
split effective in January 2004.
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 16 million single use handpieces in the United States and in
over 25 other countries. CompuDent has been favorably evaluated in 18 peer
reviewed, published clinical studies and over 25 other evaluative articles. 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. The SafetyWand was designed to conform 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, however, no independent evaluation confirms that the SafetyWand
conforms to these regulations. 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
3
impetus for the purchase of these systems by new users. In October 2003, we
launched the SafetyWand at the American Dental Association Annual Meeting in
California. Once the SafetyWand becomes available in commercial quantities, it
will compete with other safety engineered products in the medical market and
against a single product claiming to be compliant with OSHA regulations under
the Needlestick Safety Act in the dental market.
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 teeth, the CoolBlue
Wand, to assist its sales force in gaining access to dental offices
for sales of CompuDent.
Milestone's sales force currently includes one full time sales manager, 6
full time sales support staff and 12 independent sales representatives. 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 has commenced two clinical pilot studies using
the CompuFlo pressure sensing technology. The first study is to evaluate
identification of the epidural space during epidural anesthesia commonly used
for postoperative pain management and pain relief during childbirth. The second
study is designed to determine whether measuring and controlling injection
pressures of local anesthetics may aid in reducing the risk of peripheral nerve
injury while increasing patient safety. No assurances can be given that these
clinical studies will prove CompuFlo efficacious for these purposes. No
products have yet been designed using the CompuFlo technology, FDA marketing
approval has not been obtained and no historical revenues have been generated
from sale of devices embodying the CompuFlo technology.
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............ 1,440,000 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 calendar day
following the date the units begin trading.
After that date the common stock and the
warrants will both trade separately and trading
in the units will cease.
Shares of common stock to be
outstanding after
this offering................ 9,672,243(1)
Warrants:
Number to be outstanding
after this offering......... 1,440,000
Exercise terms.............. The warrants are exercisable at any time
after they become separately tradable, which
will be the 31st calendar day following the
date the units begin trading, 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. The exercise of the
warrants will be conditional upon the
underlying shares being covered by an effective
registration statement at that time. We cannot
assure that an effective registration statement
will be in effect at the time when investors
may seek to exercise their warrants.
Expiration date............. February , 2009
Redemption.................. Beginning six months from the effective date
of this 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 American Stock
Exchange on the pricing date of this offering.
For example, if we seek to exercise our right
to redeem the warrants, the potential loss of
appreciation, or difference between the warrant
exercise price and the stock price on the date
of exercise, to investors from their failure to
exercise or sell a warrant during the 30 days
notice period, would be as follows:
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(1) Including an estimated 679,566 shares constituting part of the units to
be issued, at the price of the units offered hereby, to satisfy
$2,188,204 of indebtedness, accrued interest and accrued compensation of
which 617,454 shares will be issued on the date of this Prospectus and
62,112 shares will be issued, at that price, ten days after the closing
of this offering.
5
ASSUMED CLOSING ASSUMED MARKET POTENTIAL LOSS OF
PRICE OF OUR STOCK ASSUMED WARRANT PRICE AT TIME OF POTENTIAL GAIN APPRECIATION
ON PRICING DATE EXERCISE PRICE REDEMPTION FROM EXERCISE FROM REDEMPTION
-------------------- ----------------- ------------------ ---------------- -------------------
$3.20 $4.80 $6.40 $1.60 $1.35
$7.40 $2.60 $2.35
$8.40 $3.60 $3.35
$3.40 $5.20 $6.80 $1.70 $1.45
$7.80 $2.70 $2.45
$8.80 $3.70 $3.35
$3.60 $5.40 $7.20 $1.80 $1.55
$8.20 $2.80 $2.55
$9.20 $3.80 $3.55
The Company may not give a notice of
redemption of the Warrants unless the
underlying shares are covered by an effective
registration statement. Additionally, an
effective registration statement must be in
place for at least 30 calendar days after
mailing of the notice of redemption before the
redemption may be effected. Consequently, if
an effective registration statement covering
the underlying shares is in place at the time
that the Company mails its notice of
redemption, but, during the notice period, the
registration statement ceases to be in effect
(or is suspended), then the notice period will
automatically be extended for that number of
calendar days equal to the number of calendar
days of cessation (or suspension), unless
waived in writing by the warrant holder.
AMEX symbols:
Existing.................... Common Stock MS
Proposed.................... Units MSU
Warrants MSW
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 216,000 units;
o warrants to purchase 144,000 units granted to the representative in
connection with this offering;
o outstanding compensatory options for 429,282 shares of common stock,
exercisable at a weighted average price of $4.66 per share and
outstanding warrants for 799,730 shares of common stock exercisable at a
weighted average exercise price of $4.48 per share; or
o conversion rights relating to convertible notes in the aggregate
principal amount of $100,000 convertible into 70,709 shares of common
stock and shares of series A convertible preferred stock convertible
into 4,381 shares of common stock.
6
SUMMARY FINANCIAL INFORMATION
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------- -------------------------------
2002 2001 2003 2002
------------ ------------ -------------- --------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues ................................... $ 4,074 $ 4,094 $ 3,101 $ 3,216
Gross profit ............................... $ 2,093 $ 2,120 $ 1,541 $ 1,717
Operating expenses ......................... $ 3,763 $ 5,321 $ 2,683 $ 2,777
Net loss ................................... $ (2,440) $ (3,991) $ (1,787) $ (1,604)
Net loss per share--basic and
diluted(1) ................................ $ (.59) $ (1.07) $ (.42) $ (.39)
Weighted average number of shares
outstanding--basic and diluted(1) ......... 4,156,558 3,714,197 4,217,185 4,084,342
----------
(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 September 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 September 30, 2003:
o The issuance of additional 94,327 shares of common stock to the various
noteholders mentioned above, as consideration for previously extending
the maturity date on the notes, out of which 13,526 common shares were
issued to Leonard Osser, our Chairman and Chief Executive Officer;
o The issuance of 102,195 shares of common stock to vendors in payment of
outstanding trade payables in the amount of approximately $503,000;
o The issuance of 2,333 shares of common stock upon the exercise of
options for an aggregate exercise price of $7,750;
o The payment of $50,000 of outstanding debt due to the Chairman & Chief
Executive Officer.
o The issuance of 39,613 shares of common stock for a consideration, net
of commissions and closing costs, of $217,485 under an equity put
agreement;
o The issuance of 16,667 shares of common stock to Leonard Osser, our
Chairman and Chief Executive Officer, upon the exercise of options for
an aggregate exercise price of $50,000;
o The issuance of 25,365 preferred shares in payment of $25,365 of
outstanding debt, including principal and interest to a non-affiliate
noteholder;
o The expected issuance, on the date this offering becomes effective, of
an estimated 249,100 units (assuming a unit price of $6.44), in payment
of $1,604,204 of debt, including interest, to Leonard Osser, our
Chairman and Chief Executive Officer and to a major stockholder;
o The expected issuance, on the date this offering becomes effective, of
an estimated 59,627 units (assuming a unit price of $6.44), in payment
of $384,000 of accrued compensation to Leonard Osser, our Chairman and
Chief Executive Officer; and
o The expected issuance, ten days after the closing of this offering, of
an estimated 31,056 units (assuming a unit price of $6.44) in payment of
$200,000 of accrued liabilities for legal services.
7
Pro forma as adjusted for this offering takes into account the pro forma
data as well as the receipt of $7,588,000 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 SEPTEMBER 30, 2003
(IN THOUSANDS) (UNAUDITED, IN THOUSANDS)
------------------- ----------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- ------------
BALANCE SHEET DATA:
Current assets ............................ $ 893 $ 1,275 $1,500 $9,088
Working capital (deficiency) .............. (5,214) (1,449) 649 8,237
Total assets .............................. 1,241 1,514 1,740 9,328
Total liabilities ......................... 7,347 4,391 1,492 1,492
Stockholders' equity (deficiency) ......... (6,106) (2,877) 248 7,836
8
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 $1.8 million for the nine months ended
September 30, 2003. At September 30, 2003, we had an accumulated deficit of
approximately $43.6 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 September 30, 2003, after adjustment to
reflect the subsequent repayment of $503,000 of trade payables through the
issuance of common stock in October 2003, was approximately $946,000. 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 predecessors 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 representatives and in-house sales people.
Abroad, we lack distributors in many markets. To be successful we will need to
hire and retain 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.
9
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 the manufacturer of our CompuDent and
CompuMed units and the principal manufacturer of our handpieces for those units
pursuant to which they manufacture these products under specific purchase
orders but without any long-term contract or minimum purchase commitment. We
have been supplied by these manufacturers since the commencement of production
in 1998. However, 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 who was promoted to this position from that of
Senior Vice President in September 2003, 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 ability to regain compliance with the
continued listing standards by the conclusion of the plan period at the end of
2003. Since that date the continued listing of our securities on the American
Stock Exchange has been subject to periodic review by the Exchange and the
Exchange has accepted supplemental submissions by Milestone showing continued
progress towards regaining compliance. However, on December 18, 2003 the
Exchange informally advised Milestone that it had not demonstrated sufficient
progress towards regaining compliance by the end of the plan period and further
advised that it would shortly begin delisting proceedings. If such proceedings
are initiated by the Exchange, Milestone intends to appeal such action and
request
10
an oral hearing. At such hearing, Milestone would present the fact that at the
conclusion of the offering covered by this prospectus, Milestone would again be
in compliance with the Exchange's stockholder equity criterion with expected
stockholders' equity exceeding the minimum amount required by the American
Stock Exchange by $1,836,000. While we believe that completion of this offering
is necessary to maintain our listing on the American Stock Exchange, no
assurance can be given that listing will be continued until that time. 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 news 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 $.42 and $7.77. 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 1,233,392 shares of our
common stock at prices ranging from $.87 to $18.00 per share with a weighted
average exercise or conversion price of $4.55. 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 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
11
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 39,613 shares sold in October and through
December 15, 2003, under an equity put agreement expiring on May 10, 2004, we
may sell up to an additional 660,387 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 617,454 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 31.4% of the issued and outstanding shares of our common
stock (30.1% 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 exercise the warrants, the shares of common stock
underlying them must be covered by an effective registration statement and, if
the issuance of shares is not exempt under state securities laws, must be
properly registered with state securities regulators. At present, we plan to
have a registration statement current when the warrants are exercised and, to
the extent that the underlying shares do not qualify for one or more exemptions
under state securities laws, we intend to register the shares with the relevant
authorities. However, we cannot provide absolute assurances that state
exemptions will be available, the state authorities will permit us to register
the underlying shares, or that an effective registration statement will be in
place at the relevant time(s). These factors 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 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
12
materially impair our ability to raise capital through the sale of additional
equity securities. Once this offering is completed, there will be 9,705,576
shares of common stock actually issued and 9,672,243 outstanding. Also, there
will be another 4,798,706 shares of common stock reserved for future issuance
as follows:
o up to 1,440,000 shares underlying the warrants;
o up to 648,000 shares underlying the over-allotment option, including the
shares underlying the warrants included in that option;
o up to 432,000 shares underlying the representative's warrants, including
the shares underlying the warrants included in the representative's
warrants;
o up to 314,333 shares underlying stock options previously granted, or to
be granted, under our Stock Option Plan;
o up to 1,028,896 shares underlying other stock options and warrants that
were granted and remained outstanding as of December 31, 2003;
o up to 70,709 shares underlying 6% convertible notes in the aggregate
principal amount of $100,000 and up to 4,381 shares of common stock
underlying our series A convertible preferred stock;
o up to 660,387 shares reserved for issuance, at our option, under an
equity put agreement; and
o up to 200,000 shares underlying other stock options approved to be
granted on December 22, 2003.
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 6,112,678 shares of common stock outstanding, of which
2,764,267 are freely tradable. The remaining 3,348,410 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, 102,195
restricted shares not held by affiliates and 3,083,551 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 162,665 restricted shares may be sold without limitation
under Rule 144(k). We have granted demand registration rights to holders of
155,614 shares of common stock including shares underlying warrants and
piggyback registration rights to holders of convertible notes covering an
aggregate of 70,709 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 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.
THE DECREASE OF OUR OUTSTANDING SHARES AS A RESULT OF THE REVERSE STOCK SPLIT,
WITHOUT CHANGE TO OUR AUTHORIZED CAPITALIZATION, INCREASES THE ABILITY OF OUR
BOARD OF DIRECTORS TO ISSUE SHARES WITHOUT STOCKHOLDER APPROVAL. ISSUANCE OF
SHARES MAY DILUTE THE VALUE OF OUR OUTSTANDING SHARES OR HAVE A NEGATIVE IMPACT
ON THE TRADING PRICE OF THE COMMON STOCK.
The 1-for-3 stock split effected in January 2004 reduced our outstanding
shares from 18,338,033 to 6,112,678 (9,672,243 shares after giving effect to
the consummation of this transaction and related issuances of units). Since the
reverse stock split was effected without change in our authorized shares, the
differential between outstanding shares and authorized shares increased, thus
providing the Board of Directors with increased ability to effect issuances of
stock without stockholder authorization. For example, shares may be issued in
capital raising transactions, mergers or acquisitions for compensatory reasons
where other governing rules or statutes do not separately require stockholder
approval. The issuance of these shares for less than their book value or for
less than value paid by purchasers in this offering could have a dilutive
effective on purchasers in this offering. Further the issuance of the shares
could also have a negative impact on the trading price of our then outstanding
common stock, including the stock issued in this offering.
13
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.
RECENT DEVELOPMENTS
Since October 1, 2003, we have entered into the following financing
transactions:
On October 2, 2003 we issued 1,646,419 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 94,327 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 $1,265,545 of debt
and accrued interest due to a major investor, K. Tucker Andersen, and $435,985
of debt and accrued interest and $640,000 of deferred compensation due to our
Chief Executive Officer and Chairman, Leonard Osser. Of the total debt and
accrued interest due to Messrs. Andersen and Osser, and the deferred
compensation owed to Mr. Osser, $1,604,204 and $384,000, respectively will be
paid through the issuance, on the effective date of this offering, of an
estimated 249,100 and 59,627 units valued at the initial offering price. The
remaining $97,326 of indebtedness to Messrs. Andersen and Osser and $256,000 of
deferred compensation to Mr. Osser will be paid in cash. The cash portion of the
total payment represents the estimated tax on the interest and compensation.
On October 21, 2003 we received $7,750 upon the exercise of options for
2,333 shares of common stock.
On October 31, 2003 we issued 102,195 shares of our common stock to
principal vendors, in satisfaction of trade payables in the aggregate amount of
approximately $503,000.
14
During October and through December 15, 2003 we issued an aggregate of
39,613 shares of common stock in consideration for a total of $217,500, after
brokerage commissions and closing costs, under an equity put agreement.
On December 15, 2003 we issued 16,666 shares of common stock upon the
exercise of options by the CEO for an aggregate price of $50,000.
In December 2003 we reached an agreement to satisfy $200,000 of accounts
payable through the issuance of 29,985 units ten days after the closing of this
offering. The units will be issued at the same terms and price as offered in
this offering.
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;
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 $9.25 million, and after deducting $647,500
reflecting the estimated underwriting discount, a non-accountable expense
allowance of $277,500, and other estimated offering expenses of $737,000
payable by us, the net proceeds to us from this offering will be approximately
$7.59 million, or $8.80 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 36.5%
Product development ................................ $1,095,000 14.4%
Production tooling ................................. $ 250,000 3.3%
Non-sales personnel expense ........................ $ 235,000 3.1%
Repayment of debt and accrued compensation ......... $ 525,000 6.9%
Miscellaneous working capital ...................... $2,713,000 35.8%
---------- -----
Total ........................................... $7,588,000 100.0%
========== =====
Sales and marketing expenses. This amount consists of the costs we expect
to incur to expand our independent and sales support staff, 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.
15
Production tooling. This amount represents the estimated costs for the
development of molds and dies for the commercial production of the SafetyWand.
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 $97,326 out of $1,701,530 outstanding debt to two of our major
shareholders, Leonard Osser, our Chairman and Chief Executive Officer, and K.
Tucker Andersen, the beneficial owner of 20.7% of our outstanding shares of
common stock, and the payment of $256,000 out of $640,000 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.
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.
CAPITALIZATION
The following table sets forth our capitalization as of September 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 September
30, 2003:
o The issuance of 94,327 additional shares of common stock to these
debtholders as agreed remuneration for previously extending the maturity
date of the notes, out of which 13,526 were issued to Leonard Osser, our
Chairman and Chief Executive Officer;
o The issuance of 102,195 shares of common stock as payment of
approximately $503,000 due to principal vendors;
16
o The issuance of 39,613 shares of common stock for a consideration, net
of commission and closing costs of $217,075 under an equity put
agreement;
o The issuance of 2,333 shares of common stock upon the exercise of
options for a total consideration of $7,750;
o the payment of $50,000 of outstanding debt due to our Chairman and
Chairman and Chief Executive Officer.
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 16,667 shares of common stock to Leonard Osser, our
Chairman and Chief Executive Officer, upon the exercise of options for
an aggregate exercise price of $50,000.
o The expected issuance, on the date this offering becomes effective, of
249,100 units, in payment of $1,604,204 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 date this offering becomes effective, of
59,627 units, in payment of $384,000 of accrued compensation to Leonard
Osser, our Chairman and Chief Executive Officer.
o The expected issuance, ten days after the closing of this offering, of
an estimated 31,056 units (assuming a unit price of $6.44) in payment of
$200,000 of accrued liabilities for legal services.
Pro forma as adjusted for this offering takes into account the pro forma
data as well as the receipt of $7,588,000 of estimated net proceeds from this
offering, the deduction of underwriting discounts and commissions and other
estimated offering expenses to be paid by us.
SEPTEMBER 30, 2003
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ----------- ------------
(IN THOUSANDS)
Accounts payable and accrued expenses ....................... $1,726 $1,118 $1,118
Notes payable including interest ............................ 2,105 150 150
Accrued compensation ........................................ 560 224 224
------ ------ ------
Total debt ................................................ 4,391 1,492 1,492
------ ------ ------
Stockholders' equity (deficiency):
Common stock, $0.001 par value, 50,000,000 shares
authorized, 5,890,875 shares issued and 5,857,542
outstanding, actual; 6,825,576 shares issued and 6,792,243
outstanding, pro forma; and 9,705,576 shares issued and
9,672,243 outstanding, pro forma as adjusted ............. 6 7 10
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 .................................. 41,623 44,747 52,332
Retained earnings (deficit) ................................. (43,574) (43,574) (43,574)
Unearned compensation ....................................... (20) (20) (20)
Treasury stock, at cost, 33 shares .......................... (912) (912) (912)
------- ------- -------
Total stockholders' equity (deficiency) ................... (2,877) 248 7,836
------- ------- -------
Total capitalization ...................................... $ 1,514 $ 1,740 $ 9,328
========= ========= =========
17
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
---------- ----------
2002
First Quarter ..................................... $ 2.04 $ 1.56
Second Quarter .................................... $ 3.00 $ 1.74
Third Quarter ..................................... $ 2.04 $ .87
Fourth Quarter .................................... $ 1.20 $ .63
2003
First Quarter ..................................... $ 1.02 $ .42
Second Quarter .................................... $ 1.20 $ .54
Third Quarter ..................................... $ 4.98 $ .81
Fourth Quarter .................................... $ 7.77 $ 3.09
2004
First Quarter (through February 10, 2004) ......... $ 4.20 $ 3.07
According to the records of our transfer agent, there were approximately
3,000 holders of record of our common stock as of December 31, 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.
18
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 nine-month periods ended September 30, 2003 and 2002
and the balance sheet data for September 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, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------- -------------------------------
2001 2002 2002 2003
------------- ------------- -------------- --------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenues ........................................ $ 4,094 $ 4,074 $ 3,216 $ 3,101
Cost of sales ................................... 1,973 1,980 1,499 1,560
---------- ---------- ---------- ----------
Gross profit .................................... 2,121 2,094 1,717 1,541
Selling, general and administrative
expenses ....................................... 5,271 3,589 2,713 2,492
Research and development ........................ 50 148 64 112
Closing of Deerfield, IL facility ............... -- 26 -- 79
---------- ---------- ---------- ----------
Loss from operations ............................ (3,200) (1,669) (1,060) (1,142)
Sale of prophy angle business and related
consulting income .............................. 64 80 -- --
Other income .................................... -- -- 72 --
Interest expense, net ........................... (855) (851) (616) (645)
---------- ---------- ---------- ----------
Net loss ........................................ $ (3,991) $ (2,440) $ (1,604) $ (1,787)
========== ========== ========== ==========
Net loss per share -- basic and diluted ......... $ (1.07) $ (.59) $ (.39) $ (.42)
========== ========== ========== ==========
Weighted average number of shares
outstanding -- basic and diluted ............... 3,714,197 4,156,558 4,084,341 4,217,185
========== ========== ========== ==========
BALANCE SHEET DATA:
(IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30,
2002 2003
-------------- --------------
Current assets ......................... $ 893 $ 1,275
Working capital ........................ $ (5,214) $ (1,449)
Total assets ........................... $ 1,241 $ 1,514
Total liabilities ...................... $ 7,347 $ 4,391
Stockholders' equity (deficit) ......... $ (6,106) $ (2,877)
19
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 sales 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.
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------
2003 2002
------------------------ ------------------------
DOMESTIC
CompuDent ..................... $ 524,566 25.4% $ 799,671 32.8%
Handpieces .................... 1,398,347 67.7% 1,461,607 59.9%
Other ......................... 141,417 6.9% 176,923 7.3%
---------- ----- ---------- -----
Total Domestic ................ $2,064,330 100.0% $2,438,201 100.0%
========== ===== ========== =====
INTERNATIONAL
CompuDent ..................... $ 574,225 55.4% $ 436,228 56.1%
Handpieces .................... 460,152 44.4% 337,714 43.4%
Other ......................... 2,574 0.2% 3,764 0.5%
---------- ----- ---------- -----
Total International ........... $1,036,951 100.0% $ 777,706 100.0%
========== ===== ========== =====
DOMESTIC/INTERNATIONAL ANALYSIS
Domestic ...................... $2,064,330 66.6 $2,438,201 75.8
International ................. 1,036,951 33.4 777,706 24.2
---------- ----- ---------- -----
$3,101,281 100.0% $3,215,907 100.0%
========== ===== ========== =====
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2002 2001
------------------------ ------------------------
DOMESTIC
CompuDent ..................... $ 956,275 30.1% $1,309,712 39.0%
Handpieces .................... 1,999,050 63.0% 1,756,498 52.4%
Other ......................... 219,605 6.9% 288,092 8.6%
---------- ----- ---------- -----
Total Domestic ................ $3,174,930 100.0% $3,354,302 100.0%
========== ===== ========== =====
INTERNATIONAL
CompuDent ..................... $ 495,730 55.1% $ 519,089 70.2%
Handpieces .................... 403,346 44.9% 192,271 26.0%
Other ......................... 0 0.0% 28,048 3.8%
---------- ----- ---------- -----
Total International ........... $ 899,076 100.0% $ 739,408 100.0%
========== ===== ========== =====
DOMESTIC/INTERNATIONAL ANALYSIS
Domestic ...................... $3,174,930 77.9% $3,354,302 81.9%
International ................. 899,076 22.1% 739,408 18.1%
---------- ----- ---------- -----
$4,074,006 100.0% $4,093,710 100.0%
========== ===== ========== =====
20
We have earned gross profits of 51.8% and 51.4% in the years ended
December 31, 2001 and 2002, respectively, and 53.4% and 49.7% in the nine-month
periods ended September 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 1,646,419 shares of common
stock and 25,365 shares of convertible preferred stock and satisfied
approximately $503,000 of trade payable by issuing 102,195 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 $1,979,734 of
debt, accrued interest and accrued compensation through issuance of 296,812
units. In December 2003 we reached an agreement to satisfy, ten days after the
closing of this offering, $200,000 of accounts payable through issuance of
29,895 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. We believe that the SafetyWand is one of the first
safety engineered injection devices that conforms with OSHA regulations under
the federal Needlestick Safety Act, while also meeting the clinical needs of
dentists, however, no independent evaluation confirms that the SafetyWand
conforms to these regulations. 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. The SafetyWand became available in limited
quantities for marketing and evaluation in January 2004. We expect to begin
offering commercial quantities of the SafetyWand within 60 days after
completion of this offering.
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;
21
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 teeth, the CoolBlue
Wand, which also helps in 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, the CompuFlo and an improvement
to the controls for CompuDent were developed by our Director of Clinical
Affairs and assigned to us. Upon sale of products using any such 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, 8,333 shares 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.
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 nine
months ended September 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
nine months ended September 30, 2003 was approximately $183,000 greater than
the loss reported for the nine months ended September 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.
22
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.
NINE-MONTH
PERIODS ENDED SEPTEMBER 30,
-------------------------------------------------------
2003 2002
--------------------------- ---------------------------
Net sales ................................ $ 3,101,281 100.0% $ 3,215,907 100.0%
Cost of sales ............................ 1,560,288 50.3% 1,499,063 46.6%
Gross profit ............................. 1,540,993 49.7% 1,716,844 53.4%
Selling, general & administrative
expense ................................. 2,491,737 80.3% 2,712,649 84.4%
Closing of Deerfield, Il facility ........ 79,023 2.5% 0.0%
Research and development ................. 112,158 3.6% 63,928 1.9%
Loss from operations ..................... (1,141,925) (36.8)% (1,059,733) (32.9)%
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
2002 2001
--------------------------- ---------------------------
Net sales ................................ $ 4,074,006 100.0% $ 4,093,710 100.0%
Cost of sales ............................ 1,980,949 48.6% 1,973,156 48.2%
Gross profit ............................. 2,093,057 51.4% 2,120,554 51.8%
Selling, general & administrative
expense ................................. 3,588,836 88.1% 5,271,032 128.8%
Closing of Deerfield, Il facility ........ 26,067 0.6% 0.0%
Research and development ................. 147,709 3.6% 49,943 1.2%
Loss from operations ..................... (1,669,555) (41.0)% (3,200,421) (78.2)%
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 $19,704 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.
23
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.
Nine months ended September 30, 2003 compared to nine months ended
September 30, 2002
Net sales for the nine months ended September 30, 2003 and 2002 were
$3,101,281 and $3,215,907, respectively. The $114,626 or 3.6% decrease is
primarily related to an approximate $175,000 decrease in CompuDent and CompuMed
domestic sales, a $63,000 decrease in domestic sales of the Wand handpieces.
These decreases were partially offset by a $122,000 increase in foreign sales
of the Wand handpiece. The decrease in Wand handpiece sales is the result of
changing the primary vendor of the Wand handpiece, resulting in inconsistent
inventory levels. Those transition issues have been resolved and are resulting
in improved supply chain management.
Cost of sales for the nine months ended September 30, 2003 and 2002 were
$1,560,288 and $1,499,063, respectively. The $61,225 increase is attributable
primarily to higher sales volume to foreign distributors.
For the nine months ended September 30, 2003, Milestone generated a gross
profit of $1,540,993 or 49.7% as compared to a gross profit of $1,716,844 or
53.4% for the nine months ended September 30, 2002. The decrease in gross
profit percentage is primarily attributable to increased sales to foreign
distributors. Sales to foreign distributors are of higher volume but at a
reduced margin.
Selling, general and administrative expenses for the nine months ended
September 30, 2003 and 2002 were $2,491,737 and $2,712,649, respectively. The
$220,912 decrease is attributable primarily to an approximate $241,000 decrease
in expenses associated with the sale and marketing of the Wand. An approximate
$63,000 expense associated with the independent sales representative start up
costs, was primarily offset by a commensurate amount of commissions earned
during the similar period in the previous year.
Milestone incurred costs totaling $79,023 relating to the closure of its
Deerfield, IL facility.
Research and development expenses for the nine months ended September 30,
2003 and 2002 were $112,158 and $63,928, respectively. These costs were related
to the development of Milestone's SafetyWand.
The loss from operations for the nine months ended September 30, 2003 and
2002 was $1,141,925 and $1,059,733, respectively. The $82,192 increase in loss
from operations is explained above.
Milestone generated $72,000 in income for the nine months ended September
30, 2002 as a result of a consulting contract which expired in October 2002.
Interest expense of $645,457 was incurred for the nine months ended
September 30, 2003 as compared to $616,519 for the nine months ended September
30, 2002. The increase is attributable to higher average borrowings in 2003.
The net loss for the nine months ended September 30, 2003 was $1,787,382
as compared to a net loss of $1,604,252 for the nine months ended September 30,
2002. The $183,130 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 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 September 30, 2003, the accompanying condensed consolidated financial
statements have been prepared assuming Milestone will continue as a going
concern. However, as shown in the
24
accompanying condensed consolidated financial statements, Milestone incurred
net losses of approximately $1,787,000 and $1,604,000 and negative cash flows
from operating activities of $861,000 and $418,000 during the nine months ended
September 30, 2003 and 2002, respectively. As a result, Milestone had a cash
balance of approximately $96,000, a working capital deficiency of approximately
$1,449,000 and a stockholders' deficit of approximately $2,877,000 as of
September 30, 2003. These matters raised substantial doubt about Milestone's
ability to continue as a going concern. Management believes that its initial
concerns about the Company's ability to continue as a going concern have been
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 September 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 1,646,419 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 102,195 shares of common stock valued at $4.92
per share, the approximate fair market value.
Additionally, we reached agreements to satisfy, an aggregate amount of
$1,963,000 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.
Milestone has no commitments for future capital expenditures, but expects
to spend $1,095,000 for product development and $250,000 for production tooling
for the SafetyWand. Milestone expects that the proceeds of this offering will
be sufficient to meet its needs for capital resources for working capital and
for capital expenditures for at least 12 months.
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;
o On January 31, 2003, we completed the closing of the Deerfield, Illinois
facility, resulting in the termination 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
25
maturity date in common stock at a rate of one share of common stock for every
$.936 of indebtedness. Additionally, we granted the investor warrants to
purchase 53,419 of our common stock at a per share price of $1.56 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 nine months ended September 30, 2003, the Company's net cash used
in operating activities was $860,990. This was attributable primarily to a net
loss of $1,787,382 adjusted for noncash items of $280,494 (of which $242,628
was for amortization of debt discount and deferred financing costs); a $372,167
increase in accounts receivable; an $135,997 increase in inventories; a
$137,575 decrease in advances to contract manufacturer; a $3,341 decrease in
prepaid expenses; an increase in accounts payable of $399,731 a $402,827
increase in accrued interest; a $29,412 decrease in accrued expenses; and an
$240,000 increase in deferred compensation.
For the nine months ended September 30, 2003, the Company used $15,817 in
investing activities for capital expenditures.
For the nine months ended September 30, 2003, the Company generated
$962,994 from financing activities as it issued promissory notes to existing
investors totaling $900,000, incurred $108,537 of net borrowings from its Chief
Executive Officer, recorded $22,721 in deferred financing activities and
incurred $22,500 in expenses in registering shares.
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 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.
26
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 18 peer
reviewed, published clinical studies and over 25 other evaluative articles. 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
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, 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.
27
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 15% to 20% of
the time because of needle deflection associated with hypodermic syringes. The
bidirectional 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 for $75 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
800,000 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.
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 was designed to conform with more than 30 parameters published by
OSHA to be met by safety engineered products while also meeting the clinical
needs of dental practitioners, however, no independent evaluation confirms that
the SafetyWand conforms to these regulations. 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
28
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. The SafetyWand
became available in limited quantities for marketing and evaluation in January
2004.
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. Since June we have generated approximately $150,000 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. Under a further understanding with DaVinci, these rights were
expanded to include products for the consumer home market. We began selling the
CoolBlue Wand at a dental trade show in late October 2003. Through December 15,
2003 we have sold approximately $26,000 of these units and have received orders
for an additional $20,000.
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.
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 whitening system
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 Inc., 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.
29
The Proposed PDL Injector Device
The periodontal ligament injection, 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.
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
30
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 bodily fluids. Due to cash constraints, Milestone has not yet
developed devices embodying this technology for specific applications. A major
medical center has commenced two clinical pilot studies using the CompuFlo
pressure sensing technology. The first study is to evaluate identification of
the epidural space during epidural anesthesia commonly used for postoperative
pain management and pain relief during childbirth. The second study is designed
to determine whether measuring and controlling injection pressures of local
anesthetics may aid in reducing the risk of peripheral nerve injury while
increasing patient safety. No assurances can be given that these clinical
studies will prove CompuFlo efficacious for these purposes. No products have
yet been designed using the CompuFlo technology, FDA marketing approval has not
been obtained and no historical revenues have been generated from sale of
devices embodying the CompuFlo technology.
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.
Due to cash constraints, Milestone has not yet applied for 510(k) FDA marketing
clearance for the SafetyInfuse Wand, but we expect to do so in 2004.
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 September 30, 2003 were approximately $690,000, $388,000,
and $250,000, respectively. The Wand disposable handpiece is manufactured for
us in Mexico by Nypro Precision Assemblies ("NPA"), a subsidiary of Nypro Inc.
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 supplied to us by
United Systems, which arranges for its manufacture by manufacturers in China.
We may expand our relationship with this supplier to include production of
other types of handpieces. All of the manufacturers for our products, including
those supplying United Systems, are ISO compliant.
31
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.
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
our sales force 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
32
distributors, establishment of distribution arrangements, supporting local
marketing efforts and acting as liaison with the parent company. International
sales represented 18%, 22% and 32% of sales in 2001 and 2002, and the first nine
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 nine months of 2003, respectively, and
10%, 14% and 26% of total sales in those periods, respectively.
United Systems is our principal distributor in China, Taiwan, and South
Korea. Handpiece use for these territories is less than in Europe and the US.
In 2001, 2002 and the first nine 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 nine months of 2003, represented collectively, 7%, 8% and 6%,
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 schools in the U.S.
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 SafetyWand handpiece has not yet
been made available in commercial quantities. When so available, it will
compete with other safety engineered products in the medical market and against
a single product claiming to be compliant with OSHA regulations under the
Needle Stick Act in the dental market.
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
33
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.
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
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
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
SAFETYWAND
Dental Anesthetic and Delivery Injection Unit with Automated Rate
Control ................................................................. 6,652,482 11/25/03
COMPUFLO
Pressure/Force Computer Controlled Drug Delivery System .................. 6,200,289 3/13/01
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
In addition, we have recently received a Notice of Allowance for patent
protection on a safety intravenous catheter introduction device from the U.S.
Patent Office.
34
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 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 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.
35
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. 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
36
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 January 26, 2004 Milestone had 10 full-time employees, including three
executive officers, six sales support staff, a national sales manager, and two
part time employees. In addition, 12 independent sales representatives provide
us with their services on an independent basis.
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.
37
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) ................. 58 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 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.
38
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.
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.
39
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth all compensation
earned, in all capacities, during the fiscal years ended December 31, 2003,
2002, and 2001 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 2003 fiscal year and whose salary as
determined by Regulation S-B, Item 402, exceeded $100,000 (the individuals
falling within categories (i) and (ii) are collectively referred to as the
"Named Executives").
SUMMARY COMPENSATION TABLE
AWARDS
ANNUAL COMMON STOCK
COMPENSATION UNDERLYING
SALARY OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($) (#)
--------------------------- ------ -------------- -------------
Leonard A. Osser ............ 2003 351,770(1) 16,667
Chief Executive 2002 351,800(2) 16,667
Officer and Chairman 2001 350,967(3) 16,667
Stuart J. Wildhorn .......... 2003 163,207
President 2002 155,400 2,333
2001 93,750 16,667
Thomas A. Stuckey ........... 2003 144,835
Chief Financial 2002 136,267(4) 2,333
Officer and Vice President 2001 116,905 3,333
------------
(1) Includes $320,000 in deferred compensation but excludes $51,928 paid by
Milestone to Marilyn Elson, a certified public accountant, in payment of
tax services and assistance with preparation of this registration
statement. Ms. Elson is the wife of Mr. Osser.
(2) Includes $320,000 in deferred compensation but excludes $19,049 paid by
Milestone to Marilyn Elson, Mr. Osser's wife, in payment of professional
tax services.
(3) Includes $350,000 in deferred compensation. The deferred compensation,
together with an additional $141,346 of deferred compensation from 2000,
was paid subsequent to year end through the issuance of 204,728 units,
each consisting of one share and one six-year warrant to purchase one
share at prices ranging from $2.40-$6.00. It excludes $20,850 paid by
Milestone to Marilyn Elson.
(4) Includes a $20,000 bonus paid in 2002.
STOCK OPTIONS
The following tables show certain information with respect to incentive
and non-qualified stock options granted in 2003 to Named Executives under
Milestone's 1997 Stock Option Plan and the aggregate value at December 31, 2003
of such options. In general, the per share exercise price of all options is
equal to the fair market value of a share of Common Stock on the date of grant.
OPTION GRANTS IN 2003 INDIVIDUAL GRANTS OF OPTIONS
NUMBER OF PERCENT OF TOTAL
SHARES OF COMMON OPTIONS GRANTED
STOCK UNDERLYING TO EMPLOYEES EXERCISE PRICE
NAME OPTIONS IN 2003 ($/SH) EXPIRATION DATE
---- ------------------ ----------------- --------------- ----------------
Leonard A. Osser ......... 16,667 (1) 67% $ .87 01-01-08
------------
(1) Options vest December 1, 2007
40
AGGREGATED 2003 YEAR END OPTIONS VALUES
FOR OPTIONS GRANTED PRIOR TO AND DURING 2003
NUMBER OF SHARES OF
COMMON
STOCK UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 12-31-2002 AT 12-31-2002(1)
EXERCISABLE EXERCISABLE
NAME UNEXERCISABLE UNEXERCISABLE
--------------------------------- ----------------------- ---------------------
Leonard A. Osser ........... 0 / 66,667 $0 / $28,583
Stuart J. Wildhorn ......... 12,667 / 6,333 $1,167 / $583
Thomas M. Stuckey .......... 20,222 / 778 $1,167 / $583
------------
(1) Based on the closing price on December 31, 2003 of $3.09 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 16,667 shares of Common Stock exercisable only during the last 30 days
of the five-year option term unless Milestone achieves certain financial goals
to 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
16,667 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 204,728 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
$2.40 per share through January 31, 2003, thereafter at $3.00 per share through
January 31, 2004, and thereafter at $6.00 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 50,375 units, in payment of $336,000 of accrued
compensation.
In December 2003 Milestone entered into a new employment agreement with
Mr. Osser for a five-year term commencing January 1, 2004. Under the new
agreement Mr. Osser will receive base compensation of $300,000 per year,
payable one half in cash and one half in common stock valued at the average
closing price of the common stock during the first 15 trading days in the month
of December during each year of the term. While the number of shares to be
issued will be determined each year, the stock will not be issuable until the
end of the term of the agreement. In addition, Mr. Osser may earn annual
bonuses up to an aggregate of $300,000, payable one half in cash and one
41
half in common stock, contingent upon Milestone achieving predetermined annual
operating cash flow, revenue and earnings targets. For 2004 he can earn a
$150,000 bonus based on Milestone achieving break-even cash flow from
operations, a $100,000 bonus based on Milestone achieving net revenues of
$6,250,000 and a $50,000 bonus based on Milestone achieving break-even
earnings, determined in accordance with generally accepted accounting
principles. The cash flow bonus and the earnings bonus will not be payable to
the extent that the payment thereof will reduce operating cash flow or earnings
below break-even, respectively. For purposes of the agreement operating cash
flow shall mean cash flow from operations adjusted for financing transactions
plus accounts receivable increases and less accounts payable increases. Shares
of common stock issued in partial payment of bonuses will be valued at the
average closing price of the common stock during the first 15 trading days in
the month of March during each year of the term. The stock portion of the bonus
awards, if any, will be paid at the end of the term of the agreement.
In addition, if during any year of the term of the agreement Mr. Osser
earns a bonus under the above formulae, he shall also be granted 5-year stock
options to purchase twice the number of shares earned under the above formulae,
each such option to be exercisable at a price per share equal to the fair
market value of a share on the date of grant (110% of fair market value if Mr.
Osser is a 10% or greater stockholder on the date of grant). The options shall
vest and become exercisable to the extent of one-third of the shares covered at
the end of each of the first three years following the date of grant, but shall
only be exercisable while Mr. Osser is employed by Milestone or within 30 days
after the termination of his employment.
COMPENSATION OF DIRECTORS
In 2003, each non-employee director was granted a five-year option to
purchase 6,667 shares of our Common Stock at an exercise price of $1.50, 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
SECURITIES TO BE NUMBER OF
ISSUED UPON WEIGHTED AVERAGE SECURITIES
EXERCISE OF EXERCISE PRICE OF REMAINING AVAILABLE
OUTSTANDING OUTSTANDING FOR FUTURE ISSUANCE
OPTIONS AND OPTIONS AND UNDER EQUITY
WARRANTS WARRANTS COMPENSATION PLANS
------------------ ------------------- --------------------
Equity compensation plans approved by
stockholders (1):
Grants under our 1997 Stock Option Plan ......... 200,115 $ 3.12 114,218
Equity compensation plans not approved by
stockholders(2)
Aggregate Individual Option Grants ............. 229,167 $ 6.00 Not Applicable
Total ........................................ 429,282 $ 4.66
------------
(1) Consisting of our 1997 stock option plan covering a total of 333,333
common shares underlying options issuable to officers and other key
employees and excluding 2,333 options which were exercised in October
2003 and 16,667 options which were exercised in December 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
42
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.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Pursuant to a $1 million private placement which was completed in
February 2000, Leonard Osser, the Chairman and Chief Executive Officer of
Milestone, purchased $250,000 principal amount of 10% secured promissory notes
and five-year warrants to purchase 11,905 shares of Milestone's Common Stock,
immediately exercisable at $5.25 per share with such exercise price increasing
each anniversary to a final exercise price of $21.00 per share. 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 $5.25 per share up
to the date of maturity. Additionally, pursuant to an agreement made as of
January 31, 1999, Milestone issued 600,000 shares of Common Stock in full
payment of Milestone's three percent Senior Convertible Promissory Notes in the
aggregate principal amount of $2,250,000, of which 66,667 shares were issued to
Leonard Osser, Chairman and Chief Executive Officer. In April 2000, Mr. Osser
provided Milestone with a $200,000 line of credit which is payable on January 2,
2003. In December 2001, the Company reached an agreement with Mr. Osser to
satisfy $491,346 of his deferred compensation through the issuance of 204,728
units, each unit consisted of one share of Milestone common stock and one
warrant to purchase an additional share of each stock. These units were issued
to Mr. Osser in January 2002.
On February 8, 2001, Milestone issued to holders of its 10% Secured
Promissory Notes issued in January 2000 an aggregate of 9,214 shares of common
stock in payment of accrued interest in the amount of $36,278.75, including
2,580 shares to Cumberland Associates and entities whose funds were managed by
Cumberland and 1,967 shares to K. Tucker Andersen. Payment of interest to
Leonard Osser and another then affiliate was deferred until maturity of the
notes. Cumberland Associates and K. Tucker Andersen are each 5% or greater
shareholders and Leonard Osser is Milestone's Chairman and Chief Executive
Officer.
On March 9, 2001, Milestone issued to K. Tucker Andersen, a major existing
investor a warrant to purchase 33,333 shares of Common Stock, exercisable at
any time for five years from the date of issuance at $3.30 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
11,280 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 $2.40 per share through January 31, 2003, thereafter at
$3.00 per share through January 31, 2004, and thereafter at $6.00 per share
through January 31, 2007, at which time they will expire.
In December 2001, we reached an agreement with Mr. Osser to satisfy
$491,346 of his deferred compensation through the issuance of 204,728 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.
In January 2002, we issued 108,333 units to K. Tucker Andersen, each
comprised of one share of common stock and one five-year warrant to purchase one
share of common stock at prices increasing from $2.40 to $6.00, in consideration
for $250,000. We also issued to Mr. Andersen, in January 2002, 11,280 additional
units in repayment of interest in the amount of $27,072 accrued under a $500,000
line of credit.
As of September 30 and November 10, 2003 we issued an aggregate of 147,011
shares of common stock to Mr. Osser in repayment of $404,459 of principal and
accrued interest on the 6%/12% notes
43
and the prior extension of these notes, an aggregate of 779,184 shares of common
stock to K. Tucker Andersen, in satisfaction of $2,345,304 of principal and
accrued interest on the 6%/12%, 8% and 10% notes and the prior extension of
these notes and an aggregate of 660,257 shares of common stock to Cumberland
Associates, LLC, in satisfaction of $1,816,450 of principal and accrued interest
on the 6%/12% notes and the prior extension of these notes. The shares issued to
Mr. Osser, Mr. Andersen and Cumberland Associates, represented their share of
common stock issued to the holders of that debt in the aggregate amount of
approximately $5 million, including accrued interest, and Mr. Osser, Mr.
Andersen and Cumberland Associates received no extra or special benefit that was
not shared on a pro rata basis by all of the holders of that debt.
On October 9, 2003 we reached an agreement to satisfy $1,265,545 of debt
and accrued interest due to a major investor, K. Tucker Andersen, and $435,985
of debt and accrued interest and $640,000 of deferred compensation due to our
Chief Executive Officer and Chairman, Leonard Osser. Of the total debt and
accrued interest due to Messrs. Andersen and Osser, and the deferred
compensation owed to Mr. Osser, $1,604,204 and $384,000, respectively will be
paid through the issuance, on the effective date of this offering, of an
estimated 249,100 and 59,627 units valued at the initial offering price. The
remaining $97,326 of indebtedness to Messrs. Andersen and Osser and $256,000 of
deferred compensation to Mr. Osser will be paid in cash. The cash portion of the
total payment represents the estimated tax on the interest and compensation.
Additionally, the technology underlying our SafetyWand, the CompuFlo and
an improvement to the controls for CompuDent were developed by our Director of
Clinical Affairs and assigned to us. Upon sale of products using any such
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, 8,333 shares of our common stock upon the issuance of each additional
patent relating to these technologies.
We have adopted a policy that, in the future, the audit committee must
review all transactions with any officer, director or 5% shareholder.
44
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 ......................... 1,322,058(3) 20.89%
Stuart J. Wildhorn .................... 13,444(4) *
Thomas M. Stuckey ..................... 13,989(5) *
Paul Gregory .......................... 10,858(6) *
Leonard M. Schiller ................... 30,339(7) *
Jeffrey Fuller ........................ 6,667(8) *
Leslie Bernhard ....................... 6,667(9) *
All directors & executive officers as a
group (7 persons) ................... 1,404,022(10) 21.90%
5% AND GREATER STOCKHOLDERS
K. Tucker Andersen .................... 1,316,717(11) 21.54%
Cumberland Associates, LLC ............ 660,258(12) 10.80%
------------
* 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
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; and Cumberland Associates, LLC, 1114
Avenue of the Americas, New York, New York.
(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
45
options exercisable within 60 days from the filing of this proxy statement
held by the named individual, divided by 6,112,678 outstanding shares on
December 15, 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) 204,728 shares issuable upon exercise of stock options
within 60 days of the date hereof, which until January 31 are exercisable
at $3.00, and beginning February 1, 2004 will be exercisable at $6.00 and
(ii) warrants immediately exercisable to purchase 11,904 shares at $5.25
per share.
(4) Includes 11,111 shares subject to stock options, exercisable within 60
days of the date hereof at $7.50 per share and 2,333 shares subject to
stock options, exercisable within 60 days of the date hereof at $2.25 per
share.
(5) Includes 8,333 shares subject to stock options, exercisable within 60
days of the date hereof at $6.5625 per share, 2,222 shares subject to
stock options exercisable within 60 days of the date hereof at $7.50 per
share and 2,333 shares subject to stock options exercisable within 60
days of the date hereof at $2.25 per share. Mr. Stuckey disclaims
beneficial ownership of (i) 3,333 shares which are held by his wife as
custodian for their children, and (ii) 567 shares which are owned by his
wife in her IRA.
(6) Includes 50 shares held by Mr. Gregory's wife, 4,141 shares subject to
stock options, exercisable within 60 days of the date hereof at $6.5625
per share, and 6,667 subject to stock options, exercisable within 60 days
of the date hereof at $1.50 per share.
(7) Includes 4,141 shares subject to stock options, exercisable within 60
days of the date hereof at $6.5625 per share, 6,667 shares subject to
stock options, exercisable within 60 days of the date hereof at $1.50 per
share and 19,531 shares subject to stock options exercisable within 60
days of the date hereof at $9.00 per share.
(8) Includes 6,667 shares subject to stock options, exercisable within 60
days of the date hereof at $1.50 per share.
(9) Includes 6,667 shares subject to stock options, exercisable within 60
days of the date hereof at $1.50 per share
(10) Includes 285,541 shares subject to stock options, 11,904 shares subject
to warrants all of which are exercisable within sixty (60) days of the
date hereof and 30,667 shares to which he has shared voting and
dispositive power.
(11) Based solely upon an amendment to Schedule 13D filed by K. Tucker
Andersen with the Securities and Exchange Commission on November 13,
2003.
(12) Based solely upon Form 4 filed by Cumberland Associates, LLC with the
Securities and Exchange Commission on November 5, 2003.
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.
46
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 9,705,576 shares of common stock issued and
9,672,243 outstanding (10,104,243 outstanding if the over-allotment option is
exercised in full) and 25,356 shares of series A preferred stock. As of the
date of this prospectus, we have 6,112,678 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 on the 31st calendar day after this offering and ending on ,
2005. 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 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.
We may not give a notice of redemption of the warrants unless the
underlying shares are covered by an effective registration statement.
Additionally, an effective registration statement must be in place for at least
30 calendar days after mailing of the notice of redemption before the
redemption may be effected. Consequently, if an effective registration
statement covering the underlying shares is in place at the time that we mail
our notice of redemption, but, during the notice period, the
47
registration statement ceases to be in effect (or is suspended), then the
notice period will automatically be extended for that number of calendar days
equal to the number of calendar days of cessation (or suspension), unless
waived in writing by the warrant holder.
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 warrant, the holder
must deliver to our transfer agent the 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.
In order for you to exercise the warrants, the shares of common stock
underlying them must be covered by an effective registration statement and, if
the issuance of shares is not exempt under state securities laws, must be
properly registered with state securities regulators. At present, we plan to
have a registration statement current when the warrants are exercised and, to
the extent that the underlying shares do not qualify for one or more exemptions
under state securities laws, we intend to register the shares with the relevant
authorities. However, we cannot provide absolute assurances that state
exemptions will be available, the state authorities will permit us to register
the underlying shares, or that an effective registration statement will be in
place at the relevant time(s). These factors may have an adverse effect on the
demand for the warrants and the prices that can be obtained from reselling
them.
PREFERRED STOCK
Under our Certificate of Incorporation, our board of directors has the
authority, without further action by the stockholders, to issue from time to
time up to 5,000,000 shares of preferred stock in one or more series. The board
of directors may fix the number of shares, designations, preferences, powers
and other special rights of each series of the preferred stock. The issuance of
preferred stock could decrease the amount of earnings and assets available for
distribution to holders of common stock, affect adversely the rights and
powers, including voting rights, of the holders of common stock, or have the
effect of delaying, deferring or preventing a change in control in Milestone.
No shares of the preferred stock have yet been issued or designated.
However, we are obligated to issue 25,356 shares of Series A convertible
preferred stock to a non-affiliate noteholder who agreed to take these shares
in exchange for his portion of approximately $5 million of secured debt.
Initially these shares of the Series A preferred stock will be convertible into
one share of common stock (three shares after giving effect to the proposed
one-for-three reverse stock split). The Series A preferred stock will vote
together with the common stock as a single class and will have one vote for
each share of common stock into which it is convertible. It will have a
liquidation preference of $1.00 per share and will be entitled to 8% cumulative
annual dividends on the amount of its liquidation preference, in cash or common
stock, at Milestone's option, until conversion. The Series A preferred stock
will become convertible into common stock six months after the closing of this
offering and unless converted earlier, will automatically convert to common
stock on November 1, 2005.
OPTIONS AND WARRANTS
As of the date of this prospectus, we had outstanding 200,115 compensatory
stock options granted to employees and directors. These options have exercise
prices ranging from $.87 to $18.00 per share and expire between February 2005
and January 2008. Of these options, 70,337 are currently exercisable.
48
As of the date of this prospectus, we had outstanding 229,167 compensatory
stock options granted to non-employees. These options have exercise prices
ranging from $1.50 to $13.50 per share and expire between July 2005 and May
2008. Of these options, 176,944 are currently exercisable.
As of the date of this prospectus, we had outstanding 799,730 warrants.
These options have exercise prices ranging from $1.56 to $9.00 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, 226,323 shares of common stock,
including shares underlying warrants and convertible debentures are covered by
registration rights agreements with the holders of these securities. Regarding
102,195 shares of common stock, there is an informal understanding that we will
file a registration statement in connection with these shares. Regarding 53,419
shares, we have agreed to use our reasonable best efforts to file a
registration statement covering these shares. The remaining 70,709 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 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.
UNDERWRITING
The underwriters named below have severally agreed, subject to the terms
and conditions contained in an underwriting agreement with us, to purchase
1,440,000 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. .........
S.W. Bach & Company ......................
----------
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
216,000 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
49
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 216,000
additional units from us on the same terms as set forth in this prospectus with
respect to the 1,440,000 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:
TOTAL WITHOUT TOTAL WITH
OVER-ALLOTMENT OVER-ALLOTMENT
PER 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).
Representative's Warrants. On completion of this offering, we will issue to
the representative of the underwriters, Paulson Investment Company, Inc.,
warrants to purchase from us up to 144,000 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 may not be sold,
transferred, assigned or hypothecated for a period of one year following the
effective date of this prospectus, except to an individual who is an officer or
partner (but not director) of the underwriters and members of the selling group
and their officers and partners, 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, directors and the holders of 5% or more
of our securities 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;
50
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 presently apply to 3,083,551 shares of our common
stock, 392,331 options or warrants to acquire shares of our common stock and
392,331 shares of common stock underlying these options and warrants. 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. Currently, there are
no agreements by Paulson Investment Company, Inc. to release any of the
securities from the lock-up agreements.
Our officers, directors and the holders of 5% or more of our securities
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.
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.
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
158,463 shares of common stock and options to purchase 71,873 shares of Common
Stock.
51
In addition, Morse, Zelnick, Rose & Lander. LLP was owed approximately
$665,000 for legal fees at December 31, 2003. It has agreed to accept units,
valued at the initial public offering price in payment of $200,000 of this
indebtedness (an estimated 31,056 units) 10 days from the closing of this
offering pursuant to a March 2003 commitment.
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. The following documents filed by us with the Securities and Exchange
Commission are incorporated in this prospectus by reference:
(1) Annual Report on Form 10-KSB for the fiscal year ended December 31,
2002;
(2) Quarterly Report on Form 10-QSB for the fiscal quarters ended March
31, 2003, June 30, 2003 and September 30, 2003 including the amendment
to Form 10-QSB for the fiscal quarter ended September 30, 2003, as
filed with the Commission on November 14, 2003.;
(3) Current Reports on Form 8-K filed on April 17, 2003, July 3, 2003 and
July 23, 2003; and
Upon written or oral request, we will provide, without charge, to each
person to whom a copy of this prospectus is delivered, a copy of any document
incorporated by reference in this prospectus (other than exhibits, unless such
exhibits are specifically incorporated by reference in such documents).
Requests should be directed to Milestone Scientific Inc., 220 South Orange
Avenue, Livingston, NJ 07039, (973) 535-2717 Attention: Leonard Osser, Chairman
and Chief Executive Officer.
We intend to furnish our shareholders with annual reports containing
financial statements audited by our independent public accountants. This
prospectus will not be accompanied by our latest annual report to shareholders.
52
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
INDEX
PAGE
----
Interim Financial Statements for the Nine Months Ended September 30, 2003
-- Condensed Consolidated Balance Sheets
September 30, 2003 (Unaudited) and December 31, 2002 .......................... F-2
-- Condensed Consolidated Statements of Operations
Nine Months Ended September 30, 2003 and 2002 (Unaudited) ..................... F-3
-- Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2003 and 2002 (Unaudited) ..................... F-4
-- Notes to Condensed Consolidated Financial Statements (Unaudited) ................ F-6
Financial Statements for the Year Ended December 31, 2002
-- Report of Independent Public Accountants ........................................ F-14
-- Consolidated Balance Sheet at December 31, 2002 ................................. F-15
-- Consolidated Statements of Operations years ended December 31, 2002 and 2001 .... F-16
-- Consolidated Statements of Changes in Stockholders' Deficiency years ended
December 31, 2002 and 2001 .................................................... F-17
-- Consolidated Statements of Cash Flows years ended December 31, 2002 and 2001 .... F-19
-- Notes to Consolidated Financial Statements ...................................... F-21
F-1
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------- ----------------
(UNAUDITED)
ASSETS
Current Assets:
Cash ................................................................. $ 95,870 $ 9,683
Accounts receivable, net ............................................. 611,602 239,435
Inventories .......................................................... 255,288 119,291
Advances to contract manufacturer .................................... 250,360 300,000
Deferred debt financing costs, net ................................... -- 159,877
Prepaid expenses ..................................................... 61,611 64,952
----------- -----------
Total current assets ........................................... 1,274,731 893,238
Equipment, net ........................................................ 205,158 227,207
Advances to Contract Manufacturer -- Long term ........................ -- 87,935
Deferred Debt Financing -- Long term .................................. 1,964 --
Other Assets .......................................................... 32,333 32,333
----------- -----------
Totals ......................................................... $ 1,514,186 $ 1,240,713
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Account payable, including $32,000 to related parties................. $ 1,177,061 $ 1,269,523
Accrued expenses ..................................................... 57,080 86,492
Accrued interest ..................................................... 197,585 169,519
Note payable net of debt discount .................................... 915,485 4,581,708
Notes payable-officer/stockholder .................................... 376,215 --
----------- -----------
Total current liabilities ...................................... 2,723,426 6,107,242
Accounts payable, including $160,000 to related parties................ 492,193 --
Accrued interest ...................................................... 1,042 139,323
Deferred compensation payable to officer/stockholder .................. 560,000 320,000
Notes payable, net of debt discount ................................... 582,514 480,091
Notes payable -- officer/stockholder .................................. 32,000 300,000
----------- -----------
Total liabilities .............................................. 4,391,175 7,346,656
----------- -----------
Commitments and Contingencies
Stockholders' Deficiency:
Preferred stock, par value $.001; authorized 5,000,000 shares......... -- --
8% Cumulative convertible preferred par value $.001; authorized and
issued 25,365 shares; .............................................. 25 --
Common stock, par value $.001; authorized, 50,000,000 shares;
5,890,875 shares and 4,244,457 shares issued, at September 30, 2003
and December 31, 2002, respectively ................................ 5,891 4,244
Additional paid-in capital ........................................... 41,622,760 36,608,096
Accumulated deficit .................................................. (43,574,149) (41,786,767)
Unearned compensation ................................................ (20,000) (20,000)
Treasury stock, at cost, 33,333 shares ............................... (911,516) (911,516)
----------- -----------
Total stockholders' deficiency ................................. (2,876,989) (6,105,943)
----------- -----------
Totals ....................................................... $ 1,514,186 $ 1,240,713
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
F-2
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
----------------- -----------------
Net sales ................................................................. $ 3,101,281 $ 3,215,907
Cost of sales ............................................................. 1,560,288 1,499,063
------------- -------------
Gross profit .............................................................. 1,540,993 1,716,844
------------- -------------
Selling, general and administrative expenses .............................. 2,491,737 2,712,649
Charge in connection with the closing of the Deerfield, IL facility ....... 79,023 --
Research and development expenses ......................................... 112,158 63,928
------------- -------------
Totals ................................................................. 2,682,918 2,776,577
------------- -------------
Loss from operations ...................................................... (1,141,925) (1,059,733)
Other income .............................................................. -- 72,000
Interest, net ............................................................. (645,457) (616,519)
------------- -------------
Net loss .................................................................. $ (1,787,382) $ (1,604,252)
============= =============
Loss per share -- basic and diluted ....................................... $ (.42) $ (.39)
============= =============
Weighted average shares outstanding -- basic and diluted .................. 4,217,185 4,084,341
============= =============
See Notes to Condensed Consolidated Financial Statements.
F-3
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
---------------- ----------------
Cash flows from operating activities:
Net loss .............................................................. $ (1,787,382) $ (1,604,252)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation ........................................................ 26,618 41,672
Amortization of debt discount and deferred financing costs .......... 242,628 234,837
Loss on disposal of fixed assets .................................... 11,248 --
Amortization of advertising cost .................................... -- 24,803
Stock options issued for services ................................... -- 2,500
Changes in operating assets and liabilities:
Increase in accounts receivable .................................... (372,167) (153,015)
(Increase) decrease in inventories ................................. (135,997) 80,614
Decrease in advances to contract manufacturer ...................... 137,575 174,449
(Increase) decrease in prepaid expenses ............................ 3,341 (10,378)
Increase in other assets ........................................... -- (19,971)
Increase in accounts payable ....................................... 399,731 169,465
Increase in accrued interest ....................................... 402,827 381,682
Increase (decrease) in accrued expenses ............................ (29,412) 19,829
Increase in deferred compensation .................................. 240,000 240,000
------------ ------------
Net cash used in operating activities ............................ (860,990) (417,765)
------------ ------------
Cash flows from investing activities-payment for capital expenditures .. (15,817) (69,691)
------------ ------------
Cash flows from financing activities:
Expenses related to registering shares ................................ (22,500) --
Proceeds from note payable -- officer/stockholder ..................... 180,537 --
Payments to note payable -- officer/stockholder ....................... (72,322) --
Proceeds from issuance of notes payable ............................... 900,000 525,000
Payments for deferred financing costs ................................. (22,721) (40,538)
------------ ------------
Net cash provided by financing activities ........................ 962,994 484,462
------------ ------------
Net Increase (Decrease) in Cash ........................................ 86,187 (2,994)
Cash, beginning of period .............................................. 9,683 15,742
------------ ------------
Cash, end of period .................................................... $ 95,870 $ 12,748
============ ============
See Notes to Condensed Consolidated Financial Statements.
F-4
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
Supplemental schedule of noncash financing activities:
In September 2003, the Company granted warrants to purchase 5,000 shares
of common stock (with an estimated fair value of $10,400) in connection with a
$50,000 credit facility provided by an existing investor. This resulted in an
initial increase to debt discount and to additional paid-in capital.
On September 30, 2003, in consideration for payment of $5,014,267 of
aggregate debt and interest, the Company issued 1,646,419 shares of common
stock and $25,365 face amount of 8% cumulative convertible preferred stock.
In June 2003, we granted warrants to purchase 53,419 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 nine months ended September 30, 2003, pursuant to the 6%/12%
promissory note agreements, we converted $206,989 of accrued interest into
additional principal.
In January 2002, we issued 11,280 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 204,728 units (consisting of one share of common stock
and one warrant to purchase an additional share of common stock).The warrants
are exercisable at $2.40 per share through January 31, 2003; at $3.00 per share
through January 31, 2004 and thereafter at $6.00 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.
In September 2002, pursuant to the 6%/12% promissory note agreements, the
Company converted $41,512 of accrued interest into additional principal.
In August 2002, the Company issued 66,667 shares of common stock in
exchange for payment of $90,000 of outstanding legal fees.
In July 2002, the Company issued 62,500 units consisting of one share of
common stock and one warrant to purchase an additional share of common stock to
a vendor as consideration for services rendered in accordance with the
agreement valued at $150,000.
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
September 30, 2003 and the results of operations for the nine months ended
September 30, 2003 and 2002.
The results reported for the nine months ended September 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 $1,787,000 and $1,604,000 and negative
cash flows from operating activities of approximately $861,000 and $418,000
during the nine months ended September 30, 2003 and 2002, respectively. As a
result, Milestone had a cash balance of only approximately $96,000, a working
capital deficiency of approximately $1,449,000 and a stockholders' deficiency
of approximately $2,877,000 as of September 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 September 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.
REDUCTION OF OPERATING OVERHEAD
To date, the Company has taken certain steps in order to reduce its
operating overhead and utilization of cash. These steps include, amongst
others, the following:
o Commencing in 2001 and continuing through 2003, 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.
F-6
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 2 -- BASIS OF PRESENTATION -- (CONTINUED)
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, are now outsourced to an independent warehouse located in
Pennsylvania.
RESTRUCTURING LIABILITIES AND PROFORMA IMPACT
On September 30, 2003, the Company satisfied approximately $5,014,000 of
secured debt including interest, through the issuance of 1,646,419 shares of
Common Stock and $25,365 face amount of 8% cumulative convertible preferred
stock. In addition, during October and November 2003, the Company took the
following additional steps to restructure its liabilities and raise equity.
o On October 31, 2003, the Company issued 102,195 shares of common stock
to certain of its principal vendors having a fair value of approximately
$502,800, in satisfaction of trade payables and future services in the
aggregate amount of $502,800.
o The Company has agreed to issue 94,327 shares of common stock having a
fair value of $329,572 in satisfaction of $329,572 of deferred financing
costs incurred in extending certain of its outstanding loans.
o The Company issued 33,943 shares of common stock upon the receipt of
approximately $189,000 upon exercising its rights to draw upon a private
equity put facility.
o The Company issued 2,333 shares of its common stock upon the exercise of
options by an employee and the receipt of $7,750.
o Additionally, the Company reached agreements with a major investor and
the Company's chairman and chief executive officer to satisfy in the
aggregate, an approximate $1,961,000 of debt, accrued interest and
deferred compensation through the issuance of securities at fair value
at the later of (i) the effective date of a public offering or (ii)
January 2, 2004.
These transactions have had or will have a significant impact on the
Company's net worth. Presented below on a proforma basis is selected financial
data, which gives effect to the aforementioned transactions as if they occurred
on September 30, 2003.
SEPTEMBER 30, 2003
-----------------------
ACTUAL PROFORMA
----------- ---------
(IN THOUSANDS)
Total current assets ........................... $ 1,275 $1,643
Total current liabilities ...................... 2,724 1,301
Working capital (deficiency) ................... (1,449) 342
Total liabilities .............................. 4,391 1,768
Total stockholders equity (deficiency) ......... (2,877) 114
ADDITIONAL RESOURCES
In April 2003, the Company received an additional $900,000 8% line of
credit from a major investor which is scheduled to mature on January 1, 2005.
As of September 30, 2003, $600,000 was outstanding on the aforementioned line
of credit.
EQUITY PUT FACILITY
During October 2003 and through November 4, 2003, Milestone exercised its
right to draw upon a private equity facility. In exchange of net proceeds of
$189,440 the Company issued 33,943 shares of
F-7
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 2 -- BASIS OF PRESENTATION -- (CONTINUED)
common stock. The put facility was arranged in January 2001 under the terms of
a three-year private equity line agreement with Hillgreen Investments Limited
("Hillgreen"), a British Virgin Islands corporation. Hillgreen is obligated to
purchase, subject to the fulfillment of specified conditions, up to 700,000
shares of Milestone's common stock. 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. All
shares that are sold are 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.
EQUITY OFFERING
On November 10, 2003, the Company filed with the Securities Exchange
Commission a registration statement on Form S-2 (the "Registration Statement").
The Registration Statement covers the sale of units of common stock and
warrants for an aggregate firm commitment gross offering price of $8,000,000 to
$10,000,000. The warrants included in the units are exercisable at any time
after they become separately tradable until their expiration date, five years
after the date of the closing of the offering of an exercise price equal to
150% of the closing market price of our common stock on the pricing date of
this offering. Some or all of the warrants may be redeemed by us at a price of
$0.01 per warrant, by giving not less than 30 days notice to the holders of the
warrants, which the Company may do at any time, beginning 6 months from the
effective date of this offering after the closing price for the Company's
common stock on the principal exchange on which it trades (i.e. AMEX) has
equaled or exceeded 200% of the price of the Company's common stock on the
effective date of this offering. The common stock included in the units and the
warrants will trade only as a unit for 30 days following the closing date of
the offering, unless the underwriter determines that separate trading should
occur earlier.
After that date, the common stock included in the units and the warrants
will trade separately. The size of the offering, the number of units to be
sold, the price per unit, the securities included in the units and the exercise
price of the warrants are all subject to change.
As currently contemplated, the gross proceeds of an $8,000,000 offering
are expected to yield net proceeds, of $6,500,000 after taking into account
underwriting discounts and commissions and estimated offering expenses. As set
forth in the Registration Statement the net proceeds of the offering will be
used primarily to expand and support sales and marketing efforts for CompuDent
in the United States, including new marketing and advertising campaigns,
support the launch of the recently announced SafetyWand product line, expand
international sales efforts and develop commercial models of products using
other new subcutaneous injection technology. We will retain broad discretion in
the allocation of the net proceeds within the categories set forth above. The
amounts actually expended within these categories 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 other factors. There are
no assurances that the Company will be successful in raising the aforementioned
amount of capital or any other amount.
The accompanying unaudited 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 the Company be unable to continue as a going
concern.
F-8
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 3 -- LOSS PER SHARE
The rights of the Company's preferred and common stockholders are
substantially equivalent. The Company has included the 25,365 outstanding
preferred shares from the date of issuance in the weighted average number of
shares outstanding in the computation of basic loss per share for the three and
nine months ended September 30, 2002 and 2003, in accordance with the "two
class" method of computing earnings (loss) per share.
Options and warrants to purchase 1,100,271 and 1,584,452 shares of common
stock were outstanding as of September 30, 2003 and 2002, respectively, but
were not included in September 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 25% of our net
sales for the nine months ended September 30, 2003 and approximately 18% for
the nine months ended September 30, 2002. At June 30, 2003, receivables from
this customer were approximately 70% 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 $108,215 of
notes payable on demand with interest payable at 6% per annum.
The $108,215 arose when the Company's CEO provided the Company with a
$57,322 short term loan on January 17, 2003 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, April 7 and
September 30, 2003, the Company's CEO provided additional demand loans of
$38,215, $35,000 and $50,000, respectively. The loans for $38,215 and $35,000
were provided to fund operations. The loan for $50,000 was provided for the
purpose of covering expenses relating to the further exploration of equity
financing alternatives. As of September 30, 2003 and November 4, 2003, $108,215
remains outstanding.
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 $108,215 notes payable was extended
to January 2, 2005.
NOTE 6 -- NOTES PAYABLE
6%/12% PROMISSORY NOTES
On September 30, 2003, the Company satisfied $5,014,014 of secured debt
obligations including interest through the issuance of 1,646,419 shares of its
Common stock and 25,365 of its Preferred Stock. These obligations consisted of
the following:
o 6%/12% Promissory Notes with an aggregate value of $2,822,959
o 8% Promissory Notes with an aggregate value of $1,604,315
o $500,000 line of credit and $86,740 of accrued interest
F-9
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 6 -- NOTES PAYABLE -- (CONTINUED)
As of September 30, 2003, short term notes payable, net of a $9,955 debt
discount, consist of the following:
$329,572 of additional consideration given to the original noteholder of
the 6%/12% of promissory notes when they agreed to extend the obligations on
April 15, 2002 until July 1, 2003. The $329,572 of the additional consideration
was subsequently satisfied through the issuance of 94,327 shares of the
Company's Common stock during October and November 2003 valued at $3.48 per
share, the fair value.
o $500,000 borrowed under the $1,000,000 6% credit facility.
o $600,000 borrowed under the $900,000 8% credit facility.
Agreements reached in October 2003 provide for the satisfaction of the
obligations through the issuance of equity securities by January 2004. (See
Note 2)
Long term notes payables consist of $100,000 in 6% promissory notes and
$500,000 of the 8% promissory note.
Descriptions of the above obligations follow.
(A) THE 6%/12% PROMISSORY NOTES CONSIST OF THE FOLLOWING ISSUANCES
(i) On September 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").
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 $5.25 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 were accruing interest expense at
12%. These deferred financing costs were being amortized through July
1, 2003. These obligations were satisfied as described above through
the issuance of 390,374 shares of common stock and 25,365 of
convertible preferred stock. To date and subsequent to September 30,
2003, the Company issued 40,262 shares of the common stock in
satisfaction of the $140,212 of deferred financing costs.
(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 assets and 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.
F-10
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 6 -- NOTES PAYABLE -- (CONTINUED)
For the nine months ended September 30, 2003 and 2002, we converted
into principal, accrued interest of $206,989 and $171,785,
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 are currently
accruing interest expense at 12%. Accordingly, the deferred financing
costs and the unamortized financing charges were being amortized
through July 1, 2003.
These obligations were satisfied as described above through the
issuance of 532,924 shares of common stock. From October 10, 2003
through November 10, 2003, the Company issued 54,066 shares of common
stock in satisfaction of the $189,360 of deferred financing costs.
(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 23,333 shares of our common stock,
exercisable at $9.00 per share. In connection with the $400,000, the investor
received five-year warrants to purchase 26,667 shares of our common stock
exercisable at $3.75 per share. In connection with the $100,000, the investor
received five-year warrants to purchase 6,667 shares of our common stock at
$3.75 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.
At the option of the Company, this $500,000 can be convertible into common
stock. On September 30, 2003, the Company satisfied $500,000 of the obligation
and $120,644 of related interest through the issuance of 204,833 shares of the
Company common stock.
During 2002 and through February 2003, we issued a total of $1,385,000
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.
During 2002 and through February 2003, the Company issued a total of
$1,385,000 promissory notes to an existing investor maturing on September 30,
2003. At the option of the company, the notes bear interest of 8% if paid in
cash and 10% if paid in stock.
During the nine months ended September 30, 2003, the Company borrowed
$600,000 under an $800,000, 8% credit facility from an existing investor. In
October 2003, agreements were reached providing for the issuance of equity
securities in satisfaction of these obligations and related interest.
On September 30, 2003, the Company issued 324,644 shares of its common
stock in consideration for payment of these promissory notes including
interest.
F-11
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 6 -- NOTES PAYABLE -- (CONTINUED)
(C) $500,000 LINE OF CREDIT
On March 9, 2001 the Company obtained from a major existing investor, a
10% $500,000 line of credit, which was to mature on August 31, 2002.
Additionally, the Company pays a 2% facility fee on the line outstanding
balance.
In connection with obtaining the line of credit, the lender received
warrants to purchase 33,333 shares of common stock at an exercise price of
$3.30. The estimated fair value of the warrants, which amounted to $40,000 was
recorded as a debt discount. In addition, the Company incurred deferred
financing fees of $28,384 which was being amortized to August 31, 2002. On
April 12, 2002 the investor agreed to extend the line of credit and payment for
interest to August 1, 2003. Furthermore in July 2003, the investor agreed to
extend the line of credit and payment for interest until September 30, 2003. In
connection with each extension, amortization of unamortized debt discount and
deferred financing costs were also extended. These obligations were satisfied
as described above through the issuance of 193,644 shares of Common Stock.
(D) 6% CONVERTIBLE PROMISSORY NOTES
During June 2003 and September 2003, we issued $50,000 promissory notes to
existing investors. The June 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 $.936
of indebtedness. Additionally, Milestone granted the investor warrants to
purchase 53,419 shares of our common stock at a per share price of $1.56 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 of $14,423
equal to the estimated fair market value of the warrants. The note dated
September 25, 2003 bears interest at 6% and matures on March 24, 2005. At the
option of the Company, the principal and interest are payable on the maturity
date in common stock at a rate of one share of common stock for every $3.30 of
indebtedness. Additionally, Milestone granted the investor warrants to purchase
5,000 of common stock at a per share price of $6.00 with an estimate fair value
of $14,423 at any time or from time to time during the period of June 4, 2003
through June 5, 2005. This resulted in an initial increase to debt discount and
to additional paid-in capital.
NOTE 7 -- ACCOUNTS PAYABLE -- LONG TERM
In addition to the $160,000 of trade payables which had been previously
extended to January 2005, the Company on October 3, 2003, reached agreements to
satisfy $502,800 of trade payables including $187,000 of services not yet
completed or billed through the issuance of 102,285 shares of Common stock
valued at $4.92 per share.
NOTE 8 -- 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 a meritorious defense
to this complaint based, in part, on its position that the plaintiff had no
right to return the goods.
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.
F-12
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 9 -- EMPLOYEE STOCK OPTION PLAN
As of September 30, 2003, there were 221,115 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.
NINE MONTHS ENDED SEPTEMBER 30
-----------------------------------
2003 2002
---------------- ----------------
Net loss, as reported ............................................ $(1,787,382) $(1,604,252)
Deduct: Total stock-based employee compensation expenses
determined under fair value based method for all awards .........
(168,462) (369,365)
----------- -----------
Net loss, pro forma .............................................. $(1,955,844) $(1,973,617)
----------- ===========
Loss per share: Basic and diluted
As reported ..................................................... $(.42) $(.39)
===== =====
Basic-pro forma ................................................. $(.45) $(.48)
===== =====
NOTE 10 -- 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.
NOTE 11 -- SUBSEQUENT EVENTS
REVERSE STOCK SPLIT
The Board of Directors adopted a resolution, which was approved by the
shareholders on December 9, 2003, of an amendment to the Company's Certificate
of Incorporation to effect a reverse stock split of its common stock. The ratio
would be no greater than one-for-ten, at the sole discretion of the Company's
board of directors, in connection with an underwritten public offering by the
Company.
On December 22, 2003, the Company formed a committee to determine the
amount of the split. On January 6, 2004, the committee approved a 1-for-3
reverse stock split of its common stock and the Company filed an amendment to
its Certificate of Incorporation effecting that reverse split. Accordingly, all
share and per share information in these unaudited condensed consolidated
financial statements have been restated to retroactively reflect the 1-for-3
combination.
F-13
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 the Company's 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.
/s/ J.H. Cohn LLP
Roseland, New Jersey
April 1, 2003, except for Notes B and H which are as of April 15, 2003
and Note Q which is as of January 6, 2004.
F-14
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, 50,000,000 shares; 4,244,457 shares
issued ..................................................................... 4,244
Additional paid-in capital ................................................... 36,608,096
Accumulated deficit .......................................................... (41,786,767)
Unearned compensation ........................................................ (20,000)
Treasury stock, at cost, 33,333 shares ....................................... (911,516)
-------------
Total stockholders' deficiency ............................................. (6,105,943)
-------------
Total ...................................................................... $ 1,240,713
=============
The accompanying notes are an integral part of these statements.
F-15
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
2002 2001
----------------- -----------------
Net Sales ............................................................ $ 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 ........................... $ (.59) $ (1.07)
============= =============
Weighted-average shares outstanding -- basic and diluted ............. 4,156,558 3,714,197
============= =============
The accompanying notes are an integral part of these statements.
F-16
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 .................... 3,584,299 $3,584 $34,591,642 $ (35,354,990) $ --
Warrants issued with draw-down on
credit facility ............................ 23,400
Common stock issued for consideration
for payment of accrued interest ............ 9,214 9 36,270
Warrants issued pursuant to a $500,000
line of credit ............................. 40,000
Common stock issued for services
rendered ................................... 30,769 31 149,969
Warrants issued for unearned
advertising fees ........................... 324,218 (324,218)
Proceeds from sale of common stock,
net of expenses ............................ 166,667 167 491,833
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 .................. 3,790,949 3,791 36,098,148 (39,346,570) (302,820)
Common stock issued from the sale of
common stock in 2001 ....................... 108,333 108 (108)
Common stock issued for accrued
interest ................................... 11,280 11 27,061
Common stock issued for deferred
compensation ............................... 204,728 205 491,141
Common stock issued for payment of
accounts payable ........................... 62,500 62 149,938
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 ........................... 66,667 67 89,933
Net loss .................................... (2,440,197)
--------- ------ ----------- ------------- ----------
Balance, December 31, 2002 .................. 4,244,457 $4,244 $36,608,096 $ (41,786,767) $ --
========= ====== =========== ============= ==========
F-17
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 2002 AND 2001
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-18
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS 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-19
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
Supplemental schedule of noncash financing activities:
In January 2002, we issued 11,280 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 204,728 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 $2.40 per share through January 31, 2003; at $3.00 per share through January
31, 2004 and thereafter at $6.00 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 62,500 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 66,667 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 6,667 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 9,214 shares of common stock in exchange for
payment of accrued interest totaling $36,279.
In February 2001, we issued 30,769 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 33,333 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.
In March 2001, we granted warrants to purchase 130,208 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-20
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
(Registered Trademark) , a single use disposable handpiece. The system is
marketed in dentistry under the trademark CompuDent (Trade Mark) and Wand Plus
(Registered Trademark) and in medicine under the trademark CompuMed (Trade
Mark). CompuDent (Trade Mark) is suitable for all dental procedures that
requires local anesthetic. CompuMed (Trade Mark) and Wand Plus (Registered
Trademark) 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. Our products 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-21
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- BASIS OF PRESENTATION -- (CONCLUDED)
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 subsidiary 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-22
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (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 1,614,785 and 1,108,611 outstanding options and warrants for
the years ended December 31, 2002 and 2001, respectively and the payment of the
notes payable with shares of common 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 institutions. At times, such
investments may be in excess of the Federal Deposit Insurance
F-23
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 (Registered Trademark) 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-24
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $5.25 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 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
F-25
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- NOTES PAYABLE -- (CONTINUED)
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 23,333 shares of
the Company's common stock, exercisable at $9.00 per share. In
connection with the $400,000, the investor received five-year
warrants to purchase 26,667 shares of the Company's common stock
exercisable at $3.75 per share. In connection with the $100,000, the
investor received five-year warrants to purchase 6,667 shares of the
Company's common stock at $3.75 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 333,333 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
$6.00 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 166,667 shares of the Company's common stock. In 1999, the Plan
was amended, providing for the grant of options to purchase up to 333,333
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
F-26
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- STOCK OPTION PLAN -- (CONTINUED)
the Company at a price 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 ......... $ (.59) $ (1.07)
============ ============
Pro forma loss per share ........... $ (.64) $ (1.21)
============ ============
The weighted-average fair value of the individual options granted during
2002 and 2001 was estimated as $.66 and $5.37, 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 ........... 309,703 $ 15.33
Granted .......................................... 46,667 6.96
Forfeited ........................................ (46,615) 9.06
-------
Options outstanding at December 31, 2001 ......... 309,755 15.48
Granted .......................................... 57,667 2.37
Forfeited ........................................ (120,141) 14.97
--------
Options outstanding at December 31, 2002 ......... 247,281 $ 12.24
======== ========
F-27
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- STOCK OPTION PLAN -- (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2002.
REMAINING
NUMBER CONTRACTUAL NUMBER
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISABLE
----------------- ------------- -------------- ------------
$1.6500.......... 16,667 4.0 0
2.2500 ......... 20,333 4.0 6,778
2.6250 ......... 16,667 2.0 0
3.0000 ......... 16,667 1.0 0
3.6000 ......... 8,333 4.5 0
3.7500 ......... 1,667 1.7 1,667
3.7500 ......... 3,333 4.8 0
4.6875 ......... 1,667 0.7 1,667
4.8300 ......... 8,281 2.5 5,521
5.4375 ......... 2,333 2.1 1,555
6.0000 ......... 16,667 3.0 0
6.5625 ......... 27,000 2.5 18,000
7.5000 ......... 33,333 1.8 33,333
7.5000 ......... 26,667 3.6 8,889
9.0000 ......... 9,667 1.0 9,667
9.0000 ......... 1,500 1.5 1,500
12.0000 ......... 500 1.5 500
15.0000 ......... 500 1.5 500
18.0000 ......... 500 1.5 500
48.0000 ......... 16,666 0.0 0
47.5000 ......... 8,333 0.3 8,333
69.0000 ......... 10,000 0.2 10,000
------ ------
247,281 108,410
======= =======
The weighted-average exercise price of options exercisable at December 31,
2002 is $15.90.
The Company charged $10,000 to operations during the year ended December
31, 2002, representing the fair market value of 50,000 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 110,000
common stock purchase warrants issued to consultants.
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 208,333 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 $2.40 per share
F-28
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- EMPLOYMENT CONTRACT AND DEFERRED COMPENSATION (CONTINUED)
through January 31, 2003 and then at $3.00 per share through January 31, 2004
and thereafter at $6.00 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:
2002 2001
---------------- ----------------
Current assets and liabilities
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) ......... $ -- $ --
============= =============
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.
F-29
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 system kits ............ $1,452,005 $1,828,801
The Wand 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.
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 unit
and system kit with Tricor Systems, Inc. ("Tricor") and for the manufacture of
The Wand disposable handpiece by Nypro Inc.
F-30
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE N -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
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 and the CompuFlo 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 390,625 shares of common stock exercisable on the following dates
and prices over the life of the Agreement: (1) $3.84 during the first 18
months, (2) $6.75 during the next year and (3) $9.00 during the next year.
The Agreement provided for a termination clause in the fourth month if the
Company's average closing stock price does not exceed $6.75 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 $6.75. 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 $6.75 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 130,208 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 260,417 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
F-31
MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE O -- RELATED PARTY TRANSACTIONS -- (CONTINUED)
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 2,381 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.
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 700,000 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 66,667 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 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.
The Board of Directors adopted a resolution, which was approved by the
shareholders on December 9, 2003, of an amendment to the Company's Certificate
of Incorporation to effect a reverse stock split of its common stock. The ratio
would be no greater than one-for-ten, at the sole discretion of the Company's
board of directors, in connection with an underwritten public offering by the
Company.
On December 22, 2003, the Company formed a committee to determine the
amount of the split. On January 6, 2004 the committee approved a 1-for-3
reverse stock split of its common stock and the Company filed an amendment to
its Certificate of Incorporation effecting that reverse split. Accordingly, all
share and per share information in these consolidated financial statements have
been restated to retroactively reflect the 1-for-3 combination.
F-32
INSIDE BACK COVER
COMPANY LOGO
SAFETYWAND (TM) SAFETYWAND (TM)
[PICTURE OF SAFETYWAND WITH NEEDLE
[PICTURE OF SAFETYWAND WITH NEEDLE RETRACTED.] PROTRACTED.]
SAFETYWAND (TM) HANDPIECE WITH NEEDLE, SAFETYWAND (TM) HANDPIECE WITH NEEDLE,
IN THE RETRACTED SAFE POSITION. IN THE PROTRACTED POSITION, READY FOR USE.
COOLBLUEWAND (TM) DENTAL ENHANCEMENT SYSTEM.
[PICTURE OF COOLBLUEWAND WITH BLUE LIGHT EMITTING]
================================================================================
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 ............................................................. 9
Forward Looking Statements ............................................... 14
Recent Developments ...................................................... 14
Use of Proceeds .......................................................... 15
Dividend Policy .......................................................... 16
Capitalization ........................................................... 16
Price Ranges of Our Common Stock ......................................... 18
Selected Consolidated Financial Data ..................................... 19
Management's Discussion and Analysis or Plan of Operations ............... 20
Business ................................................................. 27
Management ............................................................... 38
Limitation of Directors' Liability and Indemnification ................... 39
Executive Compensation ................................................... 40
Certain Relationships and Related Party Transactions ..................... 43
Security Ownership of Certain Beneficial Owners and Management ........... 45
Description of Securities ................................................ 47
Underwriting ............................................................. 49
Legal Matters ............................................................ 51
Experts .................................................................. 52
Where You Can Find More Information ...................................... 52
Index to Financial Statements ............................................ F-1
1,440,000 UNITS
[GRAPHIC OMITTED]
-----------------
-----------------
PROSPECTUS
-----------------
PAULSON INVESTMENT
COMPANY, INC.
S.W. BACH & COMPANY
, 2004
================================================================================
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 .............................................. $ 2,700
NASD fee ...................................................... $ 2,631
American Stock Exchange listing fee ........................... $ 53,000
Printing expenses ............................................. $ 75,000
Accounting fees and expenses .................................. $125,000
Legal fees and expenses ....................................... $350,000
Transfer agent and registrar fees and expenses ................ $ 10,000
Road Show Expenses............................................. $ 50,000
Miscellaneous ................................................. $ 68,669
--------
Total ......................................................... $737,000
========
II-1
RECENT SALES OF UNREGISTERED SECURITIES.
On January 31, 2000, Milestone issued five-year warrants to purchase an
aggregate of 47,619 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 $5.25 in 2000 to a maximum of $21.00 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 $5.25 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 10,044 shares of Common
Stock. On February 3, 2000, Milestone reduced the exercise price of all these
warrants to $3.75 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 26,667 and 6,667
shares of Common Stock, respectively, at an exercise price of $3.75 and $5.625
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 33,333 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 25,000 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 $5.58 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 30,769 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 9,214 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 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 33,333 shares of Common Stock, exercisable at
any time for five years from the date of issuance at $3.30 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
11,280 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 $2.40 per share through January 31, 2003, thereafter at
$3.00 per
II-2
share through January 31, 2004, and thereafter at $6.00 per share through
January 31, 2007, at which time they will expire. All of these units and
warrants were issued in January 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 390,667 shares of
Milestone's Common Stock at prices increasing from $3.84, to $9.00 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 204,728 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 $2.40 per share through January 31, 2003,
thereafter at $3.00 per share through January 31, 2004, and thereafter at $6.00
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 108,333 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 $2.40 per share through January 31, 2003, thereafter at $3.00
per share through January 31, 2004, and thereafter at $6.00 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.
In July 2002, we issued 62,500 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 66,667 shares of common stock in exchange for
payment of $90,000 of outstanding legal fees.
In June 2003 we issued a 6% convertible note in the amount of $50,000 and
an 18 months warrant to purchase 53,419 shares of our common stock at $1.56 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 5,000 shares of our common stock at $6.00
per share, in consideration for a $50,000 loan from an accredited investor.
In October 2003 we issued 1,646,419 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 4,381 common stock at
$5.79. Subsequently, we issued 94,327 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 entered into a binding agreement with our CEO and a
major investor under which we have sold and will issue to them approximately
249,100 units, each consisting of two shares of common stock and one warrant to
purchase one share of common stock (the "Units") in payment of $1,604,204 of
debt and interest due to our CEO and a major investor, and approximately
II-3
59,627 Units in payment of $384,000 of accrued compensation due to our CEO. The
Units will be issued on the date this offering becomes effective. Both
investors are accredited investors.
On August 13, 2002 we received a binding commitment (modifying and
confirming a March 29, 2002 undertaking), requiring our legal counsel to
purchase equity securities, valued at fair market value, in payment of $200,000
of then accrued legal fees. The specific timing of this issuance is governed by
a December 22, 2003 agreement, pursuant to which we will issue and deliver, ten
days after this offering becomes effective, approximately 31,056 Units. The
investor is an accredited investor.
On October 31, 2003 we issued 102,195 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 (10)
3.6 Certificate of Amendment filed January 8, 2004. (10)
3.7 Certificate of Designation filed January 15, 2004 (10)
3.8 By-laws of Milestone (1)
4.1 Specimen Stock Certificate (2)
4.2 Form of unit certificate (11)
4.3 Form of warrant agreement, including form of warrant
4.4 Form of representative's warrant
5.1 Opinion of Morse, Zelnick, Rose & Lander LLP
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 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
II-4
EXHIBIT
NO. DESCRIPTION
----------- -------------------------------------------------------------------------------------------------
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 Intentionally left blank.
10.25 Letter from Morse, Zelnick, Rose & Lander LLP, dated March 29, 2002, re-deferral of
payment. (10)
10.26 Letter from Leonard Osser, dated April 15, 2003 deferring payment. (9)
10.27 Letter from Morse, Zelnick, Rose & Lander LLP, dated April 2003 deferring payment. (10)
10.28 Line of Credit for $900,000 and extension of $500,000 line of credit, dated April 15, 2003. (10)
10.29 Agreement with DaVinci Systems dated July 30, 2003. (10)
10.30 Agreement with Mark Hochman and amendments thereto dated April 9, 1998, December 16,
1999, November 28, 2001, October 10, 2002 and December 19, 2003. (10)
10.31 Agreement with Strider dated September 3, 2003. (10)
10.32 Agreement with Len Osser and K. Tucker Andersen, dated October 9, 2003. (10)
10.33 Agreement with Morse, Zelnick, Rose & Lander dated December 22, 2003. (10)
10.34 Employment Agreement with Leonard Osser dated December 20, 2003. (10)
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) Previously filed in Amendment No. 1 to this Registration Statement.
(10) Previously filed in Amendment No. 3 to this Registration Statement.
(11) Previously filed in Amendment No. 2 to this Registration Statement.
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.
(5) 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 February 11, 2004.
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 February 11, 2004.
SIGNATURE TITLE
--------- -----
/s/ Leonard Osser* Chief Executive Officer and Chairman
-------------------------------- 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
*By: /s/ Leonard Osser
--------------------------------
Leonard Osser
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 (10)
3.6 Certificate of Amendment filed January 8, 2004. (10)
3.7 Certificate of Designation filed January 15, 2004 (10)
3.8 By-laws of Milestone (1)
4.1 Specimen Stock Certificate (2)
4.2 Form of unit certificate (11)
4.3 Form of warrant agreement, including form of warrant
4.4 Form of representative's warrant
5.1 Opinion of Morse, Zelnick, Rose & Lander LLP
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 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)
10.16 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 Intentionally left blank.
10.25 Letter from Morse, Zelnick, Rose & Lander LLP, dated March 29, 2002, re-deferral of
payment. (10)
10.26 Letter from Leonard Osser, dated April 15, 2003 deferring payment. (9)
10.27 Letter from Morse, Zelnick, Rose & Lander LLP, dated April 2003 deferring payment. (10)
EXHIBIT
NO. DESCRIPTION
----------- -------------------------------------------------------------------------------------------------
10.28 Line of Credit for $900,000 and extension of $500,000 line of credit, dated April 15, 2003. (10)
10.29 Agreement with DaVinci Systems dated July 30, 2003. (10)
10.30 Agreement with Mark Hochman and amendments thereto dated April 9, 1998, December 16,
1999, November 28, 2001, October 10, 2002 and December 19, 2003. (10)
10.31 Agreement with Strider dated September 3, 2003. (10)
10.32 Agreement with Len Osser and K. Tucker Andersen, dated October 9, 2003. (10)
10.33 Agreement with Morse, Zelnick, Rose & Lander dated December 22, 2003. (10)
10.34 Employment Agreement with Leonard Osser dated as of December 20, 2003. (10)
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) Previously filed in Amendment No. 1 to this Registration Statement.
(10) Previously filed in Amendment No. 3 to this Registration Statement.
(11) Previously filed in Amendment No. 2 to this Registration Statement.