<PAGE>
As filed with the Securities and Exchange Commission on October 11, 1996
Registration No. 333-11551
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
Registration Statement
Under the
Securities Act of 1933
----------------------------
PACIFIC BIOMETRICS, INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C> <C>
Delaware 8731 93-1211114
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Number) Identification No.)
</TABLE>
----------------------------
PACIFIC BIOMETRICS, INC.
1370 Reynolds Avenue
Irvine, CA 92614
(714) 263-9933
(Name, address and telephone number of principal executive offices
and principal place of business)
Paul G. Kanan, President
Pacific Biometrics, Inc.
1370 Reynolds Avenue
Irvine, CA 92614
(714) 263-9933
(Name, address and telephone number of agent for service)
----------------------------
Copies to:
Robert I. Fisher, Esq. Joseph P. Richardson, Esq.
Neil S. Belloff, Esq. Brown & Bain, P.A.
Rosenman & Colin LLP 2901 North Central Avenue
575 Madison Avenue Phoenix, Arizona 85012
New York, New York 10022 (602) 351-8415
(212) 940-8800
----------------------------
Approximate Date of Proposed Sale to the Public: As soon as practicable
after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]__________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]__________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]__________________
----------------------------
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
==============================================================================
<PAGE>
PACIFIC BIOMETRICS, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Form SB-2
Item Number and Caption Location in Prospectus
----------------------- ----------------------
<S> <C>
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus . . . . Outside Front Cover Page
2. Inside Front and Outside
Back Cover Pages of
Prospectus . . . . . . . . . . . Inside Front and Outside Back Cover Pages
3. Summary Information and Risk
Factors . . . . . . . . . . . . Prospectus Summary; Risk Factors
4. Use of Proceeds . . . . . . . . . Use of Proceeds
5. Determination of Offering Price. . Underwriting
6. Dilution . . . . . . . . . . . . Dilution
7. Selling Security Holders . . . . . Not Applicable
8. Plan of Distribution . . . . . . . Cover Page; Underwriting
9. Legal Proceedings . . . . . . . . Business - Legal Proceedings
10. Directors, Executive Officers,
Promoters and Control Persons. . Management
11. Security Ownership of Certain
Beneficial Owners and
Management . . . . . . . . . . . Principal Stockholders
12. Description of Securities. . . . . Description of Securities; Underwriting
13. Interest of Named Experts
and Counsel. . . . . . . . . . . Legal Matters; Experts
14. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities . . . . . . . . . . Management-Indemnification
15. Organization Within Last
Five Years . . . . . . . . . . . Prospectus Summary
16. Description of Business . . . . . Prospectus Summary; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; and Financial Statements
17. Management's Discussion
and Analysis or Plan of
Operation . . . . . . . . . . . Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property. . . . . . Business - Properties
19. Certain Relationships
and Related Transactions . . . . Certain Relationships and Related Transactions
20. Market For Common Equity
and Related Stockholder
Matters. . . . . . . . . . . . . Shares Eligible for Future Sale
21. Executive Compensation . . . . . . Management - Executive Compensation
22. Financial Statements . . . . . . . Financial Statements
23. Changes in and Disagreements
With Accountants on
Accounting and Financial
Disclosures. . . . . . . . . . . None
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS DATED OCTOBER 11, 1996
SUBJECT TO COMPLETION
PROSPECTUS
PACIFIC BIOMETRICS, INC.
[LOGO]
1,700,000 Units
Consisting of
1,700,000 Shares of Common Stock and
1,700,000 Redeemable Warrants
----------------------------
Each unit (a "Unit") consists of one share of common stock, par value
$.01 per share (the "Common Stock") and one redeemable Warrant (the "Warrants")
of Pacific Biometrics, Inc., a Delaware corporation (the "Company"). The
components of the Units are separately transferable immediately upon issuance
and will not trade as a unit. Each Warrant entitles the registered holder
thereof to purchase, at any time until January 31, 1998 (the "Expiration Date"),
one share of Common Stock at an exercise price of $12.00, subject to adjustment.
The Warrants are redeemable by the Company under certain conditions, at a
redemption price of $.10 per Warrant, upon at least thirty days' prior written
notice, commencing on April 30, 1997. See "Description of Securities -
Redeemable Warrants."
Prior to this Offering, there has been no public market for the Units,
Common Stock or Warrants, and there can be no assurance that any such market
will develop, or if developed, will be maintained. It is anticipated that the
Common Stock and Warrants will each be quoted on the National Association of
Securities Dealers Automated Quotation ("Nasdaq") Small Cap Market under the
symbols "PBMI" and "PBMIW," respectively. The Units are not anticipated to trade
and will not be listed on the Nasdaq Small Cap Market or any other exchange.
The initial public offering price of the Units has been determined by
negotiations between the Company and Paradise Valley Securities, Inc. (the
"Underwriter") and does not necessarily relate to the Company's book value, net
worth or other established criteria of value. See "Underwriting" for
information about factors considered in determining the initial public offering
price.
----------------------------
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE
OF RISK, IS SUBJECT TO IMMEDIATE SUBSTANTIAL DILUTION, AND
ONLY THOSE WHO CAN BEAR THE RISK OF THE ENTIRE LOSS OF THEIR
INVESTMENT SHOULD PARTICIPATE. SEE "RISK FACTORS" BEGINNING
ON PAGE 9.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
=============================================================================
Price to Underwriting Proceeds to
Public Discounts and Company(2)
Commissions(1)
- -----------------------------------------------------------------------------
Per Unit . . . . . $4.75 $.475 $4.275
- -----------------------------------------------------------------------------
Total(3) . . . . . $8,075,000 $807,500 $7,267,500
=============================================================================
(1) Does not reflect additional compensation to be received by the Underwriter
in the form of (i) a non-accountable expense allowance of $242,250 ($.1425
per Unit) ($278,587 if the over-allotment option is exercised by the
Underwriter in full); and (ii) a warrant to purchase up to 170,000 Units
at a price equal to 120 percent of the initial public offering per Unit,
exercisable over a four-year period commencing one year from the date of
this Prospectus (the "Underwriters's Unit Purchase Warrant"). In addition,
the Company has agreed to indemnify the Underwriter against certain
liabilities under the Securities Act. See "Underwriting."
(2) Before deducting other expenses payable by the Company, which are
estimated to be approximately $450,000.
(3) The Company has granted the Underwriter an option exercisable within thirty
days after the date of this Prospectus, to purchase up to an additional
255,000 Units on the same terms as the Units offered hereby to cover
over-allotments, if any. If the option is exercised in full, total "Price
to Public," "Underwriting Discounts and Commissions" and "Proceeds to
Company" will be $9,286,250, $928,625 and $8,357,625, respectively.
--------------------------------
The Units are offered by the Underwriter on a "firm commitment" basis
when, as and if delivered to and accepted by the Underwriter, and subject to
its right to reject orders in whole or in part and to certain other conditions.
It is expected that delivery of the certificates representing the Units will be
made at the offices of Paradise Valley Securities, Inc., Phoenix, Arizona, on
or about _______________, 1996.
----------------------------
Paradise Valley Securities, Inc.
___________________, 1996
<PAGE>
PBI PRODUCTS
[PICTURE] [PICTURE]
OSTEOPATCH(TM) OSTEOPATCH(TM)
[PICTURE] [PICTURE]
SPINPRO(R) SALIVASAC(R)
HDL
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMPANY'S SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE OVER-THE-COUNTER MARKET
OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
THESE ARE SPECULATIVE SECURITIES.
<PAGE>
Upon consummation of this Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). The Company intends to furnish its stockholders with annual
reports containing audited financial statements examined by the Company's
independent public accountants and quarterly reports containing unaudited
financial information for each of the first three quarters of each fiscal year.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements (including the notes thereto)
appearing elsewhere in this Prospectus. Unless otherwise indicated, the
information in this Prospectus assumes that the Underwriter's over-allotment
option is not exercised. See "Underwriting." All references to the "Company"
contained herein refer to the Company and its wholly-owned subsidiaries, unless
the context otherwise requires, and all information contained herein gives
effect to the Mergers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
THE COMPANY
The Company develops diagnostic and laboratory products and provides
laboratory services in the fields of cardiovascular disease and osteoporosis
laboratory testing. The Company's strategy is to focus on the development of
cost-effective, non invasive diagnostic tests and improved laboratory
techniques in order to achieve early diagnosis, prevention, and therapeutic
monitoring. The Company plans to (i) finalize development and commercialize a
patented skin patch product that measures bone loss markers in human
perspiration (the "Osteopatch(TM)"); (ii) expand its specialty reference
laboratory business; (iii) explore new applications and market opportunities
for the SPINPRO(R) product, its sample preparation device used to perform
certain laboratory tests; and (iv) evaluate the feasibility of noninvasive
glucose testing using SalivaSac(R), its patented saliva collection device.
Bone diseases and disorders, including osteoporosis, are a significant
health problem worldwide. An estimated 25 million Americans, and more than 75
million persons worldwide, suffer from osteoporosis. Although the National
Osteoporosis Foundation estimates that the costs associated with osteoporosis
exceed $10 billion annually in the U.S., medical intervention usually occurs
only after symptoms such as pain or fractures appear and when treatment is
generally too late to be effective. The Company believes that over fifty new
therapeutic products are under development and that the osteoporosis therapeutic
market, currently estimated at $2 billion annually, will grow significantly.
Thus, there is a need for diagnostic tools and assessments that will identify
those at risk, allow for early treatment and enhance the physician's ability to
monitor the effectiveness of such treatment.
The Company's specialty reference laboratory has developed an
expertise in the emerging field of osteoporosis laboratory assessments through
its work with diagnostic manufacturers of assays for bone markers (i.e., Ostex
International, Inc. ("Ostex") and Metra BioSystems, Inc. ("Metra")), in
addition to pharmaceutical manufacturers of drugs that prevent bone loss (i.e.,
Merck & Co., Inc. ("Merck") and The Proctor & Gamble Company ("Proctor &
Gamble)). This work has helped to establish the Company as a leader in its
understanding of biochemical markers for bone formation and bone resorption
(loss).
As a result of its work in this field, the Company has recognized the
need for a reliable, cost-effective diagnostic tool that would screen and
monitor individuals that are rapidly losing bone and those at risk of
osteoporosis. The Company has licensed technology for a transdermal collection
devise, the Osteopatch(TM), and obtained exclusive rights to antibodies for the
detection of bone loss markers in perspiration. These technologies provide the
Company with the opportunity to develop a unique diagnostic tool, coupled with
a laboratory analytical service, which should prove to be a useful indicator of
bone loss. The Osteopatch(TM) product development effort is the Company's
primary focus at this time.
In addition to its work in osteoporosis, the Company's reference
laboratory is recognized as a leader in the fields of laboratory method
verification, technical consulting, clinical trials and reference materials for
3
<PAGE>
cholesterol measurements and related risk factors for coronary heart disease.
The Company, through an affiliated foundation, is one of twelve Centers for
Disease Control ("CDC") reference network laboratories for the standardization
of cholesterol testing. The Company intends to expand the marketing of its
specialty laboratory services to pharmaceutical and diagnostic clients in its
areas of expertise. In addition, through the development and commercialization
of the Osteopatch(TM), the Company will expand its business opportunities into
clinical laboratory analysis of bone markers.
The Company also acquired the rights to a sample preparation device
which it markets under the name SPINPRO(R). SPINPRO(R) simplifies and improves
the methods used for performing certain tests in the laboratory. By reducing
the number of manual steps involved in the testing process, the laboratory can
save labor costs and achieve more consistent and accurate results. The first
application of this device is for the testing of HDL cholesterol. SPINPRO(R) is
distributed by Sigma Diagnostics ("Sigma"), a division of Sigma Chemical Co., a
major distributor of diagnostic reagents and products, to laboratories in the
U.S. and Europe. The Company is also investigating other applications and
seeking additional distributors for the SPINPRO(R) technology.
The Company is exploring applications for its proprietary SalivaSac(R)
technology, which facilitates the collection of saliva without contamination
from enzymes, food particles, blood and other particulate matter. Based on
preliminary studies conducted by the Company and others, the Company believes
that this product has the potential for numerous applications, including
therapeutic drug monitoring, the detection of drugs of abuse, measurement of
hormones and analytes of infectious diseases. The Company currently has two
National Institute of Health ("NIH") Small Business Innovative Research
("SBIR") Phase I grants to fund the research of this technology for diabetes
applications. Pending the outcome of the research being conducted under this
grant, the Company intends to continue development in this area by seeking
additional funds through grants or business partners.
The Company owns or is the exclusive licensee of rights under ten
issued U.S. patents and four pending U.S. patents. Two of these patents have
been issued, and the remainder are pending in Europe and Japan.
THE MERGER TRANSACTIONS
The Company conducts its business through its wholly-owned
subsidiaries, Pacific Biometrics, Inc., a Washington corporation ("PBI-WA") and
BioQuant, Inc., a Michigan corporation ("BioQuant"). On June 28, 1996, the
Company completed the mergers (the "Mergers") whereby BioQuant and PBI-WA
became wholly-owned subsidiaries of the Company in separate stock-for-stock
exchange transactions. In January 1995, Pacific Biometrics, Inc., a Washington
corporation ("Old PBI") and Merchant House Scientific, Inc. ("MHS") were merged
into PBI/MHS Consolidation Corporation, a Washington corporation ("PBI/MHS"),
which subsequently changed its name to Pacific Biometrics, Inc. The Company
believes that the synergies among PBI-WA and BioQuant, through the technical
expertise and research capabilities of their respective personnel, will expedite
current development of the Osteopatch(TM) product and the development of
SalivaSac(R) diagnostic applications, completion of clinical trials of these
devices and receipt of FDA approval of these devices and their applications.
Additionally, the Company anticipates that its laboratory facilities will be
positioned to capture a significant portion of the analysis revenues which will
be associated with the Osteopatch(TM) product. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview" and
"Business--General."
The Company's principal executive office is located at 1370 Reynolds
Avenue, Suite 119, Irvine, California 92614. The telephone number is (714)
263-9933.
4
<PAGE>
THE OFFERING
Securities Offered................ 1,700,000 Units, each Unit consisting of
(i) one share of Common Stock, and (ii)
one Warrant to purchase one share of
Common Stock.
Terms of Warrants................. Each Warrant is exercisable at any time
until January 31, 1998 and entitles the
holder thereof to purchase one share of
Common Stock at an exercise price of
$12.00 per share (subject to adjustment
in the event of any stock splits or
other similar events). The Warrants are
redeemable by the Company under certain
conditions at any time commencing on
April 30, 1997, upon at least 30 days
prior written notice, at $.10 per
Warrant. See "Description of
Securities-Redeemable Warrants."
Common Stock Outstanding
Prior to Offering (1)........... 1,948,343 Shares
Common Stock Outstanding
After Offering (2).............. 3,648,343 Shares
Use of Proceeds................... The Company intends to apply the net
proceeds of approximately $6,575,250
from this Offering primarily for
Osteopatch(TM)product development
activities, repayment of the Bridge
Loan, laboratory equipment and working
capital. See "Use of Proceeds."
Proposed Nasdaq Small Cap Market
Symbols (3)
Common Stock.................... "PBMI"
Warrants........................ "PBMIW"
Risk Factors...................... Investment in the Units involves a high
degree of risk and immediate substantial
dilution. See "Risk Factors" and
"Dilution."
- ---------------------------
(1) Does not include Common Stock issuable upon exercise of currently
exercisable options and warrants to purchase 684,904 shares of Common Stock,
154,411 shares of Common Stock reserved for issuance under the Company's stock
option plans and exercise of an aggregate of 300,000 warrants issued pursuant to
a private financing completed in June 1996 (the "Financing") and a private
placement (the "Bridge Loan") completed in August 1996, both consisting of notes
and warrants.
(2) Does not include (i) 255,000 shares of Common Stock and 255,000 Warrants
included in the Units issuable pursuant to the Underwriter's over-allotment
option, (ii) 170,000 shares of Common Stock and 170,000 Warrants included in
the Units issuable pursuant to the Underwriter's Unit Purchase Warrant (as
hereinafter defined) and (iii) 1,700,000 shares of Common Stock issuable upon
exercise of the Warrants offered hereby. See "Underwriting."
(3) A Nasdaq listing does not provide any assurance that an active trading
market will develop or be maintained.
5
<PAGE>
SUMMARY COMBINED FINANCIAL INFORMATION
The following table sets forth, for the periods and dates indicated,
summary historical financial information for the Company (which includes
financial information of PBI-WA), and unaudited proforma combined financial
information for the Company (which includes financial information of PBI-WA)
and BioQuant after giving effect to the merger of BioQuant and a wholly-owned
subsidiary of the Company in a reverse acquisition and the issuance of the
Units offered hereby. The summary historical financial data for the two years
ended June 30, 1996 and 1995, and for the period from inception to June 30,
1996, are derived from the historical financial statements of the Company
(which includes financial information of PBI-WA) and should be read in
conjunction with such financial statements. The summary unaudited proforma
combined financial data for the Company and BioQuant is derived from and should
be read in conjunction with such financial statements and the notes thereto.
The unaudited proforma statement of operations data assumes the merger of
BioQuant and a wholly-owned subsidiary of the Company occurred on July 1, 1995.
The balance sheet information assumes the transactions occurred on June 30,
1996. No proforma adjustments have been made to the statement of operations.
The unaudited proforma combined balance sheet data reflects adjustments for the
issuance of the 1,700,000 Units offered hereby as of June 30, 1996 (see Note 2
below).
The proforma adjustment is based upon currently available information
and certain estimates and assumptions and, therefore, the actual adjustment may
differ from the proforma adjustment. Management believes, however, that the
assumptions provide a reasonable basis for presenting the significant effects
of the transactions as they relate to the fiscal year ended June 30, 1996,
and that the proforma adjustment approximates the effect to those assumptions
and are properly applied to the proforma financial information. The following
proforma information should not be used to compare 1995 with 1996, and should
not be deemed indicative of future operating results for the consolidated
operations of the Company.
6
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations
Data: Year Ended June 30, For the Period from Inception to
------------------------------------------------- June 30, 1996
--------------------------------
1995 1996
---- -------------------------------
Proforma Proforma
Combined Combined
Actual Actual (unaudited)(1) Actual (4) (unaudited)(5)
------ ------ -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Laboratory revenues
and consulting fees $ 566,832 $ 1,657,280 $ 1,662,118 $ 2,224,112 $ 2,248,958
------------ ------------ ------------ ------------ ------------
Operating expenses:
Laboratory 373,554 985,818 985,818 1,359,372 1,359,372
Diagnostic research
and product development 665,747 604,803 1,113,986 1,464,661 4,635,893
General and
administrative 739,149 1,281,100 1,617,229 2,766,434 4,955,532
Purchased in-process
research and development 6,373,884 6,373,884 6,373,884 6,373,884
Amortization of goodwill 428,368 428,368 428,368
------------ ------------ ------------ ------------ ------------
2,206,818 9,245,605 10,090,917 12,392,719 17,753,049
------------ ------------ ------------ ------------ ------------
Operating loss (1,639,986) (7,588,325) (8,428,799) (10,168,607) (15,504,091)
------------ ------------ ------------ ------------ ------------
Other income (expense):
Interest expense (26,162) (39,853) (59,526) (66,015) (149,208)
Grants and other income 1,958 67,315 177,721 77,240 2,708,652
------------ ------------ ------------ ------------ ------------
(24,204) 27,462 118,195 11,225 2,559,444
------------ ------------ ------------ ------------ ------------
Net loss $ (1,664,190) $ (7,560,863) $ (8,310,604) $(10,157,382) $(12,944,647)
============ ============ ============ ============ ============
Net loss per share $ (1.68) $ (5.89) $ (2.78) $ (10.16) $ (4.79)
============ ============ ============ ============ ============
Weighted-average number of
common shares outstanding 988,415 1,284,281 2,984,281(3) 999,478 2,699,478(3)
============ ============ ============ ============ ============
<CAPTION>
Balance Sheet Data: At June 30, 1996
----------------
Proforma
Combined
Actual (unaudited)(2)
------ --------------
<S> <C> <C>
Working capital (deficit) $ (1,723,942) $ 4,851,308
Total assets $ 840,113 $ 7,415,363
Total liabilities $ 2,224,550 $ 2,224,550
Deficit accumulated during
the development stage $(10,157,382) $(10,157,382)
Stockholders' equity
(deficit) $ (1,384,437) $ 5,190,813
</TABLE>
- -------------------------------
(1) Reflects statement of operations data as if the merger of BioQuant into a
wholly-owned subsidiary of the Company had occurred on July 1, 1995.
(2) Reflects balance sheet data after giving proforma effect for the proceeds
of the Offering of 1,700,000 Units for net proceeds of $6,575,250.
(3) The proforma weighted-average number of shares and common stock
equivalents outstanding consists of the weighted-average number of shares
and common stock equivalents actually outstanding during the year,
computed as described in Note 2 to the consolidated financial statements
of the Company, plus the number of shares to be issued pursuant to this
Offering.
(4) Inception to date with regard to the Company is for the period from
December 1992 to June 30, 1996, with regard to BioQuant, inception to date
is for the period from October 1985 to June 30, 1996.
(5) Reflects the combined results of operations of the Company and BioQuant
for the period from inception to June 30, 1996, assuming that the
companies had been combined for their entire operating period.
7
<PAGE>
UNAUDITED CONDENSED COMBINED PROFORMA FINANCIAL DATA
The following unaudited condensed combined proforma financial data
reflects the acquisition of BioQuant, as more fully described in the
accompanying notes to the financial statements. The proforma statement of
operations for the year ended June 30, 1996, assumes the transaction described
above occurred on July 1, 1995. The historical financial data for the Company
(which includes PBI-WA) and BioQuant for the year ended June 30, 1996, are
derived from the historical financial statements of the Company (which includes
PBI-WA) and BioQuant and should be read in conjunction with such financial
statements (including the notes thereto) which are included elsewhere in this
Prospectus. The unaudited condensed combined proforma financial data is not
necessarily indicative of the results that would have been reported had such
events occurred on the dates specified, nor is it indicative of the Company's
future results. In the opinion of management, all adjustments necessary to
present fairly this proforma information have been made.
<TABLE>
<CAPTION>
For the Period from Inception to
Year Ended June 30, 1996 June 30, 1996
------------------------ --------------------------------
Unaudited
Proforma,
Company BioQuant(1) as Adjusted Actual(4) Proforma(5)
------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Laboratory revenues
and consulting fees $ 1,657,280 $ 4,838 $ 1,662,118 $ 2,224,112 $ 2,248,958
------------ ------------ ------------ ------------ ------------
Operating Expenses:
Laboratory 985,818 985,818 1,359,372 1,359,372
Diagnostic research
and product development 604,803 509,183 1,113,986 1,464,661 4,635,893
General and
administrative 1,281,100 336,129 1,617,229 2,766,434 4,955,532
Purchased in-process
research and
development(2) 6,373,884 6,373,884 6,373,884 6,373,884
Amortization of goodwill 428,368 428,368
------------ ------------ ------------ ------------ ------------
9,245,605 845,312 10,090,917 12,392,719 17,753,049
------------ ------------ ------------ ------------ ------------
Operating loss (7,588,325) (840,474) (8,428,799) (10,168,607) (15,504,091)
------------ ------------ ------------ ------------ ------------
Other income (expense):
Interest expense (39,853) (19,673) (59,526) (66,015) (149,208)
Grants and other income 67,315 110,406 177,721 77,240 2,708,652
------------ ------------ ------------ ------------ ------------
27,462 90,733 118,195 11,225 2,559,444
------------ ------------ ------------ ------------ ------------
Net loss $ (7,560,863) $ (749,741) $ (8,310,604) $(10,157,382) $(12,944,647)
============ ============ ============ ============ ============
Net loss per share $ (5.89) $ (2.78) $ (10.16) $ (4.79)
============ ============ ============ ============ ============
Weighted-average number of
common shares 1,284,281 2,984,281(3) 999,478 2,699,478(3)
============ ============ ============ ============ ============
</TABLE>
- ------------------------
(1) Includes the historical operations of BioQuant from July 1, 1995 to June
30, 1996, the effective date of the acquisition for accounting purposes.
(2) Represents a one-time noncash charge to operations relating to the
write-off of purchased in-process research and product development in
conjunction with the acquisition of BioQuant that had met several
milestones during the development process, but for which clinical trials
had not yet commenced and, in the opinion of management, had no
alternative use. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(3) The proforma weighted-average number of shares outstanding consists of the
weighted-average number of shares and common stock equivalents actually
outstanding during the year, computed as described in Note 2 to the
audited consolidated financial statements, plus the number of shares to be
issued pursuant to this Offering.
(4) Inception to date with regard to the Company is for the period from
December 1992 to June 30, 1996, with regard to BioQuant, inception to date
is for the period from October 1985 to June 30, 1996.
(5) Reflects the combined results of operations of the Company and BioQuant
for the period from inception to June 30, 1996, assuming that the
companies had been combined for their entire operating periods.
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RISK FACTORS
An investment in the securities offered hereby is highly speculative and
subject to a high degree of risk, and only those who can bear the risk of the
entire loss of their investment should participate. Prospective investors
should carefully consider the following factors in analyzing this Offering.
1. History of Losses; Uncertainty of Future Profitability. The Company has
incurred significant operating losses since inception. The consolidated net
loss for the fiscal year ended June 30, 1996 was approximately $8,310,000,
which includes a one-time charge of approximately $6,374,000. The Company's
accumulated deficit at June 30, 1996 was approximately $10,157,000, including
one-time charges of an aggregate of approximately $6,802,000. The one-time
charges are related to amortization of goodwill and purchased research and
development, in connection with the Company's mergers with BioQuant and PBI-WA.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." No assurance can be given that the net loss and accumulated
deficit will not continue to increase or that the Company will ever achieve
profitable operations. The Company has not had an extensive operating history
and revenues to date have been limited. Potential investors should be aware of
the problems, delays, expenses and difficulties encountered by an enterprise in
the Company's stage of development, many of which may be beyond the Company's
control. These include, but are not limited to, unanticipated problems relating
to the competitive and regulatory environment in which the Company operates and
marketing problems and additional costs and expenses that may exceed current
estimates. Potential investors should be aware of the difficulties normally
encountered by new enterprises and the high rate of failure associated with
such enterprises. The likelihood of success must be considered in light of the
problems, expenses, difficulties, complications, delays and competition
encountered in connection with the development of a business in the
biotechnology industry.
The Company will be required to conduct significant research, development,
testing and regulatory compliance activities that, together with projected
general and administrative expenses, are expected to result in significant
operating losses for at least the next twenty-four months. Revenues, if any,
that the Company may receive in the next twenty-four months will be limited to
revenues received from the Company's laboratory operations, payments under
research or product development relationships and payments under license
agreements which may be established and nominal revenues received in connection
with the SPINPRO(R) product. There can be no assurance, however, that the
Company will be able to establish any such relationships or enter into any such
license agreements. The Company's ability to achieve profitability depends upon
its ability to successfully complete, either alone or with others, development
of its potential medical diagnostic products, conduct clinical trials, obtain
required regulatory approvals, and manufacture and market its products or enter
into license agreements, on acceptable terms. In the event that the Company
enters into any future license agreements, such license agreements may adversely
affect the Company's profit margins on its potential products. The Company may
never achieve significant revenue or profitable operations.
2. Explanatory Paragraph in Independent Accountants' Report. The Company's
independent auditors have included an explanatory paragraph in their report on
the Company's financial statements to the effect that certain matters raise
substantial doubt about the Company's ability to continue as a going concern,
which is contingent upon the Company's ability to secure financing and attain
profitable operations. In addition, the Company's ability to continue as a
going concern must be considered in light of the problems, expenses and
complications frequently encountered by development stage companies,
introduction of new products and the competitive environment in which the
Company operates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business," "Report of Independent
Auditors" and "Financial Statements."
3. Early Stage of Development; Regulatory and Technological Uncertainties. The
Company is at an early stage of development. Except for the SPINPRO(R) HDL
cholesterol product and revenues from its laboratory, all of the Company's
potential products are currently in research and development, and no revenues
have been generated to date. A significant portion of the Company's resources
have been, and for the foreseeable future will continue to be, dedicated to the
Company's research programs and the development of potential medical diagnostic
products emanating therefrom. There can be no assurance that the Company will
be able to develop a commercial product from these projects. The Company
currently has three potential products in preclinical development, none of
which have entered human clinical trials. While the Company believes that the
results attained to date in such preclinical studies support further research
and development of these potential products,
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results attained in preclinical studies are not necessarily indicative of
results that will be obtained in human clinical trials.
The potential medical diagnostic products currently under development by the
Company may require significant additional research and development and
preclinical testing and will require extensive clinical testing prior to
submission of any regulatory application for commercial use. The Company's
potential products are subject to the risks of failure inherent in the
development of medical diagnostic products based on new technologies. These
risks include the possibilities that the Company's novel approach to diagnosis
will not be successful; that any or all of the Company's potential products will
not be found to be safe and effective or otherwise fail to receive necessary
regulatory clearances; that the products, if safe and effective, will be
difficult to manufacture on a large scale or uneconomical to market; that
proprietary rights of third parties will preclude the Company from marketing
such products; or that third parties will market superior or equivalent
products. As a result, there can be no assurance that the Company's research and
development activities will result in any commercially viable products.
4. Future Capital Needs; Uncertainty of Additional Funding. The Company will
require substantial additional funds in order to continue the research and
development programs and preclinical testing of its potential diagnostic
products and to conduct clinical trials and marketing of such products that may
be developed. The Company's capital requirements depend on numerous factors,
including the progress of its research and development programs, the progress
of preclinical and clinical testing, the time and costs involved in obtaining
regulatory approvals, the cost of filing, prosecuting, defending and enforcing
any patent claims and other intellectual property rights, competing
technological and market developments, changes in the Company's existing
license and supply relationships, the ability of the Company to establish
collaborative arrangements, the development of commercialization activities and
arrangements, and the purchase of additional capital equipment. Other than the
Company's laboratory revenues and nominal revenues from sales of the SPINPRO(R)
product, the Company has no current source of revenues or capital beyond the
proceeds of this Offering. Additionally, in fiscal 1996 the Company defaulted
on a $200,000 bank line of credit, which was subsequently converted into a term
loan. The Company is making monthly payments of principal and interest thereon,
however, should the Company default on any such payments and the term loan is
accelerated, the Company may have to reallocate its anticipated use of proceeds
from this Offering. See "Use of Proceeds." Based upon its current plans, which
the Company anticipates will include commencing human clinical trials on the
Osteopatch(TM) during the next twelve months, the Company believes that the net
proceeds of this Offering, together with cash flows from operations, will be
sufficient to meet the Company's operating expenses and capital requirements
for approximately eighteen months.
If the Company's current and projected needs change due to unanticipated events
or otherwise, the Company may be required to obtain additional capital. The
Company intends to seek such additional funding through public or private
financings or collaborative or other arrangements with corporate partners. There
can be no assurance, however, that additional financing will be available from
any of these sources, or if available, will be available on acceptable terms. If
adequate funds are not available, the Company may be required to delay, scale
back or eliminate one or more of its research and development programs,
including but not limited to the development of the Osteopatch(TM), or to obtain
funds through entering into arrangements with collaborative partners or others
that may require the Company to relinquish rights to certain of its technologies
or potential products that the Company would not otherwise relinquish.
5. Discretionary Use of Proceeds; Repayment of Debt. Although the Company
anticipates utilizing the proceeds of this Offering as stated herein, management
of the Company will have broad discretion as to the actual uses of such
proceeds. Additionally, circumstances currently expected may change in the
future resulting in a reallocation of resources from that originally
contemplated. Approximately $1,015,000 of the proceeds received in this Offering
will be utilized to repay amounts outstanding under the Bridge Loan. Of such
amount, approximately $58,000 is held by a director of the Company. See "Use of
Proceeds."
6. Dependence on Collaborators. The Company's strategy for the research,
development and commercialization of its potential medical diagnostic products
has and will require the Company to enter into various arrangements with
corporate and academic collaborators, licensors, licensees and others, and may
therefore be dependent upon the subsequent success of these outside parties in
performing their responsibilities. There can be no assurance that the Company
will be able to establish collaborative arrangements or license agreements that
the Company deems necessary or acceptable to develop and commercialize its
potential products
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or that such collaborative arrangements or license agreements will be
successful. Moreover, certain of the collaborative arrangements that the
Company may enter into in the future may place responsibility for preclinical
testing and human clinical trials and for preparing and submitting applications
for regulatory approval for potential products on the collaborative partner.
Should a collaborative partner fail to develop or commercialize successfully any
potential product to which it has rights, the Company's business, financial
condition and results of operations may be materially adversely affected. In
addition, there can be no assurance that the collaborative partner will not be
pursuing alternative competing technologies or developing competing products
either on their own or in collaboration with others, including the Company's
competitors, as a means for developing diagnostic processes for the diseases or
disorders targeted by the Company's collaborative programs.
7. Dependence on Licenses; Sale of Underlying Patents; Conflict of Interest.
The Company has licensed technologies developed by various companies and
research institutes and universities. Pursuant to the terms of those
agreements, the Company is obligated to exercise diligence in bringing
potential products to market and to make certain royalty payments that in some
instances may be substantial. The Company is also obligated to make royalty
payments on the sales, if any, of licensed products. In addition, in some
instances, the Company is responsible for making minimum royalty payments
without generating sales and may incur costs of filing and prosecuting patent
applications. One such license relating to the SPINPRO(R) product required
certain minimum payments due in June 1996 in order to maintain the exclusivity
of the license. The Company elected not to make such payment since it
determined that the lack of exclusivity would not have a material adverse
effect on the Company or give the Company's competitors any material advantage.
Each license agreement is terminable by either party, upon notice, if the other
party defaults in its obligations. The Company licensed the technology for
development of its Osteopatch(TM) product from the owner of the patents
covering such technology pursuant to arrangements requiring minimum quarterly
royalty payments. The Company is aware that the owner of such patents is in the
process of seeking a buyer therefor. Additionally, the owner of such patents
has contracted with an affiliate of a director of the Company to facilitate the
sale process. Although the Company believes that its license agreement will
not be affected by any sale of the patents which are the subject of such
license because such license is valid and enforceable and the Company has been
informed by the director of the Company involved in the sale that any conflicts
will be resolved in favor of the Company, there can be no assurance that such
patents will not be sold to a competitor of the Company, that any conflicts of
interest involving the director of the Company engaged to facilitate the sale
will be resolved in favor of the Company or that any buyer of the patents will
honor the Company's license agreement, in which case the Company will be
required to enforce its rights under the license when it may not have the
resources to do so. See "Business-Material Contracts." The termination or
cancellation of any of the Company's licensing arrangements would have a
material adverse effect on the Company's business, financial condition and
results of operations.
8. Uncertainty of Protection of Patents and Intellectual Property Rights; Risk
of Patent Infringement Liability. The Company's success depends on its ability
to obtain future patents, protect existing patents, licenses, intellectual
property rights, trade secrets, and to operate without infringing upon the
proprietary rights of others and prevent others from infringing on the
intellectual property rights of the Company. In addition, the Company has
exclusive licenses from third parties under various U.S. patents and pending
U.S. patent applications to the technology covered in whole or in part by the
claims therein. Since a patent may be invalid or circumvented by alternative
technologies, there can be no assurance as to the breadth of protection that
any such patents may afford the Company. In the event the Company is held
liable for patent infringement, insurance may not cover any or all of the
infringement damages and as such, any infringement liability would adversely
affect the business, financial condition and results of operations of the
Company.
There can be no assurance that any patent applications relating to the
Company's potential products or processes will result in patents being issued,
or that resulting patents, if any, or existing patents, will provide protection
against competitors who successfully challenge the Company's patents, obtain
patents that may have an adverse effect on the Company's ability to conduct
business, or are able to circumvent the Company's patent position. It is
possible that other parties have conducted research or made discoveries of
processes that preceded the Company's discoveries, which could prevent the
Company from obtaining patent protection of these discoveries. A substantial
number of patents have been applied for by and issued to other pharmaceutical,
biotechnology and biopharmaceutical companies, and other companies may have
filed applications for, may have been issued patents or may obtain additional
patents and proprietary rights relating to products or processes competitive
with those of the Company. In view of the time delay in patent approval and the
secrecy afforded
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patent applications, the Company does not know if there are patent applications
belonging to others which have priority over applications belonging to the
Company. There can be no assurance that others will not independently develop
products similar to or obsoleting those under development by the Company, or,
notwithstanding the Company's intellectual property protections, duplicate any
of the Company's products. The Company may determine there is no economic
benefit in commencing or continuing a patent infringement action. Further, as
stated above, there can be no assurance that the Company's current or future
exclusive licenses will not be challenged or that such license arrangements will
be honored by those granting such licenses or their successors in interest. In
such event, the Company would be required to enforce its intellectual property
rights at a time when it does not have the resources to do so, which would have
a material adverse effect on the Company's business, financial condition and
results of operations.
9. No Marketing, Sales, Clinical Testing or Regulatory Compliance Experience.
In view of the early stage of the Company and its research and development
programs, the Company has restricted hiring to research scientists and a small
administrative staff and has relied on external consulting resources for
support in regulatory compliance and marketing. The Company has made no
investment in marketing, product sales or regulatory compliance resources. If
the Company successfully develops any commercially marketable medical
diagnostic product, it may seek to enter into a joint venture, sublicense or
other marketing arrangement with parties that have an established marketing
capability, or it may choose to pursue the commercialization of such products
on its own. There can be no assurance, however, that the Company will be able
to enter into such marketing arrangements on acceptable terms, if at all.
Further, the Company will need to hire additional personnel skilled in the
clinical testing and regulatory compliance process and in marketing or product
sales if it develops products with commercial potential that it determines to
commercialize itself. There can be no assurance, however, that it will be able
to acquire such personnel. In addition, the Company's laboratory business is
subject to federal regulation under the Clinical Laboratory Improvement
Amendments of 1988 ("CLIA") and regulations promulgated thereunder and the
FDA's Good Laboratory Practices for Nonclinical Laboratory Studies regulations.
Failure to comply with applicable regulations could result in loss of
certification under CLIA and disqualification resulting in the exclusion of
studies performed in the laboratory from consideration in support of FDA
submissions, as well as civil and criminal sanctions.
10. Risk of Product Liability; Product Liability Insurance May Be Insufficient
or Unavailable. Sales of the Company's products entails the risk of product
liability claims. The Company faces financial exposure to product liability
claims in the event that use of its products results in personal injury. The
Company also faces the possibility that defects in the design or manufacture of
its products might necessitate a product recall. There can be no assurance that
the Company will not experience losses due to product liability claims or
recalls in the future. The Company currently maintains product liability
insurance with coverage limits and there can be no assurance that the coverage
limits of the Company's insurance policies will be adequate. Such insurance is
expensive, difficult to obtain and may not be available in the future on
acceptable terms, or at all. No assurance can be given that product liability
insurance can be maintained in the future at a reasonable cost or in sufficient
amounts to protect the Company against losses due to liability. Any inability
to maintain insurance at an acceptable cost or to otherwise protect against
potential product liability could prevent or inhibit the continued
commercialization of the Company's products. In addition, a product liability
claim in excess of relevant insurance coverage or product recall could have a
material adverse effect on the Company's business, financial condition and
results of operations.
11. Government Regulation and Product Approval. The U.S. Food and Drug
Administration ("FDA") and comparable agencies in state and local jurisdictions
and in foreign countries impose substantial requirements upon the testing,
manufacturing and marketing of therapeutic and diagnostic products, through
lengthy and detailed laboratory and clinical testing procedures, sampling
activities and other costly and time consuming procedures. Satisfaction of
these requirements may take several years or more and varies substantially
based upon the type, complexity and novelty of the diagnostic product.
Although the Company believes that its products currently under development
will be classified as "Class II" medical devices allowing the Company to use
the more expedient 510(k) notification procedure, there can be no assurance
that the FDA will not require the Company to submit the more cumbersome and
lengthy pre-market approval ("PMA") application. The Company will attempt to
market its products pursuant to Section 510(k) of the Food, Drug and Cosmetic
Act (the "FDC Act"), which would require filing a 510(k) submission, but not a
PMA application. According to the FDA's Office of Device Evaluation Annual
Report, during 1995, the average
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510(k) review time was approximately six months, significantly shorter than the
PMA application review process, which approximated one year. There can be no
assurance, however, that the 510(k) review process will not take more than six
months or that the FDA will not require the Company to submit a PMA application.
The 510(k) process requires that the Company show, among other things, that its
product is substantially equivalent to another legally marketed product. The
Company may begin marketing once the FDA issues an order allowing the product to
be marketed. If a medical device does not qualify for the 510(k) notification
procedure, the Company must file a PMA application, which requires more
extensive clinical testing and submissions and involves a longer process of
regulatory review and approval.
The Company believes that its osteoporosis product will be classified as a
"Class II" medical device, which will permit the Company to use the 510(k)
notification procedure. The Company is relying on (i) the fact that the FDA has
already cleared the skin patch, which has been licensed to the Company by
Sudormed, Inc. ("Sudormed") as a general sample collection device and as a
perspiration collection device for diagnosis of five drugs of abuse (opiates,
PCP, THC, cocaine and amphetamines) and thereby may be expected to clear the
skin patch as a collection device for pyridinoline ("Pyd") and
deoxypyridinoline ("Dpd") and (ii) the fact that the FDA has cleared Metra's
510(k) submissions for its immunoassay test kits, which measure Pyd and Dpd
levels in "first morning void" urine samples. If the Company is able to
demonstrate a correlation between Pyd and/or Dpd levels in perspiration and
measurable physiologic changes in patients, the Company believes that its
osteoporosis product can be shown to be substantially equivalent to medical
devices (i.e., diagnostic kits for measurement of Pyd and/or Dpd levels in
urine) which the FDA has already cleared for marketing and thus qualifying the
Company's product for the 510(k) notification procedure. The FDA may respond to
the Company's 510(k) notification, however, by directing the Company to file a
PMA application for the osteoporosis product because, despite the Company's
correlation studies and clinical tests, the FDA may consider perspiration too
different from urine as a medium for Pyd and/or Dpd. If the Company is required
to file a PMA application for its osteoporosis product, the Company would be
required to conduct substantial additional research and clinical tests before
doing so, and would be unable to file a PMA application for approximately 12 to
18 months. Even if the FDA permits the Company to proceed with a 510(k)
notification, the FDA may require the Company to support its notification with
additional research and clinical test data, resulting in a longer process of
regulatory review than is typical for 510(k) notifications.
The Company has relied on scientific, technical, clinical, commercial and other
data supplied or disclosed by others, including its collaborators, and may rely
on such data in support of applications to enter human clinical trials for its
potential products. Although the Company has no reason to believe that this
information contains errors or omissions of fact, there can be no assurance
that there are no errors or omissions of fact that would materially change the
Company's view of the likelihood of FDA approval or commercial viability of
these potential products. There can be no assurance that clinical data from
studies performed by others will be available to the Company or acceptable to
the FDA or other regulatory agencies in support of the Company's applications
for regulatory approval, and the FDA may, among other things, require the
Company to collect additional data and conduct controlled clinical studies
prior to acceptance of any such applications.
The effect of government regulation may be to delay for a considerable period
of time or prevent the marketing of any product that the Company may develop
and/or to impose costly requests for additional animal, human or other data
upon the Company, the result of which may be a delay in the marketing of its
products, thus furnishing an advantage to its competitors. There can be no
assurance that the FDA or other regulatory approval for any products developed
by the Company will be granted on a timely basis or at all. Any such delay in
obtaining or failure to obtain such approvals would adversely affect the
marketing of the Company's proposed products and the ability to earn product
revenues or royalties. As with all investigational products, additional
government regulations may be promulgated requiring additional research and
data to be submitted that could delay marketing approval of the Company's
potential products. The Company cannot predict whether any adverse government
regulation might arise from future legislation or other governmental action.
While the Company believes it is aware of all the permits it is required to
obtain and all of the governmental regulations it is required to comply with,
and believes that it can obtain such permits and comply with all such
regulations in the future, there can be no assurance that this will be the
case, that such compliance might not increase the expenses the Company will
incur or that such regulations will not be modified, making it increasingly
difficult for the Company to operate its business as it presently anticipates.
See "Business -- Government Regulation."
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12. Risks Inherent in International Transactions. The Company plans to market
its products to customers both in the U.S. and abroad. International sales and
operations may be limited or disrupted by the imposition of government
controls, export license requirements, economic and political instability,
price controls, trade restrictions, and changes in tariffs or difficulties with
foreign distributors. Foreign regulatory agencies often establish product
standards different from those in the U.S. and any inability to obtain or
maintain foreign regulatory approvals on a timely basis could have a material
adverse effect on the Company's international business operations.
Additionally, the Company's business, financial condition and results of
operations may be materially and adversely affected by fluctuations in currency
exchange rates as well as increases in duty rates and difficulties in obtaining
required licenses and permits. There can be no assurance that the Company will
be able to successfully commercialize its products in any foreign market. In
addition, the laws of some countries do not protect the Company's proprietary
rights to the same extent as do the laws of the U.S.
Distribution of the Company's products outside the U.S. is subject to extensive
government regulation. These regulations, including the requirements for
approvals or clearance to market, the time required for regulatory review and
the sanctions imposed for violations, vary from country to country. There can
be no assurance that the Company will obtain regulatory approvals in such
countries or that it will not be required to incur significant costs in
obtaining or maintaining its foreign regulatory approvals. In addition, the
export by the Company of certain of its products which have not yet been
cleared for domestic commercial distribution may be subject to FDA export
restrictions. Failure to obtain necessary regulatory approvals, the
restriction, suspension or revocation of existing approvals or any other
failure to comply with regulatory requirements would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business -- Products" and "-- Government Regulation."
13. Uncertainty of Market Acceptance. The commercial success of the Company's
products will depend upon their acceptance by the medical community and
third-party payors as clinically useful, cost-effective and safe. Pyridinium
crosslinks to measure bone loss, the technology used with the Company's
Osteopatch(TM), is a relatively new technology. Market acceptance will depend
on several factors, including the establishment of clinical utility of these
biochemical markers, the receipt of regulatory clearances in the U.S. and
elsewhere, the development of diagnostic tests that can be processed using
commercially available automated systems, the availability of third-party
reimbursement, extensive physician education and the approval and commercial
acceptance of therapies for the treatment of osteoporosis. There can be no
assurance that the Company's products will gain market acceptance. Failure to
achieve market acceptance would have a material adverse effect on the Company's
business, financial condition and results of operations.
14. Manufacturing Limitations. The Company currently does not have the
capability to manufacture products under the current Good Manufacturing
Practices regulations ("GMP") promulgated by the FDA. Accordingly, the Company
intends to outsource its manufacturing requirements relating to the
Osteopatch(TM) and the chemical reagent and test tubes to be used in laboratory
analysis. The Company has established or is in the process of establishing
arrangements with contract manufacturers to supply sufficient quantities of
such products to conduct clinical trials as well as for the manufacture,
packaging, labeling and distribution of finished products if its potential
products are approved for commercialization. If such arrangements are
terminated and if the Company is unable to manufacture or contract for a
sufficient supply of its potential products on acceptable terms, the Company's
preclinical and human clinical testing schedule may be delayed, resulting in
the delay of submission of products for regulatory approval and initiation of
new development programs, which may have a material adverse effect on the
Company's business, financial condition and results of operations. Contract
manufacturers used by the Company currently adhere to GMP. The FDA may require,
prior to 510(k) clearance, and would require prior to approval of a PMA
application, that the manufacturing facility pass a GMP inspection. The Company
may also be required to obtain a license from the state in which the products
will be manufactured in order to manufacture any investigational products,
which license will be issued only if the Company is in compliance with, among
others, GMP regulations. The Company's dependence upon third parties for the
manufacture of its products may adversely affect the Company's profit margins
and its ability to develop and deliver such products on a timely and
competitive basis. The Company has limited experience in the manufacture of
diagnostic products or medical devices in clinical quantities and for
commercial purposes. Should the Company determine to manufacture products
itself, the Company would be subject to the regulatory requirements described
above, would be subject to similar risks regarding delays or difficulties
encountered in manufacturing
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any such products and would require substantial additional capital. In addition,
there can be no assurance that the Company will be able to manufacture any
products successfully and in a cost-effective manner. The Company has entered
into a supply agreement with an affiliate of the licensor of the technology
relating to the Osteopatch(TM) for the production of the Osteopatch(TM) product.
The supply agreement requires minimum annual purchases of the Osteopatch(TM)
product commencing during the twelve month period ending March 31, 1997. Failure
to purchase the required annual minimum amounts would result in a default under
the license agreement relating to the technology incorporated into the
Osteopatch(TM). Loss of such license, loss of the supplier or failure of the
supplier to comply with GMP will have a material adverse effect on the Company's
business, financial conditions and results of operations.
15. Competition and Technological Change. There are many companies, both public
and private, including well-known pharmaceutical companies, chemical companies
and specialized biotechnology companies, engaged in developing medical
diagnostic products for certain of the applications being pursued by the
Company. Many of these companies have substantially greater capital, research
and development, manufacturing, marketing and human resources and experience
than the Company and represent substantial long-term competition for the
Company. Such companies may develop products more quickly or products that are
more effective and less costly than any that may be developed by the Company.
The industry in which the Company proposes to compete is characterized by
extensive research efforts and rapid technological progress. New developments
are expected to continue and there can be no assurance that discoveries by
others will not render the Company's products or potential products
noncompetitive. Competition may increase further as a result of advances that
may be made in the commercial applicability of technologies and greater
availability of capital for investment in these fields. See "Business --
Competition."
16. Uncertainty of Product Pricing; Healthcare Reform and Related Matters. The
levels of revenues and profitability of pharmaceutical and biotechnology
companies may be affected by the continuing efforts of governmental and third
party payors to contain or reduce the costs of healthcare through various
means. For example, in certain foreign markets pricing or profitability of
prescription pharmaceuticals and medical diagnostic processes are subject to
government control. In the U.S., there have been, and the Company expects that
there will continue to be, a number of federal and state proposals to implement
similar government control. It is uncertain what legislative proposals will be
adopted or what actions federal, state or private payors for healthcare goods
and services may take in response to any healthcare reform proposals or
legislation. The Company cannot predict the effect healthcare reforms may have
on its business, and no assurance can be given that any such reforms will not
have a material adverse effect on the Company's business, financial condition
and results of operations. Further, to the extent that such proposals or
reforms have a material adverse effect upon the business, financial condition
and profitability of other companies that are prospective collaborators for
certain of the Company's potential products, the Company's ability to
commercialize its potential products may be adversely affected. In addition, in
both the U.S. and elsewhere, sales of medical products are dependent in part on
the availability of reimbursement to the consumer from third party payors, such
as government and private insurance plans. If the Company succeeds in bringing
one or more products to the market, there can be no assurance that third party
payors will provide sufficient reimbursement to the consumer to allow the
Company to sell its products competitively.
17. Reliance on Distributors, Suppliers and Manufacturers. The Company is, and
expects that it will continue to be, highly dependent upon certain
distributors, suppliers and manufacturers and the Company's ability to operate
competitively will depend, at least in part, on its ability to assure
continuous and reliable sources of distribution and supply. If the suppliers
become unable or unwilling to continue to produce products or components for
the Company according to the Company's specifications, or to meet the Company's
delivery schedules, the Company's operations could be materially disrupted,
especially over the short term, resulting in a material adverse effect on its
results of operations or the success or timing of necessary clinical trials.
There is no assurance that the Company's distributors and suppliers will remain
in business or honor their arrangements with the Company. See "Business -
Material Contracts."
18. Dependence on Major Customers. Revenues received from laboratory operations
are generally pursuant to short-term contracts. The Company's five largest
customers with respect to its laboratory business represented approximately
63.0 percent and 64.8 percent of total sales in fiscal 1996 and fiscal 1995,
respectively. Except for Parke-Davis, Inc. ("Parke-Davis"), which represented
approximately 29.5 percent and
15
<PAGE>
43.9 percent of the Company's total sales in fiscal 1996 and fiscal 1995,
respectively, none of these customers were significant in more than one year.
The Company has no long term contracts or agreements with its customers. Each
contract is negotiated separately with the pharmaceutical manufacturer or
research organization and is usually limited to a specific project with limited
duration. The cancellation of any contracts with existing customers or the
failure to replace such contracts upon expiration or termination could have a
material adverse effect on the Company's laboratory operations. See "Business --
Major Customers."
19. Dependence on Key Personnel. The Company's success depends upon the
continued contribution of Ellen Rudnick, Chairman, Paul Kanan, President, G.
Russell Warnick, Chief Scientific Officer and Elizabeth Teng Leary, Vice
President and Director of Laboratories, and its ability to attract and retain
qualified personnel in the future. The loss of services of, or a material
reduction in the amount of time devoted to the Company by, any of such persons
could impair the development of the Company's programs and may have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company will enter into employment agreements with each of Ms.
Rudnick, Mr. Kanan, Mr. Warnick and Ms. Leary. See "Management -- Employment
Agreements." The Company does not maintain key person life insurance on any of
its key employees.
20. Effective Control by Principal Stockholders. The officers and directors of
the Company currently beneficially own approximately 69.8 percent of the Common
Stock of the Company (approximately 42.4 percent after this Offering) and will
have the ability to elect or significantly influence the election of all of the
directors of the Company and otherwise control or significantly influence the
affairs of the Company.
21. Arbitrary Determination of Offering Price. The offering price of the
securities offered hereby was arbitrarily determined by the Company and the
Underwriter and bears no relationship to the Company's assets, book value,
results of operations or other established criteria of value. The factors
considered in determining the public offering price, in addition to prevailing
estimates of the business potential and earning prospects of the Company, the
present state of the Company's development and an assessment of the Company's
management, as well as the consideration of the foregoing factors in relation
to market valuations of comparable companies, do not necessarily bear any
relationship to the Company's assets, accounting results or the book value of
the Company or other generally accepted criteria of value. See "Underwriting".
22. Absence of Dividends. The Company has not paid any cash dividends on its
capital stock and does not anticipate paying any such cash dividends in the
foreseeable future. Earnings, if any, will be retained to finance future
growth.
23. Certain Anti-Takeover Measures. The Board of Directors has the authority to
issue up to 5,000,000 shares of undesignated Preferred Stock and to determine
the rights, preferences, privileges and restrictions of such shares without any
further vote or action by the stockholders. The issuance of Preferred Stock
under certain circumstances could have the effect of delaying or preventing a
change in control of the Company or otherwise adversely affecting the rights of
the holders of Common Stock. The Company does not plan to issue any Preferred
Stock in the foreseeable future. The issuance of Preferred Stock, however,
could be used, under certain circumstance, as a method of preventing a takeover
of the Company. The Board of Directors, without any action of the holders of
the Common Stock, could issue shares of Preferred Stock which could have
detrimental effect on the rights of holders of the Common Stock, including loss
of voting control. Anti-takeover provisions that could be included in the
Preferred Stock when issued may have a depressive effect on the market price of
the Company's securities and may limit a stockholder's ability to receive a
premium on their shares of Common Stock by discouraging takeover and tender
offer bids. Additionally, the Company is subject to the provisions of Section
203 of the General Corporation Law of the State of Delaware, an anti-takeover
statute enacted in 1988, which may make it more difficult for the Company to
engage in a business combination with an "interested stockholder" as defined in
the statute. See "Description of Securities."
24. Substantial Dilution of Book Value. The officers, directors and present
stockholders of the Company have acquired their interest in the Company at a
cost substantially less than that which investors will pay for the Common Stock
offered hereby. An investment in such securities will result in an immediate
and substantial dilution of $3.22, or 68 percent, per share to investors and an
increase of $2.45, or 266 percent, per share in the book value of the securities
held by the present stockholders, including management. Future issuances of
securities by the Company will further dilute the ownership of investors
purchasing securities in this Offering.
16
<PAGE>
25. Underwriter's Unit Purchase Warrant. Upon completion of this Offering, the
Company will grant the Underwriter a warrant to purchase 170,000 Units at an
exercise price equal to 120 percent of the public offering price of the Units
offered hereby. The Underwriter's Unit Purchase Warrant is being registered as
part of this Offering. The issuance of this Warrant and underlying securities
may be considered to be additional compensation to the Underwriter. During the
four-year term (commencing one year from the date hereof) that the
Underwriter's Unit Purchase Warrant is exercisable, the holders thereof are
given the opportunity to profit from a rise in the market price of the
Company's Common Stock. The holders of the Underwriter's Unit Purchase Warrant
would be most likely to exercise the option at a time when the Company could
obtain capital by a new offering of securities, on terms more favorable than
those provided by the Underwriter's Unit Purchase Warrant. Consequently, the
terms on which the Company could obtain additional capital during such period
may be adversely affected. Furthermore, if any or all of the Underwriter's Unit
Purchase Warrant is exercised, the percentage of the Company's Common Stock
held by investors purchasing in this Offering will be reduced. See
"Underwriting."
26. No Prior Public Trading Market. Prior to this Offering, there has been no
public trading market for the Units, the Common Stock or the Warrants. There
can be no assurance that a regular trading market will be established for the
Common Stock or the Warrants at the conclusion of this Offering or if
established, that such market will be sustained. There will be no market for,
or listing of, the Units. Purchasers of the securities offered hereby may,
therefore have difficulties in selling such securities should they desire to do
so. The market price for the Company's securities following this Offering may be
highly volatile. Factors such as the Company's financial results, introduction
of new products in the marketplace, and various factors affecting the healthcare
industry generally may have a significant impact on the market price of the
Company's securities, as well as price and volume volatility affecting small and
emerging growth companies, in general, and not necessarily related to the
operating performance of such companies. See "Underwriting."
27. Possible Restrictions on Market Making Activities in Company's Securities.
The Underwriter has advised the Company that it intends to make a market in the
Company's securities following consummation of this Offering. Rule 10b-6
promulgated under the Exchange Act may prohibit the Underwriter from engaging
in any market making activities with regard to the Company's securities for the
period from two or nine business days (or such other applicable period as Rule
10b-6 may provide) prior to any solicitation by the Underwriter of the exercise
of Warrants until the later of the termination of such solicitation activity or
the termination (by waiver or otherwise) of any right that the Underwriter may
have to receive a fee for the exercise of Warrants following such solicitation.
As a result, the Underwriter may be unable to provide a market for the
Company's securities during the period the Warrants are exercisable. Any
temporary cessation of such market-making activities could have an adverse
effect on the market price of the Company's securities. See "Underwriting."
28. Future Sales of Common Stock Under Rule 144 or Otherwise. All of the
Company's issued and outstanding Common Stock as of the date of this Prospectus
are "restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act of 1933, as amended (the "Securities Act"). Subject to
the restrictions contained in certain agreements with the Underwriter
restricting the sale or other disposition of the Common Stock for 12 months
following the date of this Prospectus without the prior written consent of the
Underwriter, 1,595,623 restricted shares will be eligible for sale under Rule
144 commencing after such 12 month restriction. In general, under Rule 144, a
person (or persons whose shares are aggregated) who has satisfied a two-year
holding period may sell "restricted securities" within any three-month period
limited to a number of shares which does not exceed the greater of one percent
of the then outstanding shares or the average weekly trading volume during the
four calendar weeks prior to such sale. Rule 144 also permits the sale (without
any quantity limitation) of "restricted securities" by a person who is not an
affiliate of the issuer and who has satisfied a three-year holding period. See
"Shares Eligible for Future Sale" and "Principal Stockholders."
29. Current Prospectus and State Registration Required to Exercise Warrants.
Purchasers of Units will be able to exercise the Warrants only if a current
prospectus relating to the securities underlying the Warrants is then in effect
and only if such securities are qualified for sale or exempt from qualification
under the applicable securities laws of the states in which the various holders
of Warrants reside. Although the Company will use its best efforts to maintain
the effectiveness of a current prospectus covering the securities underlying the
Warrants, there can be no assurance that the Company will be able to do so. The
Company will be unable to issue Common Stock to those persons desiring to
exercise their Warrants if a current prospectus covering the Common Stock
17
<PAGE>
issuable upon the exercise of the Warrants is not kept effective or if such
Common Stock is not qualified nor exempt from qualification in the states in
which the holders of the Warrants reside. See "Description of
Securities--Warrants."
30. No Assurance of Nasdaq Small Cap Market Listing. The Company has applied to
have the Common Stock and Warrants quoted on the Nasdaq Small Cap Market. In
order to have its securities quoted on the Nasdaq Small Cap Market, an issuer
is required to have total assets of at least $4,000,000, capital and surplus of
at least $2,000,000, a minimum price per share of not less than $3.00, at least
100,000 publicly held common shares with a market value of at least $1,000,000
and there must be a minimum of two registered and active market makers. No
assurance can be given that the Common Stock and Warrants will be accepted for
inclusion on the Nasdaq Small Cap Market or otherwise remain qualified for
quotation on the Nasdaq Small Cap Market. If for any reason the Common Stock
and Warrants are not eligible for quotation or do not remain qualified for
quotation on the Nasdaq Small Cap Market, then in such case the securities are
expected to be traded in the over-the-counter market through the OTC Electronic
Bulletin Board. Even assuming Nasdaq Small Cap Market eligibility, there can be
no assurance that an active trading market will develop for the Company's
securities.
31. Possible Delisting of Securities from Nasdaq Small Cap Market; Disclosure
Relating to Low-Priced Stocks. The Company's failure to meet Nasdaq's Small Cap
Market listing maintenance criteria in the future for any reason may result in
the discontinuance of the inclusion of the Company's securities on the Nasdaq
Small Cap Market. In order to remain quoted on the Nasdaq Small Cap Market, a
company must maintain $2,000,000 in assets, a $200,000 market value of the
public float and $1,000,000 in total capital and surplus. In addition,
continued inclusion requires two market-makers and a minimum bid price of
$1.00 per share; provided, however, that if a company falls below such minimum
bid price, it will remain eligible for inclusion in Nasdaq Small Cap Market if
the market value of the public float is at least $1,000,000 and the company has
$2,000,000 in capital and surplus. In the event of Nasdaq Small Cap Market
delisting, trading, if any, in the Company's securities may then continue to be
conducted on the OTC Electronic Bulletin Board or in the non-Nasdaq
over-the-counter market. As a result, an investor may find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of the
Company's securities. In addition, the Company would be subject to Rule l5g-9
(the "Rule") promulgated under the Exchange Act, which imposes various sales
practice requirements on broker-dealers who sell securities governed by the Rule
to persons other than established customers and accredited investors (generally
institutions with assets in excess of $5,000,000 or individuals with a net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse). For transactions covered by the Rule, the broker-dealer must
make a special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, the
Rule may have an adverse effect on the ability of broker-dealers to sell the
Company's securities and may affect the ability of purchasers in this Offering
to sell the Company's securities in the secondary market and otherwise affect
the trading market in the Company's securities.
The Commission has adopted rules that regulate broker-dealer practices
in connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the Nasdaq
system, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system). The
penny stock rules, which generally became effective January 1, 1993, require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt
from the rules, to deliver a standardized risk disclosure document prepared by
the Commission that provides information about penny stocks and the nature and
level of risks in the penny stock market. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market value of each penny stock held in
the customer's account. The bid and offer quotations, and the broker dealer and
salesperson compensation information must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer's confirmation. These disclosure
requirements may have the effect of reducing the level of trading activity in
the secondary market for a stock that becomes subject to the penny stock rules.
If the Company's securities become subject to the penny stock rules, investors
in this Offering may find it more difficult to sell their securities. The
Company's securities will, however, upon consummation of the Offering, be
outside the definitional scope of a penny stock under the rules.
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units offered
hereby are estimated to be $6,575,250 ($7,629,037 if the Underwriter's
over-allotment option is exercised in full) after deducting underwriting
discounts and commissions of approximately $1,049,750 ($1,207,213 if the
Underwriter's over allotment option is exercised in full) and expenses of this
Offering of approximately $450,000. The Company anticipates that the net
proceeds of this Offering will be applied substantially as follows:
<TABLE>
<CAPTION>
Approximate
Allocation of Proceeds Dollar Amount Percent
- ---------------------- ------------- -------
<S> <C> <C>
Osteopatch(TM) product development
activities $ 3,800,000 57.8%
Repayment of bridge loan 1,015,000 15.4%
Laboratory equipment 500,000 7.6%
Working capital 1,260,250 19.2%
------------ ------
Total $ 6,575,250 100%
============ ======
</TABLE>
The Bridge Loan funds were used by the Company for working capital
purposes, including the payment of license fees, repayment of certain
indebtedness including a $50,000 loan to the Company from Terry Giles, a
director of the Company, salaries and general and administrative expenses, and
for the purchase of laboratory equipment. Bridge Loan borrowings bear interest
at the rate of 14 percent per annum. Craig Goldstone, a director of the
Company, holds $58,334 of Bridge Loan notes that will be repaid with a portion
of the net proceeds of this Offering. See "Certain Relationships and Related
Transactions--Bridge Financing."
The Company anticipates using the proceeds of this Offering allocated
to working capital to fund anticipated growth in the laboratory operations and
for employee salaries and for general and administrative expenses.
The Company anticipates, based on currently proposed plans and
assumptions relating to its operations, that the proceeds of this
Offering, together with projected cash flow from operations, will be
sufficient to satisfy its contemplated cash requirements for
approximately eighteen months. In the event that the Company's plans
change or its assumptions change or prove to be inaccurate or if the
proceeds of this Offering or projected cash flow prove to be
insufficient to fund operations (due to unanticipated expenses,
technical problems, difficulties or otherwise), the Company may find it
necessary or advisable to reallocate some of the proceeds within the
above-described categories. The Company has no current arrangements with
respect to, or sources of, additional financing. There can be no
assurance that any such additional financing will be available to the
Company on commercially reasonable terms, or at all. See "Risk
Factors--Discretionary Use of Proceeds; Repayment of Debt."
If the Underwriter's over-allotment option is exercised in full,
additional net proceeds of $1,053,787 will be added to working capital. Pending
utilization of the proceeds of the Offering, the Company may make temporary
investments in bank certificates of deposit, prime commercial paper, U.S.
Government obligations, investments in money-market funds or other similar
short-term low-risk investments.
CAPITALIZATION
The following table sets forth the Company's capitalization at June
30, 1996, and as adjusted to give effect to the issuance and the sale of the
1,700,000 Units offered hereby and the application of the estimated net
proceeds therefrom. This table should be read in connection with the Company's
financial statements.
<TABLE>
<CAPTION>
June 30, 1996(1)
------------------------------------
Actual Pro Forma(2)(3)
------------ -------------------
<S> <C> <C>
Current liabilities.................................. $2,224,550 $2,224,550
Stockholders' deficit:
Common stock, par value $.01 per
share, 30,000,000 shares authorized;
1,739,169 shares outstanding; 3,439,169
shares pro forma.................................. 17,392 34,392
------ ------
Additional paid-in-capital........................ 8,755,553 15,313,803
Accumulated deficit............................... (10,157,382) (10,157,382)
------------ ------------
Total Stockholders' equity (deficit)............ $(1,384,437) $5,190,813
============ ==========
</TABLE>
(Footnotes on next page)
19
<PAGE>
(Footnotes from previous page)
- ----------------------------------
(1) Does not reflect the conversion of certain indebtedness into 142,274
shares of Common Stock and the issuance of 66,900 shares of Common Stock,
subsequent to June 30, 1996, none of which are being registered pursuant
to this Offering.
(2) Reflects gross proceeds of this Offering of $8,075,000 and estimated net
proceeds of $6,575,250.
(3) Does not give effect to (a) $1,211,250 gross proceeds ($1,053,787 of
estimated net proceeds) that will be realized if the Underwriter's
over-allotment option to acquire an additional 255,000 Units is exercised
in full, and (b) the exercise of the Warrants.
DILUTION
At June 30, 1996, the Company had a negative net tangible book value
of $(1,596,380) or $(0.92) per share. Negative net tangible book value
per share represents the amount of the Company's tangible assets less
the amount of its liabilities, divided by the number of shares of Common
Stock outstanding. After giving effect to (i) the sale of 1,700,000
Units offered hereby, (ii) the Company's receipt of the net proceeds of
this Offering less underwriting discounts and commissions and other
estimated offering expenses, and (iii) the conversion of certain debt of
management into 142,274 shares of Common Stock at the rate of $3.45 per
share on August 1, 1996, but without giving effect to the exercise of
the Warrants, the Underwriter's over-allotment option, or the
Underwriter's Unit Purchase Warrant, the net tangible book value of the
Company, as adjusted, at June 30, 1996 would have been $5,469,715 or
$1.53 per share. This represents an immediate dilution to the public
investors of $3.22 per share or 68 percent and an aggregate increase in
net tangible book value to the present stockholders of $2.45 per share
or 266 percent. The following table illustrates this per share dilution:
Public offering price per share ........................... $4.75
Negative net tangible book value per share
before the Offering ................................... $(0.92)
Increase per share attributable to new investors ....... $2.45
Pro forma net tangible book value per
share after the Offering ............................... $1.53
-----
Dilution per share to new investors ....................... $3.22
=====
The following table summarizes on a pro forma basis, as of August 31,
1996, the differences between existing stockholders and purchasers of shares in
this Offering with respect to the number of shares of Common Stock purchased
from the Company, the total consideration paid and the average purchase price
per share:
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price
------------------- --------------------- -------
Per
Number Percent Amount Percent Share
------ ------- ------ ------- -----
<S> <C> <C> <C> <C> <C>
Current
Stockholders.... 1,948,343 53.4% $4,968,313 38.1% $2.55
New
investors....... 1,700,000 46.6% $8,075,000 61.9% $4.75
--------- ----- ----------- -----
Total........... 3,648,343 100.0% $13,043,313 100.0%
========= ===== =========== =====
</TABLE>
- --------------
The above table assumes no exercise of the Warrants, the Underwriter's
over-allotment option, the Underwriter's Unit Purchase Warrant or
currently outstanding options and warrants (including the Bridge
Warrants, as hereinafter defined). To the extent that the over-allotment
option, the Warrants, the Underwriter's Unit Purchase Warrant and
currently outstanding options and warrants (including the Bridge
Warrants), for which an aggregate of 3,819,744 shares are reserved for
issuance upon exercise of such warrants and options (not including those
options available for grant under the Company's Stock Incentive Plan),
are exercised, there will be further dilution to new investors.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its
capital stock. The Company currently intends to retain its earnings to finance
the growth and development of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus.
Overview
The Company was incorporated in Delaware on May 9, 1996 and conducts
its businesses through two wholly-owned subsidiaries, BioQuant and PBI-WA. On
June 28, 1996, the Company completed the Mergers whereby BioQuant and PBI-WA
became wholly-owned subsidiaries of the Company in stock-for-stock exchanges.
The Merger with BioQuant was treated as a purchase by PBI-WA for accounting
purposes in accordance with generally accepted accounting principles ("GAAP").
As a result of this transaction, the Company's results of operations for the
year ended June 30, 1996, as reported in the financial statements included
elsewhere in this Prospectus, include only the operations of PBI-WA for the
year.
In January 1995, Old PBI and MHS merged into PBI/MHS, which merger was
treated as a purchase for accounting purposes in accordance with GAAP.
As a result of that transaction, the Company's results of operations for
the year ended June 30, 1995, include only five months of the results of
operations of Old PBI whereas fiscal 1996 results include a full year of
PBI-WA (i.e., Old PBI and MHS) operations. The comparisons in the discussions of
results of operations below are based on proforma information which assumes that
both PBI-WA and BioQuant were merged with the Company's subsidiaries on July 1,
1994. This information is not necessarily indicative of the results that would
have been reported had such events occurred on the dates specified, nor is it
indicative of the Company's future results.
As a result of the mergers described above, the Company operates a
reference laboratory that services the pharmaceutical and medical diagnostics
industries, produces a disposable HDL cholesterol testing device and is
currently developing the Osteopatch(TM) diagnostic product. The Company is also
conducting research relating to the feasibility of developing products utilizing
SalivaSac(R).
To date, the Company's revenues have consisted primarily of fees
charged by the laboratory for services provided to customers, a nominal amount
of sales from the SPINPRO(R) HDL cholesterol testing device, and U.S.
Government grants awarded to the Company under the NIH SBIR programs to support
research activities.
Expenses consist, and are expected to continue to consist, primarily
of operating expenses necessary to conduct the commercial laboratory operation,
research and development costs for products under development, administration
expenses and payment of license and royalty fees to acquire and maintain the
Company's intellectual property rights.
Through June 30, 1996, the Company had an accumulated deficit of
approximately $10,157,000, including a one-time charge of approximately
$6,374,000 for purchased research and development expenses relating to the
Company's merger with BioQuant and a one-time charge of approximately $428,000
relating to the merger involving Old PBI and MHS. See footnote 1 of Notes to
Financial Statements.
The audited consolidated financial statements of the Company reflect
the historical results of BioQuant as of June 28, 1996 and not for the full
fiscal year. The following discussion reflects the proforma results of
operations of the Company and its subsidiaries on a combined basis giving
effect to the merger transactions described above as if they were consummated on
the first day of the fiscal periods presented.
Recent Developments
For the three month period ended September 30, 1996, the Company
estimates that its revenues and net loss for such quarterly period will
be approximately $577,000 and $(525,000), respectively. The laboratory
operations accounted for in excess of 90 percent of total revenues for
the period, which trend management expects to continue until the
introduction of additional products into the marketplace. Operating
expenses are estimated to be $1,043,000 which is consistent with prior
quarterly periods and includes a one-time charge of approximately
$221,000 in connection with the issuance of Common Stock to certain
executive officers and directors. Included in other expenses of $105,000
is the commission paid to the underwriter of this Offering in connection
with the Bridge Loan, which commission amounted to $64,000.
21
<PAGE>
Results of Operations
Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995
Revenues. Revenues increased by $608,110, or 57.7 percent, to
$1,662,218 in fiscal 1996 as compared to $1,054,008 in fiscal 1995. The
laboratory operations accounted for substantially all of the increase in the
Company's revenues. The increase in laboratory revenues was due to an increase
in the number and size of clinical trials on new pharmaceutical products and
diagnostic devices, which the Company's laboratory conducted for third parties.
Additionally, revenues were enhanced as a result of the beginning of commercial
sales of the SPINPRO(R) HDL cholesterol device in January 1996. In addition to
the foregoing, the Company received certain NIH SBIR program and other revenues
aggregating approximately $177,000.
Expenses. Expenses related to the operation of the laboratory and
managing customer clinical trials increased by $115,477, or 13.3 percent, to
$985,818 in fiscal 1996 as compared to $870,341 in fiscal 1995. This increase
was directly related to the increase in laboratory revenues. The Company
benefited from a productivity increase, resulting in an increase in operating
margin of the laboratory operations from 17.4 percent to 40.7 percent. General
and administrative expenses increased by $86,835, or 5.7 percent, to $1,617,229
in fiscal 1996 as compared to $1,530,394 in fiscal 1995. This increase was due
principally to increased salaries and personnel. Research and product
development expenses increased to $1,113,986 in fiscal 1996 and from $973,850
in fiscal 1995. The increase was due mainly to increased activity relating to
the Osteopatch(TM), including assay development and laboratory evaluation of
various technical details relating to the product specifications in preparation
for clinical trials necessary for FDA approval. Further, increased resources
were devoted to research on two potential applications for the SalivaSac(R)
technology relating to diabetes. In the coming twelve to eighteen months, the
Company expects increases in product development activities, particularly to
fund clinical trials for the Osteopatch(TM).
Net Loss. Net loss increased by $5,566,759, or 202.9 percent to
$8,310,504 in fiscal 1996 as compared to $2,743,745 in fiscal 1995. The
net loss reported in fiscal 1996 includes a one-time charge of
approximately $6,374,000 for purchased research and development expenses
relating to the Company's merger with BioQuant. The net loss in fiscal
1995 includes a one-time charge of $428,000 for amortization of goodwill
relating to the PBI-WA/MHS Merger. Excluding the effect of the one-time
charges associated with the Mergers in fiscal 1996 and the merger of
PBI-WA with MHS in fiscal 1995, net loss for fiscal 1996 declined by
approximately $379,000 from $2,315,000 as compared to $1,936,000 in
fiscal 1995. The Company, however, expects normal operating losses to
increase substantially for at least two years due to anticipated
increases in research and development activities associated with the
Osteopatch(TM) product, establishment of a marketing program for the
reference laboratory and general and administrative expenses.
Liquidity and Capital Resources
Based on the Company's audited financial statements, the Company
sustained a deficit cash flow from operations of $729,534 for the year ended
June 30, 1996, as compared with a deficit cash flow from operations of $865,981
for the year ended June 30, 1995. The decrease in the deficit cash flow from
operations is attributable principally to an increase in revenue for the year.
This deficit cash flow was financed principally by loans from stockholders of
$464,461 and sales of common stock amounting to $360,000. In June 1996, the
Company issued promissory notes amounting to $250,000 in connection with a
private placement of debt financing. These funds were used to support
additional investment in equipment, to pay expenses associated with the
Company's proposed initial public offering ("IPO"), to provide working capital,
to support the Company's product development and to pay administrative
expenses.
Successful future operations depend primarily upon the Company's
ability to complete development of the Osteopatch(TM) product, obtain FDA
clearance, and achieve successful product commercialization. The Company's
operations also depend on its ability to successfully grow a profitable
reference laboratory operation. In order to achieve these results, the Company
will need substantial additional capital to fund product development and invest
in the growth of laboratory operations. Accordingly, the Company expects to
continue to incur substantial losses for at least the next two years as it
funds these activities.
The Company and its subsidiaries have funded their operations to date
principally through equity financings and, to a lesser extent, through
debt financings. The debt financing includes term debt and leases used
to fund equipment purchases, as well as a bank line of credit and
stockholder loans. In June 1996, the remaining balance
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on a line of credit was converted to a term loan. At June 30, 1996, the Company
had $181,127 in term debt obligations outstanding (including capital leases) and
a working capital deficit of $1,723,942. At June 30, 1996, the Company had
$615,703 in trade payables and accrued liabilities. The Company reported a
negative cash flow from operations of $729,534 for the year ended June 30, 1996.
This cash flow deficit has been funded principally through stockholder loans and
sales of common stock. In addition to the cash flow deficit from operations, the
Company's requirements to service its term debt were $62,105 for the year ended
June 30, 1996, and are expected to approximate $180,000 in the current fiscal
year due to monthly principal and interest payments.
The Company is obligated under its manufacturing agreement dated March
1, 1994 (the "Manufacturing Agreement") to reimburse the supplier of the
SPINPRO(R) product for certain costs, approximately $317,000, incurred by the
supplier to produce the product. The supplier is entitled to add a surcharge to
the cost of the SPINPRO(R) product until such production costs are fully
recovered. The Company and certain of the Company's directors and stockholders
have guaranteed the Company's obligations under the Manufacturing Agreement. The
Company has the right to purchase such molds and additional equipment for a
purchase price equal to the unamortized portion of the cost of such equipment.
Additionally, the Company was required to make a minimum royalty payment in June
1996 under the SPINPRO(R) license agreement in order to maintain exclusivity of
the technology. The Company elected not to make such payment and believes that
the loss of exclusivity, of which the Company has not yet been notified, will
not have a material adverse effect on the business or prospects of the Company.
The Company had a $200,000 line of credit with a bank that was
converted to a term loan in June 1996 as a consequence of an earlier payment
default. The balance at the date of conversion was $159,485. This loan bears
interest at the bank's index rate plus 2.5 percent (10.75 percent at June 30,
1996), and is payable monthly at the rate of $14,127, including interest. The
loan is due in June 1997. The Company also has a loan from a bank with a
balance outstanding of $16,522 at June 30, 1996. This loan bears interest at
the prime rate plus 1.4 percent (9.9 percent at June 30, 1996), and is payable
monthly at the rate of $2,085, including interest. The loan is due in January
1997. The above loans are collateralized by the Company's accounts receivable
and equipment, and by personal guarantees from certain stockholders.
In June 1996, pursuant to a private financing, the Company received
$250,000 in exchange for promissory notes and 50,000 warrants. The notes issued
in connection with the Financing bear annual interest at the rate of 14 percent
and were repaid out of the proceeds of the Bridge Loan. The warrants issued in
connection with the Financing are exercisable until April 30, 1998, subject to
a six-month lock-up period until April 30, 1997 (which may be reduced at the
discretion of the Underwriter), at an exercise price of $5.70 per share.
In August, 1996, the Company completed a private placement of units
consisting of an aggregate of $1,000,000 in principal amount of promissory
notes and 250,000 warrants to purchase Common Stock. The Company received net
proceeds of $936,000 from the Bridge Loan, which was used to repay certain
indebtedness, including the notes issued in the Financing, to support product
development activities and for working capital. The promissory notes issued in
connection with the Bridge Loan bear annual interest at the rate of 14 percent
and are payable upon consummation of this Offering. The Warrants issued in
connection with the Bridge Loan are exercisable until January 31, 1998, subject
to a twelve month lock-up period until October, 1997 (which may be reduced at
the discretion of the Underwriter), at an exercise price of $5.70 per share.
In addition to the debt financings described above, the Company raised
$360,000 during the year ended June 30, 1996 and an additional $10,000
subsequent to the fiscal year end through private sales of its Common Stock.
The proceeds were used to support the Company's product development activities.
At June 30, 1996, the Company had borrowed $660,000 from certain
stockholders. These borrowings were uncollateralized and bore interest at an
index rate plus 1 percent (approximately 9.5 percent at June 30, 1996).
Subsequent to year end, the Company issued 142,274 shares at a price of $3.45
per share in satisfaction of loans amounting to $460,000 plus accrued interest.
Additionally, $200,000 of such loans were refinanced in connection with the
Company's Bridge Loan completed in August 1996.
The Company believes that the net proceeds of this Offering, together
with anticipated cash flows from operations, will be sufficient to meet the
Company's operating expenses and capital requirements, including the purchase
of laboratory equipment of approximately $500,000, for approximately eighteen
months.
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BUSINESS
General
The Company is a holding company that was formed on May 9, 1996 for
the purpose of holding all of the outstanding shares of stock of PBI-WA and
BioQuant following the mergers on June 28, 1996 of wholly-owned subsidiaries of
the Company with and into PBI-WA and BioQuant, respectively. See "Prospectus
Summary -- The Merger Transactions."
PBI-WA was founded in 1989 as a specialized lipoprotein laboratory
that became recognized as a leader in the fields of laboratory method
verification, technical consulting, clinical trials and reference
materials for cholesterol measurements and related risk factors for
coronary heart disease. Through an affiliated not-for-profit foundation,
PBI-WA became one of twelve CDC reference network laboratories
established for standardization of cholesterol testing in the world. The
Company's specialty reference laboratory has developed an expertise in
the emerging field of osteoporosis laboratory assessments through its
work with diagnostic manufacturers of assays for bone markers (i.e.
Ostex and Metra), in addition to pharmaceutical manufacturers of drugs
that prevent bone loss (i.e. Merck and Proctor & Gamble). This has
helped to establish the Company as a leader in its understanding of
biochemical markers for bone formation and bone resorption (loss).
In January 1995, PBI-WA completed a merger with one of its former
clients, Merchant House Scientific, Inc. This merger enabled PBI-WA to offer
its first disposable product to the laboratory testing market, SPINPRO(R), a
sample preparation device which simplifies and improves the methods for
performing certain kinds of tests in the laboratory setting. This technology
facilitates sample preparation for tests that are performed "off-line" or
involve a "pretreatment" step prior to obtaining results, thus making the
testing procedure less labor intensive resulting in lower overall cost and more
consistent and accurate results.
The Company's BioQuant subsidiary was founded in 1985 and conducted
extensive research and development, mostly funded by government grants,
relating to various immunoassays. In 1989, BioQuant patented a device known as
the SalivaSac(R) that facilitates the collection of saliva without
contamination from enzymes, food particles, mucopolysaccharides, blood, and
other particulate matter. The SalivaSac(R) enables non-invasive diagnostic
testing through collection of saliva. Based on preliminary studies conducted by
the Company and others, this product has the potential for numerous
applications, including therapeutic drug monitoring, the detection of drugs of
abuse, measurement of hormones and analytes of infectious disease. The Company
currently has two NIH SBIR Phase I grants to fund the research of this
technology for diabetes applications. In 1993, BioQuant acquired a license to
utilize skin patch technology for use in the field of osteoporosis. In 1995,
BioQuant acquired rights to antibodies specific to biochemical markers of bone
loss for use with the skin patch technology. The Company has focused its
efforts on developing a product that the Company believes will become a useful
indicator of bone loss leading to osteoporosis.
The Company believes that the synergies among PBI-WA and BioQuant,
through the technical expertise and research capabilities of their
respective personnel, will expedite current development of the
Osteopatch(TM) product and the development of SalivaSac(R) diagnostic
applications, completion of clinical trials of these devices and receipt
of FDA approval or clearance of these devices and their applications.
Additionally, the Company anticipates that its laboratory facilities will
be positioned to capture a significant portion of the analysis revenues
which will be associated with the Osteopatch(TM) product.
The Company's strategy is to (i) finalize development and
commercialize the Osteopatch(TM); (ii) expand its specialty reference
laboratory business; (iii) explore new applications and market opportunities
for the SPINPRO(R); and (iv) evaluate the feasibility of noninvasive glucose
testing using, SalivaSac(R).
Osteoporosis. The human body and its major organs are supported and
protected by a matrix of connective tissues. Major connective tissue systems in
the body include bone, cartilage, tendons and skin. The body's principal
connective tissue systems are bone and cartilage. Major diseases and disorders
affecting bone and cartilage include osteoporosis, Paget's disease, cancers
that metastasize to bone, osteoarthritis and other disorders. Many of these
diseases and disorders can be disabling, can affect the quality of life, and
can eventually lead to death.
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Bone is a dynamic tissue that is continually regenerated and
remodelled. This process consists of bone formation and resorption (loss) and
is necessary to maintain skeletal integrity. Between 10 percent and 20 percent
of the adult skeleton is replaced each year by the remodeling process. From
childhood to early adulthood, bone formation exceeds resorption, causing bone
mass to increase. After reaching peak bone mass between the ages of thirty and
forty, bone resorption begins to exceed formation, and both men and women
experience a slow, age-related phase of bone loss, lasting for the rest of
their lives. Many women also experience an accelerated phase of bone loss for
several years following menopause, primarily due to the cessation of estrogen
production.
Bone resorption occurs when cells called "osteoclasts" excavate small
pits throughout the bone. This process is followed by bone formation, in which
cells called "osteoblasts" produce and deposit bone collagen to fill the pits
excavated by the osteoclasts. Remodeling takes place continuously throughout
the skeleton, at multiple locations and in different phases at the same time.
The osteoclastic and osteoblastic processes produce fragments of collagen and
other proteins, which are released into the bloodstream and eventually appear
in other bodily fluids, including urine and perspiration.
In general, the bone resorption and formation processes are tightly
coupled and balanced. When this process becomes unbalanced or exaggerated, bone
disease occurs. Additionally, certain drugs or medications can have an adverse
side effect of increasing bone loss.
Osteoporosis is a disease characterized by low bone mass and a
deterioration of the structural integrity of bone, which significantly
increases the risks of bone fractures, primarily of the spine, hip, wrist and
pelvis, and of back pain and spinal deformity. There are three basic forms of
osteoporosis: (i) postmenopausal osteoporosis; (ii) age-associated
osteoporosis, affecting men and women over the age of seventy; and (iii) idio-
pathic osteoporosis, affecting premenopausal women and middle-aged men and of
unknown cause. In addition, there is a related condition known as secondary
osteoporosis, in which bone loss results from an identifiable agent or disease,
such as certain gastro-intestinal diseases or the use of steroids to treat
autoimmune diseases.
By far the most common form of osteoporosis is postmenopausal
osteoporosis, which accounts for approximately 80 percent of the individuals
who suffer from osteoporosis. Postmenopausal osteoporosis typically begins to
affect women within fifteen to twenty years after menopause as a result of an
accelerated rate of bone resorption related to an estrogen deficiency caused by
menopause.
Osteoporosis is widespread and represents a major health care problem.
An estimated 25 million Americans and more than 75 million people worldwide
suffer from osteoporosis. In the U.S. alone, approximately 1.5 million hip and
other bone fractures occur each year as a result of osteoporosis, and many of
the elderly women and men who incur these fractures are confined to wheelchairs
or have to enter nursing homes as a result and may also suffer additional
complications.
According to the National Osteoporosis Foundation, forty percent of
all women in the U.S. will have at least one fracture by the age of seventy and
expenditures in the U.S. related to osteoporosis currently exceed $10 billion
annually, with such costs expected to triple by the year 2020 resulting from
the expected increase in the aged population. The Company believes that delaying
the onset of severe osteoporosis could reduce the incidence of fractures and
thereby result in treatment cost savings and improved quality of life.
Therapeutic Options. Treatment exists to prevent continued bone loss,
but as yet there is no effective treatment to restore bone mass in individuals
with advanced osteoporosis.
Estrogen replacement therapy, calcium supplementation and exercise are
used to prevent or at least forestall continued bone loss. In the U.S.,
estrogen replacement therapy is the treatment of choice for women with
postmenopausal osteoporosis. Recent studies suggest that estrogen replacement
therapy is required for a minimum of seven years following menopause (and
possibly for life) in order to provide protection against osteoporosis.
Estrogen replacement therapy has a number of potential side effects,
including increased risk of endometrial cancer, possibly increased risks of
breast and other cancers, and increased risks of gallbladder disease. As a
result, approximately 70 percent of American women taking estrogen (which is
prescribed for a number of purposes, including the treatment of menopausal
symptoms and the prevention of cardiovascular disease) stop doing so after the
first year of use. In addition, recent studies have suggested that the standard
dosage is inadequate to stop bone loss in approximately 15 percent of the women
using estrogen replacement therapy.
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The effective use of estrogen replacement therapy is hampered because
there is no effective means of monitoring the rate of bone loss at relatively
short intervals in order (i) to enable patients to decide whether the efficacy
of treatment outweighs the risks of its side effects and (ii) to determine the
approximately 15 percent of the women using estrogen replacement therapy for
whom the standard dosage is inadequate and serves only to expose them to the
side effects of therapy without its benefits.
A number of pharmaceutical companies worldwide are currently
developing other drugs for the treatment of osteoporosis. Most of these new
drugs are designed to stop bone resorption, although some effort is directed
toward agents that will stimulate bone growth. Many of these drugs are in
various stages of pre-clinical and clinical trials in the U.S., Europe and
Japan, and some of them are expected to become commercially available in the
next two years. For example, Merck received FDA approval in October 1995 for
their new bisphosphonate drug, Fosamax(R). The bisphosphonates act to stop bone
resorption and are expected to increase the need for diagnostic testing in
order to identify those patients who are losing bone rapidly, and to verify
that the dose prescribed is adequate to stop bone loss in a particular patient.
Eli Lily & Co. and Proctor & Gamble also have new drugs in Phase III clinical
trials.
Diagnosis. Osteoporosis is a "silent" disease in which rapid bone loss
occurs years, and even decades, before clinical symptoms appear. Diagnosis of
osteoporosis frequently occurs only at the time of a bone fracture.
At present, bone densitometry involving quantitative computed
tomography (in the case of the vertebrae) and dual-energy absorptiometry
(in the case of the spine and hip), is used to measure the amount of
bone loss in order to diagnose osteoporosis or to assess the risks of
osteoporosis. Bone densitometry has a considerable limitation, however,
because it does not permit a convenient measurement of the rate of bone
loss. In order to evaluate the rate of bone loss, bone densitometry
requires a baseline measurement and successive measurements over a
period of one to two years in order to determine the changes in bone
mass of a patient with actively progressing osteoporosis experiencing
the average rate of bone loss of 2 to 4 percent per year. Measurements
must be spread over an even longer period in order to measure rates of
bone loss lower than 2 to 4 percent annually.
Because of the long period of time required to measure the rate of
bone loss, the Company believes current bone densitometry techniques are not
suitable for general screening of women in the early stages of menopause or for
monitoring the efficacy of treatments for osteoporosis. More recently,
biochemical markers have been identified that are reliable indicators of the
rate of bone loss.
In a diagnostic context, a biochemical marker is a chemical produced
by the body whose presence is highly specific to a particular disease or
condition. During the last five years, there has been considerable research
devoted to developing a biochemical marker for bone resorption sufficiently
sensitive to permit rates of resorption to be determined.
Most research attention has been directed to four biochemical markers:
Pyd, Dpd, N-telopeptide and C-telopeptide. All of these markers identify the
presence of bone collagen fragments in body fluids. Collagen is the major
protein component of bone. Collagen cross-links provide structural stability
and insolubility to collagen and are released when collagen breaks down during
bone resorption.
All the markers appear highly specific to bone loss, although there is
debate in the scientific community on the specificity of each marker. All the
markers have been studied extensively in urine. These studies have shown that
(i) the markers are released into the blood stream (and ultimately into urine,
as the kidneys extract them as a waste) only when mature bone breaks down and
not when new bone is formed, (ii) markers are not metabolized further once
released into the blood stream and thus directly reflect bone resorption and
(iii) marker levels are not affected by diet (e.g. foods containing collagen).
In addition to biochemical markers for resorption, markers have been
discovered for bone formation. These include certain molecules that are
released into the blood as a result of osteoblastic activity, such as alkaline
phosphatase and osteocalcin.
Research suggests that urine tests may not provide the most accurate
information concerning resorption, particularly because urine test results
reflect only a "snapshot" of the patient's bone marker levels which may be
affected by many external variables such as exercise, hormone levels and
medications. Studies have indicated that urine tests to detect signs of
resorption are subject to variations in excess of 30 percent, much too high
to be
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considered a predictor of risk of osteoporosis. Such variability limits the
utility of urine tests to measuring the effectiveness of resorption-blocking
drugs during treatment only after osteoporosis has been conclusively diagnosed
by other means. This high variability rate could be avoided by using multiple
urine samplings over a twenty-four hour period, but at high cost and
inconvenience to the patient. To date, no effective blood serum test for bone
markers is commercially available, although several are under development. The
Company believes that the Osteopatch(TM) provides a solution to the wide
variations experienced in urine sampling, resulting in a more accurate
measurement of bone loss, which in turn will improve the ability to detect
subtle changes in bone resorption, and, when compared to control group
standards, identify individuals who are losing bone rapidly and are subject to
increased risk of fracture due to osteoporosis.
The Company's Osteopatch(TM)
The Company holds exclusive worldwide rights to the use of a
transdermal perspiration collection device, the Osteopatch(TM), for measuring
bone loss that may assist in the detection of osteoporosis. Seven patents have
been issued to the inventors of this device and one patent is expected to be
granted to the Company and additional patents are pending. The Osteopatch(TM)
is designed for extended wear (e.g. several days) and is particularly useful in
capturing biochemical markers via continuous collection from perspiration over
an extended time period. The Company will be measuring markers of bone
resorption (loss) from perspiration as an early indicator of bone loss. Since
bone metabolism is known to vary during the day and from day-to-day, the
Company believes the Osteopatch(TM) will enable the Company to reduce this
variation and thereby be able to distinguish a disease state of bone loss from
normal biological variations due to physical exertion, fluctuating hormone
levels and other factors. Along with the patented collection device, the
Company has exclusive rights to patented antibodies that are specific to known
biochemical markers of bone loss. The Company is developing a proprietary,
highly sensitive immunoassay that can measure the bone loss markers in human
perspiration.
The Company has under development a skin patch test to measure both
Pyd and Dpd in perspiration as a screening, monitoring and early
diagnostic test for osteoporosis. Pyd and Dpd are well known biochemical
markers of bone resorption that have been characterized by numerous
clinical studies and publications from around the world. These markers
have been reported in the scientific literature to be highly specific to
the breakdown of bone collagen and sensitive to diseases and therapies
affecting bone metabolism and in one recent study, predictive of
osteoporosis associated fractures. The Company has exclusive rights,
relating to bone resorption in human perspiration, to use patented
antibodies for these markers owned by Metra, a developer and marketer of
bone loss urine tests. The Company expects to introduce its
Osteopatch(TM) test in the U.S. and possibly abroad in the first half of
1998, following completion of its immunoassay and clinical trials, which
introduction is subject to approval or clearance by the FDA. See "Risk
Factors -- Government Regulation and Product Approval." The skin patch
test is expected to provide patient convenience, ease of laboratory
collection and processing, and superior accuracy.
The Company believes that the "ease of use" of the Osteopatch(TM) will
make it attractive to the "point of care" testing market. Point of care testing
occurs in the physician's office, outpatient sites and in the patient's home.
The Company believes that the point of care testing marketplace will grow
substantially over the next several years.
It is the Company's strategy to develop alliances and distribution
agreements with organizations that either currently market to the point of care
testing marketplace or are positioning themselves for this marketplace,
including pharmaceutical companies, diagnostic distributors, and consumer
health related entities. The Company has had numerous discussions with many
entities and intends to establish strategic relationships once the Company has
filed its 510(k) application with the FDA, which the Company expects will occur
in approximately twelve months. The Company has also received inquiries from
distributors outside the U.S. and will continue to explore the international
marketplace for its products.
The Company believes that the education of physicians, patients, and
insurers about the long term benefits of early diagnosis and treatment of bone
disorders is important to the success of the Company's products. As managed
care becomes increasingly more prevalent in the U.S., emphasis on disease
prevention should increase along with the demand for early and cost-effective
diagnostic tests. This emphasis on preventive health care along with the
availability of advanced drug therapies for osteoporosis from pharmaceutical
companies will
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continue to increase the need for cost-effective diagnostic devices that detect
osteoporosis and monitor the effectiveness of drug therapies.
Laboratory Operations
The Company has a fully equipped 6,000 square feet laboratory in
Seattle, Washington that supports product development in the diagnostics and
pharmaceutical industries. This facility provides full service laboratory
analysis, development of reference methods, protocol development, data
management and consulting services to a large number of clients, including
Abbott, Bristol-Myers, Squibb, DuPont, Genzyme, Merck, Metra, Ostex, Proctor &
Gamble and Parke-Davis. The Company also maintains a 1,000 square feet
development laboratory in Irvine, California, to support the development and
manufacture of the SalivaSac(R) product.
The Company's laboratory has supported numerous Phase I through IV
pharmaceutical clinical trials as well as diagnostic product clinical trials.
The Company's expertise in lipid analysis includes in-house CDC reference
methodologies for total cholesterol, LDL cholesterol, HDL cholesterol and
triglycerides. Research and routine methodologies include quantitation of
lipids and lipoproteins by different techniques such as fractionation by
ultracentrifugation, electrophoresis, chemical precipitation and various immuno
assays. The Company's scientists have been extensively involved at the national
level in developing guidelines for lipid measurements and method improvement.
Many of the current standard lipid methods have been developed at the Company,
including the current CDC Designated Comparison Method for HDL cholesterol.
In the emerging field of osteoporosis laboratory assessments, the
Company has developed a complete test menu for bone metabolism, including the
serum markers of bone formation, the urinary markers of bone resorption, and
several related tests involving measurement of hormones and other substances.
The key services that the Company provides to the diagnostics industry
are conducting laboratory analysis including contract research to assist in
product development, providing reference materials to assess quality of
products in research and development and manufacturing stages, providing
proficiency testing and standardization services through the Company's CDC
network reference laboratory, supporting diagnostic clinical trials as a
central specialty laboratory and clinical trial manager, and consulting for
regulatory, strategic, and technical issues related to successful product
development.
In both the pharmaceutical and diagnostic market segments, the
Company's central laboratory services are highly regarded for the training and
skills of its scientists and support personnel, the techniques used for
laboratory testing, the quality control measures employed and the Company's
ability to manage complex data efficiently and creatively for its clients.
In addition to expansion of the Company's reference laboratory
services, the Company also expects that its laboratory operations will
increase concurrently with the introduction of the Osteopatch(TM) and
that its revenues will increase proportionately with market acceptance
of the Osteopatch(TM), since the perspiration collected from the
Osteopatch(TM) must be analyzed in a laboratory setting and it is
expected that the Company's laboratory in Seattle, Washington will
conduct a significant portion of the analysis related to the
Osteopatch(TM) product. The reputation of the laboratory for quality,
the consistency of doing all testing from a single laboratory and the
inherent advantages of this technology are all expected to contribute to
physician acceptance of test results in this emerging new field.
Strategically, since the Company will also manufacture its own assay to
use with the Osteopatch(TM), the Company will have characteristics of
both a diagnostic test kit manufacturer and a clinical laboratory. This
will be an unique combination in the osteoporosis field that will enable
the Company to compete effectively against both clinical laboratories
and diagnostic manufacturers since the Company should benefit from
higher profit margins by providing both services.
SalivaSac(R)
Saliva is a potentially useful body fluid for diagnostic purposes but
is difficult to handle in the laboratory because it contains
mucopolysaccharides, particulate matter, blood contamination, enzymes and other
large molecules. These substances tend to complicate the processing of saliva,
which must be frozen or centrifuged, and often interfere with sensitive assays
used to measure analytes of medical interest. The Company has a patented saliva
collection and processing device called the SalivaSac(R). The SalivaSac(R) is a
small device consisting of a semipermeable outer membrane and containing a small
quantity of a substance such as salt or
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sugar that acts as an osmotic driver. When the device is placed in the mouth it
rapidly fills with saliva that is filtered as it passes through the
semipermeable membrane. The resulting fluid is clear, easy to use, and does not
contain interfering substances. Based on preliminary studies conducted by the
Company and others, this product has numerous potential applications including
therapeutic drug monitoring, detection of drugs of abuse, measurement of
hormones and analytes of infectious disease.
The Company is also researching two applications of this technology
for diabetes. One application, supported by an NIH SBIR grant, is the
development of a saliva test for long term diabetic control. The Company
is investigating the measurement of glycated proteins in saliva as a
non-invasive test to potentially replace hemoglobin A1c. A second
application, also supported by an NIH SBIR grant, involves the
measurement of saliva glucose as a non-invasive substitute for blood
glucose. While previous attempts by others to correlate saliva glucose
with blood glucose have been unsuccessful, the Company has had
encouraging preliminary results using the SalivaSac(R) device as it
appears to exclude substances that interfere with accurate glucose
measurements. In addition to developing applications for the
SalivaSac(R), the Company will seek to license the SalivaSac(R) to
others for applications in markets that the Company does not intend to
serve itself, such as testing for drugs of abuse. The Company does not
believe that any products developed using SalivaSac(R) will be available
for regulatory approval or test marketing prior to 1998.
SPINPRO(R)
The Company has licensed a patented technology that simplifies the
preparation of serum samples for tests requiring a separation step prior to
obtaining an analytical result. This technology incorporates the functions of
precise sample measurement, sample separation and reagent dispensing in a
specially designed, multiple chamber sample tube. This low cost, disposable
device enables the accurate and controlled processing of complex tests
requiring a pretreatment step by relatively unskilled laboratory personnel. The
Company has named this new technology "SPINPRO(R)" and has registered the name
as a Company trademark.
The Company has introduced its first SPINPRO(R) product to the market
in the form of a device that facilitates the testing of HDL cholesterol. A test
that previously required tedious off-line preparation in most laboratories is
now greatly facilitated by using the Company's SPINPRO(R) technology. This
device is distributed by Sigma, a large distributor of diagnostic reagents and
products to laboratories in the U.S. and several European countries. In order
to maintain its exclusive distribution rights, Sigma must purchase the
following minimum quantities in the first three years of the contract: 1.25
million units, 2.75 million units and 4.00 million units, respectively. The
Company is investigating other applications of SPINPRO(R) technology.
The Company was required to make a minimum royalty payment in June 1996 under
the SPINPRO(R) license agreement in order to maintain exclusivity of the
technology. The Company elected not to make such payment and believes that the
loss of exclusivity, of which the Company has not yet been notified, will not
have a material adverse effect on the business or prospects of the Company.
Business Strategy
The Company's strategy is to focus on the development of
cost-effective, convenient diagnostic tests and improved laboratory
techniques that support the objectives of early diagnosis, prevention
and therapeutic monitoring. Critical to this strategy is focusing the
development of new products in certain disease areas. The Company,
therefore, will strive to be a leader in testing relating to common,
chronic diseases of an aging population, which ensures a large and
growing population for the next two to three decades. Additionally, the
Company anticipates that it will build on its leadership reputation in
laboratory testing and methods in the fields of coronary heart disease
and osteoporosis by aggressively seeking new clinical trial support
business from developers of new therapeutics and diagnostics in these
fields, and continue to maintain leadership in these areas through the
support of methods standardization and proficiency testing. Over time,
if feasible, the Company anticipates that it will build similar
capabilities and expertise in diabetes and arthritis testing and
therapeutic monitoring by seeking a role in clinical trials of new
products and technology developed by others.
The Company's business strategy is to establish the Osteopatch(TM) as
the standard collection and diagnostic device for risk assessment and
management of therapy for osteoporosis and to develop applications for the
SalivaSac(R) to aid in the treatment of diabetes and other ailments. This
strategy includes educating physicians and other healthcare professionals,
forming strategic marketing and distribution alliances with established market
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leaders to establish and then expand market share for the Osteopatch(TM),
maintaining a strong proprietary position for its products and technology,
expanding laboratory operations and continued dedicated research of its products
and technologies.
A key factor driving the Company's strategy as it relates to the
Osteopatch(TM) is the belief that a small percentage of the population at risk
for osteoporosis-related fracture is currently diagnosed and that an even
smaller percentage is effectively treated. The Company believes that the
historical lack of consistent therapeutic intervention can be traced in part to
the limited availability of timely, cost-effective and accurate methods that
detect and monitor bone loss. The Company believes that the demand for its
products will be driven in part by the physician's need to easily,
inexpensively and accurately (i) identify those persons most at risk before
significant bone loss occurs, (ii) quantify the parameters of each patient's
bone remodeling process, (iii) determine therapeutic dosage and duration of
therapy, and (iv) monitor the effectiveness of, and patient compliance with,
prescribed therapies.
Material Contracts
The Company has the exclusive rights to certain patents, which it
believes substantially covers the Osteopatch(TM) technology as it
relates to osteoporosis applications. Pursuant to the terms of the
Company's license agreement with Sudor Partners, the Company is required
to pay royalties to Sudor Partners in the amount of 5 percent of gross
sales of patches and 5 percent of profits derived from after-use
diagnostic analysis or evaluative analysis revenues received through the
Company's laboratory. The Company is required to make minimum royalty
payments in the amount of $15,000 each quarter. The license terminates
automatically if the Company should fail to make a royalty payment on
the date due. The license is also terminable in the event (i) of a
failure to perform any conditions of the license agreement, (ii) the
Company becomes insolvent or institutes bankruptcy proceedings, (iii)
the Company's assets are seized or attached, (iv) of a failure to make
timely royalty payments and (v) of termination of the supply agreement
discussed below. Upon termination, Sudor Partners acquires title to any
improvements to the patented technology and to any registrations or
approvals of governmental agencies, such as the FDA, relating to
products that incorporate the patented technology. The Company is
currently in compliance with all obligations under the license
agreement.
The supply agreement between the Company and Sudormed, an affiliate of
Sudor Partners, provides that such affiliate will manufacture the
Osteopatch(TM) for the Company. Sudormed currently subcontracts manufacture of
the patch technology to The 3M Company. In the event certain specified minimum
purchases are not met by the Company, the license agreement will become
non-exclusive. The Company is required to purchase a minimum of 25,000
Osteopatch(TM) units prior to March 31, 1997. The required minimum purchase
amount increases each year through March 31, 2001, when 2,000,000 units must be
purchased. Sudor Partners has the right to change the price for units in the
event that its direct costs of manufacturing the units changes.
The Company is aware that the owners of the patents relating to the
Osteopatch(TM) technology are in the process of seeking a buyer for such
patents and have engaged Douglas S. Harrington, M.D., a director of the
Company, to facilitate the sale process. Although a conflict of interest may
arise with respect to such director's fiduciary obligations to the Company and
his contractual obligations with respect to the sale of the patents, the
Company believes that the ultimate sale of the patents by the owners thereof
will not have any material impact on the Company and that any potential
conflicts of interest will be resolved in favor of the Company. There can be no
assurance, however, that such patents will not be sold to a competitor of the
Company, that any conflicts of interest which may arise relating to the
director who has been engaged to facilitate the sale of such patents will be
resolved in favor of the Company or that the ultimate buyer of the patents will
honor the Company's license with respect to such patents, in which event the
Company may be required to enforce its rights under the license agreement at a
time when it does not have sufficient resources to do so. See "Risk Factors --
Dependence on Licenses".
The Company has contracted with Assay Designs, Inc. to develop a Pyd
immunoassay and a Dpd immunoassay and related test kits for the Company for use
with the Osteopatch(TM). Such immunoassays are utilized in connection with
biochemical markers which identify the presence of bone collagen fragments in
body fluids, such as perspiration. Pursuant to the development agreement, the
Company must satisfy specified fee arrangements and will be assessed a late
charge for any payment not timely made. The agreement may be terminated upon the
Company's failure to make a required payment. The Company is currently in
compliance with its obligations under this agreement.
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Excluding Japan, the Company is the exclusive worldwide licensee of
antibody technology from Metra, which is used in the quantitative measurement
of pyridinium crosslinks in all body fluids. The license will convert to a
non-exclusive license upon the earlier of (i) seven years from the first
commercial sale of products incorporating the licensed technology, or (ii)
February 15, 2005. The licensee must pay a royalty per patient report. The
license is terminable (A) upon a material breach of the license agreement, (B)
upon dissolution or liquidation of the Company, or (C) the Company's failure to
invest either (i) $100,000 annually in the research and development of the
licensed technology prior to its submission for FDA approval or (ii) $40,000
annually in the research and development of the licensed technology subsequent
to its submission for FDA approval. Under the license agreement, Metra receives
a royalty-free, non-exclusive license to use improvements made by the Company
to the Metra anti-body technology. The Company is currently in compliance with
its obligations under this agreement.
The Company has contracted with Irvine Scientific to manufacture its
SPINPRO(R) HDL product. The Manufacturing Agreement is terminable upon ninety
days written notice by the Company. The Company is obligated under the
Manufacturing Agreement to reimburse Irvine Scientific for certain costs,
approximately $317,000, incurred to produce the product. Irvine Scientific is
entitled to add a surcharge to the cost of the SPINPRO(R) product until such
production costs are fully recovered. The Company and certain of the Company's
directors and stockholders have guaranteed the Company's obligations under the
manufacturing agreement. The Company has the right to purchase such molds and
additional equipment for a purchase price equal to the unamortized portion of
the cost of such equipment. The Company is currently in compliance with all
obligations under this agreement. Additionally, the Company was required to make
a minimum royalty payment in June 1996 under the SPINPRO(R) license agreement in
order to maintain exclusivity of the technology. The Company elected not to make
such payment and believes that the loss of exclusivity, of which the Company has
not yet been notified, will not have a material adverse effect on the business
or prospects of the Company.
The Company has entered into an agreement with Sigma whereby Sigma has
the exclusive right to distribute the SPINPRO(R) HDL device in the U.S. and
certain European countries and (except for physician sales and service)
throughout the rest of the world on a non-exclusive basis. The agreement, set
to expire October 26, 1998, is automatically renewable for successive one year
terms unless either party otherwise notifies the other of its intention to
terminate. The agreement is terminable in the event (i) of a failure to observe
any material term of the agreement, (ii) either party becomes insolvent or
(iii) if either party makes an order or resolution to windup or liquidate. The
Company is currently in compliance with all obligations under this Agreement.
Licensed Patents and Proprietary Rights
The Company's success will depend in part on its ability to obtain
patent protection for its products both in the U.S. and other countries. The
Company is the exclusive licensee of rights under ten issued U.S. patents and
four additional pending U.S. patent applications, seven of such patents and two
of such patent applications relating to the Osteopatch(TM) technology. The
patent positions of biotechnology and pharmaceutical firms are generally
uncertain and involve complex legal and factual questions. No consistent policy
has emerged regarding the breadth of claims allowed in biotechnology patents.
While the Company's licensor is currently prosecuting its patent applications,
the Company does not know whether any application will result in the issuance
of a patent or, if any patent is issued, whether claims ultimately allowed
thereunder will provide significant proprietary protection or will be
invalidated.
The commercial success of the Company will also depend in part on not
infringing patents or proprietary rights of others, and not breaching licenses
granted to the Company. The Company may be required to obtain licenses to
third-party technology necessary to conduct the Company's business. Any failure
by the Company to license, at a reasonable cost, any technology required to
commercialize its technologies or products would have an adverse impact on the
Company.
Litigation, that could result in substantial cost to the Company, may
also be necessary to enforce any patents issued to the Company's licensor or to
determine the scope and validity of other parties' proprietary rights. If the
outcome of any such litigation is adverse to the Company, the Company's
business could be adversely affected. To determine the priority of inventions,
the Company may have to participate in interference proceedings declared by the
U.S. Patent Office or similar proceedings in foreign patent offices, which
could result in substantial cost to the Company and may result in an adverse
decision as to the priority of the inventions licensed to the Company. The
Company believes there will continue to be significant litigation in the
industry regarding patent and other intellectual property rights.
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The Company also relies upon unpatented trade secrets. Others may
independently develop substantially equivalent proprietary information
and techniques, or otherwise gain access to the Company's trade secrets
or disclose such technology. The Company requires its employees and
consultants to execute a confidentiality agreement upon the commencement
of an employment or consulting relationship with the Company. The
agreement provides that all confidential information developed by or
made known to an individual during the course of the employment or
consulting relationship generally must be kept confidential. In the case
of employees, the agreement provides that all inventions conceived by
the individual while employed by the Company are the Company's exclusive
property. These agreements may not provide meaningful protection for the
Company's trade secrets in the event of unauthorized use or disclosure of such
information. See "Risk Factors -- Uncertainty of Protection of Patents and
Intellectual Property Rights; Risk of Patent Infringement Liability."
Government Regulation
The development, testing, manufacturing and marketing of the Company's
products are regulated in the U.S. by the FDA. The testing for, preparation of,
and subsequent FDA review of required applications is expensive, lengthy and
uncertain. Moreover, regulatory approval, if granted, can include significant
limitations on the indicated uses for which a product may be marketed. Failure
to comply with applicable regulations can result in fines, suspensions of
approvals, product seizures, injunctions, recalls, operating restrictions and
criminal prosecutions. Delays in receipt of or failure to receive clearances or
approvals for the products of the Company would adversely affect the marketing
of such products and the results of future operations.
Distribution of the Company's products outside the U.S. will also be
subject to regulation which varies from country to country. Japan requires the
submission of clinical data in a manner analogous to the requirements of the
FDA. France requires the submission of clinical data with local content. The
regulatory requirements in all countries, however, are subject to change. In
addition, the export by the Company of certain of its products that have not
yet been cleared for domestic, commercial distribution may be subject to export
restrictions imposed by U.S. regulatory agencies.
Diagnostic products marketed in the U.S. are required to obtain FDA
clearance. The Company intends to seek FDA clearance for the Osteopatch(TM) in
the form of a 510(k) "device" premarket notification procedure to demonstrate
"substantial equivalence" to a legally marketed product. Clinical test data will
be required to substantiate substantial equivalence. The Company anticipates
that its 510(k) notification will be acted upon favorably and quickly, although
there can be no assurance that this will be the case. The Company is relying on
(i) the fact that the FDA has already cleared the skin patch as a collection
device and may be expected to clear the Osteopatch(TM) as a collection device
for Pyd and Dpd and (ii) the fact that the FDA has cleared Metra's 510(k)
submissions for its immunoassay test kits to measure Pyd and Dpd levels in
"first morning void" urine samples. If the Company is able to demonstrate a
correlation between Pyd and/or Dpd levels in perspiration and measurable
physiologic changes in patients, the Company believes that its osteoporosis
product can be shown to be substantially equivalent to medical devices (i.e.
diagnostic kits for measurement of Pyd and/or Dpd levels in urine) which the FDA
has already cleared for marketing and thus qualifies for the 510(k) notification
procedure. Furthermore, there can be no assurance that the FDA will not request
the development of additional data following the original submission, causing
the Company to incur further cost and delay. Nor can there be any assurance that
the FDA will not restrict the intended use of the product as a condition for
clearance. In addition, the Company's promotional and educational activities
regarding its diagnostic products must comply with evolving FDA policies and
regulations regarding acceptable product promotion practices.
If the FDA concludes that a device is not substantially equivalent to
another legally marketed device, submission of a PMA will be required. If the
FDA indicates that a PMA is required for the products of the Company, the
application will require the results of clinical studies and manufacturing
information, and likely review by a panel of experts outside of the FDA.
Clinical studies would need to be conducted in accordance with FDA
requirements. The failure to comply would result in the FDA's refusal to accept
the data or the imposition of regulatory sanctions. FDA review of a PMA can
take significantly longer than that for a 510(k) notification. Further, if a
company wishes to propose modifications to a product subsequent to FDA approval
under a PMA application, including changes in indications or other significant
modifications to labeling, or modifications to the
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manufacturing process, or if a company wishes to change its manufacturing
facility, a PMA supplement must first be submitted to the FDA for its review and
approval.
The FDA also requires the Company to manufacture its products in
compliance with current GMP regulations which govern the procedures, controls
and documentation used in manufacturing the Company's products. The FDA ensures
GMP compliance through periodic facility inspections. Accordingly, the
manufacturer of the components of the Company's products must comply with these
requirements.
The Company's laboratory business is subject to federal regulation by
the Department of Health and Human Services ("HHS") and the FDA. Under
the Clinical Laboratory Improvements Amendments of 1988 and regulations
promulgated thereunder, the Company's laboratory must maintain a
certificate of compliance with the regulatory requirements applicable to
the types of clinical testing performed by the laboratory. These
regulatory requirements govern the laboratory's test methods, quality
control procedures and proficiency, and may be enforced through
inspections and proficiency testing by HHS or its designee. Under the
FDA's Good Laboratory Practices regulations, the Company's laboratory
must comply with regulations promulgated by the FDA that govern testing
procedures and quality control procedures relating to non-clinical
testing performed in support of applications for research or marketing
permits regulated by the FDA. These regulations may be enforced through
inspections by the FDA. See "Risk Factors -- Government Regulation and
Product Approval."
Competition
The Company expects to experience intense competition from companies
developing biochemical markers with clinical applications for bone resorption.
The Company anticipates that it will face intense competition in attempting to
establish market share. To the Company's knowledge, however, none of these
competitive products are as simple or easy to use as the Osteopatch(TM). There
can be no assurance, however, that the competitive positions of these
competitors or of other companies will not be enhanced significantly through
collaborative arrangements with large pharmaceutical companies, other companies
or academic institutions. The Company's competitors may succeed in developing,
obtaining patent protection for, receiving FDA and other regulatory approvals
for, or commercializing products more rapidly than the Company. If the Company
is successful in commercializing its products, it will be required to compete,
with respect to manufacturing efficiency and marketing capabilities, in areas
that it has limited expertise. The Company also competes in acquiring products
or technology from universities. Furthermore, rapid technological development
could result in actual or proposed technologies, products or processes of the
Company becoming obsolete prior to successful commercialization.
Certain diseases and disorders targeted by the Company's products can
be diagnosed and monitored using existing imaging technologies, such as
dual-energy X-ray absorptiometry ("DEXA"). The Company believes that current
imaging systems serve a different function than products that test for
biochemical markers, since the Company's products can identify a patient's rate
of bone loss, while DEXA measures a patient's existing bone mineral density.
Two of the leading companies in this field are Lunar Corporation and Hologic,
Inc.
Other companies that measure bone loss through bone markers include
Metra and Ostex, which have allied themselves with larger diagnostic and
pharmaceutical companies. These companies and their strategic alliances have
greater financial and other resources than the Company. The Company's products
will have to compete based on technological superiority, usefulness in
commercial versus clinical environments, ease of patient use, accuracy of
results and price. There can be no assurance that the Company will be able to
effectively compete based on the foregoing factors. See "Risk Factors --
Competition and Technological Change."
Major Customers
One customer, Parke-Davis, individually accounted for approximately
29.5 percent and 43.9 percent of the Company's total sales in fiscal 1996 and
fiscal 1995, respectively. Sales to the Company's five largest customers
represented approximately 63.0 percent and 64.8 percent of total sales in
fiscal 1996 and fiscal 1995, respectively. Except for Parke-Davis, none of
these customers were significant in more than one year. The Company has no long
term contracts or agreements with its customers. Each contract is negotiated
separately with the pharmaceutical manufacturer or research organization and is
usually limited to a specific project with limited duration. The cancellation
of any contracts with existing customers or the failure to replace such
contracts
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upon expiration or termination could have a material adverse effect on the
Company's laboratory operations. As the Company's laboratory operations grow,
the Company expects that its dependence on any one or group of customers will
diminish. See "Risk Factors -- Dependence on Major Customers."
Employees
As of June 30, 1996, the Company employed twenty-four persons,
including twenty-one full time and three part time, of which four are
management personnel, three are administrative personnel, fourteen are
laboratory staff and three are support staff. The Company's employees are not
covered by any collective bargaining arrangements or unions. The Company
considers its relationship with its employees to be good.
Facilities
The Company's executive offices are located at 1370 Reynolds Avenue,
Irvine, California and its laboratory facilities are located at both the
Irvine, California location and in Seattle, Washington. The Company leases
approximately 3,570 square feet of office space, which consists of
approximately 1,000 square feet of laboratory space in Irvine, California
pursuant to a one year lease, at an annual rental of $32,130, which expires on
September 30, 1997. The Company also leases approximately 7,500 square feet of
office space that includes approximately 6,000 square feet of laboratory space
in Seattle, Washington pursuant to a five year lease at an annual rental of
$121,093, which expires on September 30, 1997. The Company is currently seeking
alternate facilities which will be adequate for its expected levels of
operations after September 1997.
Legal Proceedings
The Company is not a party to any legal proceedings.
MANAGEMENT
Directors and Officers
The Directors, executive officers and key employees of the Company are
as follows:
Name Age Position
- ---- --- --------
Ellen A. Rudnick 45 Chairman
Paul G. Kanan 50 President, CEO and Director
G. Russell Warnick 52 Chief Scientific Officer
Elizabeth Teng Leary, Ph.D 48 Vice President and Director
of Laboratories
Mary L. Campbell 51 Treasurer and Director
Douglas S. Harrington, M.D. 43 Secretary and Director
Craig M. Goldstone 39 Director
Terry M. Giles 47 Director
The following is a brief description of the professional experience and
background of the officers and directors of the Company.
Ellen A. Rudnick: Ms. Rudnick has served as Chairman of the Company
since July 1996, and served from 1993 to 1996 as Chairman of the Board and a
director of BioQuant. Since 1992, she has served as Chairman of CEO Advisors,
Inc. ("CEO Advisors"), a health care consulting company that she and Mr. Kanan
founded. From 1990 through 1992, Ms. Rudnick served as President and CEO of
Healthcare Knowledge Resources, Inc., a health care information company in Ann
Arbor, Michigan and as President of its successor, HCIA. She was employed from
1975 to 1990 by Baxter Healthcare Corporation, most recently as Corporate Vice
President and President of its Management Services Division. She serves on the
Boards of NCCI and Lakeland Health Services. Ms. Rudnick holds a B.A. degree
from Vassar College and an M.B.A. degree from the University of Chicago
Graduate School of Business.
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Paul G. Kanan: Mr. Kanan has served since July 1996 as the President,
Chief Executive Officer and a director of the Company, and served from
1993 to 1996 as the President and a director of BioQuant. Mr. Kanan is
also an officer and director of CEO Advisors, a health care consulting
firm that he and Ms. Rudnick founded in 1992. From 1991 to 1992, Mr.
Kanan operated his own health care consulting firm, and during part of
such period served as acting CEO and CEO of SPS, Inc., a healthcare
service firm. From 1988 to 1991, he served as President and CEO of
Oncotech, Inc., a medical diagnostic company in Irvine, California
involved in the development and marketing of oncological testing. From
1976 to 1988, Mr. Kanan was employed by Baxter Healthcare Corporation,
most recently as President of its Chemotherapy Services Division. He
received his B.S.E. degree from the University of Michigan and an M.B.A.
degree from Harvard University Graduate School of Business.
G. Russell Warnick: Mr. Warnick has served as the Company's Chief
Scientific Officer since July 1996. Mr. Warnick was a co-founder of PBI-WA and
has served as its President from 1989 to 1996. From 1976 to 1990, Mr. Warnick
was associated with the University of Washington in a number of roles including
research associate, research scientist and most recently Director of the
Lipoprotein Laboratory at the Northwest Lipid Research Center. As an
internationally recognized expert in cholesterol testing, he has been
extensively involved in developing national guidelines for improving laboratory
performance. He has authored over 150 books, chapters, articles and abstracts,
primarily in areas of lipid/lipoprotein measurement and developed a method for
measurement of HDL cholesterol that has been widely adopted by other clinical
laboratories. Mr. Warnick holds a B.A. in chemistry and an M.S. in biochemistry
from Utah State University and an M.B.A. from City University of Seattle.
Elizabeth Teng Leary, Ph.D., DABCC: Dr. Leary has served as the
Company's Vice President and Director of Laboratories since July 1996. From
1989 to July 1996, she was Vice President and Director of the Laboratory
Division of PBI-WA. Dr. Leary has served in a number of clinical laboratory
management positions prior to co-founding PBI-WA in 1989 with Mr. Warnick. Dr.
Leary served as the Director of Chemistry at Cooperative Medical Laboratories of
Providence Hospital, Everett, Washington from 1978 to 1989; Consultant to the
Northwest Lipid Research Center from 1988 to 1989; and Director of Chemistry at
the General Hospital of Everett from 1978 to 1989. Dr. Leary is a Diplomate of
the American Board of Clinical Chemistry and serves as Chair of the American
Association for Clinical Chemistry Lipid and Lipoproteins Division. She is also
the Director of the CDC Cholesterol Reference Method Laboratory at Pacific
Biometrics Research Foundation. Her focus in recent years has been
standardization and method development in lipids and osteoporosis testing. She
has authored over 25 publications and abstracts. Dr. Leary received her B.A.
from the University of California, Berkeley; her Ph.D. in biochemistry from
Purdue University; and participated in post doctoral training in clinical
chemistry at the University of Washington.
Mary L. Campbell: Ms. Campbell has served as a non-employee officer in
the capacity of Treasurer and a director of the Company since July 1996,
and served as secretary, treasurer and a director of BioQuant from 1993
to 1996. Since 1988, she has served as the treasurer of Enterprise
Management, Inc., the general partner of Enterprise Development Fund,
L.P., a venture capital firm and investor in BioQuant. Since 1995, she
has also served as Vice President and Treasurer of EDM, Inc., the
general partner of Enterprise Development Fund II, Limited Partnership,
a venture capital firm formed in 1995. From 1984 to 1987, she was
employed by Michigan Capital and Service, Inc., a venture capital
subsidiary of the National Bank of Detroit, most recently as its president. Ms.
Campbell also serves as a director of Vista Restaurants International and
Synthon, Incorporated, and is an adjunct lecturer at the University of
Michigan's Graduate School of Business. Ms. Campbell holds B.A. and M.B.A.
degrees from the University of Michigan and an M.A. degree from Fairfield
University.
Douglas S. Harrington, M.D.: Dr. Harrington has served as the
Secretary and a director of the Company since July 1996, and from 1993 to 1996
was Chairman of the BioQuant Scientific Advisory Board and a director since
1995. From 1992 to early 1995, Dr. Harrington was the President of Nichols
Institute Reference Laboratory in San Juan Capistrano, California, a major
reference laboratory for esoteric testing. Dr. Harrington also serves as an
Associate Clinical Professor of pathology and microbiology at the University of
Nebraska Medical Center, where he has been a member of the faculty since 1986.
Dr. Harrington has 87 publications including papers, book chapters and
abstracts. He received his B.A. from the University of Colorado and his M.D.
from the University of Colorado Health Sciences Center. He is board certified in
anatomical and clinical pathology and hematology.
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Dr. Harrington is active in a number of organizations, including a member of the
Dean's Board of the University of California-Irvine Graduate School of
Management, serving on the boards of Sigma, Specialty Laboratories, Inc., White
River Concepts and California Private Equity Fund.
Craig M. Goldstone: Mr. Goldstone, a director of the Company since
July 1996, was Chairman of the Board of PBI-WA from 1995 to 1996. He also
serves as Senior Vice President-Investments for PaineWebber's New York office,
which he joined in January, 1995. From May 1991 to January 1995, Mr. Goldstone
held Vice President positions at Lehman Brothers.
Terry M. Giles: Mr. Giles has been a director of the Company since
July 1996 and previously a director of PBI-WA from 1995 to 1996. In 1975, Mr.
Giles founded the law firm of Giles and Burkhalter, Orange County, California,
of which he is a member. Mr. Giles has served on the board of Computerland
since 1987, and is a member of the Board of Regents of Pepperdine University.
He received his B.A. from the California State University at Fullerton and his
J.D. from Pepperdine University School of Law.
Subsequent to this Offering, the Company intends to hire a full-time
Chief Financial Officer, who will also be appointed Treasurer of the
Company, responsible for the financial affairs of the Company. The
Company is currently interviewing several candidates for this position.
Indemnification
Pursuant to the Company's Certificate of Incorporation, as amended, and
Amended and Restated By-laws, officers and directors of the Company will be
indemnified by the Company to the fullest extent allowed under Delaware law for
claims brought against them in their capacities as officers or directors. The
Company is in the process of attempting to obtain directors and officers
liability insurance. Indemnification will not be provided if the officer or
director does not act in good faith and in a manner reasonably believed to be in
the best interests of the Company, or, with respect to any criminal proceedings,
if the officer or director had no reasonable cause to believe his conduct was
lawful. Accordingly, indemnification may be sought for liabilities arising under
the Securities Act. The Underwriting Agreement between the Company and the
Underwriter (the "Underwriting Agreement") also contains provisions under which
the Company and the Underwriter have agreed to indemnify each other (as well as
the other officers and directors) for certain liabilities, as well as the
other's liabilities under the Securities Act. See "Underwriting." Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted for directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and may, therefore, be unenforceable.
Committees of the Board
The Board of Directors has established a compensation committee (the
"Committee"). The Committee is comprised solely of "non-employee directors"
within the meaning of Rule 16b-3(b)(3) promulgated under the Exchange Act and
"outside directors" within the contemplation of section 162(m)(4)(C)(i) of the
Internal Revenue Code of 1986, as amended (the "Code"). The Compensation
Committee is responsible for establishing salaries, bonuses and other
compensation for the Company's executive officers and for administering the
Company's 1996 Stock Option Plan, including granting options and setting the
terms thereof pursuant to such plan. The members of the Compensation Committee
are Ms. Campbell, Dr. Harrington and Mr. Goldstone.
The Board of Directors has established an Audit Committee. The Audit
Committee is comprised solely of non-employee directors and is charged with
reviewing the Company's annual audit and meeting with the Company's independent
accountants to review the Company's internal controls and financial management
practices. The members of the Audit Committee are Dr. Harrington, and Mr.
Giles.
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Directors' Compensation
The Company's policy is not to pay compensation to directors who are
also employees of the Company for their services as directors. The Company's
compensation policy for non-employee directors is to grant such persons for
each meeting attended in person up to a maximum of six meetings that number of
stock options, based on the fair market value on the date of grant, equal to
$1,000. The Company will also reimburse reasonable out-of-pocket expenses of
directors for attendance at meetings.
Scientific Advisory Board
The Company has organized a scientific advisory board (the "Scientific
Advisory Board"), of which Dr. Harrington serves as Chairman, currently
consisting of six individuals (the "Scientific Advisors"), including Dr.
Harrington. The Scientific Advisors have extensive experience in medical
research. At the Company's request, the Scientific Advisors will review and
evaluate the Company's research programs and advise the Company with respect to
technical matters in fields in which the Company is involved. The Scientific
Advisory Board will meet periodically as a group to review and discuss the
Company's progress in research and development. In addition, certain members
meet or consult by phone in smaller groups or individually with Company
scientists on a more frequent basis.
All of the Scientific Advisors are employed by other entities and some
may have consulting agreements with entities other than the Company, some of
which entities may in the future compete with the Company. The Scientific
Advisors are expected to devote only a small portion of their time to the
Company and are not expected to participate actively in the day-to-day affairs
of the Company.
The following is a brief description of the professional experience and
background of the Scientific Advisors:
Douglas S. Harrington, M.D.: Dr. Harrington is Chairman of the
Scientific Advisory Board. See "Management" for biographical data.
Charles E. Becker, M.D.: Dr. Becker recently retired as a professor of
Medicine and a professor of Pharmacy at the University of California, San
Francisco, where he was affiliated since 1969. He is board certified by the
American Board of Internal Medicine, American Board of Toxicology and American
Board of Preventive Medicine/Occupational Medicine. He has authored over 150
articles, with a particular emphasis on environmental diseases. Dr. Becker
received his M.D. degree from Georgetown University School of Medicine.
Conrad Johnston Jr., M.D.: Dr. Johnston is a Professor of Medicine and
Director of Endocrinology at the University of Indiana School of Medicine. He
serves as Vice President of the Board of Trustees of the National Osteoporosis
Foundation and as Chairman of its Scientific Advisory Board. Dr. Johnston has
published more than 250 articles, chapters, and abstracts in the field of bone
mineral research and serves as the associate editor of Bone and Mineral, and is
a member of the editorial boards of the Journal of Bone and Mineral Research
and the Journal of Clinical Endocrinology and Metabolism. In 1993, he was
awarded the Sandoz prize for gerontological research. Dr. Johnston received his
B.A. and M.D. degrees from Duke University.
Michael Kleerekoper, M.B., B.S., F.A.C.P., F.A.C.E.: Dr. Kleerekoper
is Professor of Medicine in the Division of Endocrinology and Metabolism, and
Associate Chairman of the Department of Internal Medicine at Wayne State
University School of Medicine in Detroit, Michigan. From 1976 to 1993, Dr.
Kleerekoper was a member of the Bone and Mineral Division at Henry Ford
Hospital in Detroit, and Division Head of that group from 1985. He also served
as Deputy Director of the Bone and Mineral Research Laboratory and the
Director, Center for Osteoporosis Research. He is a member of the Program and
Education Committees of the American Society of Bone Mineral Research (ASBMR),
the Scientific Advisory Board of the National Osteoporosis Foundation, and the
editorial boards of the Journal of Bone and Mineral Research, BONE,
Osteoporosis International, Journal of Clinical Endocrinology and
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Metabolism, and Clinical Chemistry. Dr. Kleerekoper received his B.Sc., M.B. and
B.S. degrees from The University of Sydney, Australia.
Robert Lindsay, M.B. Ch.B., Ph.D., M.R.C.P.: Dr. Lindsay is Chief of
Internal Medicine at the Helen Hayes Hospital in New York, and Director of its
Clinical Research Center. He also serves as Professor of Clinical Medicine at
New York's Columbia University and an Adjunct Professor at Rensselaer
Polytechnic Institute. Dr. Lindsay is President of the National Osteoporosis
Foundation and a member of the Advisory Committee, NIH, Office of Research into
Women's Health. Dr. Lindsay is a Fellow of the following organizations: the
Royal College of Physicians and Surgeons, the American College of Nutrition,
the Royal Society of Medicine, and the American College of Endocrinology. Dr.
Lindsay received his B.Sc., M.B.Ch.B, Ph.D., and M.R.C.P. from the University
of Glasgow, Scotland.
Donald Schoendorfer, Ph.D.: Dr. Schoendorfer is the Vice President of
Research and Development for Sudormed, which he co-founded and from
which the Company's skin patch licenses were obtained. Dr. Schoendorfer is the
co-inventor of the skin patch technology licensed by the Company. He holds
thirty-eight issued patents and has over sixteen years experience developing and
commercializing medical products. Dr. Schoendorfer holds a B.A. degree from
Baldwin Wallace College, a B.S. degree from Columbia University and M.S. and
Ph.D. degrees from the Massachusetts Institute of Technology.
Executive Compensation
The following table sets forth the compensation earned by the Company's
Chairman, its Chief Executive Officer and all other executive officers earning
in excess of $100,000 for the year ended June 30, 1996.
SUMMARY COMPENSATION TABLE
Annual Compensation
-----------------------------------------------------
Other
Name and Annual All Other
Principal Compensa- Compensa-
Position Year Salary Bonus tion tion
- ---------------- ---- ------ ----- ---------- ---------
Ellen Rudnick
Chairman 1996 -- -- $117,500(1) --
Paul G. Kanan
President and
Chief 1996 -- -- $117,500(1) --
Executive
Officer
- -------------------
(1) Amounts above reflect payments to such persons through CEO Advisors, a firm
owned by Paul Kanan and Ellen Rudnick, for management services to BioQuant.
Such persons received cash of $24,000 and a promissory note in the amount of
$93,500 in July 1996 in lieu of the remaining cash payment due under the
management contract. The promissory notes mature on July 9, 1997 and bear
interest at the rate of 7 percent per annum. In consideration of receipt of
such notes in lieu of cash, such persons also received stock options to
purchase 27,100 shares of common stock at $3.45 per share.
Employment Agreements
In October, 1996, the Company will enter into two year employment
agreements with each of Paul Kanan, Ellen Rudnick, G. Russell Warnick and
Elizabeth Teng Leary, the Company's key employees. See "Risk Factors --
Dependence on Key Personnel". All such employees are entitled to receive
customary benefits, including disability benefits and participation in all
Company stock, health and benefit plans available to other executive officers
and employees.
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Mr. Kanan's and Ms. Rudnick's employment agreements provide for annual
salaries of $180,000 and $140,000, respectively, and during their
employment and for periods ranging from nine months to two years thereafter
depending on the circumstances of termination, a prohibition from engaging in
any business that competes with that of the Company. In addition, both Mr.
Kanan and Ms. Rudnick are prohibited from recruiting or soliciting any employee
or any person that has a business relationship with the Company for a two year
period. If such persons are terminated for "cause," as defined in each
employment agreement, such persons will be entitled to receive their respective
salary and bonus up to the date of termination. In the event such persons are
terminated without cause they shall be entitled to receive immediate payment for
all debt owed to them by the Company, plus their salary, bonus and benefits for
a period of nine months thereafter. Furthermore, upon termination, any stock
options held by Mr. Kanan and Ms. Rudnick received subsequent to July 1, 1996
will accelerate and become exercisable in full during the ninety day period
subsequent to the date of termination. The Company has agreed to finance the
exercise of these options in exchange for a three-year promissory note with
interest payable in either stock or cash on a quarterly basis at the rate of 7
percent per annum. Options received prior to July 1, 1996 will be unaffected by
such termination of employment.
Mr. Warnick's and Ms. Leary's employment agreements provide for annual
base salaries of $90,000 and $85,000, respectively, and contain similar
restrictions as described above prohibiting engaging in any business that
competes with that of the Company for a period of nine months following
termination. In addition, both Mr. Warnick and Ms. Leary will be entitled to a
bonus of $50,000 and $30,000, respectively, in the event certain product
development and laboratory operation milestones are achieved. Further, such
persons are prohibited for a period of two years after termination of employment
from recruiting or soliciting any employee or any person that has a business
relationship with the Company. If such persons are terminated for "cause," as
defined in each employment agreement, such terminated person will be entitled to
receive their salary and bonus up to the date of termination. In the event such
persons are terminated without cause they shall be entitled to receive their
salary, bonus and benefits for a period of nine months thereafter and the
Company has agreed to indemnify such persons against any liabilities or claims
with respect to certain personal guarantees under bank loans and a lease on
behalf of the Company.
1996 Stock Incentive Plan
The Company adopted a Stock Incentive Plan (the "Plan") in July 1996 to
induce certain individuals to remain in the employ or service of the Company and
its subsidiaries and to attract new employees and non-employee directors. The
Plan is administered by the Committee, which will have the exclusive power to
select the officers, directors, consultants, advisors and employees of the
Company who are eligible for option grants or awards, and to determine the terms
and conditions of any options or awards granted, including but not limited to
the option price, method of exercise and the term during which the options may
be exercised. The total number of shares of Common Stock reserved for issuance
under the Plan is 1,000,000 (although only an aggregate of 154,411 may be issued
during the next 120 days by agreement with the Underwriter). Options granted
under the Plan may be non-qualified options, options qualifying as incentive
stock options within the meaning of Section 422(b) of the Code, or stock
appreciation rights. The Committee may also award restricted stock, performance
shares, loans or tax offset payments. The option price of each incentive stock
option ("ISO") granted under the Plan shall be not less than the fair market
value (110 percent of the fair market value if the grant is to an employee
owning more than 10 percent of the outstanding Common Stock) of the Common Stock
subject to the option, as determined in good faith by the Committee. ISO's
granted under the Plan will be exercisable for a period, not to exceed ten
years, as determined by the Committee. The option exercise price and period
within which non-qualified options may be exercised will be determined at the
discretion of the Committee. The Plan will terminate not later than July 9,
2006. 539,840 options to purchase Common Stock have been issued to date in
connection with the Plan.
The initial per share exercise price for an ISO may not be less than the
fair market value thereof on the date of grant, or 110 percent of such fair
market value with respect to a participant who, at such time, owns stock
representing more than 10 percent of the total combined voting power of all
classes of stock of the Company. The
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<PAGE>
initial per share exercise price for a non-qualified stock option may not be
less than 85 percent of the fair market value thereof on the date of grant or
100 percent of such fair market value with respect to a participant who is, or
may reasonably be expected to become, a "covered employee" within the meaning of
section 162(m)(3) of the Code. The initial per share exercise price for the
options granted to non-employee directors is the fair market value of the Common
Stock on the date of grant.
No option granted pursuant to the Plan may be exercised more than ten
years after the date of grant, except that ISOs granted to participants who own
more than 10 percent of the total combined voting power of all classes of stock
of the Company at the time the ISO is granted may not be exercised after five
years after the date of grant. No participant may be granted ISOs that are
exercisable for the first time in any one calendar year with respect to Common
Stock having an aggregate fair market value in excess of $100,000 on the date of
grant. No option granted under the Plan is transferable by the optionee other
than by death.
Generally, an option may be exercised only while the recipient is in the
active employ or service of the Company, or within thirty days after
termination of a participant's employment or service as a director other than
by reason of retirement or death, or within one year after termination of
employment or service by reason of death, or within ninety days after
termination of a participant's termination of employment or service by reason
of retirement.
In the event of the death or retirement of an optionee, each option
granted to him shall become immediately exercisable in full.
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of the date hereof with
respect to the beneficial ownership of the outstanding Common Stock of the
Company by each director, all 5 percent stockholders of the Company and all
directors and officers as a group.
<TABLE>
<CAPTION>
Name of Beneficial Amount and Percentage of
Owner Outstanding Common Stock
- --------------------------- -----------------------------------------------
Number of Prior to Offering After Offering
Shares(1) Percent(2) Percent(3)
<S> <C> <C> <C>
Ellen A. Rudnick(4) 267,674 10.2% 6.2%
Paul G. Kanan(5) 267,674 10.2% 6.2%
G. Russell Warnick(6) 121,044 4.6% 2.8%
Elizabeth Teng Leary(7) 90,125 3.4% 2.1%
Mary L. Campbell(8) 303,910 11.5% 7.0%
Craig M. Goldstone(9) 201,421 7.6% 4.6%
Terry M. Giles(10) 566,668 21.5% 13.1%
Douglas S. Harrington(11) 18,965 * *
All directors and officers
as a group (8 persons)(12) 1,837,481 69.8% 42.4%
</TABLE>
- --------------------------------
* Less than 1 percent.
(1) Includes currently exercisable options and warrants to purchase shares
of Common Stock.
(2) Based on an aggregate of 1,948,343 shares of Common Stock outstanding
and 684,904 shares of Common Stock subject to currently exercisable
options and warrants.
(3) Based on an aggregate of 3,648,343 shares of Common Stock to be
outstanding and 684,904 shares of Common Stock subject to options or
warrants exercisable within 60 days of the date of this Prospectus.
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<PAGE>
(4) Includes 58,991 shares of Common Stock and 208,683 shares of Common
Stock subject to currently exercisable warrants and options. Does not
include 80,000 shares of Common Stock subject to options granted in
July 1996 which do not vest within the next 60 days.
(5) Includes 58,991 shares of Common Stock held by the Kanan Living Trust
Dated May 15, 1990, of which Mr. Kanan is a co-trustee with his wife,
and 208,683 shares of Common Stock subject to currently exercisable
warrants and options. Does not include 80,000 shares of Common Stock
subject to options granted in July 1996 which do not vest within the
next 60 days.
(6) Includes 114,164 shares of Common Stock and 6,880 shares of Common
Stock subject to options granted in July 1996. Does not include 80,000
shares of Common Stock subject to options granted in July 1996 which do
not vest within the next 60 days.
(7) Includes 86,865 shares of Common Stock and 3,260 shares of Common Stock
subject to options granted in July 1996. Does not include 80,000 shares
of Common Stock subject to options granted in July 1996 which do not
vest within the next 60 days.
(8) Includes 263,016 shares of Common Stock (of which 5,206 shares were
issued in connection with the conversion of certain indebtedness in
July 1996) and 40,894 shares of Common Stock subject to currently
exercisable options and warrants all held by Enterprise Development
Fund I, L.P. ("EDF"), of which Enterprise Management, Inc. ("EMI")
acts as general partner and in which Ms. Campbell is an officer and
one of three directors. Ms. Campbell disclaims beneficial ownership as
to all of said shares, except for approximately 21,000 shares (or
approximately 7 percent of such shares) which represents her one-third
interest in EMI which, in turn, holds an approximately 21 percent
interest in EDF.
(9) Includes 107,273 shares of Common Stock, 66,792 shares of Common Stock
subject to currently exercisable options and warrants, 12,773 shares of
Common Stock which were issued upon conversion of certain indebtedness
in July 1996 and 14,583 shares subject to currently exercisable
warrants issued in connection with the Bridge Loan. Does not include
80,000 shares of Common Stock subject to options granted in July 1996
which do not vest within the next sixty days.
(10) Includes 377,373 shares of Common Stock, of which 351,668 shares are
held by Millennium Partners, L.P., of which Mr. Giles controls
approximately 70 percent and is therefore deemed the beneficial owner of
such shares, 55,000 shares of Common Stock granted to Mr. Giles in July
1996, 124,295 shares of Common Stock which were issued upon conversion
of certain indebtedness in July 1996 and 10,000 shares of Common Stock
subject to warrants issued in the June 1996 private placement.
(11) Includes 18,965 shares of Common Stock subject to currently exercisable
options and warrants. Does not include 40,000 shares of Common Stock
subject to options granted in July 1996 which do not vest within the
next sixty days.
(12) Includes 1,258,741 shares of Common Stock and 578,740 shares of Common
Stock subject to currently exercisable options and warrants. Does not
include 440,000 shares of Common Stock subject to options granted to
management in July 1996 which do not vest within the next sixty days.
In the event such options and warrants are fully exercised, management
will hold an aggregate of approximately 2,277,481 shares or
approximately 66.8 percent based on a total of 3,408,747 shares
outstanding subsequent to such exercise. Does not include 1,000,000
shares reserved for issuance under the Company's Stock Incentive Plan
(pursuant to an agreement with the underwriter, a maximum of 154,411
shares subject to options may be granted within 120 days following the
date of this Prospectus), or Warrants offered hereby or warrants issued
in the June 1996 Financing and August 1996 Bridge Loan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Manufacturing Agreement, Terry Giles, then a
director of PBI-WA and currently a director of the Company, and three former
directors of PBI-WA, guaranteed the obligations of MHS under the Manufacturing
Agreement with respect to certain costs of production of the manufacturer
incurred in connection with the production of the SPINPRO(R) product.
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<PAGE>
In connection with a line of credit established on April 15, 1995 by
PBI-WA from the US Bank of Washington, N.A. (the "Bank"), Messrs. Giles and
Goldstone, then directors of PBI-WA and currently directors of the Company, and
two former directors of PBI-WA, personally guaranteed all indebtedness of PBI-WA
under the line of credit. In consideration for such guarantees, PBI-WA issued to
such persons an aggregate of 26,066 shares (pre-Merger) of PBI-WA common stock.
Additionally, in connection with the conversion of the line of credit
into a term loan on June 11, 1996, Elizabeth Teng Leary and G. Russell Warnick,
officers of the Company, delivered updated guarantees to the Bank which
continued prior guarantees delivered on October 28, 1992 and April 15, 1995.
Further, G. Russell Warnick personally guaranteed the lease in Seattle,
Washington.
During the period from July 1994 through June 1996, Terry Giles,
provided the Company (and PBI-WA), on eight separate occasions, with loans
aggregating $400,000. These loans bore interest at annual variable rates
ranging from 8.25 percent to 10 percent. All of such loans plus interest were
converted into 124,295 shares of Common Stock of the Company on July 31, 1996
at the rate of $3.45 per share. Additionally, Mr. Giles invested $50,000 in the
Financing described below. Mr. Giles received a promissory note in like amount
with interest at 14 percent per annum, which note was repaid with a portion the
proceeds of the Bridge Loan, and an aggregate of 10,000 Warrants to purchase
Common Stock through April 30, 1998 at an exercise price equal to $5.70 per
share.
During the period from July 1994 through June 1996, Craig Goldstone,
provided the Company (and PBI-WA), on four separate occasions, with loans
aggregating $100,879. These loans bore interest at the annual rate of 9.25
percent. $42,500 of such amount plus interest was converted into 12,773 shares
of Common Stock of the Company on July 31, 1996 at the rate of $3.45 per share.
$58,334 of such loan amount was used in connection with the Bridge Loan
described below for which Mr. Goldstone received a promissory note in like
amount with interest at 14 percent per annum, which note will be repaid with a
portion of the proceeds of this Offering, and an aggregate of 14,583 Bridge
Warrants (as defined below) to purchase Common Stock through April 30, 1998 at
an exercise price equal to $5.70 per share. See "Description of Securities --
Bridge Warrants".
EDF, an entity in which Mary Campbell, a director of the Company,
maintains a minority ownership interest, converted an aggregate of $17,500 of
loans to the Company plus interest into 5,206 shares of Common Stock of the
Company on July 31, 1996 at the rate of $3.45 per share. Ms. Campbell disclaims
beneficial ownership of such shares held by EDF as a result of her minority
interest therein.
In July 1996, the Board of Directors granted Terry Giles, 55,000 shares
of Common Stock for services rendered to the Company in excess of that required
by non-employee directors.
In July 1996, the Board of Directors of the Company granted, pursuant
to the Plan, options to purchase Common Stock at an exercise price of $3.45 per
share to directors and officers as follows: Paul Kanan - 80,000; Ellen Rudnick
- - 80,000; Craig Goldstone - 80,000; G. Russell Warnick - 80,000; Elizabeth Teng
Leary - 80,000; Douglas S. Harrington - 40,000.
In July 1996, the Board of Directors of the Company authorized the
grant, contemporaneously with the Company's IPO, of options to purchase 50,000
shares of Common Stock at an exercise price equal to the IPO price per share
(i.e., $4.75) to Craig Goldstone in connection with services rendered on behalf
of the Company beyond the normal services expected of a non-employee director.
In July 1996, the Board of Directors of the Company granted options to
purchase Common Stock at an exercise price of $3.45 per share in connection
with deferred salaries as follows: G. Russell Warnick - 6,880; and Elizabeth
Teng Leary - 3,260.
In August 1996, the Board of Directors of the Company granted 9,000
shares of Common Stock to Craig Goldstone in connection with services rendered
on behalf of the Company.
On September 5, 1996, the Board of Directors adopted resolutions
assigning a certain contract and other obligations of the Company to Messrs.
Giles and Goldstone and three former directors of PBI-WA. Specifically, the
Company is assigning its rights and obligations pursuant to that certain letter
agreement dated June 13, 1995 between PBI-WA and Irvine Scientific, the
manufacturer of the Company's SPINPRO(R) product, whereby 13,270 shares of the
Company's Common Stock (as adjusted to give effect to the exchange in connection
with the Mergers) were issued to Irvine Scientific in satisfaction of certain
indebtedness, subject to a put option
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<PAGE>
whereby the Company would have to repurchase such shares for $140,000 in the
event the Company does not exercise its call option to purchase such shares
prior to January 1, 1999. The Company did not want to risk using its cash
resources in connection with the put option and, accordingly, has given up its
rights with respect to the call option.
Additionally, Messrs. Giles and Goldstone and three former directors of
PBI-WA have agreed to assume the Company's obligations (i) under a severance
arrangement with a former employee whereby the Company would be obligated to
pay such former employee $50,000 upon consummation of an IPO, and (ii) pursuant
to the Agreement of Merger and Plan of Reorganization, dated September 30,
1994, by and between MHS and Old PBI, whereby the Company would be obligated to
issue certain additional shares of its Common Stock to former PBI-WA
stockholders who have not previously waived their rights to receive such shares
as a result of the inability of the Company to achieve certain minimum revenue
targets for its SPINPRO(R) product by June 30, 1996.
Paul Kanan and Ellen Rudnick, are principals of CEO Advisors, a company
that provided management services to BioQuant beginning in 1993. This
arrangement has been terminated effective upon the consummation of the Mergers
on June 28, 1996, except for the provision of an assistant to Ellen Rudnick,
rent and office support on a pro rata basis at the estimated annual rate of
$28,000. During fiscal 1995 and fiscal 1996, BioQuant paid CEO Advisors an
aggregate of $109,000 and $186,000, respectively, for all services rendered.
Amounts outstanding at June 30, 1996 under this arrangement aggregated
$187,000, which is evidenced by two promissory notes in the principal amount of
$93,500 and bear interest at 7 percent per annum. The promissory notes were
issued to each of Paul Kanan and Ellen Rudnick along with options to purchase
27,100 shares of Common Stock at an exercise price of $3.45 as an inducement to
accept the notes in lieu of cash.
The Company believes that the transactions between the Company and its
officers and directors described above are on terms no less favorable to the
Company than could have been obtained from unaffiliated parties under similar
circumstances.
Bridge Financings
In June 1996, the Company borrowed $250,000 from private investors
payable with interest at 14 percent per annum (the "Financing"). This loan was
repaid in full out of the proceeds of the Bridge Loan described below. A total
of 50,000 Bridge Warrants were issued in connection with this Loan. See
"Description of Securities - Bridge Warrants."
In August 1996, the Company completed the Bridge Loan financing (the
"Bridge Loan") consisting of 14 percent Promissory Notes in the aggregate
principal amount of $1,000,000 payable on the closing of this Offering together
with interest at 14 percent per annum and warrants to purchase an aggregate of
250,000 shares of Common Stock exercisable at $5.70 per share. The Company will
use a portion of the proceeds of this Offering to repay the Bridge Loan,
together with accrued interest thereon. See "Use of Proceeds." Additionally,
the Company has granted demand and piggyback registration rights with respect
to the Bridge Warrants issued in connection with the Bridge Loan and the June
1996 Financing and the Common Stock issuable upon exercise thereof.
Messrs. Giles and Goldstone, directors of the Company, invested $50,000
and $58,334, respectively in the Financing and the Bridge Loan, respectively.
Mr. Giles' note was repaid out of the proceeds of the Bridge Loan. Mr.
Goldstone's note will be repaid with a portion of the proceeds of this Offering.
Messrs. Giles and Goldstone also received Bridge Warrants to purchase 10,000 and
14,583 shares of Common Stock, respectively, through April 30, 1998 at an
exercise price of $5.70 per share in connection with these financing
transactions.
In connection with the Bridge Loan, the Company agreed to reimburse
legal expenses and paid a fee of $64,000 to the Underwriter, which acted as the
exclusive placement agent therefor. The net proceeds to the Company from the
issuance and sale of notes and warrants pursuant to the Bridge Loan were
approximately $936,000, of which approximately $250,000 was used to repay a
loan from certain investors as described above.
Management believes that all material ongoing transactions between the
Company and any of its affiliates are on terms no less favorable to the Company
than those that could be obtained from unaffiliated third parties. All future
material affiliated transactions and loans will be made or entered into on
terms that are no less favorable to the Company than those that can be obtained
from unaffiliated third parties and will be approved by
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<PAGE>
a majority of the independent outside members of the Company's board of
directors who do not have an interest in such transactions.
DESCRIPTION OF SECURITIES
General
The authorized capital stock of the Company consists of an aggregate of
35,000,000 shares, of which 30,000,000 shares are of Common Stock, par value
$.01 per share and 5,000,000 shares are Preferred Stock, par value $.01 per
share.
Units
Each Unit offered hereby consists of (i) one share of Common Stock and
(ii) one Warrant. At any time commencing on the date of issuance through
January 31, 1998, each Warrant will be exercisable to purchase one share of
Common Stock. The Common Stock and Warrants will be separately transferable
from the Units immediately upon completion of this Offering.
Common Stock
The Company is authorized to issue 30,000,000 shares of Common Stock,
$.01 par value per share, of which 1,948,343 shares are currently outstanding.
Holders of Common Stock are entitled to one vote for each share held of record
on all matters to be voted on by stockholders. There are no preemptive,
subscription, conversion or redemption rights pertaining to the Common Stock.
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors from funds legally available therefor and to
share ratably in the assets of the Company available upon liquidation. The
holders of Common Stock do not have the right to cumulate their votes in the
election of directors and, accordingly, the holders of more than 50 percent of
all the Common Stock outstanding are able to elect all directors. The officers
and directors will continue to control a majority of the votes following
completion of this Offering and, accordingly, they will be able to elect all of
the Company's directors. All of the outstanding shares of Common Stock are, and
the Common Stock offered hereby, upon issuance and when paid for, will be duly
authorized, validly issued, fully paid and non-assessable.
Warrants
In connection with this Offering, the Company has authorized the
issuance of up to 2,175,000 Warrants (including 255,000 Warrants that may be
issued upon exercise of the Underwriter's over-allotment option and 170,000
Warrants issuable upon exercise of the Underwriter's Unit Purchase Warrant) and
has reserved an equivalent number of shares of Common Stock at a price of
$12.00 per share. The Warrants will be exercisable at any time after the
original date of their issuance (which is the date of this Prospectus) through
January 31, 1998, unless earlier redeemed. The Warrants are redeemable by the
Company at $.10 per Warrant, upon thirty days' notice, at any time commencing
April 30, 1997, if the closing average bid price per share of the Common Stock
for twenty consecutive trading days prior to the date notice of redemption is
given equals or exceeds $16.80 per share. In the event the Company gives notice
of its intention to redeem, a holder would be forced either to exercise his or
her Warrant within thirty days after the date of notice or accept the
redemption price.
The exercise price of the Warrants may be reduced at any time from time
to time in the discretion of the board of directors when it appears to be in
the best interests of the Company to do so. Any such reduction would benefit
the holders who do not exercise their Warrants prior to the effective date of
the reduction.
The Warrants will be issued in registered form under a Warrant
Agreement between the Company and American Securities Transfer & Trust, Inc.
(the "Warrant Agent"). The shares of Common Stock underlying the Warrants, when
issued upon exercise of a Warrant, will be fully paid and nonassessable, and the
Company will pay any transfer tax incurred as a result of the issuance of Common
Stock to the holder upon its exercise.
The Warrants contain provisions that protect the holders against
dilution by adjustment of the exercise price in certain events, such as stock
dividends and distributions, stock splits, recapitalization, mergers or
consolidations and certain issuances below the fair market value of the Common
Stock. The Company is not
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<PAGE>
required to issue fractional shares upon the exercise of a Warrant. The holder
of a Warrant will not possess any rights as a stockholder of the Company until
such holder exercises the Warrant.
The foregoing discussion of certain terms and provisions of the
Warrants is qualified in its entirety by reference to the detailed provisions
of the Warrant Agreement, the form of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
For the Company to redeem or a holder to exercise the Warrants, there
must be a current registration statement in effect with the Commission and
qualification under applicable state securities laws (or applicable exemptions
from state qualification requirements) with respect to the shares or other
securities underlying the Warrants. The Company has agreed to use all
reasonable efforts to cause a registration statement or a post-effective
amendment to this registration statement with respect to such securities under
the Securities Act to be filed and to become and remain effective during the
term of the Warrants and to take such other actions under the laws of various
states as may be required to cause the redemption of the Warrants or the sale
of Common Stock upon exercise of Warrants to be lawful. The Company will not
call for redemption or not be required to honor the exercise of Warrants if, in
the opinion of the Board of Directors upon advice of counsel, such would be
unlawful. See "Risk Factors -- Current Prospectus and State Registration
Required to Exercise Warrants."
Bridge Warrants
In connection with the financings completed in June 1996 and August
1996, respectively, the Company issued an aggregate of 300,000 warrants (the
"Bridge Warrants") to purchase 300,000 shares of Common Stock at an exercise
price, in the event of an initial public offering of the Company's securities,
equal to 120 percent ($5.70) of the public offering price of the Units offered
in such IPO. The Bridge Warrants are exercisable until April 30, 1998. The
Company granted demand and piggy back registration rights with respect to the
Bridge Warrants and the Common Stock issuable upon exercise thereof.
Preferred Stock
Preferred Stock may be issued from time to time in one or more series.
The Board of Directors are authorized to determine the rights, preference,
privileges and restrictions granted to, and imposed upon any such series. The
issuance of Preferred Stock could be used, under certain circumstance, as a
method of preventing a takeover of the Company and could permit the board of
directors, without any action of the holders of the Common Stock to issue
Preferred Stock that could have a detrimental effect on the rights of holders
of the Common Stock, including loss of voting control. Anti-takeover provisions
that could be included in the Preferred Stock when issued may have a depressive
effect on the market price of the Company's securities any may limit a
stockholder's ability to receive a premium on their shares of Common Stock by
discouraging takeover and tender offer bids. There are no shares of Preferred
Stock currently outstanding and the Company does not plan to issue any
Preferred Stock in the foreseeable future.
Underwriter's Unit Purchase Warrant
The Company has agreed to sell to the Underwriter warrants to purchase
from the Company an aggregate of up to 170,000 Units exercisable at a price per
Unit equal to 120 percent ($5.70) of the public offering price of the Units
offered hereby. The Underwriter's Unit Purchase Warrant and the securities
underlying such option are subject to demand registration on one occasion at
the request of the Underwriter (of which the Company shall bear all expenses)
and "piggyback" registration rights in the event the Company registers any
class of equity securities (other than securities registered on Form S-8, Form
S-4 or other similar registration form) for a period of five years from the
date of this Prospectus. See "Underwriting."
45
<PAGE>
Transfer Agent and Warrant Agent
American Securities Transfer & Trust, Inc. is the transfer agent for
the Common Stock and Warrant Agent with respect to the Warrants.
Anti-Takeover Protections
The Company is a Delaware corporation, and the Delaware General
Corporation Law contains certain provisions applicable to the Company that may
have the effect of preventing a non-negotiated change of control of the
Company. These provisions, among other things, prevent anyone who owns 15
percent or more of the outstanding voting stock of the Company or who is an
affiliate or associate of the Company and owned 15 percent or more of the
outstanding shares of stock of the Company at any time within the prior three
years (in either case, an "interested stockholder") from engaging in any
business combination with the Company for a period of three years after
becoming an interested stockholder, unless (i) prior to the date the
stockholder became an interested stockholder, the Board of Directors approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder; (ii) the interested
stockholder, while acquiring his or her 15 percent, acquires at least 85 percent
of the outstanding shares, excluding shares held by directors who are also
officers and certain shares held under employee stock option plans; or (iii) on
or subsequent to such date, the business combination is approved by the
Company's Board of Directors and by the affirmative vote of two-thirds of the
shares voting at a stockholders' meeting, excluding shares held by the
interested stockholder.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this Offering the Company will have 3,648,343
shares of Common Stock outstanding (3,903,343 shares if the Underwriter's
over-allotment option is exercised in full), excluding shares issuable upon the
exercise of the Warrants, Bridge Warrants, outstanding stock options and
warrants and the Underwriter's Unit Purchase Warrant. Of these outstanding
shares, the 1,700,000 shares offered hereby (1,955,000 if the Underwriter's
over-allotment option is exercised in full) will be freely tradeable without
restriction or further registration under the Securities Act, except for any
shares purchased by an "affiliate" of the Company (in general, a person who has
a control relationship with the Company) which will be subject to the
limitations of Rule 144 adopted under the Securities Act. Of the remaining
shares, 1,595,623 shares of Common Stock are deemed to be "restricted
securities," as that term is defined under Rule 144 promulgated under the
Securities Act and will be eligible for sale under Rule 144 in October 1997.
In general, under Rule 144, as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or person whose shares are aggregated), who has owned restricted
Common Stock beneficially for at least two years is entitled to sell, within
any three-month period, a number of shares that does not exceed the greater of
1 percent (36,483 shares after the Offering) of the total number of outstanding
shares of the same class or, if the Common Stock is quoted on the Nasdaq Stock
Market, the average weekly trading volume during the four calendar weeks
preceding the sale. A person who has not been an affiliate of the Company for
at least the three months immediately preceding the sale and who has
beneficially owned such shares of Common Stock for at least three years is
entitled to sell such shares under Rule 144 without regard to any of the
limitations described above.
The directors, officers and certain stockholders of the Company have
agreed not to sell or otherwise dispose of their Common Stock for a period of
twelve months from the completion of this Offering without the prior written
consent of the Underwriter. In addition, the Underwriter has received certain
registration rights under the Securities Act with respect to the Underwriter's
Unit Purchase Warrant and the Units issuable upon exercise of the Underwriter's
Unit Purchase Warrant. See "Underwriting."
Prior to this Offering, there has been no market for the Common Stock
and no prediction can be made as to the effect, if any, that market sales of
Common Stock or the availability of such shares for sale will have on the
market prices prevailing from time to time. Nevertheless, the possibility that
substantial amounts of Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Common Stock and could impair
the Company's ability to raise capital through the sale of its equity
securities.
46
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement,
Paradise Valley Securities, Inc. (the "Underwriter") has agreed to purchase
1,700,000 Units from the Company.
The Underwriting Agreement provides that the obligations of the
Underwriter is subject to certain conditions precedent. The nature of the
Underwriter's obligations is that it is committed to purchase all Units offered
hereby if any of such Units are purchased.
The Company has been advised by the Underwriter that it proposes
initially to offer the Units directly to the public at the IPO price set forth
on the cover page of this Prospectus and to certain dealers (which may include
the Underwriter) at such public offering price less a concession not to exceed
$___ per Unit. The Underwriter may allow, and such dealers may reallow, a
discount not to exceed $___ per Unit in sales to certain other dealers. After
the IPO, the public offering price and concessions and discounts may be changed
by the Underwriter.
The Company has granted to the Underwriter an option, exercisable in
whole or in part not later than 30 business days after the date of this
Prospectus, to purchase an aggregate of 255,000 Units at the IPO price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriter exercises such option, the
Underwriter will have a firm commitment to purchase such Units, and the Company
will be obligated pursuant to the option to sell such Units to the Underwriter.
The Underwriter may exercise the option for the purposes of covering
over-allotments, if any, made in connection with the distribution of the Units
to the public.
The Underwriter has informed the Company that the Underwriter does not
intend to confirm sales of Units offered hereby to any accounts over which it
exercises discretionary authority.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act.
All of the Company's directors, executive officers, certain other
management of the Company who will beneficially own an aggregate of 1,837,481
shares of Common Stock upon the completion of this Offering, have agreed not to
sell, offer to sell, contract to sell or otherwise dispose of any shares of
Common Stock or any other security convertible into or exchangeable for, or
options to purchase or acquire, shares of Common Stock without the prior
written consent of the Underwriter for a period of one year after the date of
this Prospectus. Certain other stockholders of the Company have agreed not to
sell or otherwise dispose of a total of 300,000 shares of Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of the Underwriter. See "Shares Eligible for Future Sale." In addition,
the Company has agreed not to sell, issue, contract to sell, offer to sell, or
otherwise dispose of any shares of Common Stock or any other security
convertible into or exchangeable for shares of Common Stock without the prior
written consent of the Underwriter during the same period.
The Company has agreed to sell to the Underwriter, for nominal
consideration, warrants to purchase up to 170,000 Units on the closing date of
this Offering. The warrants will have an exercise price per share of $5.70,
will be exercisable beginning on the first anniversary of the date of this
Prospectus for a period of four years, and contain certain anti-dilution,
registration rights, net issuance and exercise provisions. Until the first
anniversary date of this Prospectus, the warrants may not be sold, transferred,
assigned, or hypothecated, except to the Underwriter or certain dealers, or
their officers or partners, subject to certain conditions. During the terms of
such warrants, the holders thereof will have the opportunity to profit from an
increase in the market price of the Company's Common Stock. The existence of
such warrants may adversely affect the terms on which the Company can obtain
additional financing, and the holders of such warrants can be expected to
exercise such warrants at a time when the Company, in all likelihood, would be
able to obtain additional capital by offering shares of its Common Stock on
terms more favorable to the Company than those provided by the exercise of such
warrants.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance equal to 3 percent of the gross proceeds raised pursuant to this
Offering.
47
<PAGE>
Prior to this Offering, there has been no public market for the Common
Stock. Accordingly, the IPO price has been determined through negotiations
between the Company and the Underwriter. Among the factors in such negotiations
were prevailing market conditions, certain financial information concerning the
Company, market valuations of publicly traded companies that the Company and the
Underwriter believe to be comparable to the Company, estimates of the business
potential of the Company, the present state of the Company's development and the
markets for its products and services, an assessment of the Company's
management, the economics of the industry in which the Company operates, and the
economy as a whole.
Unless granted an exemption by the Commission from Rule 10b-6, in the
event that the Company engages the Underwriter to assist in soliciting exercise
of the Warrants, the Underwriter will be prohibited from engaging in any market
making activities with regard to the Company's securities for the period from
nine business days (or such other applicable period as Rule 10b-6 may provide)
prior to any solicitation of the exercise of warrants until the later of the
termination of such solicitation activity or the termination (by waiver or
otherwise) of any right that the Underwriter may have to receive a fee for the
exercise of Warrants following such solicitation. As a result, the Underwriter
may be unable to continue to make a market in the Company's securities during
certain periods while the Warrants are exercisable.
The Underwriter acted as placement agent in connection with a private
placement of notes and warrants completed August, 1996 and received commissions
and non-accountable expense allowance in the aggregate amount of $64,000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Certain Relationships and Related Transactions".
LEGAL MATTERS
The legality of the issue of the securities underlying the Units
offered hereby will be passed upon for the Company by Rosenman & Colin LLP, 575
Madison Avenue, New York, New York. Certain legal matters will be passed upon
for the Underwriter by Brown & Bain, P.A., 2901 North Central Avenue, Suite
2000, Phoenix Arizona.
EXPERTS
The consolidated balance sheet as of June 30, 1996 and the consolidated
statements of operations and cash flows for each of the two years in the period
ended June 30, 1996 and for the period from inception, December 1992, to June
30, 1996 and the consolidated statement of stockholders' deficit for the period
from inception, December 1992, to June 30, 1996 of the Company included in this
Prospectus, have been included herein in reliance on the report, which includes
an explanatory paragraph with respect to the entity's ability to continue as a
going concern as described in Note 18 to Consolidated Notes to Financial
Statements, of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
The balance sheet as of June 30, 1996 and the statements of operations
and cash flows for each of the two years in the period ended June 30, 1996 and
for the period from inception, October 1985, to June 30, 1996 and the statement
of stockholders' deficit for the period from inception, October 1985, to June
30, 1996 of BioQuant included in this Prospectus, have been included herein in
reliance on the report, which includes an explanatory paragraph with respect to
the entity's ability to continue as a going concern as described in Note 11 to
Financial Statements, of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
The statements of income for the seven month period from July 1, 1994
to January 31, 1995 of Old PBI included in this Prospectus, have been included
herein in reliance on the report, which includes an explanatory paragraph with
respect to the entity's ability to continue as a going concern as described in
Note 9 to Financial Statements, of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
48
<PAGE>
ADDITIONAL INFORMATION
The Company is not a reporting company. The Company has filed with the
Commission a registration statement (the "Registration Statement") under the
Securities Act with respect to the securities offered by this Prospectus. This
Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and this Offering, reference is made to the Registration
Statement including the exhibits filed therewith. The Registration Statement
may be inspected at the Public Reference Section at the Commission's principal
office, 450 5th Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at
the Northeast Regional Office, Room 1028, 7 World Trade Center, New York, New
York 10048 and the Chicago Regional Office, Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661-2511. Copies may be obtained from the
Commission's principle office upon payment of the fees prescribed by the
Commission. The Commission maintains a World Wide Web site that contains the
Company's Registration Statement and other information filed electronically
with the Commission. The address of the Commission's World Wide Web site is
http://www.sec.gov. Although the Company believes that this Prospectus describes
all material terms of those contracts or documents referenced herein, statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete and where the contract or other document
has been filed as an exhibit to the Registration Statement, each such statement
is qualified in all respects by such reference to the applicable document filed
with the Commission.
List of Trademarks
SalivaSac(R), SPINPRO(R), PBI Plus(TM) and Osteopatch(TM) are
trademarks of the Company. Fosamax(R) is a registered trademark of Merck & Co.
49
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PACIFIC BIOMETRICS, INC. (a Delaware corporation):
Report of Independent Accountants........................... F-2
Consolidated Balance Sheet as of June 30, 1996.............. F-3
Consolidated Statement of Operations for the years ended
June 30, 1996 and 1995, and for the period from inception
(December 1992) to June 30, 1996.......................... F-4
Consolidated Statement of Cash Flows for the years ended
June 30, 1996 and 1995, and for the period from inception
(December 1992) to June 30, 1996.......................... F-5
Consolidated Statement of Stockholders' Deficit for the
period from inception (December 1992)
to June 30, 1996.......................................... F-6
Notes to Consolidated Financial Statements.................. F-7
BIOQUANT, INC. (a Michigan corporation)
Report of Independent Accountants........................... F-18
Balance Sheet as of June 30, 1996........................... F-19
Statement of Operations for the years ended June 30, 1996
and 1995, and for the period from inception (October 1985)
to June 30, 1996.......................................... F-20
Statement of Cash Flows for the years ended June 30, 1996
and 1995, and for the period from inception (October
1985) to June 30, 1996.................................... F-21
Statement of Stockholders' Deficit for the period from
inception (October 1985) to
June 30, 1996............................................. F-22
Notes to Financial Statements............................... F-23
PACIFIC BIOMETRICS, INC. (a Washington corporation)
Report of Independent Accountants........................... F-31
Statement of Operations for the period from July 1, 1994, to
January 31, 1995.......................................... F-32
Notes to Statement of Operations............................ F-33
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Pacific Biometrics, Inc.
Seattle, Washington
We have audited the accompanying consolidated balance sheet of Pacific
Biometrics, Inc. (a Delaware corporation) (a company in the development stage)
as of June 30, 1996, and the related consolidated statements of operations and
cash flows for the years ended June 30, 1996 and 1995, and for the period from
inception (December 1992) to June 30, 1996, and the consolidated statement of
stockholders' deficit for the period from inception (December 1992) to June 30,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Pacific
Biometrics, Inc. as of June 30, 1996, and the consolidated results of its
operations and its cash flows for the years ended June 30, 1996 and 1995, and
for the period from inception (December 1992) to June 30, 1996, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern . As discussed in Note 18 to
the consolidated financial statements, the Company has experienced recurring
losses from operations and cash flow shortages, and has reported deficiencies in
working capital and stockholders' equity. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 18. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
Seattle, Washington
September 5, 1996
F-2
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 192,898
Accounts receivable, net of allowance for doubtful
accounts of $11,630.................................... 252,412
Other receivable.......................................... 31,200
Supplies.................................................. 19,837
Prepaid expenses.......................................... 4,261
------------
Total current assets................................... 500,608
Property and equipment, net................................. 131,823
Other assets:
Technology license........................................ 164,062
Prepaid financing costs................................... 30,000
Lease deposits............................................ 8,620
Organization costs........................................ 5,000
------------
Total assets........................................... $ 840,113
------------
------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable to bank..................................... $ 175,967
Notes payable to related parties.......................... 849,461
Notes payable--First Bridge Loan.......................... 250,000
Accounts payable.......................................... 337,827
Accrued liabilities....................................... 277,876
Advance from Pacific Biometrics Research Foundation....... 5,000
Deferred compensation..................................... 34,996
Advances from customers................................... 288,263
Capital lease obligations................................. 5,160
------------
Total current liabilities.............................. 2,224,550
------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding...........
Common stock, $0.01 par value, 30,000,000 shares
authorized, 1,739,169 shares issued and outstanding.... 17,392
Additional paid-in capital................................ 8,755,553
Deficit accumulated during the development stage.......... (10,157,382)
------------
Total stockholders' deficit............................ (1,384,437)
------------
Total liabilities and stockholders' deficit............ $ 840,113
------------
------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995, AND FOR THE PERIOD
FROM INCEPTION (DECEMBER 1992) TO JUNE 30, 1996
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(DECEMBER 1992)
TO JUNE 30,
1996 1995 1996
----------- ----------- ---------------
<S> <C> <C> <C>
Laboratory testing revenues and
consulting fees......................... $ 1,657,280 $ 566,832 $ 2,224,112
----------- ----------- ---------------
Operating expenses:
Laboratory............................ 985,818 373,554 1,359,372
Diagnostic research and product
development........................ 604,803 665,747 1,464,661
General and administrative............ 1,281,100 739,149 2,766,434
Purchased in-process research and
product development................ 6,373,884 6,373,884
Amortization of goodwill.............. 428,368 428,368
----------- ----------- ---------------
Total operating expenses........... 9,245,605 2,206,818 12,392,719
----------- ----------- ---------------
Operating loss.......................... (7,588,325) (1,639,986) (10,168,607)
----------- ----------- ---------------
Other income (expense):
Interest expense...................... (39,853) (26,162) (66,015)
Grant and other income................ 67,315 1,958 77,240
----------- ----------- ---------------
27,462 (24,204) 11,225
----------- ----------- ---------------
Net loss................................ $(7,560,863) $(1,664,190) $ (10,157,382)
----------- ----------- ---------------
----------- ----------- ---------------
Net loss per share...................... $ (5.89) $ (1.68) $ (10.16)
----------- ----------- ---------------
----------- ----------- ---------------
Number of shares used in per-share
calculation............................. 1,284,281 988,415 999,478
----------- ----------- ---------------
----------- ----------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995, AND FOR THE PERIOD
FROM INCEPTION (DECEMBER 1992) TO JUNE 30, 1996
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(DECEMBER 1992)
1996 1995 TO JUNE 30, 1996
----------- ----------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers.......... $ 1,686,710 $ 538,453 $ 2,205,087
Cash paid to suppliers and
employees........................... (2,443,706) (1,384,201) (4,371,935)
Grants and other income received...... 67,315 5,929 77,240
Interest paid......................... (39,853) (26,162) (66,015)
----------- ----------- -----------------
Cash used by operations............. (729,534) (865,981) (2,155,623)
----------- ----------- -----------------
Cash flows from investing activities:
Cash acquired in connection with
merger of BioQuant.................. 31,200 31,200
Cash acquired in connection with
merger of Pacific Biometrics, Inc.
(a Washington corporation).......... 190,498 190,498
Purchases of technology licenses...... (100,000)
Advances to BioQuant prior to
acquisition, net.................... (145,000) (145,000)
Capital expenditures.................. (18,592) (28,498) (61,495)
Other receivables..................... 17,675
Organization costs.................... (5,000) (5,000)
Deposits and other.................... 133 (4,702)
----------- ----------- -----------------
Cash used by investing activities... (137,392) 179,808 (94,499)
----------- ----------- -----------------
Cash flows from financing activities:
Common stock sold for cash............ 360,000 553,900 1,463,900
Borrowings from related parties....... 464,461 228,003 859,963
Issuance of notes in connection with
First Bridge Loan................... 250,000 250,000
Repayment of bank borrowings.......... (62,105) (8,544) (70,649)
Prepaid financing costs............... (30,000) (30,000)
Payments on capital lease
obligations......................... (18,534) (11,660) (30,194)
----------- ----------- -----------------
Cash provided by financing
activities........................ 963,822 761,699 2,443,020
----------- ----------- -----------------
Increase in cash and cash equivalents... 96,896 75,526 192,898
Cash and cash equivalents:
Beginning of period................... 96,002 20,476
----------- ----------- -----------------
End of period......................... $ 192,898 $ 96,002 $ 192,898
----------- ----------- -----------------
----------- ----------- -----------------
Reconciliation of Net Loss to Net Cash
Used by Operating Activities:
Net loss.............................. $(7,560,863) $(1,664,190) $ (10,157,382)
Purchased in-process research and
product development expense......... 6,373,884 6,373,884
Amortization of goodwill.............. 428,368 428,368
Common stock issued for services...... 466,026 80,500 546,526
Services provided for subscription
receivable.......................... 16,978 55,556
Depreciation and amortization......... 29,992 27,378 64,642
Amortization of technology license.... 11,111 49,722 100,000
Changes in operating accounts:
Accounts receivable................. 22,789 (117,979) (95,190)
Other receivables................... (9,946) 3,399 6,551
Supplies............................ 15,063 2,345 6,671
Prepaid expenses.................... 14,308 (13,962) (1,534)
Accounts payable and accrued
liabilities....................... (99,781) 218,182 405,124
Deferred compensation............... 22,496 12,500 34,996
Advances from clients............... (14,613) 90,778 76,165
----------- ----------- -----------------
Cash used by operations........... $ (729,534) $ (865,981) $ (2,155,623)
----------- ----------- -----------------
----------- ----------- -----------------
</TABLE>
See Note 16 for noncash transactions.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (DECEMBER 1992) TO JUNE 30, 1996
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
AMOUNTS ------------------------- SUBSCRIPTION PAID-IN DEVELOPMENT
PER SHARE SHARES AMOUNT RECEIVABLE CAPITAL STAGE
--------- ---------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued for
cash at inception
(December 1992)......... $ 0.98 511,862 $ 5,119 $ (245,000) $ 494,881
Cash received in
satisfaction of
subscription
receivable.............. 161,000
Net loss................. $ (199,455)
--------- ---------- ---------- ------------ ----------- ------------
Balance, June 30,
1993.................. 511,862 5,119 (84,000) 494,881 (199,455)
Common stock issued in
connection with purchase
of technology license
and services............ $ 0.89 62,561 569 (55,556) 54,987
Cash received in
satisfaction of
subscription
receivable.............. 84,000
Cash received in
satisfaction of
subscription
receivable.............. 38,578
Stockholder loans
converted to equity..... 310,000
Common stock issued for
cash.................... $ 10.55 4,739 47 49,953
Net loss................. (732,874)
--------- ---------- ---------- ------------ ----------- ------------
Balance, June 30,
1994.................. 579,162 5,735 (16,978) 909,821 (932,329)
Services provided in
satisfaction of
subscription
receivable.............. 16,978
Stockholder loans
converted to equity..... 324,963
Common stock issued for
services and loan
guarantees.............. $ 1.68 47,867 479 80,021
Common stock issued in
connection with
acquisition of Pacific
Biometrics, Inc.
(a Washington
corporation)............ $ 0.77 189,061 1,891 143,109
Common stock issued for
cash.................... $ 13.13 42,181 422 553,478
Conversion from $0.01 par
value common stock to no
par value common
stock................... 2,011,392 (2,011,392)
Net loss................. (1,664,190)
--------- ---------- ---------- ------------ ----------- ------------
Balance, June 30,
1995.................. 858,271 2,019,919 (2,596,519)
Common stock issued for
cash.................... $ 7.91 45,500 360,000
Common stock issued for
services................ $ 3.45 135,080 466,026
Issuance of $0.01 par
value common stock in
exchange for no par
value common stock in
connection with
acquisitions of BioQuant
and Pacific Biometrics,
Inc. (a Washington
corporation)............ (2,835,556) 2,835,556
Common stock issued in
connection with
acquisition of
BioQuant................ $ 8.46 700,318 7,003 5,919,997
Net loss................. (7,560,863)
--------- ---------- ---------- ------------ ----------- ------------
Balance, June 30,
1996.................. 1,739,169 $ 17,392 $ $8,755,553 $(10,157,382)
--------- ---------- ---------- ------------ ----------- ------------
--------- ---------- ---------- ------------ ----------- ------------
<CAPTION>
TOTAL
------------
<S> <C>
Common stock issued for
cash at inception
(December 1992)......... $ 255,000
Cash received in
satisfaction of
subscription
receivable.............. 161,000
Net loss................. (199,455)
------------
Balance, June 30,
1993.................. 216,545
Common stock issued in
connection with purchase
of technology license
and services............
Cash received in
satisfaction of
subscription
receivable.............. 84,000
Cash received in
satisfaction of
subscription
receivable.............. 38,578
Stockholder loans
converted to equity..... 310,000
Common stock issued for
cash.................... 50,000
Net loss................. (732,874)
------------
Balance, June 30,
1994.................. (33,751)
Services provided in
satisfaction of
subscription
receivable.............. 16,978
Stockholder loans
converted to equity..... 324,963
Common stock issued for
services and loan
guarantees.............. 80,500
Common stock issued in
connection with
acquisition of Pacific
Biometrics, Inc.
(a Washington
corporation)............ 145,000
Common stock issued for
cash.................... 553,900
Conversion from $0.01 par
value common stock to no
par value common
stock...................
Net loss................. (1,664,190)
------------
Balance, June 30,
1995.................. (576,600)
Common stock issued for
cash.................... 360,000
Common stock issued for
services................ 466,026
Issuance of $0.01 par
value common stock in
exchange for no par
value common stock in
connection with
acquisitions of BioQuant
and Pacific Biometrics,
Inc. (a Washington
corporation)............
Common stock issued in
connection with
acquisition of
BioQuant................ 5,927,000
Net loss................. (7,560,863)
------------
Balance, June 30,
1996.................. $ (1,384,437)
------------
------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BASIS OF PRESENTATION AND PROPOSED INITIAL PUBLIC OFFERING
Organization and Basis of Presentation
Pacific Biometrics, Inc. ('PBI-Delaware' or the 'Company') was incorporated
in Delaware in May 1996. PBI-Delaware was formed in connection with the
acquisition of BioQuant, Inc. ('BioQuant'), a Michigan corporation, and Pacific
Biometrics, Inc. ('PBI'), a Washington corporation. On June 28, 1996, the
Company completed the mergers whereby BioQuant and PBI became wholly-owned
subsidiaries of the Company in separate stock-for-stock exchange transactions.
In January 1995, Pacific Biometrics, Inc. ('Old PBI') and Merchant House
Scientific Inc., a California corporation ('Merchant House'), merged with and
into PBI/MHS Consolidation Corporation, a Washington Corporation which survived
the merger and subsequently changed its name to Pacific Biometrics, Inc. The
merger of PBI-Delaware, BioQuant and PBI was completed in June 1996, whereby the
majority of the outstanding stock of PBI-Delaware is owned by the former
stockholders of PBI and has been accounted for as a reverse acquisition. The
minority of outstanding stock of PBI Delaware is owned by the former
shareholders of BioQuant. All outstanding shares of stock, options and warrants
of PBI and BioQuant were exchanged for similar securities of PBI-Delaware. The
merger has been accounted for as a purchase transaction with PBI as the
accounting acquirer of BioQuant. Prior to the merger, the operations of
PBI-Delaware consisted of its initial formation and the issuance of one share of
common stock for cash consideration of $4.00.
These financial statements present the consolidated balance sheet of
PBI-Delaware, PBI and BioQuant as of June 30, 1996, as the merger occurred on
June 28, 1996. The consolidated statements of operations, cash flows and
stockholders' deficit include the results of PBI-Delaware and PBI for the
periods presented. The Company is at an early stage of development. Except for
the revenues from the laboratory and from the sale of the Company's cholesterol
diagnostic product, all of the Company's potential products are currently in
research and development, and no revenues have been generated to date.
Consequently, the Company is a development stage enterprise.
All material intercompany balances and transactions have been eliminated in
the accompanying consolidated financial statements.
BioQuant was incorporated in 1985 and has been engaged in research and
product development activities since inception. BioQuant is currently engaged in
the development of a diagnostic test related to osteoporosis. The BioQuant
product line includes a patented skin patch technology, patented antisera and
proprietary immunoassays for the measurement of human perspiration. BioQuant
also owns a patented saliva collection device which is currently being developed
for non-invasive diabetes tests.
PBI was incorporated in 1989 and has been engaged in providing laboratory
and clinical research support services to the pharmaceutical and diagnostic
industries. PBI provides services on normal credit terms to commercial and
research organizations throughout the United States.
The January 1995, merger of Old PBI and Merchant House involved certain
shares of stock that were issued on a contingent basis. Rights to substantially
all of the contingent shares were subsequently waived. Consequently, this
transaction was treated as a purchase in accordance with generally accepted
accounting principles with Merchant House as the acquiring entity because the
majority of the shares of the surviving entity were held by the former
shareholders of Merchant House.
F-7
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION, BASIS OF PRESENTATION AND PROPOSED INITIAL PUBLIC
OFFERING--(CONTINUED)
A summary of the allocation of purchase price based on an independent
appraisal is as follows:
<TABLE>
<CAPTION>
Assets acquired:
<S> <C>
Cash............................................ $ 190,498
Accounts receivable............................. 156,944
Accounts receivable from related parties........ 37,751
Supplies........................................ 15,892
Property and equipment.......................... 116,773
Other assets.................................... 3,641
Goodwill........................................ 428,368
---------
Total assets acquired............................. 949,867
Liabilities assumed............................... 804,867
---------
$ 145,000
---------
---------
</TABLE>
Goodwill recorded in the acquisition of PBI was written off in 1995 due to
the recurring net operating losses of PBI and the expectation that losses would
continue for the foreseeable future.
On June 28, 1996, PBI-Delaware acquired BioQuant. This acquisition was
accomplished through the issuance of three classes of common stock. All classes
of common stock held equal voting rights; however, two classes of common stock
were restricted as to their trading rights (the 'restricted stock'). The right
to trade the restricted stock was dependent on the Company's ability to achieve
certain performance milestones. In July 1996, a majority of the Company's
stockholders voted to convert all of the outstanding classes of common stock to
a single class of common stock thereby eliminating any trading restrictions on
the stock. The accompanying consolidated financial statements reflect all the
outstanding common stock as a single class of stock as if the conversion had
occurred as of the earliest period presented.
A summary of the allocation of purchase price based on an independent
appraisal is as follows:
<TABLE>
<S> <C>
Assets acquired:
Cash............................................ $ 31,200
Supplies........................................ 10,616
Property and equipment.......................... 18,197
Technology license.............................. 164,062
Other assets.................................... 3,282
Purchased in-process research and product
development.................................. 6,373,884
-----------
Total assets acquired............................. 6,601,241
Liabilities assumed............................... 674,241
-----------
$ 5,927,000
-----------
-----------
</TABLE>
The purchased in-process research and product development had met several
technical milestones during the development process, but at the date of
acquisition clinical trials had not yet commenced. Consequently, the purchased
in-process research and development had not yet reached technological
feasibility, as defined by generally accepted accounting principles. In
management's opinion, this technology had no alternative future use. Therefore,
the amount was charged to expense in accordance with generally accepted
accounting principles.
In connection with the BioQuant merger, options and warrants to purchase
BioQuant shares were converted to options and warrants to purchase 570,564
shares of common stock of the Company at prices ranging from $.13 to $4.22 per
share.
F-8
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION, BASIS OF PRESENTATION AND PROPOSED INITIAL PUBLIC
OFFERING--(CONTINUED)
The following presents the results of operations of the Company on a
proforma basis for the years ended June 30, 1996 and 1995, as if the
acquisitions of PBI by Merchant House and BioQuant by PBI (formerly Merchant
House) had occurred on July 1, 1994:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Laboratory testing revenues and
consulting fees....................... $ 1,662,118 $ 1,054,008
Purchased in-process research and
product development................... -- $ 6,373,884
Goodwill amortization................... -- $ 428,368
Net loss................................ $ (1,936,720) $ (9,117,629)
Net loss per share...................... $ (1.51) $ (9.22)
</TABLE>
Initial Public Offering
The Company is currently in the process of raising approximately $8 million
through an initial public offering of its common stock. The Company has engaged
an underwriter and retained legal counsel to pursue this financing plan and,
although the success of the offering cannot be predicted with certainty, the
Company plans to complete the offering later in 1996. The Company intends to use
the proceeds of this financing to repay certain debt and support the financial
requirements associated with implementing its business plan. (See Note 18.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents consist of a money market fund which is
maintained at a bank. The Company considers all investments with an initial
maturity of three months or less at the time of purchase to be cash equivalents.
Supplies
Supplies consist of items used to calibrate test equipment or verify
testing methods related to lipids and saliva collection devices. These items are
recorded at the lower of estimated cost (weighted-average) or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are provided using straight-line and accelerated methods over the useful lives
of the related assets. Leasehold improvements are amortized over the terms of
the respective leases. The cost and related accumulated depreciation of property
or equipment sold or otherwise disposed of are removed from the accounts and the
resulting gains or losses are included in the statement of operations.
Licensing Fees
Licensing Agreements represent amounts paid by BioQuant and PBI for rights
to certain technologies. The amount paid by PBI in connection with the license
of the SpinPro device was under agreement without a specified term and had been
fully amortized as of June 30, 1996. The other licensing agreement provides
BioQuant an exclusive worldwide (except Japan) license of certain technology
related to the Osteopatch device.
F-9
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The BioQuant licensing agreement converts to a non-exclusive arrangement upon
the earlier of (i) seven years from the first commercial sale of products
incorporating the licensed technology, or (ii) February 15, 2005.
Related licensing fees have been recorded at cost and are being amortized
over the estimated useful lives of the agreements of three to four years. The
amount charged to expense in connection with amortizing these licensing fees
was $11,111 and $49,722 for the years ended June 30, 1996 and 1995, and $100,000
for the period from inception to June 30, 1996.
Customer Advances
The Company receives advances from certain customers to perform consulting,
laboratory services and clinical studies. These advances are deferred and
recognized as revenue in the period the related services are performed.
Income Taxes
Deferred tax assets and liabilities are recorded for differences between
the financial statement and tax bases of the assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is recorded for the amount of income tax payable or refundable for the
period increased or decreased by the change in deferred tax assets and
liabilities during the period.
Financial Instruments
The carrying amounts of cash and cash equivalents approximate fair value
due to the short-term maturities of these instruments. The carrying value of the
Company's debt approximates their estimated fair values because the rates of
interest on the debt approximates current interest rates for similar obligations
with like maturities.
Recent Pronouncements
During March 1995, the Financial Accounting Standards Board issued
Statement No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of' (SFAS No. 121), which requires the Company
to review for impairment its long-lived assets and intangibles whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In certain situations, an impairment loss would be
recognized. SFAS No. 121 will become effective for the Company's 1997 fiscal
year.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123, 'Accounting for Stock-Based Compensation' (SFAS No. 123)
which establishes a fair value method of accounting for stock-based compensation
plans, and requires additional disclosures for those companies which elect not
to adopt the new method of accounting. SFAS No. 123 will be effective for the
Company's 1997 fiscal year. The Company does not intend to adopt the fair value
method of accounting for stock-based compensation, and will provide the required
additional disclosures beginning in its fiscal year ending June 30, 1997.
Net Loss Per Share
Net loss per share is computed using the weighted-average number of common
stock and common stock equivalent shares outstanding during the periods. Common
equivalent shares from stock options and warrants are excluded from the
computation if their effect is antidilutive, except that pursuant to the
requirements of the Securities and Exchange Commission Staff Accounting Bulletin
No. 83, common equivalent shares relating to stock, options and warrants (using
the treasury stock method and the anticipated offering price) issued subsequent
to September 5, 1995, have been included in the computation for all periods
presented.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Accordingly, actual results could differ from those estimates
and assumptions.
F-10
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Risks and Uncertainties
The Company's products require approvals from the Food and Drug
Administration (FDA) and international regulatory agencies prior to
commercialized sales. There can be no assurance that the Company's products will
receive any of the required approvals. If the Company is denied such approvals
or if such approvals are delayed, it would have a material adverse effect on the
Company.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30, 1996:
<TABLE>
<S> <C>
Laboratory equipment.............................. $104,838
Computer equipment................................ 39,619
Office furniture and equipment.................... 10,644
Leasehold improvements............................ 13,358
Equipment held under capital leases............... 28,006
--------
196,465
Less accumulated depreciation and amortization.... (64,642)
--------
$131,823
--------
--------
</TABLE>
At June 30, 1996, the Company had equipment under capital leases with a
book value of $20,071, net of accumulated amortization of $7,935.
4. FINANCING
First Bridge Loan
In June 1996, the Company completed its First Bridge Loan financing of
$250,000. These loans bear interest at the rate of 14% and were due on
completion of the Company's Second Bridge Loan financing (see Note 16). The
Company issued 50,000 warrants in connection with this financing. Each warrant
entitles the holder to purchase a share of the Company's common stock at a price
equal to 120% of the price realized in the Company's proposed initial public
financing (see Note 1). A discount was not recorded for the value of the
warrants because the amount is not material.
Bank Financing
The Company had a $200,000 line of credit with a bank which was converted
to a term loan in June 1996. The balance at the date of conversion was $159,485.
This loan bears interest at the bank's index rate plus 2.5% (10.75% at June 30,
1996), and is due on demand; however, if no demand is made the Company must make
monthly payments of $14,127, including interest. The loan is due in June 1997.
The Company has a loan from a bank with a balance outstanding of $16,522 at
June 30, 1996. This loan bears interest at the prime rate plus 1.4% (9.9% at
June 30, 1996). The loan is due on demand; however, if no demand is made the
Company must make monthly payments of $2,085, including interest. The loan is
due in January 1997.
F-11
<PAGE>
The above loans are collateralized by the Company's accounts receivable and
equipment, and by personal guarantees from certain stockholders. The loans
require, among other matters, that the Company maintain a minimum tangible net
worth of $200,000. The Company is not in compliance with this covenant at June
30, 1996. The bank has waived the violation of this covenant and subsequent to
June 30, 1996, the loan agreement was modified to remove the covenant.
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. FINANCING--(CONTINUED)
Stockholder Loans
At June 30, 1996, the Company had borrowed $660,000 from certain
stockholders. These borrowings are uncollateralized and bear interest at an
index rate plus 1% (approximately 9.5% at June 30, 1996). These borrowings
require monthly payments of interest only until due. Certain of these loans
matured in May 1995; however, no demand for repayment has been asserted.
Subsequent to year end, the Company issued 142,274 shares at a price of $3.45
per share in satisfaction of loans amounting to $460,000 plus accured interest
of $30,845. The remaining balance owing to stockholders of $200,000 was
refinanced in connection with the Second Bridge Loan (see Note 17).
Interest paid to these stockholders during the years ended June 30, 1996
and 1995, was $2,469 and $8,832, respectively, and $11,301 for the period from
inception to June 30, 1996.
5. DEFERRED COMPENSATION
The Company has entered into deferred compensation agreements with two of
its senior executives. The agreements provide that a specified portion of their
salaries be deferred until they elect to receive the deferred amount. At June
30, 1996, the Company's deferred compensation obligation was $34,996 which is
reflected as a liability on the accompanying consolidated balance sheet.
Compensation expense in connection with these agreements was $22,496 and $12,500
for the years ended June 30, 1996 and 1995, respectively, and $34,996 for the
period from inception to June 30, 1996.
6. EMPLOYMENT AND NONCOMPETITION AGREEMENTS
The Company has finalized negotiations for and will enter into employment
and noncompetition agreements with certain executives. These agreements will
specify that the executives may not engage in any competitive activity for
periods ranging from 9 months to 2 years following termination. The agreements
will provide for compensation of 9 months salary, bonuses and benefits in the
event of termination without cause.
7. ROYALTY OBLIGATION
In 1992, the Company entered into an exclusive licensing agreement for
diagnostic technology related to cholesterol testing. The Company paid a
licensing fee of $100,000 (see Note 2). The agreement indicates that the Company
must make royalty payments of 5% of sales (subject to certain minimum amounts)
to retain the exclusive right to the technology. The Company did not make the
prescribed minimum payment due on June 30, 1996. Management is currently
negotiating with the other parties for modification of the terms of the
agreement.
8. RELATED PARTY TRANSACTIONS
The Company paid $27,661 and $27,754 to related parties for consulting
services provided during the years ended June 30, 1996 and 1995, respectively,
and $55,415 for the period from inception to June 30, 1996.
In September 1993, the Company entered into a contract for management and
consulting services with a company owned by certain of the Company's
stockholders. The Company incurred $186,000 and $108,726 for management and
consulting services provided during the years ended June 30, 1996 and 1995,
respectively, and $300,098 for the period from inception to June 30, 1996. The
liability for management consulting services under this contract at June 30,
1996, of $187,000 was converted to a promissory note bearing annual interest at
7% with
F-12
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
no specific due date. This obligation is included with notes payable to
related parties on the accompanying balance sheet. The management contract was
terminated effective June 28, 1996.
9. INCOME TAXES
At June 30, 1996, the Company had accumulated net operating loss
carryforwards for tax purposes of approximately $5.5 million which expire
through 2011. As a result of the merger with Merchant House, the availability of
these net operating losses will be limited to a prescribed amount each year as
specified in the Internal Revenue Code. Losses accumulated through the date
BioQuant and PBI were acquired of approximately $2.8 million and $2.7 million,
respectively, will be limited to use by the respective company which generated
the net operating losses.
The following is a reconciliation of income tax benefit to the amount based
on the U.S. statutory rate of 34%:
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
YEARS ENDED JUNE 30, (DECEMBER 1992)
-------------------------- TO JUNE 30,
1996 1995 1996
----------- ----------- ---------------
<S> <C> <C> <C>
Income tax benefit based on U.S.
statutory rate................... $(2,570,693) $ (565,825) $(3,453,510)
Write-off of purchased research and
development...................... 2,167,121 -- 2,167,121
Amortization of goodwill........... -- 145,645 145,645
Losses which provide no current tax
benefit.......................... 403,572 420,180 1,140,744
----------- ----------- ---------------
Income tax benefit............... $ 0 $ 0 $ 0
----------- ----------- ---------------
----------- ----------- ---------------
Significant components of the Company's deferred tax assets and liabilities are as
follows at June 30, 1996:
Deferred tax assets:
Start-up costs................................. $ 292,684
Deferred compensation.......................... 75,479
Depreciation................................... 35,150
Technology license fees and other.............. 25,621
Tax loss carryforwards......................... 1,879,210
-----------
Total deferred tax assets........................ 2,308,144
Valuation allowance.............................. (2,308,144)
-----------
Net deferred tax assets........................ $ 0
-----------
-----------
The provision for income taxes was as follows:
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(DECEMBER 1992)
TO JUNE 30,
1996 1995 1996
----------- ----------- ---------------
<S> <C> <C> <C>
Current provision.................. $ -- $ -- $ --
Deferred provision................. (403,572) (475,988) (1,367,479)
Change in valuation allowance...... 403,572 475,988 1,367,479
----------- ----------- ---------------
Provision for income taxes....... $ 0 $ 0 $ 0
----------- ----------- ---------------
----------- ----------- ---------------
</TABLE>
F-13
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. CONTINGENT OBLIGATION TO SUPPLIER
The Company has entered into a manufacturing agreement with a supplier to
produce one of the Company's products for distribution. The agreement requires
the supplier to incur certain costs to produce the product, and entitles the
supplier to a surcharge on units purchased until those costs have been fully
recovered. At June 30, 1996, the Company is obligated to the supplier for
amounts ranging from $16,000 to $50,000 in connection with purchases of product
under this agreement. The accompanying consolidated financial statements include
an accrual of $16,000 relating to these obligations. The Company is also
contingently obligated to the supplier for approximately $317,000 at June 30,
1996, in connection with the supplier's purchase of manufacturing equipment used
to produce the Company's product.
11. COMMITMENTS
Technology and Manufacturing Agreements
The Company has entered into a license agreement with respect to its
osteoporosis technology. This agreement provides for royalty payments to the
licensors of 5% of gross sales as defined in the agreement, with minimum royalty
payments of $15,000 each quarter.
The Company has also entered into a manufacturing agreement with an
affiliate of the owners of the technology which requires certain minimum
purchases to retain the exclusive use of the licensed technology. This agreement
requires that the Company purchase a minimum of 25,000 units prior to March 31,
1997.
Commitment to Repurchase Common Stock
During the year ended June 30, 1995, the Company issued 13,270 shares of
common stock to a supplier in satisfaction of a $70,000 obligation.
Concurrently, the Company obtained the right to reacquire these shares at
specified prices through December 31, 1998. If the stock is not reacquired by
December 31, 1998, the supplier has the right to require repurchase by the
Company for $140,000. The obligation to repurchase these shares was assumed by
certain stockholders and directors of the Company effective September 5, 1996.
12. SEVERANCE AGREEMENTS
In September 1994 the Company terminated an employment contract with one of
its employees. Concurrently, the Company entered into a consulting agreement
with the executive which provided for monthly payments of $5,000 beginning
November 1, 1994, and ending October 1, 1995. All amounts owed under this
agreement were paid. The agreement also provides for a lump-sum payment of
$50,000 in the event the Company completes an initial public offering. This
obligation has been assumed by certain stockholders and directors of the Company
effective September 5, 1996.
In September 1995 the Company entered into a severance agreement with one
of its executives which provided for fifteen monthly payments of $10,000
beginning in September 1995. The Company is current on its payment obligations
on this agreement. The Company also agreed to issue 4,739 warrants for the
purchase of common stock which are exercisable at $10.55 per share.
In September 1995 the Company terminated its consulting contract with a
stockholder. Under the termination agreement, the Company agreed to pay a fee to
the consultant based on the proceeds of capital raised through December 31,
1995, arising through the efforts of the consultant. The amount due under this
arrangement was $14,000 which was paid through the issuance of 2,836 shares of
the Company's common stock.
F-14
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. SEVERANCE AGREEMENTS--(CONTINUED)
In November 1995 the Company entered into a severance agreement with one of
its executives whereby the executive received 4,068 shares of the Company's
common stock valued at $20,000, and salary continuation through January 1996.
13. STOCK OPTION PLANS AND STOCK PURCHASE WARRANTS
In prior years, PBI had adopted an Incentive Stock Option Plan ('ISO Plan')
and a Nonstatutory Stock Option Plan ('NSO Plan'). The ISO Plan provided that
any options granted would be exercisable at no less than the fair value of the
underlying common stock, and were to expire five years from the date of grant.
The options granted, if any, were intended to conform to all requirements of
Section 422A of the Internal Revenue Code, as amended. No options were issued
under the ISO Plan.
Options were granted under the NSO Plan at exercise prices to be determined
by the Board of Directors. Any options granted vested 20% on December 31 of the
year granted, and 20% on the same date of each year until fully vested. Any
options granted were to expire ten years from the date of grant. To date, all
options under the NSO Plan were granted with an exercise price equal to the
estimated fair value of the underlying common stock at the time of grant.
The following is a summary of the activity in the NSO Plan for the period
from inception:
<TABLE>
<CAPTION>
EXERCISE PRICE OPTIONS
------------------ -------
<S> <C> <C>
Granted............................ $0.79 1,422
Canceled........................... $0.79 (948)
-------
Balance, June 30, 1990........... 474
Granted............................ $0.79 4,739
Canceled........................... $0.79 (1,896)
-------
Balance, June 30, 1991........... 3,317
Granted............................ $0.79 21,517
-------
Balance, June 30, 1992........... 24,834
Granted............................ $0.79-$5.27 3,886
Canceled........................... $1.58 (190)
-------
Balance, June 30, 1993........... 28,530
Granted............................ $0.37-$5.27 48,081
Canceled........................... $5.27 (1,896)
-------
Balance, June 30, 1994........... 74,715
Canceled.......................... $0.37-$5.27 (74,715)
-------
Balance, June 30, 1995 and
1996..........................
-------
-------
</TABLE>
All outstanding options were fully vested and exercised in connection with
the merger between PBI and Merchant House, at which time both stock option plans
were terminated.
1996 Stock Incentive Plan
In July 1996, the Company adopted a Stock Incentive Plan (the 'Plan') with
1,000,000 shares of common stock reserved for issuance under this Plan. Options
granted under this plan may be either incentive stock options within the meaning
of Section 422(b) of the Internal Revenue Code, or nonqualified options. The
Company may also award stock appreciation rights, restricted stock, performance
shares, loans or tax offset payments. The option price of each incentive stock
option granted shall not be less than the fair value of the
F-15
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. STOCK OPTION PLANS AND STOCK PURCHASE WARRANTS--(CONTINUED)
underlying common stock, and will expire no later than ten years following the
date of grant. With respect to nonqualified options, the exercise price and term
will be determined at the discretion of the Board. However, the exercise price
will not be less than 85% of the fair value of the underlying stock, and the
term will not exceed a period of ten years. There were no options or warrants
outstanding under this Plan at June 30, 1996.
14. LEASES
The Company has entered into noncancelable operating leases for office
facilities. Under these leases, the Company is responsible for its proportionate
share of real estate taxes, insurance and common area maintenance costs. Rent
expense on these lease agreements was $205,128 and $93,433 for the years ended
June 30, 1996, and 1995, respectively, and and $338,421 for the period from
inception to June 30, 1996.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
--------------------------------------------------
<S> <C>
1997.............................................. $156,120
1998.............................................. 15,061
--------
$171,181
--------
--------
</TABLE>
15. MAJOR CUSTOMERS
The Company's sales to its largest customer represented approximately 29.5%
and 43.9% of its total sales in 1996 and 1995, respectively, and sales to its
five largest customers represented approximately 63.0% and 64.8% of total sales
in 1996 and 1995, respectively.
16. SUPPLEMENTARY INFORMATION ON NONCASH TRANSACTIONS
Stockholder Loans Converted to Equity
In 1994 and 1995, certain of the Company's stockholders converted their
loans to the Company to equity. The amount converted was $324,963 and $310,000
during the years ended June 30, 1995 and 1994, respectively, and $634,963 for
the period from inception to June 30, 1996.
Common Stock Issued for Technology Licenses, Services and Loan Guarantees
The Company has issued common stock for technology licenses, services and
loan guarantees as follows:
<TABLE>
<CAPTION>
NUMBER OF ESTIMATED
YEAR ISSUED SHARES FAIR VALUE
---------------------------------------- --------- ----------
<S> <C> <C>
1994.................................... 62,561 $ 55,556
1995.................................... 47,867 $ 80,500
1996.................................... 135,080 $ 466,026
For the period from inception to June
30, 1996.............................. 245,508 $ 602,082
</TABLE>
Common Stock Issued in Connection with Acquisitions
In connection with the 1995 merger of Old PBI and Merchant House, as
described in Note 1, the Company issued 189,061 shares of common stock to the
stockholders of Old PBI.
F-16
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. SUPPLEMENTARY INFORMATION ON NONCASH TRANSACTIONS--(CONTINUED)
In 1996, the Company acquired BioQuant through an exchange of common stock
as described in Note 1. The Company issued 700,318 shares of common stock to the
stockholders of BioQuant in connection with this acquisition.
17. SUBSEQUENT EVENTS
Second Bridge Loan
Subsequent to year end, the Company arranged additional financing in the
form of a Second Bridge Loan of $1,000,000. This loan bears interest at 14% and
is due on completion of the Company's proposed initial public offering (see Note
1). The Company issued 250,000 warrants in connection with this financing. Each
warrant entitles the holder to purchase a share of the Company's common stock at
a price equal to 120% of the price realized in the Company's proposed initial
public offering (see Note 1). The proceeds of this financing were used, in part,
to repay the notes issued in the First Bridge Loan (see Note 4). The balance
will be used for working capital and to support the Company's product
development activities.
Common Stock Issued for Services
Subsequent to year end, the Company issued 64,000 shares of common stock to
Directors in exchange for services.
Stock Options Granted for Services
Subsequent to year end, the Company granted to employees and Directors
539,840 options to purchase its common stock. The Company also granted 50,000
options to a Director to purchase its common stock subject to the completion of
its proposed initial public offering. These options have an exercise prices,
ranging from $3.45 to $4.75 per share, and vest in varying periods ranging up to
four years.
Common Stock Sold for Cash
Subsequent to year end, the Company sold 2,900 shares of common stock for
cash consideration of $10,005.
18. GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has sustained
recurring losses from operations and cash flow shortages, and is reporting
deficits in working capital and stockholders' equity at June 30, 1996. These
matters raise substantial doubt about the Company's ability to continue as a
going concern.
The ability of the Company to sustain itself as a going concern is
dependent on its ability to generate sufficient cash to meet its financial
requirements and, ultimately, upon achieving profitable operations. As discussed
in Note 1, the Company is currently in the process of raising approximately $8
million through an initial public offering of its common stock and, although the
success of the offering cannot be predicted, the Company plans to complete this
financing later in 1996. The outcome of the Company's efforts to complete the
initial public offering is not determinable at this time. However, the
underwriting agreement provides that the offering is a firm commitment. In
addition, management believes that the planned proceeds of the offering will be
sufficient to fund the Company's operations for approximately 18 months. As
discussed in Note 17, the Company raised $1,000,000 in bridge loan financing
subsequent to year end which was used to repay certain outstanding obligations
and support the Company's current working capital requirements.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
F-17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
BioQuant, Inc.
Irvine, California
We have audited the accompanying balance sheet of BioQuant, Inc. (a
Michigan corporation) (a company in the development stage) as of June 30, 1996,
and the related statements of operations and cash flows for the years ended June
30, 1996 and 1995, and for the period from inception (October 1985) to June 30,
1996, and the statement of stockholders' deficit for the period from inception
(October 1985) to June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BioQuant, Inc. as of June
30, 1996, and the results of its operations and its cash flows for the years
ended June 30, 1996 and 1995, and for the period from inception (October 1985)
to June 30, 1996, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 11 to the
financial statements, the Company has sustained recurring losses from operations
and cash flow shortages, and is reporting deficiencies in working capital and
stockholders' equity. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 11. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
Seattle, Washington
September 5, 1996
F-18
<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 31,200
Accounts receivable................... 278
Advance to PBI........................ 100,000
Supplies.............................. 10,616
Prepaid expenses...................... 2,727
-------------
Total current assets............... 144,821
Property and equipment, net............. 18,197
Other assets:
Technology license, net of accumulated
amortization of $85,938............ 164,062
Lease deposits........................ 277
-------------
Total assets....................... $ 327,357
-------------
-------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable to related parties...... $ 429,461
Notes payable to affiliate............ 90,000
Advances from PBI--Delaware........... 155,000
Accounts payable...................... 34,364
Accrued liabilities................... 65,416
-------------
Total liabilities.................. 774,241
-------------
Commitments and contingencies
Stockholders' deficit:
Common stock, no par value, 1,000
shares authorized, one share issued
and outstanding.................... 2,340,381
Accumulated deficit................... (2,787,265)
-------------
Total stockholders' deficit........ (446,884)
-------------
Total liabilities and stockholders'
deficit........................... $ 327,357
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995,
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 1985) TO JUNE 30, 1996
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(OCTOBER 1985) TO
1996 1995 JUNE 30, 1996
--------- --------- ------------------
<S> <C> <C> <C>
Revenues........................... $ 4,838 $ 16,270 $ 24,846
--------- --------- ------------------
Operating expenses:
Research and product
development................... 509,183 308,103 3,171,232
General and administration....... 336,129 338,593 2,189,098
--------- --------- ------------------
Total operating expenses...... 845,312 646,696 5,360,330
--------- --------- ------------------
Operating loss..................... (840,474) (630,426) (5,335,484)
--------- --------- ------------------
Other income (expense):
Interest expense................. (19,673) (2,040) (83,193)
Grant income..................... 101,714 32,420 2,576,914
Interest and other income........ 8,692 10,687 54,498
--------- --------- ------------------
Other income (expense), net... 90,733 41,067 2,548,219
--------- --------- ------------------
Net loss........................... $(749,741) $(589,359) $ (2,787,265)
--------- --------- ------------------
--------- --------- ------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995,
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 1985) TO JUNE 30, 1996
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(OCTOBER 1985) TO
1996 1995 JUNE 30, 1996
--------- --------- -----------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Cash received from customers..... $ 6,070 $ 17,669 $ 24,568
Cash paid to suppliers and
employees..................... (857,349) (617,068) (5,109,502)
Grants and interest received..... 110,406 42,116 2,631,412
Interest paid.................... (19,673) (2,040) (83,193)
--------- --------- -----------------
Cash used by operations....... (760,546) (559,323) (2,536,715)
--------- --------- -----------------
Cash flows from investing
activities:
Purchase of equipment............ (3,518) (8,167) (168,347)
Loan to affiliate................ (100,000) (100,000)
Purchase of technology license... (50,000) (20,000) (70,000)
Deposits......................... 20 (252) (277)
--------- --------- -----------------
Cash used by investing
activities.................. (153,498) (28,419) (338,624)
--------- --------- -----------------
Cash flows from financing
activities:
Preferred stock sold for cash.... 298,000 613,743 2,267,771
Financing costs incurred in
connection with issuance of
preferred stock............... (26,725) (26,725)
Common stock sold for cash....... 10,000 54,200
Repurchase of common stock....... (67,086)
Borrowings from related
parties....................... 456,961 456,961
Borrowings from affiliates....... 137,500 170,000
Issuance of convertible
subordinated notes............ 51,418
--------- --------- -----------------
Cash provided by financing
activities.................. 892,461 597,018 2,906,539
--------- --------- -----------------
(Decrease) increase in cash and
cash equivalents................... (21,583) 9,276 31,200
Cash and cash equivalents:
Beginning balance................ 52,783 43,507
--------- --------- -----------------
Ending balance................... $ 31,200 $ 52,783 $ 31,200
--------- --------- -----------------
--------- --------- -----------------
Reconciliation of Net Loss to Cash
Used by Operations:
Net loss......................... $(749,741) $(589,359) $(2,787,265)
Adjustments to reconcile net loss
to cash used by operations:
Depreciation and
amortization................ 76,024 44,369 236,088
Common stock issued for
services and subordinated
convertible notes........... 35,803
Reduction in notes payable to
affiliate in lieu of payment
of management fees.......... (47,500) (47,500)
Changes in operating accounts:
Accounts receivable......... 1,232 1,399 (278)
Supplies.................... (5,021) 5,530 (10,616)
Prepaid expenses............ 3,128 (3,436) (2,727)
Accounts payable and accrued
liabilities.............. (38,668) (17,826) 39,780
--------- --------- -----------------
Cash used by operations............ $(760,546) $(559,323) $(2,536,715)
--------- --------- -----------------
--------- --------- -----------------
</TABLE>
See Note 9 for noncash transactions.
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (OCTOBER 1985) TO JUNE 30, 1996
<TABLE>
<CAPTION>
CLASS A CLASS B DEFICIT
CONVERTIBLE CONVERTIBLE ACCUMULATED
AMOUNTS PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE
PER ------------------ ------------------- ---------------------- PAID-IN DEVELOPMENT
SHARE SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE
------- -------- -------- -------- --------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock issued for cash
between October 1985 and
January 1991: $0.88 710,715 $ 71,072 -- -- -- -- $ 553,928 --
Preferred stock, Class
A.................... $2.00 -- -- 125,000 $ 250,000 -- -- -- --
Preferred stock, Class
B.................... $0.13 -- -- -- -- 428,700 $ 46,650 7,550 --
Common stock........... -- -- -- -- -- -- -- -- --
Stock repurchased and
canceled between
December 1986 and
November 1990........... $0.58 -- -- -- -- (116,100) (12,060) (55,026) --
Stock issued for services
between December 1987
and March 1991.......... $0.37 -- -- -- -- 35,750 8,345 4,835 --
Conversion of $1.00 par
value common stock to
$0.10 par value common
stock in March 1988..... -- -- -- -- -- -- (8,100) 8,100 --
Preferred stock issued
for subordinated
convertible notes in
March 1992.............. $2.00 -- -- 142,800 285,600 -- -- -- --
Preferred stock converted
to common stock in July
1993.................... -- (710,715) (71,072) (267,800) (535,600) 978,515 606,672 -- --
Common stock issued for
subordinated convertible
notes in October 1993... $1.03 -- -- -- -- 49,743 51,418 -- --
Effect of 1-for-4 reverse
stock split in October
1993.................... -- -- -- -- -- (1,032,456) -- -- --
Preferred stock issued
for cash in
October 1993............ $0.52 403,979 210,073 -- -- -- -- -- --
Common stock issued for
license agreement in
October 1993............ $0.06 -- -- -- -- 210,375 12,623 -- --
Conversion of $0.10 par
value common stock to no
par value common stock
in 1993................. -- -- -- -- -- -- 519,387 (519,387) --
Net loss for the period
from inception (October
1985) to June 30,
1994.................... -- -- -- -- -- -- -- -- $(1,448,165)
-------- -------- -------- --------- ---------- ---------- ----------- -----------
Balance, June 30,
1994................. 403,976 210,073 -- -- 554,527 1,224,935 -- (1,448,165)
Issuance of Class B
convertible preferred
stock................... $1.74 -- -- 363,840 634,098 -- -- -- --
Financing costs paid in
connection with issuance
of convertible preferred
stock Class B........... -- -- -- -- (26,725) -- -- -- --
Common stock issued as
financing costs
associated with the
Class B convertible
preferred stock......... -- -- -- -- (10,000) 5,715 10,000 -- --
Net loss................. -- -- -- -- -- -- -- -- (589,359)
-------- -------- -------- --------- ---------- ---------- ----------- -----------
Balance, June 30,
1995................. -- 403,979 210,073 363,840 597,373 560,242 1,234,935 -- (2,037,524)
Issuance of Class B
convertible preferred
stock................... $2.00 -- -- 149,000 298,000 -- -- -- --
Redemption of shares in
connection with
acquisition by
PBI-Delaware............ -- (403,979) (210,073) (512,840) (895,373) (560,241) 1,105,446 -- --
Net loss................. -- -- -- -- -- -- -- (749,741)
-------- -------- -------- --------- ---------- ---------- ----------- -----------
Balance, June 30,
1996................. -- $ -- -- $ -- 1 $2,340,381 $ -- $(2,787,265)
-------- -------- -------- --------- ---------- ---------- ----------- -----------
-------- -------- -------- --------- ---------- ---------- ----------- -----------
<CAPTION>
TOTAL
-----------
<S> <C>
Stock issued for cash
between October 1985 and
January 1991: $ 625,000
Preferred stock, Class
A.................... 250,000
Preferred stock, Class
B.................... 54,200
Common stock........... --
Stock repurchased and
canceled between
December 1986 and
November 1990........... (67,086)
Stock issued for services
between December 1987
and March 1991.......... 13,180
Conversion of $1.00 par
value common stock to
$0.10 par value common
stock in March 1988..... --
Preferred stock issued
for subordinated
convertible notes in
March 1992.............. 285,600
Preferred stock converted
to common stock in July
1993.................... --
Common stock issued for
subordinated convertible
notes in October 1993... 51,418
Effect of 1-for-4 reverse
stock split in October
1993.................... --
Preferred stock issued
for cash in
October 1993............ 210,073
Common stock issued for
license agreement in
October 1993............ 12,623
Conversion of $0.10 par
value common stock to no
par value common stock
in 1993................. --
Net loss for the period
from inception (October
1985) to June 30,
1994.................... (1,448,165)
-----------
Balance, June 30,
1994................. (13,157)
Issuance of Class B
convertible preferred
stock................... 634,098
Financing costs paid in
connection with issuance
of convertible preferred
stock Class B........... (26,725)
Common stock issued as
financing costs
associated with the
Class B convertible
preferred stock......... --
Net loss................. (589,359)
-----------
Balance, June 30,
1995................. 4,857
Issuance of Class B
convertible preferred
stock................... 298,000
Redemption of shares in
connection with
acquisition by
PBI-Delaware............ --
Net loss................. (749,741)
-----------
Balance, June 30,
1996................. $ (446,884)
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
BioQuant, Inc. (the 'Company') was incorporated in 1985 and has been
engaged in research and product development activities since inception. The
Company is currently engaged in the development of a diagnostic product test
related to osteoporosis. The Company's product line includes a patented skin
patch technology, patented antisera and proprietary immunoassays for the
measurement of human perspiration. The Company also owns a patented saliva
collection device which is currently being developed for non-invasive diabetes
tests. The Company has financed its operations principally through sales of
preferred and common stock, research grants and loans from certain stockholders.
In June 1996 the Company was acquired by Pacific Biometrics, Inc.
('PBI-Delaware'), a Delaware corporation, through an exchange of common stock.
The Company now operates as a wholly-owned subsidiary of PBI-Delaware. The
Company is an affiliate of Pacific Biometrics, Inc. ('PBI'), a Washington
corporation, through a common parent corporation.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents consist of a money market fund which is
maintained at a bank. The Company considers all investments with an initial
maturity of three months or less at the time of purchase to be cash equivalents.
Supplies
Supplies consist of devices related to the Company's saliva collection
technology and other items related to the Company's patented skin patch
technology. These items are recorded at the lower of estimated cost
(weighted-average) or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line and accelerated methods over the useful
lives of the related assets. Leasehold improvements relating to the Company's
office facilities are being amortized over the term of the lease. The cost and
related accumulated depreciation or amortization of property or equipment sold
of otherwise disposed of are removed from the accounts and the resulting gains
or losses are included in the statement of operations.
Licensing Fees
In 1995, the Company licensed certain diagnostic technology related to
osteoporosis testing for $250,000. The Company paid $50,000 and $20,000 during
the years ended June 30, 1996 and 1995, respectively, and the balance of
$180,000 in July 1996. The total licensing fee of $250,000 is being amortized
using the straight-line method over a period of four years. The amount charged
to expense in connection with amortizing these licensing fees was $62,500 and
$23,438 for the years ended June 30, 1996 and 1995, and $85,938 for the period
from inception (October 1985) to June 30, 1996.
The licensing agreement provides the Company an exclusive worldwide (except
Japan) license of the technology. The licensing agreement converts to a
non-exclusive arrangement upon the earlier of (i) seven years from the first
commercial sale of products incorporating the licensed technology, or (ii)
February 15, 2005.
F-23
<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Grant Income
The Company has received several government grants to support its research
activities. Grant revenue is recognized as the related expenses are incurred to
fulfill the specific grant requirements.
Income Taxes
Deferred tax assets and liabilities are recorded for differences between
the financial statement and tax bases of the assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is recorded for the amount of income tax payable or refundable for the
period increased or decreased by the change in deferred tax assets and
liabilities during the period.
Financial Instruments
The carrying amounts of cash and cash equivalents approximate fair value
due to the short-term maturities of these instruments. The carrying values of
the Company's debt approximates their estimated fair values because the rates of
interest on the debt approximates current interest rates for similar obligations
with like maturities.
Recent Pronouncements
During March 1995, the Financial Accounting Standards Board issued
Statement No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of' (SFAS No. 121), which requires the Company
to review for impairment its long-lived assets and intangibles whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In certain situations, an impairment loss would be
recognized. SFAS No. 121 will become effective for the Company's 1997 fiscal
year. Management does not expect this Statement to have a material impact on the
Company's financial condition or results of operations.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123, 'Accounting for Stock-Based Compensation' (SFAS No. 123)
which establishes a fair value method of accounting for stock-based compensation
plans, and requires additional disclosures for those companies which elect not
to adopt the new method of accounting. SFAS No. 123 will be effective for the
Company's 1997 fiscal year. The Company does not intend to adopt the fair value
method of accounting for stock-based compensation, and will provide the required
additional disclosures beginning in its fiscal year ending June 30, 1997.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Accordingly, actual results could differ from those estimates
and assumptions.
Risks and Uncertainties
The Company's products require approvals from the Food and Drug
Administration (FDA) and international regulatory agencies prior to
commercialized sales. There can be no assurance that the Company's products will
receive any of the required approvals. If the Company is denied such approvals
or if such approvals are delayed, it would have a material adverse effect on the
Company.
F-24
<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. ADVANCE TO PBI
During the year ended June 30, 1996, the Company loaned $100,000 to PBI.
This loan is uncollateralized and bears interest at 9.25%. The loan is due March
1, 1997.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 1996:
<TABLE>
<S> <C>
Laboratory equipment.................... $112,959
Computer equipment...................... 40,095
Office furniture and equipment.......... 13,808
Leasehold improvements.................. 1,485
--------
168,347
Less accumulated depreciation and
amortization.......................... (150,150)
--------
$ 18,197
--------
--------
</TABLE>
Depreciation expense for the years ended June 30, 1996 and 1995, was
$13,522 and $18,673, respectively, and $150,150 for the period from inception
(October 1985) to June 30, 1996.
4. FINANCING
Notes Payable to Related Parties
At June 30, 1996, the Company had received loans from certain stockholders
amounting to $222,500. These loans were uncollateralized and bear interest at
the prime rate plus 1% (9.25% at June 30, 1996). These loans were scheduled to
mature at various dates from September 1996 to October 1996. Subsequent to year
end, loans amounting to $200,000 were refinanced in connection with a bridge
loan completed by PBI-Delaware. The remaining $22,500 in stockholder loans was
converted to equity in PBI-Delaware. Interest paid in connection with these
loans was $15,647 for the year ended June 30, 1996, for the period from
inception (October 1985) to June 30, 1996. There was no interest paid in 1995.
At June 30, 1996, the Company had received loans from an affiliate
amounting to $90,000. These loans are uncollateralized and bear interest at the
prime rate plus 1% (9.25% at June 30, 1996). These loans mature at various dates
ranging from October 1996 through December 1996.
At June 30, 1996, the Company had demand loans outstanding to an affiliate
amounting to $17,500. These loans carried interest at 8% and were collateralized
by substantially all the Company's assets. These loans were converted to equity
in PBI-Delaware subsequent to year end.
Advances from PBI-Delaware
During the year ended June 30, 1996, the Company received advances from
PBI-Delaware amounting to $155,000. These advances are uncollateralized with no
specified interest rate or repayment terms.
5. RELATED PARTY TRANSACTIONS
In September 1993, the Company entered into a contract for management and
consulting services with a company owned by certain of the Company's
stockholders. The Company incurred $138,500 and $108,726 for management and
consulting services provided during the years ended June 30, 1996 and 1995,
respectively, and $300,098 for the period from inception (October 1985) to June
30, 1996. The expense reported for the year ended June 30, 1996, is net of
amounts reimbursed by PBI of $47,500 for shared management and consulting
services. This amount was reimbursed through a reduction in amounts owed to the
affiliate. The accrued liability for management and consulting services at June
30, 1996, of $189,461 was converted to a promissory note bearing
F-25
<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. RELATED PARTY TRANSACTIONS--(CONTINUED)
annual interest at 7% with no specific due date. This note is included in notes
payable to related parties on the accompanying balance sheet.
6. LEASES
In September 1995, the Company agreed to sublease its office facilities
from PBI. Under this agreement, the Company is responsible for its proportionate
share of real estate taxes, insurance and common area maintenance costs. Rent
expense under this agreement and other rental agreements was $5,707 and $25,897
for the years ended June 30, 1996 and 1995, respectively, and approximately
$264,000 for the period from inception (October 1985) to June 30, 1996. The
agreement with the affiliate was scheduled to expire in October 1996. The
Company has entered into a new lease for the facilities which extends to
September 1997. Under this lease, the Company is responsible for its
proportionate share of real estate taxes, insurance and common area costs.
Future minimum payments on this lease are $31,662 and $8,033 for the years ended
June 30, 1997 and 1998, respectively.
7. STOCKHOLDERS' DEFICIT
Preferred Stock
In 1988, the Company sold 357,145 shares of Preferred Stock, Class A, for
$300,000. In 1989, the Company sold an additional 178,570 shares of Preferred
Stock, Class A, for $150,000. In 1989 and 1990, the Company sold 125,000 shares
of Preferred Stock, Class B, for $250,000. In March 1992, the Company issued
142,800 shares of Preferred Stock, Class B, in exchange for $285,600 in
subordinated convertible promissory notes. In July 1993, all of the Company's
outstanding shares of Preferred Stock, Class A, and Preferred Stock, Class B,
were exchanged for 978,515 shares of the Company's common stock.
In October 1993, the Company issued 403,979 shares of Preferred Stock,
Class A, for $210,073. In 1994, the Company issued 362,292 shares of Preferred
Stock, Class B, for $610,082, and in 1995, the Company issued 149,000 shares of
Preferred Stock, Class B, for $298,000. In June 1996, all of the Company's
outstanding shares of Preferred Stock, Class A, and Preferred Stock, Class B,
were redeemed in connection with the acquisition by PBI-Delaware in exchange for
common stock in PBI-Delaware.
Common Stock
In 1985 and 1986, the Company issued 426,700 shares of common stock for
$54,200. The Company redeemed 116,100 of these shares for $67,086 during the
period from 1986 through 1990.
In 1988, the Company converted its $1.00 par value common stock to $0.10
par value common stock. In 1993, the Company converted its $0.10 par value
common stock to no par value common stock, and effected a 1-for-4 reverse stock
split.
In December 1993, the Company issued 210,375 shares of common stock valued
at $12,623 in connection with the assignment of a license and supply agreement
covering certain medical technology.
In June 1996, the Company was acquired by PBI-Delaware in a stock-for-stock
exchange resulting in the redemption of all except one of the Company's shares
of common stock.
Stock Options
The Company has adopted an Incentive Stock Option plan ('ISO Plan') and a
Nonqualified Stock Option plan ('NSO Plan') under which the Board of Directors
is authorized to grant options to purchase the Company's common stock. Options
granted under the ISO Plan were granted at no less than the fair value of the
underlying common stock, and generally expired ten years from the date of grant.
The ISO Plan is designed to conform to the requirements of Section 422A of the
Internal Revenue Code, as amended. Options were granted under the
F-26
<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. STOCKHOLDERS' DEFICIT--(CONTINUED)
NSO Plan at exercise prices to be determined by the Board of Directors.
Generally, options vested over a four year period, and expired five years from
the date of grant.
The following is a summary of the activity in the Company's stock option
plans for the period from inception (October 1985) to June 30, 1996:
<TABLE>
<CAPTION>
ISO PLAN NSO PLAN
------------------------ ------------------------
EXERCISE NUMBER OF EXERCISE NUMBER OF
PRICE OPTIONS PRICE OPTIONS
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Granted....................... $ 2.00 13,313 $ 0.50 4,375
Canceled...................... $ 2.00 (500)
--------- ---------
Balance, June 30, 1989... 12,813 4,375
Granted....................... $ 2-$3.00 32,625 $ 3.00 12,125
Canceled...................... $ 2.00 (2,500)
--------- ---------
Balance, June 30, 1990... 42,938 16,500
Granted....................... $ 3.00 12,563 $ 3.00 3,488
Canceled...................... $ 2-$3.00 (5,563) $ 3.00 (2,500)
--------- ---------
Balance, June 30, 1991... 49,938 17,488
Granted....................... $ 2.96 750 $ 3.00 4,500
--------- ---------
Balance, June 30, 1992... 50,688 21,988
Granted....................... $ 1.00 6,438
Canceled...................... $ 2.00 (500)
--------- ---------
Balance, June 30, 1993... 56,626 21,988
Granted....................... $ 0.06 42,000 $ 0.06 676,000
Canceled...................... $ 2.00 (6,750) $ 0.50 (4,375)
--------- ---------
Balance, June 30, 1994... 91,876 693,613
Granted....................... $ 0.20 52,000 $ 0.20 86,918
Canceled...................... $ 3.00 (38,875) $ 3.00 (4,625)
--------- ---------
Balance, June 30, 1995... 105,001 775,906
Granted....................... 5,500 $ 0.30 150,000
Exchanged..................... $0.06-$3.00 (110,501) $0.06-$3.00 (925,906)
--------- ---------
Balance, June 30, 1996...
--------- ---------
--------- ---------
</TABLE>
F-27
<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. STOCKHOLDERS' DEFICIT--(CONTINUED)
Stock Purchase Warrants
The following is a summary of the activity relating to stock purchase
warrants granted from the Company's inception (October 1985) to June 30, 1996:
<TABLE>
<CAPTION>
PREFERRED PREFERRED
COMMON STOCK, STOCK,
STOCK CLASS A, CLASS B,
EXERCISE PURCHASE PURCHASE PURCHASE
PRICE WARRANTS WARRANTS WARRANTS
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Granted....................... $ 1.00 175,000
-----------
Balance, June 30, 1990... 175,000
Granted....................... $ 4.00 18,438
Exercised..................... $ 1.00 (175,000)
--------
Balance, June 30, 1991,
1992 and 1993.......... 18,438
Granted....................... $0.20-$0.25 21,250
Canceled...................... $ 4.00 (6,250)
--------
Balance, June 30, 1994... 33,438
Granted....................... $ 0.20 15,000
--------
Balance, June 30, 1995... 48,438
Granted....................... $ 2.00 175,000
Exchanged..................... $0.20-$4.00 (48,438) (175,000)
-------- ----------- ---------
Balance, June 30, 1996...
-------- ----------- ---------
-------- ----------- ---------
</TABLE>
All outstanding options and warrants became fully vested and were exchanged
for similar options and warrants in PBI-Delaware in accordance with the terms of
the options and warrant agreements.
8. COMMITMENTS
The Company has entered into a license agreement with respect to its
osteoporosis technology. This agreement provides for royalty payments to the
licensors of 5% of gross sales as defined in the agreement, with minimum royalty
payments of $15,000 each quarter.
The Company has also entered into a manufacturing agreement with an
affiliate of the owners of the technology which requires certain minimum
purchases to retain the exclusive use of the licensed technology. This agreement
requires that the Company purchase a minimum of 25,000 units prior to March 31,
1997.
F-28
<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. SUMMARY OF NONCASH TRANSACTIONS
The Company entered into the following noncash transactions during the
period from inception (October 1985) to June 30, 1996:
<TABLE>
<S> <C>
Common stock issued for services in
1987, 1988 and 1991................... $ 35,803
----------
----------
Issuance of preferred stock in
connection with exercise of warrants
in 1990 and 1991...................... $ 175,000
----------
----------
Preferred stock issued in exchange for
convertible subordinated notes in
March 1992............................ $ 285,600
----------
----------
Common stock issued in exchange for
preferred stock, Class A and Class B
in July 1993.......................... $ 606,672
----------
----------
Common stock issued for convertible
subordinated debt in October 1993..... $ 51,418
----------
----------
Common stock issued for license
agreement in December 1993............ $ 12,623
----------
----------
Preferred stock issued in exchange for
loan from affiliate in 1995........... $ 25,000
----------
----------
Reduction in notes payable in lieu of
payment of management fees in 1996.... $ 47,500
----------
----------
Redemption of preferred stock and common
stock in connection with the Company's
acquisition by PBI-Delaware in June
1996.................................. $1,105,446
----------
----------
</TABLE>
10. INCOME TAXES
At June 30, 1996, the Company had accumulated net operating loss
carryforwards for tax purposes of approximately $2.7 million which expire
through 2011. As a result of previous financing transactions, the availability
of these net operating losses will be limited each year as specified in the
Internal Revenue Code. The availability of these net operating losses will be
limited to use by the Company.
The following is a reconciliation of income tax benefit to the amount based
on the U.S. statutory rate of 34% for the years ended June 30, 1996 and 1995,
and for the period from inception (October 1985) to June 30, 1996:
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(OCTOBER 1985)
1996 1995 TO JUNE 30, 1996
--------- --------- ----------------
<S> <C> <C> <C>
Income tax benefit based on U.S.
statutory rate................... $(254,912) $(200,382) $ (947,670)
Other.............................. 7,192
Losses which provide no current tax
benefit.......................... 254,912 200,382 940,478
--------- --------- ----------------
Income tax benefit............ $ 0 $ 0 $ 0
--------- --------- ----------------
--------- --------- ----------------
</TABLE>
F-29
<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES--(CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows at June 30, 1996:
<TABLE>
<S> <C>
Deferred tax assets:
Depreciation.................................... $ 590
Technology license fees and other............... 21,191
Tax loss carryforwards.......................... 918,697
---------
Total deferred tax assets......................... 940,478
Valuation allowance............................... (940,478)
---------
Net deferred tax assets......................... $ 0
---------
---------
</TABLE>
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(OCTOBER 1985)
1996 1995 TO JUNE 30, 1996
--------- --------- ----------------
<S> <C> <C> <C>
Current provision.................. $ $ $
Deferred provision................. 254,912 279,043 940,478
Change in valuation allowance...... (254,912) (279,043) (940,478)
--------- --------- ----------------
Provision for income taxes....... $ 0 $ 0 $ 0
--------- --------- ----------------
--------- --------- ----------------
</TABLE>
11. GOING CONCERN
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has sustained recurring
losses from operations and cash flow shortages, and is reporting deficits in
working capital and stockholders' equity. These matters raise substantial doubt
about the Company's ability to continue as a going concern.
The ability of the Company to sustain itself as a going concern is
dependent on its ability to generate sufficient cash to meet its financial
requirements and, ultimately, upon achieving profitable operations. As discussed
in Note 1, PBI-Delaware is currently in the process of raising approximately $8
million through an initial public offering of its common stock and, although the
outcome of the public offering cannot be predicted with certainty, PBI-Delaware
plans to complete this financing later in 1996. The outcome of PBI-Delaware's
efforts to complete its initial public offering is not determinable at this
time. However, the underwriting agreement provides that the offering is a firm
commitment. In addition, management believes that the planned proceeds of the
offering will be sufficient to fund the Company's operations for approximately
18 months. Subsequent to June 30, 1996, PBI-Delaware raised $1,000,000 in bridge
loan financing which was used to repay certain outstanding obligations and
support the Company's current working capital requirements.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
F-30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Pacific Biometrics, Inc.
Seattle, Washington
We have audited the accompanying statement of operations of Pacific Biometrics,
Inc. (a Washington corporation) for the seven month period from July 1, 1994, to
January 31, 1995. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the results of operations of Pacific Biometrics, Inc. for
the seven month period from July 1, 1994, to January 31, 1995, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Seattle, Washington
September 5, 1996
F-31
<PAGE>
PACIFIC BIOMETRICS, INC.
(A WASHINGTON CORPORATION)
STATEMENT OF OPERATIONS
FOR THE SEVEN MONTH PERIOD FROM JULY 1, 1994, TO JANUARY 31, 1995
<TABLE>
<S> <C>
Laboratory testing revenues and
consulting fees....................... $ 470,906
-----------
Operating expenses:
Laboratory............................ 496,787
General and administrative............ 452,652
-----------
Total operating expenses........... 949,439
-----------
Operating loss........................
(478,533)
-----------
Other income (expense):
Interest expense...................... (16,190)
Interest and other income............. 4,527
-----------
(11,663)
-----------
Net loss................................ $ (490,196)
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
PACIFIC BIOMETRICS, INC.
(A WASHINGTON CORPORATION)
NOTES TO STATEMENT OF OPERATIONS
FOR THE SEVEN MONTH PERIOD FROM JULY 1, 1994, TO JANUARY 31, 1995
1. THE COMPANY, BASIS OF PRESENTATION AND PROPOSED INITIAL PUBLIC OFFERING
Organization and Basis of Presentation
Pacific Biometrics, Inc. ('PBI' or the 'Company') was incorporated in
Washington in 1989, and has been engaged in providing laboratory and clinical
research support services to the pharmaceutical and diagnostic industries. PBI
provides services on normal credit terms to commercial and research
organizations throughout the United States.
In January 1995, PBI and Merchant House Scientific, Inc., a California
corporation ('Merchant House'), were merged with and into PBI/MHS Consolidation
Corporation, a Washington corporation which survived the merger and changed its
name to Pacific Biometrics, Inc. In June 1996, Pacific Biometrics, Inc. was
acquired by a holding company (Pacific Biometrics, Inc., a Delaware corporation,
'PBI-Delaware'), which was formed in May 1996 for the purpose of acquiring
Pacific Biometrics, Inc. and an affiliated company (BioQuant, Inc., a Michigan
corporation, 'BioQuant').
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Depreciation
Property and equipment are recorded at cost. Depreciation and amortization
are provided using straight-line and accelerated methods over the useful lives
of the related assets. Leasehold improvements are amortized over the term of the
lease. The cost and accumulated depreciation of property or equipment sold or
otherwise disposed of are removed from the accounts and the resulting gains or
losses are included in the statement of operations.
Income Taxes
Deferred tax assets and liabilities are recorded for differences between
the financial statement and tax bases of the assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is recorded for the amount of income tax payable or refundable for the
period increased or decreased by the change in deferred tax assets and
liabilities during the period.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Accordingly, actual results could differ from those estimates
and assumptions.
3. EMPLOYMENT AND NONCOMPETITION AGREEMENTS
The Company has entered into employment and noncompetition agreements with
certain executives. These agreements specify that the executives may not engage
in any competitive activity for a one-year period following termination.
F-33
<PAGE>
PACIFIC BIOMETRICS, INC.
(A WASHINGTON CORPORATION)
NOTES TO STATEMENT OF OPERATIONS--(CONTINUED)
FOR THE SEVEN MONTH PERIOD FROM JULY 1, 1994, TO JANUARY 31, 1995
4. INCOME TAXES
As a result of the merger with Merchant House, the availability of the
Company's net operating losses will be limited to a prescribed amount each year
as specified in the Internal Revenue Code, and will be limited to use by the
Company following its acquisition by PBI-Delaware in 1996.
The following is a reconciliation of income tax expense (credit) to the
amount based on the U.S. statutory rate of 34% for the period from July 1, 1994,
to January 31, 1995:
<TABLE>
<S> <C>
Income tax benefit based on U.S.
statutory rate........................ $ (166,667)
Stock options exercised................. (13,881)
Other................................... 432
Losses which provide no current tax
benefit............................... 180,116
-----------
Income tax benefit.................... $ 0
-----------
-----------
</TABLE>
The provision for income taxes was as follows for the period from July 1,
1994, to January 31, 1995:
<TABLE>
<S> <C>
Current provision....................... $
Deferred provision...................... 180,116
Change in valuation allowance........... (180,116)
-----------
Provision for income taxes............ $ 0
-----------
-----------
</TABLE>
5. SEVERANCE AGREEMENT
In September 1994 the Company terminated an employment contract with one of
its employees. Concurrently, the Company entered into a consulting agreement
with the executive which provided for monthly payments of $5,000 beginning
November 1, 1994, and ending October 1, 1995. All amounts owed under this
agreement were paid. The agreement also provides for a lump-sum payment of
$50,000 in the event the Company completes an initial public offering. This
obligation has been assumed by a Director of the Company.
6. LEASES
The Company has entered into noncancelable operating leases for office
facilities. Under these leases, the Company is responsible for its proportionate
share of real estate taxes, insurance and common area maintenance costs. Rent
expense on these lease agreements was $82,764 for the seven month period from
July 1, 1994, to January 31, 1995.
7. MAJOR CUSTOMERS
The Company's sales to its largest customer represented approximately 14.3%
of its total sales for the seven months ended January 31, 1995. Sales to its
largest five customers represented approximately 52.8% of its total sales for
the seven months ended January 31, 1995.
F-34
<PAGE>
[PBI REFERENCE LAB PHOTOS]
PBI REFERENCE LABORATORY -- SEATTLE, WASHINGTON
<PAGE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND IF GIVEN OR MADE,SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITY OFFERED BY THIS SHARES PROSPECTUS, OR AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY, BY ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES,
IMPLY THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................................................... 3
Summary Consolidated Financial
Information........................................................... 6
Risk Factors............................................................ 9
Use of Proceeds......................................................... 19
Capitalization.......................................................... 19
Dilution................................................................ 20
Dividend Policy......................................................... 20
Management's Discussion and Analysis
of Financial Condition and Results of
Operations............................................................ 21
Business................................................................ 24
Management.............................................................. 34
Principal Stockholders.................................................. 40
Certain Relationships and Transactions.................................. 41
Description of Securities............................................... 44
Shares Eligible for Future Sale......................................... 46
Underwriting............................................................ 47
Legal Matters........................................................... 48
Experts................................................................. 48
Additional Information.................................................. 49
Index to Combined Financial Statements.................................. F-1
</TABLE>
UNTIL NOVEMBER __, 1996 (25 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
[LOGO]
PACIFIC BIOMETRICS, INC.
1,700,000 Units
consisting of
1,700,000 Shares of Common Stock
1,700,000 Redeemable Warrants
-----------------
PROSPECTUS
-----------------
PARADISE VALLEY
SECURITIES, INC.
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a
corporation, within certain limitations, to indemnify any person by reason of
the fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorney's
fees) judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with an action, suit or proceeding, if such person
acted, in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and, in criminal actions or
proceedings, in addition, had no reasonable cause to believe that his conduct
was unlawful.
Article EIGHTH of the Registrant's Certificate of Incorporation, as
amended, provides that:
No director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director; provided, however, that nothing in this
Article EIGHTH shall eliminate or limit the liability of any director
(i) for breach of the director's duty of loyalty to the Corporation or
its stockholders, (ii) for acts or omissions not in good faith or which
involves intentional misconduct or knowing violation of law, (iii)
under Section 174 of the General Corporation Law of the State of
Delaware, or (iv) for any transaction from which the director derived
an improper personal benefit. Neither the amendment nor repeal of this
Article EIGHTH, nor the adoption of any provision of the Certificate of
Incorporation inconsistent with this Article EIGHTH, shall eliminate or
reduce the effect of this Article EIGHTH in respect of any matter
occurring, or any cause of action, suit or claim that, but for this
Article EIGHTH, would accrue or arise, prior to such amendment, repeal
or adoption of an inconsistent provision.
In addition, the Registrant's Amended and Restated By-laws provides
that the Registrant shall indemnify all persons to the full extent permitted,
and in the manner provided, by the Delaware General Corporation Law.
The Registrant intends to maintain director and officer liability
insurance which would provide coverage against certain securities law
liabilities.
Item 25. Other Expenses of Issuance and Distribution
The expenses payable by the Registrant in connection with the issuance
and distribution of the securities being registered (other than underwriting
discounts) are estimated as follows:
SEC Registration Fee.................................. $ 11,961
National Association of Securities
Dealers, Inc. Fee..................................... $ 3,968
Transfer Agent's Fee.................................. $ 6,000
Printing and Engraving Expenses....................... $ 75,000
Legal Fees and Expenses............................... $ 180,000
State Securities Qualification Fees................... $ 25,000
Nasdaq Exchange Listing and Expenses.................. $ 8,500
Accounting Fees and Expenses.......................... $ 105,000
Miscellaneous......................................... $ 34,571
----------
Total: $ 450,000
==========
Item 26. Recent Sale of Unregistered Securities
(a) On June 28, 1996, the Company issued an aggregate of 700,318
shares of Common Stock pursuant to a reverse triangular merger, for all issued
and outstanding shares of BioQuant in a tax-free exchange whereby BioQuant
became a wholly-owned subsidiary of the Company.
II-1
<PAGE>
(b) On June 28, 1996, the Company issued an aggregate of 1,038,851
shares of Common Stock pursuant to a reverse triangular merger, for all issued
and outstanding shares of PBI-WA in a tax-free exchange whereby PBI-WA became a
wholly-owned subsidiary of the Company.
(c) On June 28, 1996, the Company issued a total of 50,000 warrants
to three accredited investors, including 10,000 warrants to a director of the
Company, in connection with a private placement of an aggregate of $250,000
principal amount of promissory notes. The warrants entitle the holders to
purchase one share of Common Stock at an exercise price of $5.70 per share
until April 30, 1998.
(d) Pursuant to a private offering of Units consisting of promissory
notes and warrants, which closed on July 22 and August 15, 1996, the Company
issued an aggregate of 250,000 warrants to certain accredited investors,
including 14,583 warrants to a director of the Company, in connection with a
$1,000,000 debt offering. The warrants entitle the holders to purchase one share
of Common Stock at an exercise price of $5.70 per share until April 30, 1998.
The Placement Agent for this offering was Paradise Valley Securities, Inc.,
which received an aggregate commission of $64,000.
(e) In July 1996, Terry Giles, a director of the Company, converted
$400,000 of indebtedness plus accrued interest owed to him by the Company into
124,295 shares of Common Stock, which reflects a conversion rate of $3.45 per
share.
(f) Also in July 1996, the Board of Directors granted Mr. Giles
55,000 shares of Common Stock for services rendered to the Company in excess of
that required by non-employee directors.
(g) In July 1996, Craig Goldstone, a director of the Company,
converted in excess of $44,000 of indebtedness, including interest, owed to him
by the Company into 12,773 shares of Common Stock, which reflects a conversion
rate of $3.45 per share.
(h) In July 1996, Paul Kanan and Ellen Rudnick, directors and
officers of the Company, each received options to purchase 27,100 shares of
Common Stock exercisable at $3.45 per share in connection with the issuance of
promissory notes in lieu of cash for amounts accrued at June 30, 1996 for
management services rendered to a subsidiary of the Company.
(i) In July 1996, the Board of Directors of the Company granted,
pursuant to the Company's Stock Incentive Plan, options to purchase Common
Stock at an exercise price of $3.45 per share to directors and officers as
follows: Paul Kanan - 80,000; Ellen Rudnick - 80,000; Craig Goldstone - 80,000;
Russell Warnick - 80,000; Elizabeth Teng Leary - 80,000; Douglas Harrington -
40,000.
(j) In July 1996, the Board of Directors of the Company authorized
the grant, contemporaneously with the Company's initial public offering
("IPO"), of options to purchase 50,000 shares of Common Stock at an exercise
price equal to the IPO price per share (i.e. $4.75) to Craig Goldstone in
connection with services rendered on behalf of the Company beyond the normal
services expected of a non-employee director.
(k) In July 1996, the Board of Directors of the Company granted
options to purchase Common Stock at an exercise price of $3.45 per share in
connection with deferred salaries as follows: Russell Warnick - 6,880; and
Elizabeth Ten Leary - 3,260.
(l) In July 1996, the Company issued 5,206 shares of Common Stock to
an entity affiliated with a director of the Company in connection with the
conversion of indebtedness owed to such entity by the Company at a conversion
rate of $3.45 per share.
(m) In August 1996, the Board of Directors of the Company granted
9,000 shares of Common Stock to Craig Goldstone in connection with services
rendered to the Company.
(n) In August 1996, the Board of Directors of the Company granted
options to purchase 16,000 shares of Common Stock at an exercise price of $3.45
per share to a non-executive employee.
(o) On August 30, 1996, the Company issued 2,900 shares of Common
Stock to an accredited individual for an aggregate purchase price of $10,005 or
$3.45 per share.
II-2
<PAGE>
(p) In October 1996, the Board of Directors of the Company granted
options to purchase an aggregate of 19,500 shares of Common Stock at an
exercise price of $4.75 to 16 non-executive employees of the Company, which
options vest over a two year period.
(q) Prior to the mergers described above, both BioQuant and PBI-WA
funded their capital needs primarily through sales of equity and debt
securities. Generally, such sales were made to accredited investors in separate
privately negotiated transactions at various prices ranging from between $1.00
and $2.00 per share of common stock or convertible securities. All of the
securities of BioQuant and PBI-WA were exchanged in the mergers described in
(a) and (b) above at an exchange ratio of .474 Company shares for each BioQuant
share and .189 Company shares for each PBI-WA share.
All of the transactions described above (except (d) which is also
exempt pursuant to Regulation D under the Act) were exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof as transactions by an issuer not involving a public offering based on
the fact that such issuances were transactions involving either a limited
number of existing stockholders, isolated accredited purchasers without any
widespread solicitation or advertising or grants of securities for no
consideration.
<TABLE>
<CAPTION>
Item 27. Exhibits
- ------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant. *
3.2 Amended and Restated By-Laws of the Registrant.
4.1 Specimen Stock Certificate.
4.2 Specimen Warrant Certificate.
4.3 Form of Warrant Agreement.
4.4 Form of Underwriter's Unit Purchase Warrant.
5.1 Securities Opinion of Rosenman & Colin LLP.
10.1 License Agreement, dated December 31, 1992, by and
between Sudor Partners and CEO Advisors, Inc. *
10.2 Amendment No. 1 To License Agreement, dated August
6, 1993 by and between Sudor Partners and CEO
Advisors, Inc. *
10.3 Supply Agreement, dated August 6, 1993, by and
between Sudormed, Inc. and CEO Advisors, Inc. *
10.4 Assignment of License and Supply Agreements -
Consent, dated September 7, 1993, October 7, 1993
and October 11, 1993, by and between CEO Advisors,
Inc. and Bioquant, Inc. *
10.5 License Agreement, dated February 15, 1995, by and
between Metra and BioQuant. **
10.6 Development Agreement, dated October 4, 1995, by
and between BioQuant and Assay Designs. *
10.7 Agreement, dated October 26, 1995, by and between
PBI-WA and Sigma Diagnostics. *
10.8 Manufacturing Agreement, dated March 1, 1996, by
and between Merchant House Scientific and Irvine
Scientific. *
10.9 Agreement and Plan of Merger, dated May 15, 1996,
by and among BioQuant, Inc., Pacific Biometrics
Inc. and BioQuant-Acquisition, Inc. *
10.10 Agreement and Plan of Merger, dated May 15, 1996,
by and among Pacific Biometrics,Inc. (Washington),
Pacific Biometrics, Inc. (Delaware), and PBI-
Acquisition, Inc. *
10.11 Office Lease, dated January 15, 1990, by and
between Bruce M. and Ann Stever Blume and Pacific
Biometrics, Inc. *
10.12 Amendment No. 1 to Lease Agreement, dated June 15,
1992, by and between Blume 1100 Limited Partnership
and Pacific Biometrics, Inc. *
10.13 Office Lease, dated August 13, 1992, by and between
Blume 1100 Limited Partnership and Drake Mortgage.*
II-3
<PAGE>
10.14 Assignment of Lease, dated November 30, 1993, by
and between Pacific Biometrics, Inc. and Columbia
First Service, Inc. *
10.15 Standard Form Lease, dated May 23, 1993, by and
between Merchant House Scientific and Harris Trust
and Savings Bank. *
10.16 First Amendment to Lease, dated July 11, 1996, by
and between Bank of New York, as directed Trustee
for Unisys Master Trust and Registrant. *
10.17 Stock Incentive Plan.
10.18 Form of Employment Agreement, dated October ___,
1996, by and between Registrant and Ellen A.
Rudnick.
10.19 Form of Employment Agreement, dated October ___,
1996 by and between Registrant and Paul G. Kanan.
10.20 Form of Employment Agreement, dated October ___,
1996 by and between Registrant and G. Russell
Warnick.
10.21 Form of Employment Agreement, dated October ___,
1996 by and between Registrant and Elizabeth Teng
Leary, Ph.D.
21.1 Subsidiaries. *
23.1 Consent of Rosenman & Colin LLP (included in
Exhibit 5.1 of this Registration Statement).
23.2 Consent of Coopers & Lybrand L.L.P., certified
public accountants.
25.1 Powers of Attorney appear on the signature page in
Part II of the Registration Statement. *
27.1 Financial Data Schedule. *
</TABLE>
- ----------------------------------------
* Previously filed.
** Portions of this document have been deleted pursuant to a request
for confidential treatment.
Item 28. Undertakings
- ----------------------
The Registrant hereby undertakes:
(I) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a) (3)
of the Securities Act of 1933, as amended (the "Act");
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement;
(iii) Include any additional or changed material
information on the plan of distribution.
(2) That, for determining liability under the Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) To file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
(4) To provide to the Underwriter at the closing specified in
the underwriting agreement certificates in such denominations and registered in
such names as required by the Underwriter to permit prompt delivery to each
purchaser.
(5) Insofar as indemnification for liabilities arising under
the Act may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the Securities
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
II-4
<PAGE>
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(6) For determining any liability under the Securities Act, to
treat the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424 (b) (1), or (4) or
497(h) under the Securities Act as part of this registration statement as of
the time the Commission declared it effective.
(7) For determining any liability under the Securities Act, to
treat each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial bona
fide offering of these securities.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized this
Pre-Effective Amendment No. 1 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Irvine, California on
the 9th day of October, 1996.
PACIFIC BIOMETRICS, INC.
By: /s/ Paul G. Kanan
-------------------------------
Paul G. Kanan, President
In accordance with the requirements of the Securities Act of 1933,
this Pre-Effective Amendment No. 1 to Registration Statement has been signed by
the following persons in the capacities and on the dates stated:
Signature Title Date
- --------- ----- ----
/s/ Paul G. Kanan President, Chief October 9, 1996
- --------------------------- Executive Officer
Paul G. Kanan and Director
*/s/ Ellen A. Rudnick Chairman of the October 9, 1996
- --------------------------- Board of Directors
Ellen A. Rudnick
* /s/ Douglas S. Harrington Secretary and October 9, 1996
- --------------------------- Director
Douglas S. Harrington, M.D.
* /s/ Mary L. Campbell Treasurer and October 9, 1996
- --------------------------- Director
Mary L. Campbell
* /s/ Craig M. Goldstone Director October 9, 1996
- ---------------------------
Craig M. Goldstone
* /s/ Terry Giles Director October 9, 1996
- ---------------------------
Terry Giles
- ---------------------------
* Pursuant to a Power of Attorney contained in the Signature Page in connection
with the Registration Statement filed September 6, 1996.
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- -------------------------------------------------------------------------------------------- -----------
<C> <C> <S> <C>
1.1 -- Form of Underwriting Agreement.
3.1 -- Certificate of Incorporation of the Registrant.*
3.2 -- Amended and Restated By-Laws of the Registrant.
4.1 -- Specimen Stock Certificate.
4.2 -- Specimen Warrant Certificate.
4.3 -- Form of Warrant Agreement.
4.4 -- Form of Underwriter's Unit Purchase Warrant.
5.1 -- Securities Opinion of Rosenman & Colin LLP.
10.1 -- License Agreement, dated December 31, 1992, by and between Sudor Partners and CEO
Advisors, Inc.*
10.2 -- Amendment No. 1 To License Agreement, dated August 6, 1993 by and between Sudor
Partners and CEO Advisors, Inc.*
10.3 -- Supply Agreement, dated August 6, 1993, by and between Sudormed, Inc. and CEO
Advisors, Inc.*
10.4 -- Assignment of License and Supply Agreements--Consent, dated September 7, 1993, October
7, 1993 and October 11, 1993, by and between CEO Advisors, Inc. and Bioquant, Inc.*
10.5 -- License Agreement, dated February 15, 1995, by and between Metra and BioQuant.**
10.6 -- Development Agreement, dated October 4, 1995, by and between BioQuant and Assay
Designs.*
10.7 -- Agreement, dated October 26, 1995, by and between PBI-WA and Sigma Diagnostics.*
10.8 -- Manufacturing Agreement, dated March 1, 1996, by and between Merchant House Scientific
and Irvine Scientific.*
10.9 -- Agreement and Plan of Merger, dated May 15, 1996, by and among BioQuant, Inc., Pacific
Biometrics Inc. and BioQuant-Acquisition, Inc.*
10.10 -- Agreement and Plan of Merger, dated May 15, 1996, by and among Pacific Biometrics,Inc.
(Washington), Pacific Biometrics, Inc. (Delaware), and PBI-Acquisition, Inc.*
10.11 -- Office Lease, dated January 15, 1990, by and between Bruce M. and Ann Stever Blume and
Pacific Biometrics, Inc.*
10.12 -- Amendment No. 1 to Lease Agreement, dated June 15, 1992, by and between Blume 1100
Limited Partnership and Pacific Biometrics, Inc.*
10.13 -- Office Lease, dated August 13, 1992, by and between Blume 1100 Limited Partnership and
Drake Mortgage.*
10.14 -- Assignment of Lease, dated November 30, 1993, by and between Pacific Biometrics, Inc.
and Columbia First Service, Inc.*
10.15 -- Standard Form Lease, dated May 23, 1993, by and between Merchant House Scientific and
Harris Trust and Savings Bank.*
10.16 -- First Amendment to Lease, dated July 11, 1996, by and between Bank of New York, as
directed Trustee for Unisys Master Trust and Registrant.*
10.17 -- Stock Incentive Plan.
10.18 -- Form of Employment Agreement, dated October , 1996, by and between Registrant and
Ellen A. Rudnick.
10.19 -- Form of Employment Agreement, dated October , 1996 by and between Registrant and
Paul G. Kanan.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- -------------------------------------------------------------------------------------------- -----------
<C> <C> <S> <C>
10.20 -- Form of Employment Agreement, dated October , 1996 by and between Registrant and G.
Russell Warnick.
10.21 -- Form of Employment Agreement, dated October , 1996 by and between Registrant and
Elizabeth Teng Leary, Ph.D.
21.1 -- Subsidiaries.*
23.1 -- Consent of Rosenman & Colin LLP (included in Exhibit 5.1 of this Registration
Statement).
23.2 -- Consent of Coopers & Lybrand L.L.P., certified public accountants.
25.1 -- Powers of Attorney appear on the signature page in Part II of the Registration
Statement.*
27.1 -- Financial Data Schedule.*
</TABLE>
- ------------------
* Previously filed.
** Portions of this document have been deleted pursuant to a request for
confidential treatment.
<PAGE>
UNDERWRITING AGREEMENT
between
PACIFIC BIOMETRICS, INC.,
and
PARADISE VALLEY SECURITIES, INC.
______________, 1996
<PAGE>
UNDERWRITING AGREEMENT
PACIFIC BIOMETRICS, INC.
1,700,000 Shares of Common Stock
1. PARTIES AND INTRODUCTION.
The parties to this agreement (the "Agreement") are Pacific Biometrics,
Inc., a Delaware corporation (the "Company"), its wholly owned subsidiaries, and
Paradise Valley Securities, Inc. ("Paradise"), an Arizona corporation. Paradise
is sometimes referred to as the "Underwriter". The Company's wholly-owned
subsidiaries Pacific Biometrics, Inc., a Washington corporation, and BioQuant,
Inc., a Michigan corporation (collectively referred to as the "Subsidiaries")
are signatories hereto with respect to certain indemnification obligations
pursuant to Section 7 of this Agreement.
The Company proposes to issue and sell to the Underwriter 1,700,000 units
(individually a "Unit" and collectively the "Units"), each Unit consisting of
one share of the Company's authorized but unissued common stock, $.01 par value,
(the "Common Stock") and a warrant (individually a "Warrant" and collectively
the "Warrants"). Each Warrant will entitle the holder thereof to purchase one
share of Common Stock at a price of $12.00, subject to certain conditions. Such
1,700,000 Units are herein called the "Firm Units". The Firm Units, together
with (a) the shares of Common Stock and the Warrants comprising such Units and
(b) the shares of Common Stock issuable upon exercise of such Warrants, are
collectively referred to herein as the "Underwritten Securities". In addition,
the Company proposes to grant to the Underwriter an option (the "Over-Allotment
Option") to purchase up to 255,000 additional Units (hereinafter called the
"Option Units") solely to cover over-allotments, if any. The Option Units,
together with (a) the shares of Common Stock and the Warrants comprising such
Units and (b) the shares of Common Stock issuable upon exercise of such
Warrants, are collectively referred to herein as the "Option Securities". The
Underwritten Securities and the Option Securities are herein collectively
referred to as the "Unit Securities". The offer and sale of the Unit Securities
as contemplated in this Agreement are herein called the "Offering". Upon
completion of the Offering, the Units will not be traded, but the shares of
Common Stock and the Warrants shall be registered pursuant to paragraph 2 below,
and shall separately trade.
In addition, the Company proposes to sell to the Underwriter, for its own
account, warrants (collectively the "Underwriter's Unit Warrants") to purchase
170,000 Units (the "Underwriter's Warrant Units"), as more fully described in
Section 3 herein, and in such Underwriter's Unit Warrants. The Unit Securities,
the Underwriter's Unit Warrants, the Underwriter's Warrant Units, the shares of
Common Stock and the Warrants comprising the Underwriter's Warrant Units and the
shares of Common Stock issuable upon exercise of the Warrants included within
the Underwriter's Warrant Units are more fully described in the Registration
Statement and the Prospectus (as those terms are defined and referred to in
Section 2 herein), and are called collectively herein the "Securities".
2. REGISTRATION STATEMENT AND PROSPECTUS.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and amendments thereto,
on Form SB-2 (File No. 333-11551), including the related preliminary prospectus,
for the registration under the Securities Act of 1933, as amended ("the Act"),
of the Securities, copies of each of which have been delivered to the
Underwriter. The registration statement (including the prospectus, financial
statements, exhibits, and all other documents filed as a part thereof or
incorporated therein), as amended on the date on which such registration
<PAGE>
statement is declared effective (the "Effective Date") by the Commission and
deemed by virtue of Rule 430A of the General Rules and Regulations of the
Commission under the Act (the "Regulations") to be part of such registration
statement at the time it was declared effective, is hereinafter referred to as
the "Registration Statement"; and the term "Prospectus" shall mean the
prospectus so filed with the Commission pursuant to Rule 424(b) of the
Regulations. The term "preliminary Prospectus" as used herein shall mean each
prospectus used prior to the date the Registration Statement became effective
and included as a part of the Registration Statement, including any prospectus
filed with the Commission pursuant to Rule 424(a).
3. SALE, ISSUANCE AND DELIVERY OF UNITS.
3.1 Purchase and Sale of Units; Public Offering. Subject to the terms and
conditions set forth herein and on the basis of the representations, warranties
and agreements contained herein, the Company hereby agrees to issue and sell and
the Underwriter hereby agrees to purchase from the Company the 1,700,000 Firm
Units at a price equal to ninety percent (90%) of the public offering price of
$4.75 per Unit (the "Offering Price"). The difference of $0.475 per Firm Unit
between the Offering Price and the price at which the Company will sell the Firm
Units to the Underwriter is the "Underwriter's Discount".
The Underwriter will make a public offering of the Units as promptly as is
expedient in the judgment of the Underwriter, after the Registration Statement
shall have become effective, upon the terms hereof and at the Offering Price.
3.2 Underwriter's Warrants. On the Firm Closing Date (which term is
defined in paragraph 3.4, below) the Company will issue and sell to the
Underwriter, at an aggregate price of $100, the Underwriter's Unit Warrants for
the purchase of 170,000 Units (which is equal to 10% of the total number of Firm
Units sold in the Offering), at an exercise price of $5.70 per share (120% of
the Offering Price). The Underwriter's Unit Warrants shall be exercisable during
the period commencing one year and ending five years after the Effective Date.
The Underwriter's Unit Warrants shall contain the terms and provisions
hereinbelow more fully described and as set forth more particularly therein,
including, but not limited to, provisions protecting the holder(s) against
dilution by reason of stock dividends, stock splits, combinations,
recapitalization, mergers and consolidations or otherwise, provisions relating
to registration rights (both one demand and unlimited "piggy back" registration
rights) with respect to the shares of Common Stock included within the
Underwriter's Unit Warrants and the shares of Common Stock issuable upon
exercise of the Warrants included within the Underwriter's Unit Warrants, and
such other terms as are agreed upon by the Company and the Underwriter. As
further provided therein, no transfer, assignment or hypothecation of the
Underwriter's Unit Warrants (or of any of the Units, shares of Common Stock or
Warrants included therein) shall be made except to certain directors, officers,
and employees and shareholders of the Underwriter. The Underwriter's Unit
Warrants shall be issued and sold to the Underwriter as an additional
underwriting fee. The Company shall not be obligated to issue the Underwriter's
Unit Warrants until the Firm Units have been issued, sold and paid for as herein
provided.
3.3 Over-Allotment Option. Subject to the terms and conditions of this
Agreement, the Company hereby grants to the Underwriter an option to purchase
all or any portion of the Option Units, at the same price per Unit as the
Underwriter is to pay for the Firm Units, provided that the Over-Allotment
Option may be exercised only for the purpose of covering over-allotments in the
sale of the Firm Units. The Over-Allotment Option may be exercised at any time,
in whole or in part, on one occasion within 30 days from the Effective Date and
upon written notice to the Company by the Underwriter. Such notice shall set
forth the aggregate number of Option Units as to which the Over-Allotment Option
is being exercised and the time at which such Option Units will be purchased and
delivered.
-2-
<PAGE>
3.4 Delivery and Payment. Delivery and payment for the Firm Units shall be
made at the offices of the Underwriter in Phoenix, Arizona, on such date (the
"Firm Closing Date") as the Underwriter shall designate, or at such other place
or date as may be mutually agreed upon by the Company and the Underwriter, not
later than the third (or if the Firm Units are priced, as contemplated by Rule
15c6-1 of the Securities Exchange Act of 1934 (the "Exchange Act"), after 4:30
p.m. Washington, D.C. time, the fourth) full business day following the date
that any of the Units are released to the Underwriter for sale to the public;
provided, however, that in the event the Registration Statement is amended or
the Prospectus is supplemented between the Effective Date and the Firm Closing
Date, the Underwriter shall have the right to delay the Firm Closing Date to a
date that shall allow the Underwriter sufficient time to distribute the
Prospectus as amended or supplemented. The certificates for the shares of Common
Stock and the Warrants comprising the Firm Units shall be delivered in
definitive form or shall be recorded by the Depository Trust Corporation in such
names and in such denominations as the Underwriter shall request by notice at
least two business days prior to the Firm Closing Date, against payment by
official bank or certified check, wire transfer to or upon the order of the
Company, in such method as is agreed upon between the Underwriter and the
Company.
Delivery and payment for any Option Units which the Underwriter may elect
to purchase shall be made at the offices of the Underwriter, on a date (the
"Option Closing Date") which shall not be earlier than two nor later than five
full business days after exercise of the Over-Allotment Option, but in no event
earlier than the Firm Closing Date, unless otherwise agreed by the Underwriter
and the Company. Delivery of certificates, in definitive form, for the shares of
Common Stock and the Warrants comprising the Units being purchased, registered
in such names and denominations as the Underwriter shall request by at least two
business days' prior notice in writing, shall be made to the Underwriter or
shall be recorded by the Depository Trust Corporation for the account of the
Underwriter (or its nominee) against payment for the purchase price thereof by
official bank or certified check or checks payable to the order of the Company
or by wire transfer to the Company's account.
The Firm Closing Date and the Option Closing Date are sometimes referred
to collectively as the "Closing Date(s)". On any Closing Date with respect to
Option Units, there shall be delivered to the Underwriter opinions and
certificates, dated as of such Closing Date, to the same effect as those
required to be delivered on the Firm Closing Date pursuant to Section 6 hereof.
3.5 Inspection of Certificates. For the purpose of expediting the checking
and packaging of the certificates for the shares of Common Stock and the
Warrants comprising the Units, the Company agrees to make the certificates
available for inspection by the Underwriter at the offices of the Transfer Agent
(as defined in paragraph 4.8 below), not less than 24 hours prior to the
respective Closing Dates.
3.6 Use of Prospectus. The Company authorizes the Underwriter and any
dealers acquiring the Units to use the Prospectus, as from time to time amended
or supplemented, in connection with the offering and sale of the Units for a
period of 25 days after the Effective Date (and for such longer period as the
Underwriter may request if, in the opinion of the Underwriter's counsel, the
Prospectus is required by the Act and applicable Regulations to be delivered
after the expiration of such 25-day period).
3.7 Selected Dealers. The Underwriter may associate itself with other duly
licensed and authorized securities dealers ("Selected Dealers") that are members
of the National Association of Securities Dealers, Inc. ("NASD"), and may allow
all members of any such selling group such part of its discount as they may
determine pursuant to the Selected Dealers Agreement between the Underwriter and
each Selected Dealer.
-3-
<PAGE>
3.8 Subscriptions. The Underwriter may allocate Units among, or reject,
any subscriptions, in whole or in part.
3.9 Reservation of Shares. The Company shall set aside and at all times
have reserved and available a sufficient amount of Common Stock to cover the
issuance of (i) the shares subject to the Warrants, (ii) the shares subject to
the Underwriter's Unit Warrants, and (iii) the shares subject to the Warrants
included within the Warrants which comprise a part of the Units subject to the
Underwriter's Unit Warrants.
4. AGREEMENTS OF THE COMPANY.
The Company further covenants and agrees with the Underwriter as follows:
4.1 Effectiveness of Registration Statement. The Company will use its best
efforts to cause the Registration Statement, if not effective at the time and
date that this Agreement is executed and delivered by the parties hereto, to
become effective. The Company will advise the Underwriter promptly, and confirm
that advice in writing, (a) when the Registration Statement has become effective
and when any post-effective amendment to the Registration Statement shall have
become effective, (b) of the mailing or the delivery to the Commission for
filing of any amendment or post-effective amendment to the Registration
Statement or any amendment or supplement to the Prospectus, (c) of any request
by the Commission for amendment or supplement to the Registration Statement or
the Prospectus, or for additional information, promptly supplying the
Underwriter with copies of all comment letters and all other correspondence with
the Commission, (d) of the issuance by the Commission of any stop order
suspending effectiveness of the Registration Statement or of the suspension of
the qualification of the Company's Securities for sale in any jurisdiction, or
of any initiation or threat of any proceeding for any such purpose known to the
Company, and (e) of the issuance by any state securities commission or other
regulatory authority of any order suspending the qualification or the exemption
from qualification of the Company's Securities under state securities or Blue
Sky laws or the initiation or threat of any proceedings for that purpose.
4.2 Rule 430A Prospectus; Amendments to the Registration Statement. If
Rule 430A of the Regulations is employed, the Company will timely file the
Prospectus pursuant to and in compliance with Rule 424(b) of the Regulations and
will advise the Underwriter of the time and manner of such filing. The Company
will give the Underwriter advance notice of its intention to file or make any
post-effective amendment to the Registration Statement or any amendment or
supplement to the Prospectus and will submit all such amendments or supplements
to the Underwriter and the Underwriter's counsel for comments, as soon as
possible, but not later than three (3) business days before the Company proposes
to file such amendments or supplements with the Commission.
4.3 Compliance with Securities Act. The Company will comply with the Act
and the Regulations, so as to permit the continuance of offers and sales of, and
dealings in, the shares of Common Stock and the Warrants for as long as may be
necessary to complete the distribution of the Units as contemplated hereby. If
at any time when a prospectus relating to the Units is required to be delivered
under the Act, any event occurs as a result of which, in the judgment of the
Company or the Underwriter or the Underwriter's counsel, the Prospectus, as then
amended or supplemented, would include any untrue statement of a material fact,
or omit to state a material fact necessary to make the statements therein, in
light of the circumstances under which made, not misleading, or if it is
necessary at any time to amend or supplement the Prospectus to comply with the
Act, the Company will promptly notify the Underwriter, or the Underwriter will
promptly notify the Company, as the case may be, and the Company shall promptly
prepare and file with the Commission, if the Company determines such filing to
be appropriate,
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an amendment or supplement to the Registration Statement which will correct such
statement or omission, or an amendment or supplement which will effect such
compliance, and deliver to the Underwriter in connection therewith such
prospectus or prospectuses in such quantity as may be necessary to permit
compliance with the requirements of the Act. The Company agrees to file with the
Commission all required reports on Form SR in accordance with the provisions of
Rule 463 promulgated under the Act and provide a copy of such reports to the
Underwriter and its counsel.
4.4 Copies of the Registration Statement and Prospectus. The Company will
promptly deliver to the Underwriter, without charge, (a) two copies of the
Registration Statement, as originally filed, and of each amendment thereto, and
of each post-effective amendment thereto filed at any time when a prospectus
relating to the Securities to be sold hereunder is required to be delivered
under the Act, in each such case manually executed by the proper officers and a
majority of the directors of the Company (or, in case of amendments, by their
duly constituted attorneys-in-fact) and including signed copies of each consent
of experts named in the Registration Statement and all financial statements,
schedules and exhibits filed therewith (including those incorporated by
reference to the extent not previously furnished to the Underwriter), and (b)
such number of conformed copies of the Registration Statement, as originally
filed, and of each amendment and post-effective amendment thereto (in each such
case excluding exhibits), as the Underwriter may reasonably require. The Company
will promptly deliver, without charge, to the Underwriter or such others whose
names and addresses are designated by the Underwriter as soon as possible after
the Effective Date and thereafter from time to time during the period when
delivery of a prospectus relating to the Securities to be sold hereunder is
required by the Act, as many printed copies as the Underwriter may reasonably
request of the final Prospectus and any amendment or supplement thereto. The
Company will promptly deliver without charge as soon as practicable following
the public offering or sale of the Units, and thereafter from time to time for
such period as delivery of a prospectus or any amendments or supplement thereto
may be required, to the Underwriter or Selected Dealers to or through whom Units
may be issued, as many copies as the Underwriter reasonably requests of the
Prospectus and any amendment or supplement thereto.
4.5 Blue Sky Qualification. Prior to any public offering of the Units by
the Underwriter, the Company will endeavor in good faith, using counsel
reasonably designated by the Underwriter, to take such action as may be
necessary, to register or qualify the Securities for offer and sale under the
applicable securities (or "Blue Sky") laws of any states or jurisdictions of the
United States as the Underwriter may reasonably designate and will maintain such
qualifications in effect for so long as may be required for the distribution of
the Securities. The Company shall pay for all reasonable Blue Sky counsel fees
up to a maximum of $7,500 and all filing and other reasonable expenses. The
Company will file such statements and reports as may be required by the laws of
each jurisdiction in which the Shares have been registered or qualified.
4.6 Periodic and Other Reports. The Company will deliver to the
Underwriter, for a period of at least five years from the last Closing Date(s):
(a) copies of all other statements, documents, or other information which the
Company shall mail or otherwise make available to any class of its security
holders, to the financial press or to the public, or shall file with the
Commission, including, but not limited to, periodic reports required to be filed
under Sections 13 and 15 of the Exchange Act, such as reports on Forms 10-C,
10-K (or 10-KSB), 10-Q (or 10-QSB) and 8-K (which shall be provided within the
same period that such reports are required to be filed with the Commission); and
(b) upon request in writing, such other information as may reasonably be
requested with reference to the property, business and affairs of the Company as
long as such information is available to securities holders generally.
4.7 Section 11(a) Financials. The Company will make generally available to
its stockholders, will file as an exhibit to a report filed under the Exchange
Act, and will deliver to the Underwriter, as
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soon as practicable, but in no event later than the first day of the 18th full
calendar month following the Effective Date, an earnings statement (which need
not be audited but which will satisfy the provisions of Section 11(a) of the
Act) covering a period of at least twelve (12) months beginning after the
Effective Date.
4.8 Transfer Agent. The Company shall appoint American Securities Transfer
& Trust, Incorporated, of Denver, Colorado, as the transfer agent (the "Transfer
Agent"), with respect to the Common Stock and the Warrants and will make
arrangements to have available, at the office of the Transfer Agent,
certificates representing the Common Stock and the Warrants in such quantities
as may, from time to time, be necessary. In addition, the Company shall obtain a
CUSIP number for each of the Common Stock and the Warrants as promptly as
possible after filing the Registration Statement with the Commission.
4.9 Copies for Compliance with the NASD. The Company will supply the
Underwriter's counsel with such copies of the Registration Statement, any
amendment or supplement to the Registration Statement, any preliminary
Prospectus or final Prospectus and related underwriting agreements as
appropriate to satisfy filing requirements of the NASD.
4.10 Nasdaq Small Cap Market. The Company shall use its best efforts to
meet the requirements (as the NASD may from time to time impose) for the
quotation of the Common Stock and the Warrants on the Nasdaq Small Cap Market
(the "Nasdaq Market") and continue to meet the requirements for the inclusion of
the Common Stock and the Warrants on the Nasdaq Market.
4.11 Costs and Expenses; Nonaccountable Expense Allowance. Whether or not
the transactions contemplated by this Agreement are consummated or this
Agreement becomes effective or is terminated, the Company shall bear all costs
and expenses incident to the issuance, offer, sale and delivery of the
Securities including, but not limited to, all expenses and fees incident to the
filing of the Registration Statement and other appropriate filings with the
Commission pursuant to the Act and the Exchange Act, respectively, the costs,
expenses and filing fees incurred in connection with the qualification under
Blue Sky laws (including fees of Blue Sky counsel) and in connection with the
review of the terms of the Offering by the NASD (excluding counsel fees relating
to the NASD's review, which fees shall be paid by the Underwriter), fees and
disbursements of counsel and accountants for the Company, Nasdaq Market filing
and other fees, the costs of "tombstone" advertisements agreed to by the
Company, costs of preparing and printing the Registration Statement (and all
amendments and supplements thereto) and as many copies of the preliminary
Prospectus and Prospectus as the Underwriter may deem reasonably necessary.
In addition to the foregoing, the Company shall pay to the Underwriter, as
reimbursement for the Underwriter's expenses on the basis of a nonaccountable
expense allowance, an amount equal to 3% of the gross offering proceeds from the
sale of the Units (including the Option Units sold by the Company), and all of
the Underwriter's costs in excess of the nonaccountable expense allowance shall
be paid by the Underwriter. Expenses to which the nonaccountable allowance shall
be applied include fees of the Underwriter's counsel, but shall not include any
of the following (all of which shall be paid by the Company): fees of the
Company's counsel; Commission and Blue Sky filing fees; Blue Sky counsel fees
and expenses; NASD filing fees; Nasdaq Market or other Nasdaq fees; printing;
"tombstone" advertisements; and any and all other expenses customarily paid by
the issuer in a public offering. The nonaccountable expense allowance, based on
the gross proceeds from the sale of the Units, shall be paid on each of the
Closing Date(s). The Company warrants, represents and agrees that all such
payments and reimbursements will be promptly and fully made to the Underwriter.
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Notwithstanding any other provision of this Agreement, if (a) the Company
decides not to proceed with the proposed offering, (b) there is a material
adverse change in the business or financial condition of the Company and the
Subsidiaries taken as a whole, (c) there exists any material misrepresentation
of the Company contained herein or otherwise which, in the opinion of the
Underwriter and its counsel, impairs the ability of the Underwriter to fulfill
its obligations hereunder or under applicable law or regulation, (d) the
Underwriter discovers in the course of its due diligence examination of the
Company and the Subsidiaries facts which the Underwriter reasonably determines,
in its reasonable discretion, could adversely affect the sale of the Units, or
(e) the Underwriter elects to terminate this Agreement pursuant to Section 8
hereof, the Company shall reimburse the Underwriter for its actual out-of-pocket
(accountable) expenses relating to the proposed offering, up to a maximum of
$125,000. The Underwriter's expenses shall include, but are not to be limited
to, reimbursement for the services and disbursements of the Underwriter's
counsel, plus any additional expenses and fees including, but not limited to,
postage expenses, duplication expenses, long distance telephone expenses, and
other expenses incurred by the Underwriter in connection with the proposed
offering. If the Company shall fail to pay to the Underwriter any portion of the
expense allowance set forth herein after having received five (5) days' notice
of such default, the Company shall be liable to the Underwriter for reasonable
attorneys' fees and costs incurred in the collection of said amount, and
interest on said amount at the rate of 18% per annum, or the maximum applicable
legal rate, whichever is lower.
4.12 List of Stockholders. The Company shall furnish to the Underwriter a
list of the names and addresses of all stockholders subsequent to the last
Closing Date and shall cause the Transfer Agent to furnish to the Underwriter a
copy of all transfer sheets for a period of two years from the last Closing
Date.
4.13 Compliance with Undertakings. The Company will comply with all of the
undertakings contained in the Registration Statement.
4.14 Information. Prior to the Closing Date(s), the Company will supply
and deliver to the Underwriter or its counsel, all information required to
enable them to make such investigation of the Company and its business prospects
as they shall reasonably request and shall make available to them such persons
as they deem reasonably necessary or appropriate in order to verify or
substantiate any information regarding the Company and the Subsidiaries. In
addition, the Underwriter or its counsel shall have the right to review any
materials prepared in connection with any offering of securities of the Company
conducted prior to the Offering for compliance with applicable federal and state
law.
4.15 Financial Reports. From and after the date of the audited financial
statements of the Company contained in the Prospectus through the Closing
Date(s), the Company will furnish to the Underwriter unaudited monthly operating
statements and quarterly financial statements in addition to any other reports
which may be required by this Agreement to be furnished to the Underwriter.
4.16 Limitation on Options, Warrants and Rights. The Company will not,
without the prior written consent of the Underwriter, directly or indirectly
grant any options, warrants or rights to purchase or acquire Common Stock for a
period of 120 days commencing on the Effective Date or permit to be outstanding
during such period any such options, warrants or rights, other than (i) an
aggregate of up to 700,000 options and warrants that may be outstanding as of
the Effective Date; (ii) warrants or other rights which are outstanding on the
Effective Date and described in the Prospectus; (iii) the Warrants; and (iv) and
the Underwriter's Unit Warrants. The Company will not, without the prior written
consent of the Underwriter, grant any options, warrants or rights to purchase or
acquire Common Stock for a price below the greater of the Offering Price or the
market price for the Common Stock on the date of grant, for a period of one year
commencing on the Effective Date. The Company will not, without the prior
written
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consent of the Underwriter, file a Registration Statement on Form S-8 during the
90-day period following the Effective Date.
4.17 Lock-Up Agreements. The Company shall cause each officer, each
director, and each stockholder listed on Schedule 4.17A, to enter into an
agreement substantially in the form of Schedule 4.17B (a "Lock-Up Agreement").
4.18 Limitation on Securities Issuances. Without the prior written consent
of the Underwriter, the Company will not, directly or indirectly, (a) sell,
offer, contract to sell, pledge or otherwise dispose of any shares of Common
Stock or any securities convertible into or exchangeable or exercisable for or
any rights to purchase or acquire Common Stock or (b) grant to any person or
entity any right to have any shares of Common Stock or any other security of the
Company registered under the Act or any state securities laws, for a period of
365 days commencing on the Effective Date (the "Lock-Up Period"), other than (i)
the shares of Common Stock, the Warrants, the shares of Common Stock issuable
upon exercise of the Warrants, and the Underwriter's Unit Warrants, and (ii)
options to purchase shares of Common Stock granted pursuant to the Company's
stock option plan(s) in effect from time to time (provided, however, that such
options shall comply with the requirements of paragraph 4.16). Prior to the
Offering, there shall be no more than 2,750,000 shares of Common Stock issued
and outstanding and no more than 700,000 shares subject to outstanding options,
warrants or other rights to acquire share,s except shares subject to Bridge
Warrants (as defined in the Prospectus).
4.19 Limitation on Compensation Increases. Without the prior written
consent of the Underwriter, neither the Company nor any direct or indirect
subsidiary of the Company shall, during the 180-day period following the
Effective Date, increase, directly or indirectly, the Compensation of any
director, officer or employee that has as of the date hereof, or had at any time
since June 28, 1996, an aggregate compensation level greater than $90,000 per
annum. As used herein, "Compensation" includes, but is not limited to, salary,
wages, bonuses, commissions and taxable fringe benefits. In addition, during
such period, the Company will not increase the Compensation paid or accrued to
any director in connection with the director's service as a member of the Board
of Directors of the Company or any direct or indirect subsidiary of the Company.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to, and agrees with, the Underwriter
that:
5.1 Accuracy of Registration Statement. The Registration Statement
conforms, and the Prospectus and any further amendments or supplements to the
Registration Statement or the Prospectus will conform, in all material respects,
to the requirements of the Act and the Regulations and the Registration
Statement and the Prospectus did not and will not, as of the applicable
effective date as to the Registration Statement and any amendment thereto and as
of the applicable filing date as to the Prospectus and any amendment or
supplement thereto, contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; when the Registration Statement becomes
effective, and when the Prospectus is filed with the Commission, and at all
times subsequent thereto up to and including the Closing Date(s), or for such
longer period as the Prospectus is required to be delivered under the Act and
the Regulations in connection with sales by the Underwriter or Selected Dealers,
the Registration Statement and the Prospectus and any amendments or supplements
thereto will conform, in all material respects, to the requirements of the Act
and the Regulations, and will not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided, however, that the Company
makes no representations or warranties as to information contained in or
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omitted from the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished in writing to the Company with respect to the underwriting, by or on
behalf of the Underwriter, expressly for use therein.
5.2 Financial Statements Accurate. Coopers & Lybrand LLP, whose reports
appear in the Prospectus, is an independent public accountant within the meaning
of the Act and the Regulations. The financial statements of the Company and of
the Subsidiaries (including any supplementary financial information and related
schedules and notes) included in any preliminary Prospectus, the Prospectus and
the Registration Statement fairly present the financial condition of the Company
and the Subsidiaries on a consolidated basis as of the respective dates thereof,
and the results of operations and cash flows of the Company and the Subsidiaries
on a consolidated basis for the periods indicated therein, and such financial
statements have been prepared in conformity with generally accepted accounting
principles consistently applied and are in conformance with the books and
records of the Company. The financial data set forth in the Prospectus under the
captions "Prospectus Summary," "Selected Consolidated Financial Data,"
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" fairly present on the basis stated in the
Prospectus the information set forth therein and has been compiled on a basis
consistent with that of the audited financial statements included in the
Prospectus. The pro forma financial statements and other pro forma financial
information included in the Registration Statement, any preliminary Prospectus
and the Prospectus have been prepared in accordance with the Commission's rules
and guidelines with respect to pro forma financial statements, have been
properly compiled on the pro forma bases described therein and, in the
reasonable opinion of the Company, the assumptions used in the preparation
thereof are reasonable and the adjustments used therein are appropriate to give
effect to the transactions or circumstances referred to therein.
5.3 Accounting Controls. The Company and the Subsidiaries maintain (and in
the future will maintain) a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
5.4 Compliance with Organizational Documents and Other Instruments. The
execution, delivery and performance of this Agreement, the Warrants, the
Underwriter's Unit Warrants, and the Warrants included within the Underwriter's
Unit Warrants by the Company and the execution, delivery and performance of this
Agreement by the Subsidiaries, and the consummation of the transactions
contemplated hereby and thereby, does not and will not, with or without the
giving of notice or the lapse of time, or both, (i) conflict with any terms or
provisions of the charter or Bylaws of the Company or any Subsidiary, as amended
to the date hereof and the Firm Closing Date or Option Closing Date, as the case
may be; (ii) result in a breach of, constitute a default under, result in the
termination or modification of or result in the creation or imposition of any
lien, security interest, charge or encumbrance upon any of the properties of the
Company or a Subsidiary pursuant to any indenture, mortgage, deed of trust,
contract, commitment or other agreement or instrument to which the Company or
any Subsidiary is a party or by which any of their respective properties or
assets are bound or affected; (iii) violate any material law, rule, regulation,
judgment, order or decree of any government or governmental agency,
instrumentality or court, domestic or foreign, having jurisdiction over the
Company or any Subsidiary or any of their respective properties or businesses;
or (iv) result in a breach, termination or lapse of the power and authority of
the Company or any Subsidiary to own or lease and operate their respective
properties and conduct their respective businesses as described in the
Prospectus.
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5.5 No Material Adverse Change. Except as disclosed in the Registration
Statement and in the Prospectus, subsequent to the dates as of which information
is given in the Registration Statement and in the Prospectus, neither the
Company, nor any Subsidiary has or will have incurred any material liabilities
or obligations, direct or contingent, or entered into any material transactions
not in the normal course of business, and there has not been or will have been
any change in the Company's consolidated capitalization, or any material change
in the Company's and the Subsidiaries' condition (financial or otherwise),
business, prospects, operations, properties or assets, taken as a whole.
5.6 Incorporation and Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of Delaware,
with all requisite corporate power and authority and all necessary licenses,
permits, certifications, registrations, approvals, consents and franchises to
own or lease and operate its properties and to conduct its business as now being
conducted and as described in the Prospectus, except where the failure to obtain
such licenses, permits, certifications, registrations, approvals, consents and
franchises would not have a material adverse effect on the Company, its business
or condition (financial or otherwise), and has not received any notice of any
proceeding relating to the revocation or modification of any thereof, nor is it
aware of any basis therefor. The Company is duly qualified to do business and is
in good standing as a foreign corporation in each jurisdiction in which the
nature of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the Company. The Company does not own any stock or
other equity interest in, or control, directly or indirectly, any corporation,
partnership or other entity other than the Subsidiaries.
5.7 Incorporation and Standing of Subsidiaries. Each Subsidiary is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its organization, with all requisite power and authority,
corporate and other, and all necessary licenses, permits, certifications,
registrations, approvals, consents and franchises to own or lease and operate
its properties and to conduct its business now being conducted and as described
in the Prospectus, except where the failure to obtain such licenses, permits,
certifications, registrations, approvals, consents and franchises would not have
a material adverse effect on the Company, its business or condition (financial
or otherwise), and has not received any notice of any proceeding relating to the
revocation or modification of any thereof, nor is the Company aware of any basis
therefor. Each Subsidiary is duly qualified and is in good standing as a foreign
corporation authorized to do business in each jurisdiction in which the nature
of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the Company and the Subsidiaries, considered as one
enterprise. Except as disclosed in the Prospectus, the Company owns all of the
outstanding capital stock of each Subsidiary free and clear of any security
interest, claim, lien, charge, encumbrance or adverse interest of any nature.
The outstanding capital stock of each Subsidiary has been duly and validly
issued and is fully paid and nonassessable. Except as described in the
Prospectus, there are no outstanding subscriptions, rights, warrants or options
to acquire, or instruments convertible into or exchangeable for, any shares of
capital stock of any of the Subsidiaries.
5.8 Valid and Binding Agreements of the Company. Each of this Agreement,
the Warrants, and the Underwriter's Unit Warrants has been duly authorized,
executed and delivered by the Company, and constitutes its legal, valid and
binding obligation, enforceable against the Company in accordance with its
respective terms except to the extent that enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws
affecting the rights of creditors generally or general equitable principles, and
except that the rights of indemnity hereunder and thereunder may be limited by
federal or state securities laws or the public policy underlying such laws. The
Warrants included within the Underwriter's Unit Warrants have been duly
authorized and, when executed and delivered by the Company in accordance with
the terms of the Underwriter's Unit Warrants upon the due
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exercise thereof, will constitute legal, valid and binding obligations of the
Company, enforceable against the Company in accordance with the terms of such
Warrants except to the extent that enforceability and rights of indemnity
thereunder may be limited as aforesaid.
5.9 Valid and Binding Agreement of the Subsidiaries. This Agreement has
been duly authorized, executed and delivered by each Subsidiary and constitutes
its legal, valid and binding obligation, enforceable against each Subsidiary in
accordance with its terms except to the extent that enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium, or
similar laws affecting the rights of creditors generally or general equitable
principles, and except that the rights of indemnity hereunder may be limited by
federal or state securities laws or the public policy underlying such laws.
5.10 Compliance with Applicable Law. The Company and each Subsidiary has
conducted, is conducting and will conduct its business so as to comply with all
material applicable statutes and regulations, and neither the Company nor any
Subsidiary is charged with nor, to the knowledge of the Company, is under
investigation with respect to any violation of any statutes or regulations nor
the subject of any pending or threatened adverse proceedings by any regulatory
authority having jurisdiction over its business or operations except as
disclosed in the Registration Statement and the Prospectus.
5.11 Absence of Conflict and Approvals. Except as disclosed in the
Prospectus, neither the Company nor any Subsidiary is in default, nor has any
event occurred that with notice or lapse of time, or both, would constitute a
default, in any material respect in the performance of any obligation, covenant
or condition contained in any indenture, mortgage, deed of trust or other
material agreement or instrument to which the Company or any Subsidiary is a
party or by which the Company is bound or to which any of its properties or
assets is subject; and no consent, approval, authorization, order, registration
or qualification of or with any court or regulatory authority or other
governmental body is required for the issue and sale of the Securities, or the
consummation of the other transactions contemplated by this Agreement, except
the registration of the Securities under the Act, and such consents, approvals,
authorizations, registrations or qualifications as may be required by the NASD
or under the Blue Sky laws in connection with the purchase and distribution of
the Units by the Underwriter and the purchase of the Underwriter's Unit Warrants
by the Underwriter.
5.12 Capitalization. The authorized, issued and outstanding capital stock
of the Company conforms to the descriptions thereof in the Registration
Statement and in the Prospectus, has been duly and validly issued and is fully
paid and nonassessable and, except as disclosed in the Prospectus, there are no
outstanding options, warrants or other rights for the issuance of, and no
commitment, plan or arrangement to issue, any share of capital stock of the
Company or any security convertible into or exchangeable for capital stock of
the Company.
5.13 No Pre-emptive or Registration Rights. The holders of the outstanding
capital stock of the Company are not entitled to pre-emptive or other rights to
subscribe for the Units or shares of Common Stock. Except as disclosed in the
Registration Statement and the Prospectus, the offering of the Securities as
contemplated by this Agreement and the Prospectus does not give rise to any
rights relating to the registration of any shares of Common Stock or other
securities of the Company.
5.14 Legality of Securities. The Securities, when issued and paid for in
accordance with the terms of this Agreement, the Warrants, the Underwriter's
Unit Warrants, and the Warrants issuable upon exercise of the Underwriter's Unit
Warrants, as the case may be, will be validly issued and (with respect to all
shares of Common Stock included within the Securities) fully paid and
nonassessable shares of Common Stock of the Company, free of pre-emptive rights.
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5.15 No Stop Orders. To the best knowledge of the Company, the Commission
has not issued any order preventing or suspending the use of any preliminary
Prospectus or the Prospectus or any part thereof and no proceedings for that
purpose have been instituted.
5.16 Contracts. All contracts and other documents required to be filed as
exhibits to the Registration Statement have been filed with the Commission and
are fully and accurately described in all material respects in the Prospectus.
5.17 Employee Plans. Except as disclosed in the Registration Statement and
the Prospectus, neither the Company nor any Subsidiary has any employee benefit
plans (including, without limitation, pension, profit sharing, and welfare
benefit plans) or deferred compensation arrangements.
5.18 Use of Proceeds. The Company will apply the proceeds of the Offering
substantially in the manner stated in the Prospectus.
5.19 Patents, Trademarks, etc. The Company and the Subsidiaries own or
possess, or can acquire on reasonable terms, adequate patents, patent rights,
licenses, inventions, copyrights, the trademarks, service marks, trade names and
other proprietary rights and know-how (including trade secrets and other
patentable and/or unpatentable proprietary or confidential information or
procedures) (collectively, "Proprietary Rights") necessary to conduct the
business now conducted by them, and, except as described in the Prospectus or
specifically disclosed in writing to the Underwriter, neither the Company nor
any Subsidiary has received any notice or is otherwise aware of any infringement
of or conflict with asserted rights of others with respect to any Proprietary
Rights, except where such infringement or conflict (including, without
limitation, any alleged infringement or conflict described in the Prospectus),
if the subject of an unfavorable decision, ruling or finding, would not have a
material adverse effect on the business affairs, business prospects, properties,
financial condition or results of operations of the Company and the
Subsidiaries, taken as a whole.
5.20 Title to Property. Neither the Company nor any Subsidiary owns any
real property in fee simple, and the Company and each Subsidiary has good and
valid title to all personal property (including securities) owned by it, free
and clear of all liens, encumbrances and defects except such as are described in
the Prospectus or as do not materially affect the value or interfere with the
use of such property by the Company or any Subsidiary. Except as otherwise
disclosed in the Prospectus, the Company or a Subsidiary owns or leases all such
property, real, personal and mixed, tangible and intangible, as is necessary to
carry on its operations as presently conducted and as presently proposed to be
conducted.
5.21 No Litigation. Except as described in the Prospectus or disclosed in
writing to the Underwriter, there are no actions, suits or proceedings pending
or, to the Company's knowledge, threatened before any court or governmental
agency, arbitrator, authority or body to which the Company or any of the
Subsidiaries is a party or of which the business or property of the Company or
any of the Subsidiaries is the subject in which an unfavorable result or
decision would materially adversely affect the business affairs, business
prospects, properties, financial condition or results of operations of the
Company and the Subsidiaries, taken as a single enterprise, or which seek to
prevent or restrict the consummation of the transactions contemplated by this
Agreement.
5.22 No Undisclosed Sales of Securities. To the best of the Company's
knowledge, based on an examination of the Company's books and records by its
officers and its counsel, no securities of the Company have been sold by the
Company or any controlling person of the Company since the date of the Company's
formation, except as disclosed in the Registration Statement or Prospectus or
otherwise disclosed to the Underwriter.
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5.23 Prohibited Payments. None of the Company, any Subsidiary, or any of
its or their agents or employees in his or her capacity as such has made any
payment of funds of the Company or received or retained any funds in violation
of any law, rule or regulation the violation of which would have a material
adverse effect on the Company and the Subsidiaries, taken as a whole.
5.24 Taxes. The Company and each Subsidiary has filed all federal, state,
local and foreign tax returns which are known by the Company to be required to
be filed through the date hereof, or has received valid extensions thereof, and
has paid all taxes shown as due thereon. All such returns, as amended if
applicable, are complete, accurate and correct in all material respects. Neither
the Company nor any Subsidiary has any knowledge of any tax deficiency which
might be asserted against it which would materially and adversely affect the
business affairs, business prospects, properties, financial condition or results
of operations of the Company and the Subsidiaries, taken as a whole. The
provisions and reserves on the books of the Company and the Subsidiaries in
respect of federal, state, local and other taxes are, in the reasonable opinion
of the Company, adequate.
5.25 Insurance. The Company and the Subsidiaries maintain insurance of the
types and amounts required by governmental regulation and generally deemed
adequate for its and their assets, properties and business as it is presently
conducted or contemplated and consistent with insurance coverage maintained by
similar companies and businesses, including, but not limited to, insurance
covering real and personal property owned or leased against theft, damage,
destruction, acts of vandalism, products liability, and all other risks
customarily insured against, all of which insurance is in full force and effect
and not in default in any material respect thereunder.
5.26 Labor Relations. No labor disturbance by the employees of the Company
or any Subsidiary exists or, to the Company's knowledge, is imminent which could
reasonably be expected to have a material adverse effect on the condition
(financial or otherwise), business, prospects, properties or assets of the
Company and the Subsidiaries, taken as a whole.
5.27 No Operation as Investment Company. The Company has conducted and
will continue to conduct its business and financial affairs in such a manner as
to ensure that it is not and will not become an "investment company" within the
meaning of the Investment Company Act of 1940, as amended, and the rules and
regulations promulgated thereunder.
5.28 No NASD Affiliation. Except as disclosed in the Registration
Statement and the Prospectus or as otherwise disclosed to the Underwriter in
writing prior to the date hereof, no officer, director or greater than 5%
stockholder of the Company is, directly or indirectly, associated with an NASD
member broker-dealer and the Company has no management or financial consulting
agreement with any third party.
5.29 No Finders Fees. No person is entitled, directly or indirectly, to
compensation from the Company or any Subsidiary for services as a finder in
connection with the transactions contemplated by this Agreement.
5.30 Registration Under Exchange Act and Nasdaq Approval. The Common Stock
and the Warrants have been (or will be upon effectiveness of the Registration
Statement) registered under Section 12 of the Exchange Act and have been
approved for quotation through the Nasdaq Market.
5.31 Effect of Officer's Certificate. Any certificate signed by any
officer of the Company or any Subsidiary and delivered to the Underwriter or its
counsel on or prior to the Firm Closing Date or the Option Closing Date pursuant
to this Agreement or in connection with the transactions contemplated
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hereby shall be deemed a representation and warranty by the Company or the
Subsidiary, as the case may be, to the Underwriter as to the matters covered
thereby.
6. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITER.
The obligations of the Underwriter to purchase and offer the Units shall
be subject to the accuracy in all material respects of the representations and
warranties of the Company, in the case of the Firm Units as of the date hereof
and the Firm Closing Date (as if made on and as of the Firm Closing Date) and,
in the case of the Option Units, as of the date hereof and the Option Closing
Date (as if made on and as of the Option Closing Date), to the performance by
the Company and the Subsidiaries in all material respects of their respective
obligations hereunder, and to the satisfaction of the following additional
conditions on or before the Firm Closing Date in the case of the Firm Units and
on or before the Option Closing Date in the case of the Option Units:
6.1 Effectiveness of the Registration Statement. The Registration
Statement shall have become effective not later than 12:00 noon, Washington,
D.C. time, on the date following the date of this Agreement, or such later time
or date as shall have been consented to in writing by the Underwriter. The
information concerning the public offering price of the Shares and other
information omitted from the Registration Statement at the time it was declared
effective shall have been transmitted to the Commission for filing pursuant to
Rule 424(b) within the prescribed period and the Company shall have provided
evidence satisfactory to the Underwriter of such timely filing (or a
post-effective amendment providing such information shall have been filed and
declared effective in accordance with the requirements of Rules 430A and
424(b)). No stop order suspending the effectiveness thereof shall have been
issued, and no proceedings for that purpose shall have been initiated or, to the
knowledge of the Company, threatened by the Commission or any state securities
commission or similar regulatory body. Any request of the Commission for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise) shall have been complied with to the satisfaction of
the Underwriter.
6.2 No Material Misstatements or Omissions. It shall not have been
discovered prior to any of the respective Closing Dates that the Registration
Statement or Prospectus or any amendment or supplement thereto contains an
untrue statement of fact which, in the opinion of the Underwriter after
consultation with its counsel, is material, or that the Registration Statement
or any amendment or supplement thereto omits to state a fact which, in the
opinion of the Underwriter after consultation with its counsel, is material and
is required to be stated therein or is necessary to make the statements therein
not misleading or that the Prospectus or any amendment or supplement thereto
omits to state a fact which, in the opinion of the Underwriter after
consultation with its counsel, is material and is required to be stated therein
or is necessary in order to make the statements therein, in light of the
circumstances in which they were made, not misleading.
6.3 No Litigation. Between the date hereof and the Closing Date(s), there
shall be no litigation instituted or threatened against the Company, any
Subsidiary, or any of its or their respective officers or directors, and there
shall be no proceeding instituted or threatened against the Company, any
Subsidiary, or any of its or their respective officers or directors, before or
by any federal or state commission, regulatory body or administrative agency or
other governmental body, domestic or foreign, wherein an unfavorable ruling,
decision or finding would materially adversely affect the condition (financial
or otherwise), business, prospects, properties or assets of the Company and the
Subsidiaries, taken as a whole.
6.4 Change in Capitalization. Subsequent to the respective dates as of
which information is given in the Registration Statement and the Prospectus,
there shall not have been, except as contemplated
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in the Prospectus, any material change or decrease in any amounts described in
clause (c) of subparagraph 6.10.2 or 6.10.3 herein, which change or decrease is
specified in any letter referred to in paragraph 6.10, that makes it impractical
or inadvisable in the opinion of the Underwriter to proceed with the public
offering or the delivery, as the case may be, of the Units as contemplated by
the Prospectus.
6.5 Opinion of Company's Counsel. The Underwriter shall have received the
opinion, satisfactory in form and substance to the Underwriter and its counsel,
of Rosenman & Colin LLP, counsel for the Company and the Subsidiaries, dated as
of the relevant Closing Date, covering such matters as are set forth at Schedule
6.5.
In giving such opinion, such counsel may rely as to matters of fact
upon statements and certificates of officers of the Company and of the
Subsidiaries or public officials as to matters of fact of which the maker of
such certificate has knowledge, and as to matters of law of jurisdictions other
than the State of Delaware and the United States, such counsel may rely on
opinions of local counsel reasonably acceptable to the Underwriter, copies of
which certificates and opinions shall be attached to the said opinion.
6.6 Opinion of Underwriter's Counsel. The Underwriter shall have received
from Brown & Bain, P.A., its counsel, such opinion or opinions as the
Underwriter may reasonably request, dated as of the Firm Closing Date or the
Option Closing Date, as the case may be, and satisfactory in form and substance
to the Underwriter, with respect to the sufficiency of corporate proceedings and
other legal matters relating to this Agreement and the transactions contemplated
hereby, and the Company shall have furnished to said counsel such documents as
they may have reasonably required for the purpose of enabling them to pass upon
such matters. In connection with the foregoing opinion, as to matters of fact
relevant to conclusions of law, such counsel may rely, to the extent that they
deem proper, upon representations or certificates of public officials and of
responsible officers of the Company.
6.7 Blue Sky Survey. The Underwriter shall have received at or prior to
the Firm Closing Date from Brown & Bain, P.A., a memorandum or survey, in form
and substance satisfactory to the Underwriter, with respect to the qualification
or exemption for offering and sale by the Underwriter of the Units under the
state securities or Blue Sky laws of such jurisdictions as the Underwriter may
reasonably have designated to the Company. Such qualification or exemption shall
continue in effect to and including the Firm Closing Date and the Option Closing
Date.
6.8 Nasdaq Market. The Common Stock and the Warrants shall have been
approved for quotation through the Nasdaq Market.
6.9 Officers' Certificate. The Company shall have furnished to the
Underwriter a certificate, addressed to the Underwriter, of the President and of
the Chairman of the Company, dated the Closing Date, to the effect that the
signers of such certificate have examined the Registration Statement, the
Prospectus, and this Agreement and have consulted with legal counsel with
respect thereto, and that to the best of their knowledge:
6.9.1 Representations and Warranties True and Correct. The
representations and warranties of the Company in this Agreement are true
and correct on and as of the Closing Date; with the same effect as if made
on the Closing Date and the Company has complied with all the agreements
and has satisfied all the conditions on its part to be performed or
satisfied at or prior to the Closing Date.
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<PAGE>
6.9.2 No Stop Orders. The Registration Statement has become
effective under the Act. No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that
purpose have been commenced or are threatened or, to their knowledge,
contemplated by the Commission and no stop order suspending the
qualification or registration of any of the Securities under the Blue Sky
laws of any jurisdiction (whether or not a jurisdiction the Underwriter
has specified) has been issued, and no proceedings for such purposes have
been commenced or, to their knowledge, are threatened or contemplated by
any jurisdiction.
6.9.3 Registration Statement Accurate. (a) Neither the Registration
Statement, as of the time it became effective, nor any post-effective
amendment thereto, at the time it was filed, contained an untrue statement
of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, and (b)
neither the Prospectus nor any amendment thereof or supplement thereto, as
of the date thereof and as of the Closing Date, contained or contains any
untrue statement of a material fact or omitted or omits to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading, and (c) since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an
amended or supplemented prospectus which has not been so set forth. None
of the representations and warranties in the certificate delivered
pursuant to this paragraph 6.9.3 shall apply to statements in, or
omissions from, the Registration Statement or the Prospectus or any
amendment thereof or supplement thereto, which are based upon and conform
to written information furnished to the Company by the Underwriter
specifically for use in the preparation of the Registration Statement or
the Prospectus or any amendment or supplement thereto.
6.9.4 No Material Adverse Change. Subsequent to the respective dates
as of which information is given in the Registration Statement and
Prospectus, and, except as disclosed or contemplated in the Registration
Statement and the Prospectus, (a) the Company and the Subsidiaries have
not incurred any material obligations, liabilities or commitments, except
in the ordinary course of business, (b) neither the Company nor any
Subsidiary has entered into any material transaction not in the ordinary
course of business, (c) the Company has not paid or declared any dividends
or other distributions on its capital stock, (d) there has not been any
change in the capital stock or debt of the Company or any Subsidiary or
any material adverse change in the condition (financial or otherwise),
business, prospects, properties or assets of the Company and the
Subsidiaries considered as a whole, and (e) the conduct of the business
and operations of the Company or any Subsidiary has not been materially
interfered with by strike, fire, flood, hurricane, accident or other
calamity (whether or not insured), or by any court or governmental action,
order or decree, and the properties of the Company and the Subsidiaries,
considered as a single enterprise, have not sustained any material loss or
damage (whether or not insured) as a result of any such occurrence.
6.9.5 Litigation; Contracts. There are no legal proceedings pending
or, to the best knowledge of such officers, threatened against the Company
or any Subsidiary of a character affecting the validity of this Agreement
or required to be disclosed in the Registration Statement; there are no
transactions or contracts required to be disclosed in the Registration
Statement which are not so disclosed; and there are no material contracts
or documents required to be filed as exhibits to the Registration
Statement which are not so filed.
6.10 Accountant's Letter. On the Date hereof, Coopers & Lybrand LLP shall
have furnished to the Underwriter a letter, dated as of the date hereof, in form
and substance satisfactory to the
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Underwriter and its counsel, confirming that they are independent public
accountants with respect to the Company within the meaning of the Act, the
Exchange Act and the applicable rules and regulations, and stating to the effect
that:
6.10.1 Compliance with the Act. It is their opinion that the audited
consolidated financial statements and financial statement schedules of the
Company and the audited financial statements and financial statement
schedules of the Subsidiaries included in the Registration Statement
covered by their reports therein comply as to form in all material
respects with the applicable accounting requirements of the Act and the
regulations promulgated thereunder.
6.10.2 Examination of Company Books and Records. On the basis of
procedures (but not an audit in accordance with generally accepted
auditing standards) consisting of (a) reading the minutes of meetings of
the stockholders and the Board of Directors of the Company and the
Subsidiaries since the date of the latest audited balance sheet as set
forth in the Prospectus through a specified date not more than five
business days prior to the date of this Agreement, (b) performing the
procedures specified by the American Institute of Certified Public
Accountants for a review of interim financial information as described in
SAS No. 71, Interim Financial Information, on the unaudited condensed
consolidated interim financial statements of the Company included in the
Registration Statement and reading the unaudited condensed consolidated
interim financial statements of the Company for the period from July 1,
1996, to the date of latest available interim financial statements, and
(c) making inquiries of certain officials of the Company who have
responsibility for financial and accounting matters, nothing has come to
their attention that causes them to believe that at a specified date not
more than five business days prior to the date of this Agreement, there
was any change in the capital stock, increase in the long-term debt, or
decrease in consolidated net current assets or stockholders' equity, of
the Company as compared with the amounts shown in the June 30, 1996
audited consolidated balance sheet included in the Registration Statement
or, during the period from July 1, 1996 to a specified date not more than
five business days prior to the date of this Agreement, there were any
decreases, as compared with the corresponding period in the preceding year
in the combined net revenue, income from operations or the total or per
share amounts of net income of the Company and the Subsidiaries, except in
all instances for changes, increases or decreases which the Registration
Statement discloses have occurred or may occur, or except as specifically
stated in such letter.
6.10.3 Pro Forma Financial Statements. Although they are unable to
and do not express an opinion on the unaudited pro forma condensed
combined statement of operations (the "Pro Forma Financial Statements")
included in the Registration Statement, they have (a) read the Pro Forma
Financial Statements, (b) made inquiries of appropriate officials of the
Company who have responsibility for financial and accounting matters about
the basis for their determination of the pro form adjustments to the
historical amounts in the Pro Forma Financial Statements and whether the
Pro Forma Financial Statements comply in form in all material respects
with the applicable accounting requirements of Item 310 of Regulation S-B,
and (c) proved the arithmetic accuracy of the application of the pro forma
adjustments to the historical amounts in the Pro Forma Statements; on the
basis of such procedures, and such other inquiries and procedures as may
be specified in such letter, nothing came to their attention that caused
them to believe that the Pro Forma Financial Statements do not comply in
form in all material respects with the applicable requirements of Item 310
of Regulation S-B and that the pro forma adjustments have not been
properly applied to the historical amounts in the compilation of such
statements; and
6.10.4 Certain Procedures. They have performed certain procedures
with respect to certain amounts, percentages and financial information,
which are included in the Registration
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Statement and Prospectuses and which have been specified by the
Underwriter, and have found such amounts, percentages and financial
information to be in agreement with the relevant accounting and financial
records of the Company and the Subsidiaries identified in such letter.
6.11 Bring-Down Letter. At the Firm Closing Date or the Option Closing
Date, as the case may be, the Underwriter shall have received from Coopers &
Lybrand LLP a letter, dated as of the Firm Closing Date or the Option Closing
Date, as the case may be, to the effect that (a) they confirm the statements
made in the letter furnished pursuant to paragraph 6.10 hereof, except that the
"specified date" referred to in such letter shall be a date not more than five
days prior to the Firm Closing Date or the Option Closing Date, as the case may
be, and, if the Company has elected to rely on Rule 430A of the Rules and
Regulations, to the further effect that they have carried out procedures as
specified in subparagraph 6.10.4 with respect to certain amounts, percentages
and financial information specified by the Underwriter and deemed to be a part
of the Registration Statement pursuant to Rule 430(A)(b) and have found such
amounts, percentages and financial information to be in agreement with the
relevant accounting and financial records of the Company and the Subsidiaries
identified in such letter and (b) in their opinion, the audited financial
statements included in the Registration Statement comply as to form in all
material respects with the applicable requirements of the Act and the
Regulations.
6.12 Secretary's Certificates. The Underwriter shall have received, dated
as of the Firm Closing Date or the Option Closing Date, as appropriate, from the
Secretary of the Company, and from the Secretary of each Subsidiary, a
certificate of incumbency certifying the names, titles and signatures of the
officers authorized to execute this Agreement pursuant to the resolutions of the
Board of Directors of the Company or the Subsidiaries, as the case may be,
authorizing and approving the execution, delivery and performance of this
Agreement, a copy of such resolutions to be attached to such certificate,
certifying such resolutions and certifying that the Certificate or Articles of
Incorporation of the Company or the Subsidiaries and the Bylaws of the Company
or the Subsidiaries, as the case may be, have not been amended or modified,
except as described in the Prospectus.
6.13 Delivery of Shares, Warrants and Underwriter's Warrants. The Company
shall have duly executed the certificates for the shares of Common Stock, the
Warrants and the Underwriter's Unit Warrants and shall have delivered the same
to or at the direction of the Underwriter on the Closing Date.
6.14 Fees, Commissions and Expense Allowances Paid. The Company shall have
paid and delivered to the Underwriter in cash or Clearinghouse funds, free from
any rights, claims, liens or encumbrances of any other person, the
non-accountable expense allowance of 3% of the gross offering proceeds from the
sale of the Units being sold and delivered on such Closing Date.
6.15 Lock-Up Agreements.
6.15.1 Officers, Directors and Certain Stockholders. Each officer
and each director of the Company, and each stockholder of the Company
listed on Schedule 4.17A to this Agreement, shall have executed and shall
have become bound by a written Lock-Up Agreement addressed to the
Underwriter.
6.15.2 Instructions to Transfer Agent. The Company shall have
communicated appropriate stop transfer instructions to the Transfer Agent
to cause the restrictions contained in the Lock-Up Agreements to be
effective and shall have provided the Underwriter a copy of such
communication and the Transfer Agent's written acknowledgement of receipt
thereof and its agreement to comply therewith.
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6.16 Documents Satisfactory to Underwriter. All opinions, certificates,
letters and documents delivered pursuant to this Agreement will be in compliance
with the provisions of this Section 6 only if they are satisfactory to the
Underwriter and its counsel. The Company shall furnish to the Underwriter such
conformed copies of such opinions, certificates, letters and documents in such
quantities as the Underwriter shall reasonably request and such further
information, certificates and documents as the Underwriter and its counsel may
reasonably request.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Underwriting Agreement, or if any of
the certificates, opinions, written statements, or letters furnished to the
Underwriter or its counsel pursuant to this Section 6 shall not be in all
material respects reasonably satisfactory in form and substance to the
Underwriter or its counsel, this Underwriting Agreement and all obligations of
the Underwriter hereunder may be canceled at, or at any time prior to, the
Closing Date(s) by the Underwriter. Notice of such cancellation shall be given
to the Company in writing, or by telephone call confirmed in writing. The
Underwriter may waive in writing the performance of any one or more of the
conditions specified in this Section 6 or extend the time for their performance.
7. INDEMNIFICATION AND CONTRIBUTION.
7.1 Indemnification by the Company and the Subsidiaries. The Company and
the Subsidiaries, jointly and severally, shall indemnify and hold harmless the
Underwriter and each person, if any, who controls the Underwriter within the
meaning of the Act or the Exchange Act and each employee or agent of the
Underwriter, against any losses, claims, damages or liabilities, joint or
several, to which the Underwriter and any such controlling person, employee or
agent may become subject, under the Act, or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon an untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; and the Company will reimburse the
Underwriter and each such controlling person, employee or agent for any legal or
other expenses reasonably incurred by the Underwriter or such controlling
person, employee or agent in connection with investigating or defending any such
action or claim; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in any preliminary Prospectus, the
Registration Statement or the Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by the Underwriter expressly for use therein.
7.2 Indemnification by the Underwriter. The Underwriter shall indemnify
and hold harmless the Company, each of the Company's directors, each of the
Company's officers who signed the Registration Statement, each person who
controls the Company within the meaning of the Act and each employee or agent of
the Company, against any losses, claims, damages or liabilities to which the
Company or any such director, officer or controlling person may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, in each case to the extent, but only the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in any preliminary Prospectus, the Registration
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Statement or the Prospectus or any amendment or supplement in reliance upon and
in conformity with written information furnished to the Company by the
Underwriter expressly for use therein; and will reimburse any legal or other
expenses reasonably incurred by the Company or any such director, officer or
controlling person in connection with investigating or defending against any
such action or claim as such expenses are incurred.
7.3 Claims. Promptly after receipt by an indemnified party under
paragraphs 7.1 or 7.2 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against any
indemnifying party under this paragraph, notify in writing the indemnifying
party of the commencement thereof. The omission so to notify the indemnifying
party will not relieve it from any liability under this Section 7, unless and to
the extent that such omission so to notify prejudices in any material respect
the indemnifying party's ability to defend such action. In case any such action
is brought against any indemnified party, and the indemnified party notifies an
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel who shall be reasonably satisfactory to such indemnified
party; and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this Section 7 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation; provided, however,
that any indemnified party shall have the right to employ separate counsel to
represent it and all other parties and their controlling or other persons who
may be subject to liability arising out of any claim in respect of which
indemnity may be sought by the Underwriter against the Company and the
Subsidiaries or by the Company against the Underwriter hereunder, as the case
may be, if (i) the use of counsel chosen by the indemnifying party to represent
the indemnified party would present such counsel with a conflict or potential
conflict of interest which, in the judgment of the indemnified party, could
affect in any material respect the defense of such action on behalf of the
indemnified party (in which case the indemnifying party will not have the right
to direct the defense of such action on behalf of the indemnified party), (ii)
the actual or potential defendants in, or targets of, any such action include
both the indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded, based on the advice of counsel, that there may
be one or more legal defenses available to it and/or other indemnified parties
that are different from or in addition to those available to the indemnifying
party, or (iii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of the institution of such action
the indemnified party or parties shall have the right to select separate counsel
to assume such defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties, in which event the fees
and expenses of one such separate counsel shall be borne by the indemnifying
party. Any such indemnifying party shall not be liable to any such indemnified
party on account of any settlement of any claim or action effected without the
consent of such indemnifying party, which consent shall not be unreasonably
withheld in light of all factors of importance to such indemnified party.
7.4 Contribution. If the indemnification provided for in this Section 7 is
unavailable to or insufficient to hold harmless an indemnified party under
paragraph 7.1 or 7.2 in respect of any losses, claims, damages or liabilities or
actions in respect thereof referred to therein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities or actions in respect
thereof in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Subsidiaries on the one hand and the Underwriter
on the other from the Offering. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only the
relative
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benefits but also the relative fault of the Company and the Subsidiaries on the
one hand and the Underwriter on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as other relevant equitable considerations.
The Company, the Subsidiaries, and the Underwriter agree that contribution
determined by per capita allocation would not be equitable. The respective
relative benefits received by the Company and the Subsidiaries on the one hand
and the Underwriter on the other hand shall be deemed to be in the same
proportion as the total price paid to the Company and the Subsidiaries for the
Units by the Underwriter (net of underwriting discount received but before
deducting expenses) on the one hand and the aggregate Underwriter's Discount
received by the Underwriter with respect to the Units purchased under this
Agreement on the other hand, in each case as set forth in the table on the cover
page of the Prospectus, bear to the aggregate public offering price of the
Units. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Subsidiaries on the one hand or the Underwriter
on the other hand and the parties' relative intent, knowledge, access to
information and the opportunity to correct or prevent such statement or
omission.
The amount paid or payable by a party as a result of the losses,
claims, damages and liabilities (or actions in respect thereof) referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending any action
or claim. Notwithstanding the provisions of this Section 7, the Underwriter
shall not be required to contribute any amount in excess of the Underwriter's
Discounts received by it. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
8. EFFECTIVE DATE AND TERMINATION.
8.1 Effective Date. This Agreement shall become effective (a) immediately
as to paragraphs 4.11 and 9.1, Sections 7 and 8 and (b) as to all other
provisions, as of the later of (i) the date and time of the execution and
delivery hereof and (ii) the date and time the Registration Statement becomes
effective.
8.2 Termination. Until the Firm Closing Date, this Agreement may be
terminated by the Underwriter, at its option, by giving written notice to the
Company, if in the opinion of the Underwriter (i) the Company or any Subsidiary
shall have sustained a loss by fire, flood, accident, or other calamity which is
material with respect to the business of the Company and the Subsidiaries
considered as a single enterprise, whether or not such loss shall have been
insured; the Company or any Subsidiary shall have become a party to any action,
suit or proceeding of the type required to be disclosed but not disclosed in the
Prospectus; or there shall have been, since the respective dates as of which
information is given in the Registration Statement or the Prospectus, any
material adverse change in the business, key personnel, capitalization,
financial position or business prospects of the Company and the Subsidiaries
considered as a single enterprise, whether or not arising in the ordinary course
of business; (ii) trading in securities generally on the New York Stock Exchange
or the over-the-counter market shall have been suspended or limited or minimum
or maximum prices shall have been generally established on such exchange or
market, or additional material governmental restrictions, not in force on the
date of this Agreement, shall have been imposed upon trading in securities
generally by such exchange or by order of the Commission or any court or
governmental authority; (iii) a general banking moratorium shall have been
declared by federal or New York authorities; (iv) there shall have been such a
material adverse change in general economic, monetary, political, or financial
conditions, or the effect of international conditions on the financial markets
in the United States; or (v) there shall have occurred a material outbreak of
hostilities
-21-
<PAGE>
or material escalation and deterioration in the political and military situation
between the United States and any foreign power, or a formal declaration of war
or national emergency by the United States of America; in each case, the effect
of which is such as to make it, in the sole judgment of the Underwriter,
impracticable to market the Units. Any such termination shall be without
liability of any party to any other party (except for the expenses to be paid or
reimbursed by the Company as provided in paragraph 4.11 hereof and except to the
extent provided in paragraph 9.1 and Section 7 hereof).
8.3 Notice of Termination. If the Underwriter elects to prevent this
Agreement from becoming effective or to terminate this Agreement as provided in
this Section 8, it shall notify the Company promptly by telefacsimile or
telephone, confirmed by letter sent to the address specified in paragraph 9.3
hereof.
9. GENERAL AND MISCELLANEOUS.
9.1 Representations, Warranties, Covenants and Indemnities to Survive
Delivery. The respective representations, warranties, agreements, covenants,
indemnities and other statements of the Company, its officers, the Subsidiaries,
and the Underwriter set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall remain in full force and effect,
regardless of (i) any investigation made by or on behalf of the Company, the
Subsidiaries, any of its or their officers or directors, the Underwriter or any
controlling person referred to in Section 7 hereof and (ii) delivery of and
payment for the Securities. The respective agreements, covenants, indemnities
and other statements set forth in Section 7 hereof shall remain in full force
and effect, regardless of any termination or cancellation of this Agreement.
9.2 Information Furnished by the Underwriter. The statements set forth in
the last paragraph on the cover page of, and under the caption "Underwriting,"
in the Prospectus constitute the only written information furnished by the
Underwriter expressly for use therein.
9.3 Notices. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed to have been duly given
on the date of delivery if delivered personally or sent by overnight courier,
with acknowledgement of receipt, to the party to whom notice is to be given, or
on the fifth day after mailing if mailed to the party to whom notice is to be
given, by registered or certified mail, return receipt requested, postage
prepaid, and properly addressed as follows: if to the Underwriter, at 11811
North Tatum Boulevard, Suite 4040, Phoenix, Arizona 85028, attention of Emmett
Mitchell, with a copy to Joseph P. Richardson, Esq., Brown & Bain, P.A., 2901
North Central Avenue, Suite 2000, Phoenix, Arizona 85012; and if to the Company,
1370 Reynolds Avenue, Suite 119, Irvine, California 92614, attention of Paul G.
Kanan, with a copy to Neil S. Belloff, Esq., Rosenman & Colin LLP, 575 Madison
Avenue, New York, New York 10022. Any party may change its address for purposes
of this paragraph by giving the other party written notice of the new address in
the manner set forth above.
9.4 Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective successors, and, to the extent and
only to the extent stated in this Section 9, the officers, directors,
controlling and other persons referred to in Section 7 herein. Nothing in this
Agreement is intended or shall be construed to give to any other person, firm or
corporation any legal or equitable right, remedy or claim under or in respect of
this Agreement or any provision contained herein. The term "successor" as used
in this Agreement shall not include any purchaser of the Units from the
Underwriter.
-22-
<PAGE>
9.5 Waiver. The waiver of any breach of this Agreement shall not
constitute the waiver of any different or subsequent breach. To be effective,
all waivers must be in writing and signed by the party to be charged.
9.6 Severability. Any provision of this Agreement held by a court of
competent jurisdiction to be illegal, invalid or unenforceable shall be
construed and enforced, to the extent practicable and lawful, as if it had been
more narrowly drawn so as not to be illegal, invalid or unenforceable or else
shall be deemed severable from the remainder of this Agreement. The remaining
provisions of this Agreement shall remain in effect and be enforceable in
accordance with their terms.
9.7 Headings. Titles and headings to sections herein are inserted for the
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Agreement.
9.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without giving effect to
conflict of laws.
9.9 Entire Agreement. This Agreement constitutes the entire agreement
between the parties concerning the subject matter hereof and supersedes all
prior agreements and understandings.
9.10 Counterparts. This Agreement may be executed in several counterparts,
each of which when together shall constitute a single document.
DATED: _______________, 1996.
PACIFIC BIOMETRICS, INC., PARADISE VALLEY SECURITIES, INC.,
a Delaware corporation an Arizona corporation
By _________________________________ By ___________________________________
Its: _________________________ Its:____________________________
-23-
<PAGE>
Each of the undersigned acknowledges that its agreement to be a party to this
Agreement with respect to joint and several liability arising pursuant to
Section 7 hereof is a material inducement to the Underwriter entering into this
Agreement, and each of the undersigned agrees to be bound by the terms of this
Agreement.
PACIFIC BIOMETRICS, INC.,
a Washington corporation
By __________________________________
Its: __________________________
BIOQUANT, INC.,
a Michigan corporation
By __________________________________
Its: __________________________
-24-
<PAGE>
AMENDED AND RESTATED
BY-LAWS
of
Pacific Biometrics, Inc.
ARTICLE I
Stockholders
Section 1. Annual Meeting. The annual meeting of the stockholders of the
Corporation shall be held annually at such place within or without the State of
Delaware, at such time and on such date, as may from time to time be designated
by the Board of Directors, for the election of directors and for the transaction
of any other proper business.
Section 2. Special Meetings. Special meetings of the stockholders of the
Corporation may be called at any time and from time to time by the President or
by a majority of the directors then in office, and shall be called by the
Secretary upon the written request of stockholders holding of record at least
10% of the issued and outstanding shares of the Corporation entitled to vote at
such meeting. Special meetings shall be held at such place within or without the
State of Delaware, at such time and on such date as shall be specified in the
call thereof.
Section 3. Notice of Meetings. Written notice of each meeting of the
stockholders, stating the place, date and hour thereof and, in the case of a
special meeting, the purpose or purposes for which it is called, shall be given,
not less than ten nor more than sixty days before the date of such meeting (or
<PAGE>
at such other time as may be required by statute), to each stockholder entitled
to vote at such meeting. If mailed, such notice is given when deposited in the
United States mail, postage prepaid, directed to each stockholder at his or her
address as it appears on the records of the Corporation.
Section 4. Waiver of Notice. Whenever notice is required to be given of any
annual or special meeting of the stockholders, a written waiver thereof, signed
by the person entitled to notice, whether before or after the time stated in
such notice, shall be deemed equivalent to notice. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice. Attendance of a
person at a meeting of the stockholders shall constitute a waiver of notice of
such meeting, except when the person attends a meeting for the express purpose
of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened.
Section 5. Adjournment. When any meeting of the stockholders is adjourned
to another time or place, notice need not be given of the adjourned meeting if
the time and place to which the meeting is adjourned are announced at the
meeting at which the adjournment is taken. At the adjourned meeting any business
may be transacted which might have been transacted at the original meeting. If
the adjournment is for more than 30 days, or if after such adjournment the Board
of Directors shall
2
<PAGE>
fix a new record date for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at such
meeting.
Section 6. Quorum. At any meeting of the stockholders the presence, in
person or by proxy, of the holders of a majority of the issued and outstanding
shares of the Corporation entitled to vote at such meeting shall be necessary in
order to constitute a quorum for the transaction of any business. If there shall
not be a quorum at any meeting of the stockholders, the holders of a majority of
the shares entitled to vote present at such meeting, in person or by proxy, may
adjourn such meeting from time to time, without further notice to the
stockholders other than an announcement at such meeting, until holders of the
amount of shares required to constitute a quorum shall be present in person or
by proxy.
Section 7. Voting. Each stockholder shall be entitled to one vote for each
share of capital stock held by such stockholder. Voting need not be by ballot,
except that all election of directors shall be by written ballot unless
otherwise provided in the Certificate of Incorporation. Whenever any corporate
action is to be taken by vote of the stockholders, it shall, except as otherwise
required by law or by the Certificate of Incorporation, be authorized by a
majority of the votes cast at a meeting of stockholders of the holders of shares
entitled to vote thereon, except that all elections shall be decided by a
plurality of the votes cast.
3
<PAGE>
Section 8. Action Without a Meeting. Any action required or permitted to be
taken at any annual or special meeting of stockholders may be taken without a
meeting thereof, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
such corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
Section 9. Record Date. The Board of Directors may fix, in advance, a
record date, which shall not be more than sixty nor less than ten days before
the date of any meeting of stockholders, nor more than sixty days prior to any
other action, as the record date for the purpose of determining the stockholders
entitled to notice of or to vote at any meeting of the stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action.
Section 10. Proxies. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or
4
<PAGE>
dissent to corporate action in writing without a meeting may authorize another
person or persons to act for him or her by proxy, but no such proxy shall be
voted or acted upon after three years from its date, unless the proxy provides
for a longer period.
ARTICLE II
Directors
Section 1. Number; Qualifications. The Board of Directors shall consist of
one or more members. The number of directors shall be fixed by the Board of
Directors, but shall not be more than nine or less than three. If at any time
there are less than three stockholders, there may be the same number of
directors as there are stockholders. Directors need not be stockholders of the
Corporation.
Section 2. Term of Office. Each director shall hold office until his or her
successor is elected and qualified or until his or her earlier death,
resignation or removal.
Section 3. Meetings. A meeting of the Board of Directors shall be held for
the election of officers and for the transaction of such other business as may
come before such meeting as soon as practicable after the annual meeting of the
stockholders. Other regular meetings of the Board of Directors may be held at
such times as the Board of Directors of the Corporation may from time to time
determine. Special meetings of the Board of Directors may be called at any time
by the President
5
<PAGE>
of the Corporation or by a majority of the directors then in office. Meetings of
the Board of Directors may be held within or without the State of Delaware.
Section 4. Notice of Meetings; Waiver of Notice; Adjournment. No notice
need be given of the first meeting of the Board of Directors after the annual
meeting of stockholders or of any other regular meeting of the Board of
Directors. Notice of a special meeting of the Board of Directors, specifying the
place, date and hour thereof, shall be delivered personally, mailed or
telegraphed to each director at his or her address as such address appears on
the books of the Corporation at least two business days (Saturdays, Sundays and
legal holidays not being considered business days for the purpose of these
By-Laws) before the date of such meeting. Whenever notice is required to be
given under any provision of the Certificate of Incorporation or these By-Laws,
a written waiver thereof, signed by the person entitled to notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a director at a special meeting shall constitute a waiver of
notice of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders, the directors or any committee of directors need be
specified in any written waiver of notice unless so
6
<PAGE>
required by the Certificate of Incorporation or these By-Laws. A majority of the
directors present whether or not a quorum is present, may adjourn any meeting to
another time and place. Notice need not be given of the adjourned meeting if the
time and place to which the meeting is adjourned are announced at the meeting at
which the adjournment is taken, and at the adjourned meeting any business may be
transacted that might have been transacted at the original meeting.
Section 5. Quorum; Voting. A majority of the total number of directors
shall constitute a quorum for the transaction of business. The vote of the
majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors.
Section 6. Participation by Telephone. Members of the Board of Directors or
any committee thereof may participate in a meeting of the Board of Directors or
such committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting by such means shall constitute
presence in person at such meeting.
Section 7. Action Without a Meeting. Any action required or permitted to be
taken at any meeting of the Board of Directors or of any committee thereof may
be taken without a meeting if all members of the Board of Directors or such
committee, as the case may be, consent thereto in writing, and
7
<PAGE>
the writing or writings are filed with the minutes of proceeding of the Board of
Directors or of such committee.
Section 8. Committees. The Board of Directors may, by resolution passed by
a majority of the whole Board, designate one or more committees, each committee
to consist of one or more of the directors. Any such committee, to the extent
provided in the resolution of the Board of Directors, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed by the officers on all papers which may
require it, but no such committee shall have the power or authority in reference
to (a) amending the Certificate of Incorporation (except that a committee may,
to the extent authorized in the resolution or resolutions providing for the
issuance of shares of stock adopted by the Board of Directors, fix the
designations and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of the assets of the
Corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other class
or classes of stock of the Corporation, or fix the number of shares of any
series of stock or authorize the increase or decrease of the shares of any
series); (b) adopting an agreement of merger or consolidation; (c) recommending
to the stockholders the sale, lease or exchange of all or substantially all of
the Corporation's property and
8
<PAGE>
assets; (d) recommending to the stockholders a dissolution of the Corporation or
a revocation of a dissolution; or (e) amending these By-Laws and, unless the
resolution expressly so provides, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock. The Board
of Directors may designate one or more directors as alternate members of any
such committee, who may replace any absent or disqualified member at any meeting
of such committee. In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not constituting a quorum, may unanimously
appoint another director to act at the meeting in the place of such absent or
disqualified member.
Section 9. Removal; Resignation. Any director or the entire Board of
Directors may be removed with or without cause, by the holders of a majority of
the shares then entitled to vote at an election of directors. Any director may
resign at any time, upon written notice to the Corporation.
Section 10. Vacancies. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by a
majority of directors then in office, although less than a quorum, or by a sole
remaining director. When one or more directors shall resign from the Board of
Directors, effective at a future date, a majority of the directors then in
office, including those who have so resigned, shall have power to fill such
vacancy or vacancies, the vote
9
<PAGE>
thereon to take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office as provided above in
the filling of other vacancies. A director elected to fill a vacancy shall hold
office for the unexpired term of his or her predecessor.
Section 11. Compensation. The Board of Directors may fix the compensation
of directors.
ARTICLE III
Officers
Section 1. Election; Qualifications. At the first meeting of the Board of
Directors and as soon as practicable after each annual meeting of stockholders,
the Board of Directors shall elect or appoint a President, one or more
Vice-Presidents, a Secretary and a Treasurer, and may elect or appoint at such
time or from time to time such additional officers, with such titles as the
Board of Directors shall designate by resolution, as the Board of Directors
deems advisable. No officer need be a director of the Corporation. Any number of
offices may be held by the same person.
Section 2. Term of Office; Vacancies. Each officer shall hold office until
the election and qualification of his or her successor or until his or her
earlier death, resignation or removal. Any vacancy occurring in any office,
whether because of death, resignation or removal, with or without cause, or
otherwise, shall be filled by the Board of Directors.
10
<PAGE>
Section 3. Removal; Resignation. Any officer may be removed from office at
any time with or without cause by the Board of Directors. Any officer may resign
his or her office at any time upon written notice to the Corporation.
Section 4. Powers and Duties of the President. The President shall be the
chief executive officer of the Corporation and shall have general charge and
supervision of its business, affairs, administration and operations. The
President shall from time to time make such reports concerning the Corporation
as the Board of Directors of the Corporation may require. The President shall
preside at all meetings of the stockholders and the Board of Directors. The
President shall have such other powers and shall perform such other duties as
may from time to time be assigned to him or her by the Board of Directors.
Section 5. Powers and Duties of the Vice-Presidents. Each of the
Vice-Presidents shall be given such titles and designations and shall have such
powers and perform such duties as may from time to time be assigned to him or
her by the Board of Directors.
Section 6. Powers and Duties of the Secretary. The Secretary shall record
and keep the minutes of all meetings of the stockholders and of the Board of
Directors in a book to be kept for that purpose. The Secretary shall attend to
the giving and serving of all notices by the Corporation. The Secretary shall be
the custodian of, and shall make or cause to be made the
11
<PAGE>
proper entries in, the minute book of the Corporation and such other books and
records as the Board of Directors may direct. The Secretary shall be the
custodian of the corporate seal of the Corporation and shall affix or cause to
be affixed such seal to such contracts and other instruments as the Board of
Directors may direct. The Secretary shall have such other powers and shall
perform such other duties as may from time to time be assigned to him or her by
the Board of Directors.
Section 7. Powers and Duties of the Treasurer. The Treasurer shall be the
custodian of all funds and securities of the Corporation. Whenever required by
the Board of Directors, the Treasurer shall render a statement of the
Corporation's cash and other accounts, and shall cause to be entered regularly
in the proper books and records of the Corporation to be kept for such purpose
full and accurate accounts of the Corporation's receipts and disbursements. The
Treasurer shall at all reasonable times exhibit the Corporation's books and
accounts to any director of the Corporation upon application at the principal
office of the Corporation during business hours. The Treasurer shall have such
other powers and shall perform such other duties as may from time to time be
assigned to him or her by the Board of Directors.
Section 8. Delegation. In the event of the absence of any officer of the
Corporation or for any other reason that the Board of Directors may deem
sufficient, the Board of Directors may at any time or from time to time delegate
all or any part of
12
<PAGE>
the powers or duties of any officer to any other officer or officers or to any
director or directors.
ARTICLE IV
Stock
The shares of the Corporation shall be represented by certificates signed
by the President or any Vice-President and by the Treasurer, an Assistant
Treasurer, the Secretary or an Assistant Secretary. Any of or all the signatures
on the certificate may be a facsimile.
ARTICLE V
Execution of Documents
All contracts, agreements, instruments, bills payable, notes, checks,
drafts, warrants or other obligations of the Corporation shall be made in the
name of the Corporation and shall be signed by such officer or officers as the
Board of Directors may from time to time designate.
ARTICLE VI
Seal
The seal of the Corporation shall contain the name of the Corporation, the
words "Corporate Seal", the year of its organization and the word "Delaware."
13
<PAGE>
ARTICLE VII
Fiscal Year
The fiscal year of the Corporation shall end on such date of each year as
the Board of Directors may proscribe.
ARTICLE VIII
Indemnification
The Corporation shall indemnify all persons to the full extent permitted,
and in the manner provided, by the Delaware General Corporation Law, as the same
now exists or may hereafter be amended.
ARTICLE IX
Amendment of By-Laws
These By-Laws may be amended or repealed, and any new By-Law may be
adopted, by the stockholders entitled to vote or by the Board of Directors.
14
<PAGE>
COMMON STOCK [LOGO] COMMON STOCK
INCORPORATED UNDER THE LAWS OF PACIFIC BIOMETRICS, INC. SEE REVERSE FOR
THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP 69403Q 10 0
This Certifies That
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE OF
========================== PACIFIC BIOMETRICS, INC. ==========================
transferable on the books of the Corporation by the holder hereof in person or
by attorney duly authorized in writing upon surrender of this certificate
properly endorsed. This certificate and the shares represented hereby are issued
and shall be held subject to all the provisions of the Corporation's Certificate
of Incorporation and any amendments thereto, copies of which are on file with
the Transfer Agent, of which the holder hereof by acceptance of this certificate
assents.
This certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
s/ Douglas S. Harrington, M.D. s/ Paul G. Kanan
SECRETARY PRESIDENT
SEAL
COUNTERSIGNED AND REGISTERED:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
(P.O. Box 1596, Denver, CO 80201) TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
PACIFIC BIOMETRICS, INC.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT-______Custodian________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with
right of survivorship and under Uniform Gifts to Minors
not as tenants in common
Act__________________________
(State)
UNIF TRF MIN ACT-______Custodian (until age___)
(Cust)
________under Uniform Transfers
(Minor)
to Minors Act__________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ________________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the common stock represented by the within Certificate, and does hereby
irrevocably constitute and appoint ____________________________ Attorney to
transfer the said stock of the books of the within named Corporation with full
power of substitution in the premises.
Dated ______________________________
X_______________________________________
X_______________________________________
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
SIGNATURE(S) GUARANTEED:
By
_______________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION, (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
NORTHERN BANK NOTE COMPANY
- --------------------------------------------------------------------------------
- --------------------- --------------------------
Phone approval Proof Prepared On Above Date P.O. Box 608
necessitates Proof Approved: LaGrange, Illinois 60525
returning a signed 708/482-3900
copy of the final By __________________________ Fax 708/482-3332
approved proof for Date ________________________
our records.
- --------------------- --------------------------
- --------------------------------------------------------------------------------
<PAGE>
NUMBER WARRANTS
PACIFIC BIOMETRICS, INC.
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
VOID AFTER JANUARY 31, 1998 ("WARRANT EXPIRATION DATE")
CUSIP 69403Q 11 8
THIS CERTIFIES that
is entitled to purchase from PACIFIC BIOMETRICS, INC., a Delaware corporation
(hereinafter called the "Company"), upon the surrender of this Warrant
Certificate to the Company at the principal office of the Warrant Agent
hereinafter mentioned (or its successor as Warrant Agent), provided, and only
if, this Warrant Certificate shall be surrendered on or before 5:00 p.m., New
York City time, on the Warrant Expiration Date, the number of fully paid and
nonassessable shares of Common Stock, $.01 par value of the Company ("Common
Stock"), set forth above, evidenced by a certificate therefor, upon payment of
the Exercise Price for the mnumber of shares in respect of which this Warrant
Certificate is exercised; provided, however, that under certain conditions set
forth in the Warrant Agreement hereinafter mentioned, the number of shares of
Common Stock which may become purchasable pursuant to this Warrant Certificate
may be adjusted, or property other than shares of Common Stock may become
purchasable pursuant to the Warrants evidenced hereby. The Exercise Price at
which the Common Stock shall be purchasable upon the exercise of Warrants shall
be $12.00 per share, payable upon exercise, either in cash or by certified or
official bank check, in United States dollars, to the order of the Warrant
Agent. No adjustment shall be made for any dividends on any shares of stock
issuable upon exercise of Warrants and no fractional shares shall be issued. The
right of purchase represented by this Warrant Certificate is exercisable, at the
election of the registered holder hereof, either as an entirety or from time to
time in part only of the shares specified herein and, in the event that this
Warrant Certificate is exercised in respect of fewer than all of such shares, a
new Warrant Certificate for the remaining number of such shares will be issued
on such surrender.
The Warrants are issued under, and the rights represented hereby are
subject to the terms and provisions contained in a Warrant Agreement dated as of
October , 1996, between the Company and the Warrant Agent named therein, to all
the terms and provisions of which the registered holder of this Warrant
Certificate, by acceptance hereof, assents. Reference is hereby made to said
Warrant Agreement for a more complete statement of the rights and limitations of
rights of the registrered holder hereof, the rights and duties of the Warrant
Agent and the rights and obligations of the Company thereunder. Copies of the
Warrant Agreement are on file at the office of the Warrant Agent.
The Warrants represented by this Warrant Certificate may be redeemed by the
Company, at its option, at any time, on thirty days' prior written notice, at
$.10 per Warrant, if the closing sale price of the Common Stock on any national
securities exchange or the average of the closing bid and asked quotations of
the Common Stock on the Nasdaq Small-Cap Market has equaled or is greater than
sixteen dollars and eighty cents ($16.80) for twenty (20) consecutive trading
days. This Warrant Certificate may not be exercised after the close of business
on the day preceding the redemption date.
The Warrant Certificate is transferable at the office of the Warrant Agent
(or its successors as Warrant Agent) by the registered holder hereof in person
or by attorney duly authorized in writing, but only in the manner and subject to
the limitations provided in the Warrant Agreement, and upon surrender of this
Warrant Certificate. Upon any such transfer, a new Warrant Certificate, or new
Warrant Certificates of different denominations, of like tenor and representing
in the aggregate the right to purchase a like number of shares of Common Stock
will be issued to the transferee in exchange for this Warrant Certificate.
This Warrant Certificate and similar Warrant Certificates when surrendered
at the office of the Warrant Agent (or its successor as Warrant Agent) by the
registered holder in person or by attorney duly authorized in writing may be
exchanged, in the manner and subject to the limitations provided in the Warrant
Agreement, for another Warrant Certificate, or other Warrant Certificates of
different denominations, or like tenor and representing in the aggregate the
right to purchase a like number of shares of Common Stock.
This Warrant Certificate may be exercised only if a current prospectus
relating to the Common Stock is then in effect and only if the shares of Common
Stock are qualified for sale under the securities law of the state or states in
which the Warrantholder(s) reside.
This Warrant Certificate shall not be valid unless countersigned by the
Warrent Agent.
IN WITNESS WHEREOF, PACIFIC BIOMETRICS, INC. has caused to be printed
herein the facsimile signature of its President and Secretary as of the date
written above.
DATED: PACIFIC BIOMETRICS, INC.
COUNTERSIGNED:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
(P.O. Box 1596, Denver, CO 80201) By:
as Warrant Agent
By:
s/ Paul G. Kanan s/ Douglas S. Harrington, M.D.
Authorized Signature President Secretary
SEAL
<PAGE>
PACIFIC BIOMETRICS, INC.
To be Executed by the Holder in Order to Exercise Warrants
The undersigned Holder hereby irrevocably elects to exercise _________________
Warrants represented by this Warrant Certificate, and to purchase the securities
issuable upon the exercise of such Warrants, and requests that certificates or
such securities shall be issued in the name of: ___________________________
________________________________________________________________________________
[PRINTED NAME OF HOLDER]
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF HOLDER
- -----------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
and be delivered to:____________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME(S) AND ADDRESS, INCLUDING ZIP CODE)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Holder at the
address stated below.
Dated _____ ___________________________________________________________________
(SIGN EXACTLY AS NAME(S) APPEARS ON THE OTHER SIDE OF THIS WARRANT)
___________________________________________________________________
PRINTED NAME(S) OF HOLDER(S)
___________________________________________________________________
___________________________________________________________________
ADDRESS
___________________________________________________________________
SIGNATURE(S) GUARANTEED
|_| Unless this box is checked, the exercise of this Warrant is deemed to have
been solicited by Paradise Valley Securities, Inc.
ASSIGNMENT
To be Executed by the Holder in Order to Assign Warrants
FOR VALUE RECEIVED, _____________________________________________________ hereby
sells, assigns and transfers unto:
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME(S) AND ADDRESS, INCLUDING ZIP CODE)
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
------------------------------------
- --------------------------------------------------------------------------------
___________________________________________________ of the Warrants represented
by this Warrant Certificate, and hereby irrevocably constitutes and appoints
________________________________________________ Attorney to transfer This
Warrant certificate on the books of the Warrant Agent, with full power of
substitution in the premises.
Dated _____ ___________________________________________________________________
(SIGN EXACTLY AS NAME(S) APPEARS ON THE OTHER SIDE OF THIS WARRANT)
___________________________________________________________________
___________________________________________________________________
ADDRESS
___________________________________________________________________
SIGNATURE(S) GUARANTEED
THE SIGNATURE(S) ON THE EXERCISE OR ASSIGNMENT FORM MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MAY
NEED TO BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS,
SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
NORTHERN BANK NOTE COMPANY
- --------------------------------------------------------------------------------
- --------------------- --------------------------
Phone approval Proof Prepared On Above Date P.O. Box 608
necessitates Proof Approved: LaGrange, Illinois 60525
returning a signed 708/482-3900
copy of the final By __________________________ Fax 708/482-3332
approved proof for Date ________________________
our records.
- --------------------- --------------------------
- --------------------------------------------------------------------------------
<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of _________, 1996, between PACIFIC
BIOMETRICS, INC., a Delaware corporation (the "Company"), and American
Securities Transfer & Trust, Incorporated, as warrant agent (the "Warrant
Agent");
WHEREAS, the Company proposes to issue (a) 1,700,000 Warrants (hereinafter
called the "Warrants"), each entitling the holder thereof to purchase one share
of common stock, $.01 par value, of the Company ("Common Stock"), in connection
with the proposed issuance by the Company of 1,700,000 Units ("Units"), each
Unit consisting of one share of Common Stock and one Warrant, (b) up to 255,000
Warrants underlying the Underwriter's over-allotment option, and (c) 170,000
Warrants underlying a warrant to purchase Units to be granted to the Underwriter
pursuant to a certain Underwriting Agreement, dated _________, 1996, by and
among the Company and Paradise Valley Securities, Inc., as the Underwriter; and
WHEREAS, the Company proposes to register the Units on a Form SB-2
Registration Statement filed with the Securities and Exchange Commission (File
Number 333-11551) ("Registration Statement");
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, registration, transfer, exchange, replacement and exercise of Warrants
and other matters as provided herein;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:
1. Appointment of Warrant Agent. The Company hereby appoints the Warrant
Agent to act as agent for the Company in accordance with the instructions set
forth in this Agreement, and the Warrant Agent hereby accepts such appointment.
2. Warrant Certificates. The Warrant Certificates shall be registered form
only. The text of the Warrant Certificates shall be substantially as set forth
in Exhibit A attached hereto. Warrant Certificates shall be executed on behalf
of the Company by the manual or facsimile signature of the President or a Vice
President of the Company and its Secretary or any Assistant Secretary, and shall
bear a facsimile of the Company's corporate seal. Warrant Certificates shall be
dated as of the date of issuance thereof by the Warrant Agent either upon
initial issuance or upon transfer or exchange.
3. Countersignature and Registration. The Warrant Agent shall maintain
books for the transfer and registration of the Warrant Certificates. Warrant
Certificates shall be countersigned by the Warrant Agent and shall not be valid
for any purpose unless so countersigned. Warrant Certificates may be so
countersigned, however, by the Warrant Agent and be delivered by the Warrant
Agent, notwithstanding that the persons whose manual or facsimile signatures
appear thereon as proper officers of the Company shall have ceased to be such
officers at the time of such counter signature or delivery.
4. Registration of Transfers and Exchanges. The Warrants are exercisable,
detachable and separately transferable immediately after the sale of the Units
upon the effectiveness of the Registration Statement. The Warrant Agent shall
register the transfer from time to time of any outstanding Warrant Certificates
upon records to be maintained by the Warrant Agent for that purpose, upon
surrender thereof for transfer properly endorsed or accompanied by appropriate
instructions for transfer. Upon any such transfer, a new Warrant Certificate
shall be issued to the transferee and the surrendered Warrant Certificate shall
be canceled by the Warrant Agent. Warrant Certificates so canceled shall be
delivered by the Warrant Agent to the Company from time to time. Warrant
Certificates may be exchanged at the option
<PAGE>
of the holder thereof, when surrendered at the office of the Warrant Agent, for
another Warrant Certificate or other Warrant Certificates of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of shares of Common Stock. The Warrant Agent is hereby
irrevocably authorized to countersign in accordance with Section 3 of this
Agreement the new Warrant Certificates required pursuant to the provisions of
this Section, and the Company, whenever required by the Warrant Agent, will
supply the Warrant Agent with Warrant Certificates duly executed on behalf of
the Company for such purpose.
5. Exercise of Warrants. The Warrants shall expire on January 31, 1998 at
5:00 p.m., New York City time ("Warrant Expiration Date").
Subject to the provisions of this Agreement, any whole number or all of
the Warrants evidenced by a Warrant Certificate may be exercised at any time
before the Warrant Expiration Date. A Warrant shall be exercised by surrender to
the Warrant Agent of the Warrant Certificate with the exercise form thereon duly
completed and executed and payment to the Warrant Agent in lawful money of the
United States of the Exercise Price for each share of Common Stock purchased.
Upon such surrender of a Warrant Certificate and payment of the Exercise
Price as aforesaid, the Company shall issue and cause to be delivered with all
reasonable dispatch to or upon the written order of the registered holder of
such Warrant Certificate and in such name or names as such registered holder may
designate, a certificate or certificates for the number of full shares of Common
Stock so purchased upon the exercise of such Warrants. Such certificate or
certificates shall be deemed to be issued as of the date of the surrender of
such Warrant Certificates and payment of the Exercise Price, whichever shall
last occur.
If less than all of the Warrants evidenced by a Warrant Certificate are
exercised upon a single occasion, a new Warrant Certificate will be issued for
the balance of the Warrants not so exercised, which shall be issued and
delivered to, or in accordance with instructions given by, the holder of such
Warrant, and the Warrant Agent is hereby irrevocably authorized to countersign
and to deliver the required new Warrant Certificates pursuant to the provisions
of this Section and of Section 3 of this Agreement and the Company, whenever
required by the Warrant Agent, will supply the Warrant Agent with Warrants duly
executed on behalf of the Company for such purpose.
6. Reservation and Registration of Common Stock.
a. The Company shall at all times reserve and keep available for
issuance the full number of shares of Common Stock issuable upon the
exercise of all outstanding Warrants. The Transfer Agent for the Common
Stock is hereby irrevocably authorized and directed at all times to
reserve such number of authorized and unissued shares as shall be
requisite for such purpose. The Warrant Agent is hereby irrevocably
authorized to requisition from time to time such Transfer Agent for stock
certificates required to honor outstanding Warrant Certificates. The
Company will supply such Transfer Agent with duly executed stock
certificates for such purpose and will itself provide or otherwise make
available any cash or scrip which may be issuable as provided in Section 8
of this Agreement. All Warrant Certificates surrendered in the exercise of
the rights thereby evidenced shall be canceled by the Warrant Agent and
shall thereafter be delivered to the Company, and such canceled Warrants
shall constitute sufficient evidence of the number of shares of Common
Stock which have been issued upon the exercise of such Warrants. The
Company covenants that all shares of Common Stock which may be issued upon
exercise of the Warrants will upon issue be fully paid and nonassessable.
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<PAGE>
b. Upon the effectiveness of the Registration Statement, the Company
represents that it will have registered under the Securities Act of 1933,
as amended, the shares of Common Stock issuable upon exercise of the
Warrants ("Warrant Shares") and will use its best efforts to maintain the
effectiveness of such registration by post-effective amendment during the
entire period in which the Warrants are exercisable, and that it will use
its best efforts to qualify such Common Stock for sale under the
securities laws of such states of the United States as may be necessary to
permit the exercise of the Warrants in the states in which the Units are
initially qualified and to maintain such qualifications during the entire
period in which the Warrants are exercisable.
7. Exercise Price; Adjustments.
a. The price at which Common Stock shall be purchasable upon
exercise of Warrants at any time after the Common Stock and Warrants
become separately tradeable until the Warrant Expiration Date shall be
twelve dollars ($12.00) per share of Common Stock or, if adjusted as
provided in this Section, shall be such price as so adjusted (the
"Exercise Price"). The Company may in its discretion at any time and from
time to time decrease the Exercise Price below the price then in effect,
notwithstanding any provision to the contrary herein. Any such decrease
shall be determined by the Board of Directors of the Company and shall be
described in a statement filed with the Warrant Agent.
b. The Exercise Price shall be subject to adjustment from time to
time as follows:
(1) In case the Company shall at any time after the date of
this Agreement (a) declare a dividend on the Common Stock payable in the
capital stock of the Company (whether Common Stock or capital stock of any
other class), (b) subdivide the outstanding Common Stock, (c) combine the
outstanding Common Stock into a smaller number, or (d) other than in a
transaction to which Section 7(b)(7) hereof applied, issue any shares of
its capital stock in a reclassification in connection with a consolidation
or merger in which the Company is the continuing corporation), the
Exercise Price in effect at the time of the record date for that dividend
or of the effective date of that subdivision, combination or
reclassification and/or the number and kind of shares of capital stock
issuable on that date shall be proportionately adjusted so that the holder
of any Warrant exercised after such time shall be entitled to receive the
aggregate number and kind of shares of capital stock which, if the Warrant
had been exercised immediately prior to that date, he or she would have
owned upon exercise and been entitled to receive by virtue of that
dividend, subdivision, combination or reclassification. The foregoing
adjustment shall be made successively whenever any event listed above
shall occur.
(2) In case the Company shall fix a record date for the making
of a distribution to all holders of Common Stock (including any such
distribution made in connection with a consolidation or merger in which
the Company is the continuing corporation) of evidences of indebtedness or
assets (other than cash dividends or cash distributions payable out of
consolidated earnings or earned surplus or dividends payable in ordinary
shares) or subscription rights or warrants, the Exercise Price to be in
effect after that record date shall be determined by multiplying the
Exercise Price in effect immediately prior to that record date by a
fraction, of which the numerator shall be the current market price per
share of Common Stock on that record date, less the fair market value (as
determined by the Board of Directors of the Company, whose determination
shall be conclusive, and described in a statement filed with the Warrant
Agent) of the portion of the assets or evidences of indebtedness so to be
distributed or of the subscription rights or warrants applicable to one
share of Common Stock and of which the denominator shall be the current
market price per share of Common Stock. The adjustment shall be made
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<PAGE>
successively whenever a record date is fixed; and in the event that the
distribution is not so made, the Exercise Price shall again be adjusted to
be the Exercise Price which would then be in effect if the record date had
not been fixed, but the subsequent adjustment shall not affect the number
of Warrant Shares issued upon the exercise of any Warrants prior to the
date the subsequent adjustment is made.
(3) For the purpose of any computation under Section 7(b) the
current market price per share of Common Stock on any date shall be the
last reported sale price, or if none is reported, the average of the
reported closing bid and asked prices, in the over-the-counter market, in
each such case averaged over a period of ten consecutive trading days
prior to the day as of which the market price is being determined. If
there is no such closing price or closing bid and asked prices, the market
price shall be determined in any reasonable manner approved by the Board
of Directors of the Company.
(4) No adjustment in the Exercise Price shall be required
unless the adjustment would require an increase or decrease of at least
$.25; provided, however, that any adjustments which by reason of this
Section 7(b) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under
this Section 7(b) shall be made to the nearest cent or the nearest
one-hundredth of a share, as the case may be, but in no event shall the
Company be obligated to issue fractional shares upon the exercise of any
Warrant.
(5) In any case in which this Section 7 shall require that any
adjustment in the Exercise Price be made effective as of a record date for
a specified event, the Company may elect to defer until the occurrence of
the event the issuing to the holder of any Warrant exercised after that
record date the Warrant Shares and other capital stock of the Company, if
any, issuable upon the exercise over and above the Warrant Shares and
other capital stock of the Company, if any, issuable upon the exercise on
the basis of the Exercise Price in effect prior to such adjustment;
provided, however, that the Company shall deliver to the holder an
appropriate instrument evidencing the holder's right to receive such
additional shares upon the occurrence of the event requiring such
adjustment.
(6) Upon each adjustment of the Exercise Price as a result of
the calculation made in Section 7(b)(1) or (2), each Warrant Certificate
outstanding immediately prior to the making of that adjustment shall
thereafter evidence the right to purchase, at the adjusted Exercise Price,
that number of Warrant Shares (calculated to the nearest hundredth)
obtained by (A) multiplying the number of Warrant Shares purchasable upon
exercise of a Warrant immediately prior to that adjustment of the number
of Warrant Shares by the Exercise Price in effect immediately prior to
that adjustment of the Exercise Price, and (B) dividing the product so
obtained by the Exercise Price in effect immediately after that adjustment
of the Exercise Price.
(7) In case of any capital reorganization of the Company, or
of any reclassification of the Common Stock (other than a change in par
value or as a result of subdivision or combination), or in the case of the
consolidation of the Company with or the merger of the Company into any
other corporation (other than a consolidation or merger in which the
Company is the continuing corporation) or of the sale of the properties
and assets of the Company as, or substantially as, an entirety to any
other corporation, each Warrant shall after such reorganization,
reclassification, consolidation, merger or sale be exercisable, upon the
terms and conditions specified in this Agreement, for the number of shares
of stock or other securities or property to which a holder of the number
of Warrant Shares purchasable (at the time of such
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<PAGE>
reorganization, reclassification, consolidation, merger or sale) upon
exercise of the Warrant would have been entitled upon that reorganization,
reclassification, consolidation, merger or sale; and in any such case, if
necessary, the provisions set forth in this Agreement with respect to the
rights and interests thereafter of the holders of the Warrants shall be
appropriately adjusted so as to be applicable, as nearly as may reasonably
be, to any shares of stock or other securities or property thereafter
deliverable on the exercise of the Warrants. The subdivision or
combination of shares of Common Stock at any time outstanding into a
greater or lesser number of shares shall not be deemed to be a
reclassification of the Shares for the purposes of this Section. The
Company shall not effect any consolidation, merger or sale, unless prior
to or simultaneously with the consummation thereof the successor
corporation (if other than the Company) resulting from the consolidation
or merger of the corporation purchasing the assets or other appropriate
corporation or entity shall assume, by written instrument executed and
delivered to the Warrant Agent, the obligation to deliver to the holder of
each Warrant the shares of stock securities or assets as, in accordance
with the foregoing provisions, the holders may be entitled to purchase and
the other obligations under this Agreement. Notwithstanding an adjustment
pursuant to this Section in the number of Warrant Shares purchasable upon
the exercise of a Warrant, the Company shall not be required to issue
fractions of Warrant Shares upon exercise of the Warrants or to distribute
certificates which evidence fractional Warrant Shares. In lieu of
fractional Warrant Shares, there shall be paid to the registered holders
of Warrants at the time such are exercised as herein provided an amount in
cash equal to the same fraction of the current market value of the Common
Stock as the fraction of a share which the Warrant would otherwise entitle
the holder to purchase. For purposes of this Section 7(b)(7) the current
market value of the Common Stock shall be determined pursuant to Section
7(b)(3) hereof.
8. Notice to Warrantholders.
a. No holder of any of the Warrants, as such, shall have any rights
of a stockholder of the Company, either at law or equity, and the rights
of the holders of the Warrants, as such, are limited to those rights
expressly provided in this Agreement or in the Warrant Certificates.
b. The Company and the Warrant Agent may treat the registered holder
of any Warrant Certificate as the absolute owner thereof for all purposes
notwithstanding any notice to the contrary.
c. If the Company shall make any distribution on, or to holders of,
its Common Stock (or other property which may be purchasable in lieu
thereof upon the exercise of Warrants) of any property (other than a cash
dividend), the Company shall cause a notice thereof to be given to the
registered holders of the outstanding Warrants as aforesaid at least
twenty (20) days prior to the date fixed as a record date or the date of
closing the transfer books for the determination of the stockholders
entitled to receive such distribution. Failure to mail or to receive such
notice or any defect therein or in the mailing thereof shall not affect
the validity of any action taken in connection with such distribution.
9. Disposition of Proceeds on Exercise of Warrants.
a. The Warrant Agent shall account to the Company once a week, with
respect to Warrants exercised, and concurrently pay to the Company all
monies, including interest, received by the Warrant Agent for the purchase
of shares of the Company's stock through the exercise of such Warrants.
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<PAGE>
b. The Warrant Agent shall keep copies of this Agreement available
for inspection by holders of Warrants during normal business hours at its
principal office.
10. Redemption of Warrants.
a. At any time the Company may, at its option, redeem some or all of
the outstanding Warrants at ten cents ($0.10) per Warrant, upon thirty
(30) days prior written notice, if the closing sale price of the Common
Stock on any national securities exchange or the closing sale price
quotation or the average of the closing bid and asked price quotation, the
case may be, on the NASDAQ Small-Cap Market, as the case may be, has
equaled or is more than sixteen dollars and eighty cents ($16.80) for
twenty (20) consecutive trading days within the ninety (90) day period
immediately preceding the date notice of redemption is given (the
"Redemption Price"). In the event of an adjustment in the Exercise Price
pursuant to Section 7, the Redemption Price shall not be adjusted.
b. The election of the Company to redeem some or all of the Warrants
shall be evidenced by a resolution of the Board of Directors of the
Company.
c. Warrants may be exercised at any time on or before the date fixed
for redemption (the "Redemption Date").
d. Notice of redemption shall be given by first class mail, postage
prepaid, mailed not less than thirty (30) nor more than sixty (60) days
prior to the Redemption Date, to each holder of Warrants, at his address
appearing in the Warrant register.
All notices of redemption shall state:
(1) The Redemption Date;
(2) That on the Redemption Date the Redemption Price will
become due and payable upon each Warrant;
(3) The place where such Warrants are to be surrendered for
redemption and payment of the Redemption Price; and
(4) The current Exercise Price of the Warrants, the place or
places where such Warrants may be surrendered for exercise, and the
time at which the right to exercise the Warrants will terminate in
accordance with this Agreement.
e. Notice of redemption of Warrants at the election of the Company
shall be given by the Company or, at the Company's request, by the Warrant
Agent in the name and at the expense of the Company.
f. Prior to any Redemption Date, the Company shall deposit with the
Warrant Agent an amount of money sufficient to pay the Redemption Price of
all the Warrants which are to be redeemed on that date. If any Warrant is
exercised pursuant to Section 5 prior to the Redemption Date, any money so
deposited with the Warrant Agent for the redemption of such Warrant shall
be paid to the Company.
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g. Notice of redemption having been given as aforesaid, the Warrants
so to be redeemed shall, on the Redemption Date, become redeemable at the
Redemption Price therein specified, and on such date (unless the Company
shall default in the payment of the Redemption Price) such Warrants shall
cease to be exercisable and thereafter represent only the right to receive
the Redemption Price. Upon surrender of such Warrants for redemption in
accordance with said notice, such Warrants shall be redeemed by the
Company for the Redemption Price.
11. Merger or Consolidation or Change of Name of Warrant Agent. Any
corporation into which the Warrant Agent may be merged or with which it may be
consolidated, or any corporation resulting from any merger or consolidation to
which the Warrant Agent shall be a party, or any corporation succeeding to the
corporate trust business of the Warrant Agent, shall be the successor to the
Warrant Agent hereunder without the execution or filing of any paper or any
further act on the part of any of the parties hereto, provided that such
corporation would be eligible for appointment as a successor warrant agent under
the provisions of Section 14 of this Agreement. In case at the time such
successor to the Warrant Agent shall succeed to the agency created by this
Agreement and at such time any of the Warrants shall have been countersigned but
not delivered, any such successor to the Warrant Agent may adopt the
countersignature of the Warranty Agent and deliver such Warrants so
countersigned; and in case at the time any of the Warrants shall not have been
countersigned, any successor to the Warrant Agent may countersign such Warrants
either in the name of the predecessor Warrant Agent or in the name of the
successor warrant agent; and in all such cases such Warrants shall have the full
force provided in the Warrant and in this Agreement.
In case at any time the name of the Warrant Agent shall be changed and at
such time any of the Warrants shall have been countersigned but not delivered,
the Warrant Agent may adopt the countersignature under its prior name and
deliver Warrants so countersigned; and in case at that time any of the Warrants
shall not have been countersigned, the Warrant Agent may countersign such
Warrants whether in its prior name or in its changed name; and in all such cases
such Warrants shall have the full force provided in the Warrants and in this
Agreement.
12. Duties of Warrant Agent. The Warrant Agent undertakes the duties and
obligations imposed by this Agreement upon the following terms and conditions,
by all of which the Company and the holders of Warrants, by their acceptance
thereof, shall be bound:
a. The statements contained herein and in the Warrants shall be
taken as statements of the Company, and the Warrant Agent assumes no
responsibility for the correctness of any of the same except such as
describe the Warrant Agent or action taken or to be taken by it. The
Warrant Agent assumes no responsibility with respect to the distribution
of the Warrants or the Warrant Certificates except as herein otherwise
provided.
b. The Warrant Agent shall not be responsible for any failure of the
Company to comply with any of the covenants contained in this Agreement or
in the Warrant Certificates to be complied with by the Company.
c. The Warrant Agent may execute and exercise any of the rights or
powers hereby vested in it to perform any duty hereunder either itself or
by or through its attorneys, agents or employees.
d. The Warrant Agent may consult at any time with counsel
satisfactory to it (who may be counsel for the Company) and the Warrant
Agent shall incur no liability or responsibility to the Company or to any
holder of any Warrant in respect of any action taken, suffered or
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<PAGE>
omitted by it hereunder in good faith and in accordance with the opinion
or the advice of such counsel, provided the Warrant Agent shall have
exercised reasonable care in the selection and continued employment of
such counsel.
e. The Warrant Agent shall incur no liability or responsibility to
the Company or to any holder of any Warrant for any action taken in
reliance on any notice, resolution, waiver, consent, order, certificate,
or other paper, document or instrument believed by it to be genuine and to
have been signed, sent or presented by the proper party or parties.
f. The Company agrees to pay to the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the
execution of this Agreement, to reimburse the Warrant Agent for all
expenses, taxes and governmental charges and other charges of any kind and
nature incurred by the Warrant Agent in the execution of this Agreement
and to indemnify the Warrant Agent and save it harmless against any and
all liabilities, including judgments, costs and reasonable counsel fees,
for anything done or omitted by the Warrant Agent in the execution of this
Agreement except as a result of the Warrant Agent's negligence or bad
faith.
g. The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or to take any other action likely to
involve expense unless the Company or one or more registered holders of
Warrants shall furnish the Warrant Agent with reasonable security and
indemnity for any cost and expense which may be incurred, but this
provision shall not affect the power of the Warrant Agent to take such
action as the Warrant Agent may consider proper, whether with or without
any such security or indemnity. All rights of action under this Agreement
or under any of the Warrants may be enforced by the Warrant Agent without
the possession of any of the Warrants or the production thereof at any
trial or other proceeding relative thereto, and any such action, suit or
proceeding instituted by the Warrant Agent shall be brought in its name as
Warrant Agent, and any recovery of judgment shall be for the ratable
benefit of the registered holders of the Warrants, as their respective
rights or interests may appear.
h. The Warrant Agent and any stockholder, director, officer or
employee of the Warrant Agent may buy, sell or deal in any of the Warrants
or other securities of the Company or become peculiarly interested in any
transaction in which the Company may be interested, or contract with or
lend money to or otherwise act as fully and freely as though it were not
Warrant Agent under this Agreement. Nothing herein shall preclude the
Warrant Agent from acting in any other capacity for the Company or for any
other legal entity.
i. The Warrant Agent shall act hereunder solely as agent and not in
a ministerial capacity, and its duties shall be determined solely by the
provisions hereof. The Warrant Agent shall not be liable for anything
which it may do or refrain from doing in connection with this Agreement
except as a result of its own negligence or bad faith.
13. Change of Warrant Agent. The Warrant Agent may resign and be
discharged from its duties under this Agreement by giving to the Company notice
in writing, and by giving notice in writing to the holders of the Warrants at
their respective addresses appearing on the Warrant register prior to the date
so specified, specifying a date when such resignation shall take effect, which
notice shall be sent at least 30 days prior to the date so specified. The
Warrant Agent may be removed by like notice to the Warrant Agent from the
Company. If the Warrant Agent shall resign or be removed or shall otherwise
become incapable of acting, the Company shall appoint a successor to the Warrant
Agent. If the Company shall fail to make such appointment within a period of
thirty (30) days after such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Warrant Agent
8
<PAGE>
or by any registered holder of a Warrant, then any registered holder of a
Warrant may apply to any court of competent jurisdiction for the appointment of
a successor to the Warrant Agent. Any successor warrant agent, whether appointed
by the Company or by such a court, shall be a bank or trust company having its
principal office, and having capital and surplus as shown by its last published
report to its stockholders, of at least five million dollars ($5,000,000). After
appointment, the successor warrant agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as
Warrant Agent without further act or deed; but the former Warrant Agent shall
deliver and transfer to the successor warrant agent any property at the time
held by it hereunder, and execute and deliver any further assurance, conveyance,
act or deed necessary for the purpose. Failure to give any notice provided for
in this Section, however, or any defect therein, shall not affect the legality
or validity of the resignation or removal of the Warrant Agent or the
appointment of the successor warrant agent, as the case may be.
14. Identity of Transfer Agent. Forthwith upon the appointment of any
Transfer Agent for the Common Stock or of any subsequent Transfer Agent for
shares of the Common Stock or other shares of the Company's capital stock
issuable upon the exercise of the rights of purchase represented by the Warrant
Certificates, the Company will file with the Warrant Agent a statement setting
forth the name and address of such Transfer Agent.
15. Mutilated or Missing Warrant Certificates. In case any of the Warrant
Certificates shall be mutilated, lost, stolen or destroyed, the Company will
issue and the Warrant Agent will countersign and deliver in exchange and
substitution for and upon cancellation of the mutilated Warrant Certificate, or
in lieu of and substitution for the Warrant Certificate lost, stolen or
destroyed, a new Warrant Certificate of like tenor and representing an
equivalent right or interest; but only upon receipt of evidence satisfactory to
the Company and the Warrant Agent of such loss, theft or destruction of such
Warrant Certificate and indemnity, if requested, also satisfactory to them.
Applicants for such substitute Warrant Certificates shall also comply with such
other reasonable regulations and pay such other reasonable charges as the
Company or the Warrant Agent may prescribe.
16. Notices. Any notice pursuant to this Agreement to be given or made by
the Warrant Agent or the registered holder of any Warrant to or on the Company
shall be sufficiently given or made if sent by first-class mail, postage
prepaid, addressed (until another address is filed in writing by the Company
with the Warrant Agent) as follows:
Pacific Biometrics, Inc.
1370 Reynolds Avenue
Suite 119
Irvine, California 92714
Attention: President
Any notice pursuant to this Agreement to be given or made by the Company or the
registered holder of any Warrant to or on the Warrant Agent shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing by the Warrant Agent with
the Company) as follows:
American Securities Transfer & Trust, Incorporated
938 Quail Street
Suite 101
Lakewood, Colorado 80215-5513
9
<PAGE>
17. Supplements and Amendments. The Company and the Warrant Agent may from
time to supplement or amend this Agreement without the approval of any holders
of Warrants in order to cure any ambiguity or to correct or supplement any
provision contained herein which may be defective or inconsistent with any other
provision herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Warrant Agent may deem
necessary or desirable and which shall not be inconsistent with the provisions
of the Warrants and which shall not adversely affect the interests of the
holders of Warrants.
18. Successors. All the covenants and provisions of this Agreement by or
for the benefit of the Company or the Warrant Agent shall bind and inure to the
benefit of their respective successors and assigns hereunder.
19. Merger or Consolidation of the Company. The Company shall not effect
any consolidation or merger with, or sale of substantially all its property to,
any other corporation unless the corporation resulting from such merger (if not
the Company) or consolidation or the corporation purchasing such property shall
expressly assume, by supplemental agreement satisfactory in form to the Warrant
Agent and executed and delivered to the Warrant Agent, the due and punctual
performance and observance of each and every covenant and condition of this
Agreement to be performed and observed by the Company.
20. Benefits of This Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company, the
Warrant Agent and the registered holders of the Warrants any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company, the Warrant Agent and the registered
holders of the Warrants.
21. Governing Law. This Agreement and each Warrant Certificate issued
hereunder shall be governed by and construed in accordance with the laws of the
State of Delaware.
22. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes by deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the day and year first above written.
PACIFIC BIOMETRICS, INC.
By: ____________________________________________
Paul G. Kanan, President and Chief Executive
Officer
AMERICAN SECURITIES TRANSFER & TRUST,
INCORPORATED, as Warrant Agent
By: ____________________________________________
Authorized Signatory
11
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
No._______________________
For the Purchase of ______
Shares of Common Stock
October _____, 1996
PACIFIC BIOMETRICS, INC.
Redeemable Common Stock Purchase Warrants
Void After January 31, 1998 ("Warrant Expiration Date")
THIS CERTIFIES that ________________ is entitled to purchase from PACIFIC
BIOMETRICS, INC., a Delaware corporation (hereinafter called the "Company"),
upon the surrender of this Warrant Certificate to the Company at the principal
office of the Warrant Agent hereinafter mentioned (or of its successor as
Warrant Agent), provided, and only if, this Warrant Certificate shall be
surrendered and before 5:00 p.m., New York City time, on the Warrant Expiration
Date, the number of fully paid and nonassessable shares of Common Stock, $.01
par value of the Company ("Common Stock"), set forth above, evidenced by a
certificate therefor, upon payment of the Exercise Price for the number of
shares in respect of which this Warrant Certificate is exercised; provided,
however, that under certain conditions set forth in the Warrant Agreement
hereinafter mentioned, the number of shares of Common Stock which may become
purchasable pursuant to this Warrant may be adjusted, or property other than
shares of Common Stock may become purchasable pursuant to the Warrants evidenced
hereby. The Exercise Price at which the Common Stock shall be purchasable upon
the exercise of Warrants shall be $12.00 per share, payable upon exercise,
either in cash or by certified or official bank check, in United States dollars,
to the order of the Warrant Agent. No adjustment shall be made for any dividends
on any shares of stock issuable upon exercise of this Warrant and no fractional
shares shall be issued. The right of purchase represented by this Warrant is
exercisable, at the election of the registered holder hereof, either as an
entirety or from time to time in part only of the shares specified herein and,
in the event that this Warrant Certificate is exercised in respect of fewer than
all of such shares, a new Warrant Certificate for the remaining number of such
shares will be issued on such surrender.
The Warrant is issued under, and the rights represented hereby are subject
to the terms and provisions contained in a Warrant Agreement dated as of
_______________, 1996, between the Company and the Warrant Agent named therein,
to all the terms and provisions of which the registered holder of this Warrant
Certificate, by acceptance hereof, assents. Reference is hereby made to said
Warrant Agreement for a more complete statement of the rights and limitations of
rights of the registered holder hereof, the rights and duties of the Warrant
Agent and the rights and obligations of the Company thereunder. Copies of the
Warrant Agreement are on file at the office of the Warrant Agent.
<PAGE>
The Warrants represented by this Warrant Certificate may be redeemed by
the Company, at its option, at any time, on thirty days' prior written notice,
at $.10 per Warrant, if the closing sale price of the Common Stock on any
national securities exchange or the average of closing bid and asked quotation
of the Common Stock on the NASDAQ Small-Cap Market has equaled or is greater
than sixteen dollars and eighty cents ($16.80) for twenty (20) consecutive
trading days. This Warrant Certificate may not be exercised after the close of
business on the day preceding the redemption date.
The Warrant Certificate is transferable at the office of the Warrant Agent
(or its successor as warrant agent) by the registered holder hereof in person or
by attorney duly authorized in writing, but only in the manner and subject to
the limitations provided in the Warrant Agreement, and upon surrender of this
Warrant Certificate. Upon any such transfer, a new Warrant Certificate, or new
Warrant Certificates of different denominations, of like tenor and representing
in the aggregate the right to purchase a like number of shares of Common Stock
will be issued to the transferee in exchange for this Warrant Certificate.
This Warrant Certificate and similar Warrant Certificates when surrendered
at the office of the Warrant Agent (or its successor as warrant agent) by the
registered holder in person or by attorney duly authorized in writing may be
exchanged, in the manner and subject to the limitations provided in the Warrant
Agreement, for another Warrant Certificate, or other Warrant Certificates of
different denominations, of like tenor and representing in the aggregate the
right to purchase a like number of shares of Common Stock.
This Warrant Certificate may be exercised only if a current prospectus
relating to the Common Stock is then in effect and only if the shares of Common
Stock are qualified for sale under the securities law of the state or states in
which the Warrantholder resides.
This Warrant Certificate shall not be valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, PACIFIC BIOMETRICS, INC. has caused to be printed
herein the facsimile signature of its President or a Vice President as of the
date written above.
PACIFIC BIOMETRICS, INC.
By:_____________________________________
President
AMERICAN SECURITIES TRANSFER & TRUST,
INCORPORATED, as Warrant Agent
By:_____________________________________
Authorized Signature
2
<PAGE>
[ FORM OF ]
ELECTION TO PURCHASE
PACIFIC BIOMETRICS, INC.
1370 Reynolds Avenue
Suite 119
Irvine, California 92714
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant(s) for, and to purchase thereunder,
____________________ shares of the stock provided for therein, and requests that
certificates for such shares shall be issued in the name of ____________________
_________________________ (Please Print) and be delivered to ___________________
___________________________ at ______________________________ and, if said
number of shares shall not be all of the shares purchasable thereunder, that a
new Warrant Certificate for the balance remaining of the shares purchasable
under the within Warrant Certificate be registered in the name of, and delivered
to, the undersigned at the address stated below.
Dated: _____________________________, 199__
Name of Warrantholder: ___________________________________________________
( Please Print )
Address:__________________________________________________________________
Signature: _______________________________________________________________
Note: The above signature must correspond with the name
as written upon the face of this Warrant in every
particular, without alteration or enlargement or any
change whatever.
3
<PAGE>
[ FORM OF ]
ASSIGNMENT
For value received, the undersigned registered holder of the attached
Warrant Certificate hereby sells, assigns and transfers unto the Assignee(s)
named below (including the undersigned with respect to any Warrants that are
evidenced by the Warrant Certificates that are not being assigned hereby) all of
the right of the undersigned under the Warrant Certificate, with respect to the
number of Warrants set forth below, and does hereby irrevocably constitute and
appoint __________________ the undersigned's attorney-in-fact, to make such
transfer on the books of the within-named Corporation maintained for the
purpose, with full power of substitution in the premises.
Social Security of other
Name of identifying number of Number of
Assignee(s) Address Assignee(s) Warrants
----------- ------- ------------------------ ---------
Date: ________________________, 199__
Signature: _______________________________________________________________
Note: The above signature must correspond with the name
as written upon the face of this Warrant in every
particular, without alteration or enlargement or any
change whatever.
4
<PAGE>
THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF CAN BE
TRANSFERRED ONLY IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, AND
APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE UNDERLYING SECURITIES MAY
NOT BE SOLD, TRANSFERRED, OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT, UNLESS, IN THE OPINION OF COUNSEL TO THE COMPANY, SUCH
REGISTRATION IS NOT THEN REQUIRED.
UNDERWRITER'S UNIT PURCHASE WARRANT
PACIFIC BIOMETRICS, INC.
170,000 Units
(Common Stock and Warrants)
THIS CERTIFIES THAT, for value received, Paradise Valley Securities, Inc.,
an Arizona corporation (the "Underwriter"), or its successors and permitted
assigns (the "Holder") is entitled to subscribe for and purchase from PACIFIC
BIOMETRICS, INC., a Delaware corporation, whose address is 1370 Reynolds Avenue,
Suite 119, Irvine, California 92614 (the "Company"), at any time from and after
the one year anniversary of the effective date of the Company's Registration
Statement on Form SB-2 (File No. 333-11551) filed with the Securities and
Exchange Commission (the "Registration Statement"), and prior to Midnight (Los
Angeles, California time) on October __, 2001, which latter date is five years
from the effective date of the Registration Statement (the "Exercise Period"),
170,000 units (the "Units"), each Unit (i) consisting of one share of the
Company's common stock, $.01 par value (the "Common Stock"), and (ii) a warrant
("Purchase Warrant") to purchase one share of Common Stock, at a price of $5.70
per Unit (as adjusted in accordance with this Warrant, the "Purchase Price"),
subject, however, to the provisions and upon the terms and conditions
hereinafter set forth in this Warrant. The Purchase Warrants which are included
in the Units shall be issued pursuant to and subject to the terms and conditions
of that Warrant Agreement between the Company and American Securities Transfer &
Trust, Incorporated, as warrant agent, the form of which was filed as Exhibit
4.3 to the Registration Statement, or any successor or replacement warrant
agreement. The term "Effective Date" as used in this Warrant means October __,
1996, the effective date of the Registration Statement.
This Warrant is the "Underwriter's Unit Warrant" issued pursuant to the
Underwriting Agreement dated October __, 1996 relating to the initial public
offering of Units underwritten by Paradise Valley Securities, Inc.
1. Exercise; Issuance of Certificates; Payment for Shares. The rights
represented by this Warrant may be exercised by the Holder, in whole or in part
(but not as to a fractional Unit), at any time or from time to time during the
Exercise Period, upon presentation and surrender of this Warrant to the Company,
at its principal office as set forth on Page 1 of this Warrant, with a duly
executed subscription (in the form attached hereto) and accompanied by payment
of the Purchase Price for each Unit so purchased. Such payment shall be made, in
cash or by certified, bank, or cashier's check, payable to the order of the
Company, or by wire transfer of funds to the Company's account. The Units so
purchased shall be deemed to have been issued to the Holder as of the close of
business on the date on which this Warrant shall have been surrendered to the
Company, along with the subscription and full payment for the Units purchased.
Certificates for the securities so purchased and, unless this Warrant shall have
expired, a new Warrant representing the number of Units, if any, with respect to
which this Warrant shall not then have been exercised, shall be delivered to the
Holder within a reasonable time, and in any event within 30 days, after the
Holder has complied with the provisions of this Section 1.
<PAGE>
2. Restrictions on Transfer of Warrant. For the one year period after the
Effective Date the Holder may not sell, assign pledge, hypothecate or otherwise
transfer any rights under this Warrant to anyone other than (a) any officer or
partner of the Underwriter; (b) any other underwriter identified in the
Underwriting Agreement and described in the Registration Statement (or any
substitute underwriter appointed in accordance with the Underwriting Agreement)
and any such underwriter's officers or partners; (c) any successor to the
business of the Underwriter; or (d) any transferee who receives this Warrant by
operation of law as a result of the death or dissolution of any Holder permitted
by this Section 2.
3. Reservation of Shares. The Company covenants and agrees that all
securities that it may issue upon the exercise of the rights represented by this
Warrant will, upon issuance, be fully paid and nonassessable and free from all
taxes, liens and charges. The Company further covenants and agrees that at all
times prior to the expiration of the Exercise Period, there shall be authorized
and reserved for issuance upon exercise of this Warrant such number of shares of
Common Stock as shall be required for issuance on full exercise of this Warrant.
The Company further agrees that at all such times prior to the expiration of the
exercise period for the Purchase Warrants there shall be authorized and reserved
for issuance upon exercise of the Purchase Warrants included within the Units
subject to this Warrant such number of shares of Common Stock as shall be
required for issuance on full exercise of such Purchase Warrants.
4. Exchange, Assignment, or Loss of Warrant.
(a) This Warrant is exchangeable, without expense other than as
provided in this Section 4, at the option of the Holder, upon presentation and
surrender hereof to the Company, for other Warrants of different denominations
entitling the holder(s) thereof to purchase in the aggregate the same number of
Units purchasable hereunder.
(b) This Warrant may not be sold, transferred, assigned, or
hypothecated except as permitted under Section 2 herein. Any such permitted
assignment shall be made by surrender of this Warrant to the Company, together
with a duly executed assignment (in the form of the assignment attached hereto)
and funds sufficient to pay any transfer tax, whereupon the Company shall,
without charge, execute and deliver a new Warrant or Warrants in the name(s) of
the assignee(s) named in such instrument of assignment, and this Warrant shall
promptly be canceled.
(c) This Warrant may be divided or combined with other Warrants that
carry the same rights upon presentation and surrender of this Warrant at the
office of the Company together with a written notice, signed by the Holder,
specifying the names and denominations in which new Warrants are to be issued.
(d) The Company will execute and deliver a new Warrant of like tenor
and date upon receipt by the Company of evidence satisfactory to it of the loss,
theft, destruction, or mutilation of this Warrant, and (i) in the case of loss,
theft, or destruction, upon receipt by the Company of indemnity satisfactory to
the Company, or (ii) in the case of mutilation, upon presentation, surrender,
and cancellation of this Warrant.
(e) The term "Warrant" as used in this Section 4 includes any
warrants issued in substitution for or replacement of this Warrant, or into
which this Warrant may be divided or exchanged.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Company, either at law or equity.
The rights of the Holder are limited to those
-2-
<PAGE>
expressed in the Warrant and are not enforceable against the Company except to
the extent set forth herein.
6. Adjustment and Other Events.
(a) In case the Company shall declare any dividend or other
distribution upon its outstanding Common Stock payable in Common Stock or shall
subdivide its outstanding shares of Common Stock into a greater number of
shares, then the number of Units that may thereafter be purchased upon the
exercise of the rights represented hereby shall be increased in proportion to
the increase through such dividend, distribution, or subdivision, and the
Purchase Price shall be decreased in such proportion. In case the Company shall
at any time combine the outstanding shares of its Common Stock into a smaller
number of shares, the number of Units that may thereafter be purchased upon the
exercise of the rights represented hereby shall be decreased in proportion to
the decrease through such combination, and the Purchase Price shall be increased
in such proportion.
(b) In case of any (i) reclassification, capital reorganization, or
other change of outstanding Common Stock of the Company (other than a change as
a result of an issuance of Common Stock under Subsection 6(a)), or (ii)
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and that does not result in any reclassification, capital
reorganization or other change of the shares of Common Stock issuable upon
exercise of this Warrant), or (iii) sale or conveyance to another corporation of
all or substantially all of the Company's assets as an entirety, then and in
such event the terms of this Section 6 shall be deemed to be appropriately
adjusted, and the Company shall cause effective provision to be made, so that
the Holder shall have the right thereafter, by exercising this Warrant, to
purchase the kind and amount of shares of stock, warrants or other rights to
purchase such stock, and other securities and property, if any receivable upon
such reclassification, capital reorganization, or other change, consolidation,
merger, sale or conveyance that the Holder would have received had the Warrants
been exercised immediately prior to such event.
(c) The Company shall not effect any consolidation, merger, or sale
or conveyance of assets within the meaning of subsection 6(b)(ii)-(iii), unless
prior to or simultaneously with the consummation thereof the successor
corporation (if other than the Company) resulting from such consolidation or
merger or the corporation purchasing such assets shall assume by written
instrument executed and mailed or delivered to the Holder hereof pursuant to
Section 10 herein, the obligation to deliver to such Holder such shares of
stock, securities, or assets as, in accordance with the foregoing provisions,
such Holder may be entitled to purchase. In no event shall the securities
received pursuant to this subsection be registerable or transferable other than
pursuant and subject to the terms of this Warrant.
(d) If the Company shall at any time or from time to time (i)
distribute (otherwise than as a dividend in cash or in Common Stock or in
securities convertible into or exchangeable for Common Stock) to the holders of
Common Stock (or grant any rights to such holders to acquire) assets, including
stock or other securities of any subsidiary, without any consideration paid or
to be paid by such holders or for a consideration paid less than the fair market
value of such assets as reasonably determined by the Board of Directors of the
Company, or (ii) declare a dividend upon the Common Stock (to the extent payable
otherwise than out of earnings or earned surplus, as indicated by the accounting
treatment of such dividend in the books of the Company, and otherwise than in
Common Stock, or securities convertible into or exchangeable for Common Stock),
then the Company shall reserve, and the holder of each Warrant shall thereafter
upon exercise thereof be entitled to receive, for each share of Common Stock
purchasable thereunder on the record date established by the Company for the
determination of holders
-3-
<PAGE>
of Common Stock entitled to receive such distribution, right or dividend (or if
no such record date shall have been established, on the date of such
distribution, grant of such right or payment of such dividend), (i) the amount
of such assets that would have been distributable to, or as to which such right
would have been granted to, the holder thereof, or (ii) the amount of such
dividend (to the extent above-stated) that such holder would have received had
such holder been a holder of one share of Common Stock on such record (or other)
date. Such entitlement by the Holder shall be without increase in (except in
respect for the consideration, if any, paid for such assets by the holders of
Common Stock) the then current Purchase Price.
(e) If (i) there shall be an event requiring an adjustment as
provided in subsections 6(a) or 6(b); (ii) the Company shall make a distribution
that comes within subsection 6(d); (iii) the Company shall offer for
subscription pro rata to the holders of its Common Stock any additional shares
of stock of any class, or other rights; or (iv) there shall be a voluntary or
involuntary dissolution, liquidation or winding up of the Company; then, in any
one or more of such cases, the Company shall give to the Holder (i) at least
twenty days' prior written notice of the date on which the books of the Company
shall close or a record shall be taken for such dividend, distribution or
subscription rights, or for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, and (ii) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, at least twenty days' prior written notice of the date when the same
shall take place. Such notice in accordance with the foregoing clause and to the
extent applicable shall specify (i) in the case of any such dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto, and (ii) when the holders of Common Stock shall
be entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, liquidation or winding up, as the case may
be. Upon the happening of an event requiring adjustment of the Purchase Price or
the kind or amount of securities or property purchasable hereunder, the Company
shall forthwith give notice to the Holder, which such notice shall be
accompanied by a certificate of the Company, stating the adjusted Purchase Price
and the adjusted number of shares of Common Stock and Purchase Warrants
purchasable or the kind and amount of any such securities or property so
purchasable upon exercise of this Warrant, as the case may be, and setting forth
in reasonable detail the method of calculation and the facts upon which such
calculation is based. Such certificate shall, absent manifest error, be
conclusive evidence of the correctness of any computation made thereunder.
(f) No fractional shares of Common Stock or script representing
fractional shares of Common Stock shall be issued upon the exercise of this
Warrant, and the Company shall have no obligation for any cash payment with
respect thereto.
(g) The number of shares of Common Stock of any class at any time
outstanding shall include all shares of Common Stock of that class then owned or
held by or for the account of the Company.
(h) Irrespective of any adjustment or change in the Purchase Price
or the number of Units or other securities actually purchasable under each
Warrant, the Warrants theretofore and thereafter purchased may continue to
express the Purchase Price and the number of Units or other securities
purchasable thereunder as such price and number of Units were expressed in the
Warrants when initially issued.
7. Registration Rights Under the Securities Act of 1933.
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<PAGE>
(a) Optional Registrations. If at any time or times after the first
annual anniversary of the Effective Date and before the seventh annual
anniversary of the Effective Date, the Company shall determine to register any
shares of its Common Stock or securities convertible into or exchangeable or
exercisable for shares of the Common Stock under the Securities Act of 1933, as
amended (the "Act") (whether in connection with a public offering of securities
by the Company (a "primary offering"), a public offering of securities by
stockholders (a "secondary offering"), or both, but not in connection with a
registration effected solely to implement an employee benefit plan or a
transaction to which Rule 145 or any other similar rule of the Securities and
Exchange Commission (the "Commission") under the Act is applicable), the Company
will promptly give written notice thereof to the holders of Registrable
Securities (as hereinafter defined in paragraph 7(d) below) then outstanding
(the "Holders"). In connection with any such registration, the Company will use
its best efforts to effect the registration under the Act of all Registrable
Securities which such Holders may request in a writing delivered to the Company
within 15 days after delivery of such notice by the Company pursuant to Section
10 hereof; provided, however, that in the case of the registration of shares of
Common Stock by the Company in connection with an underwritten public offering,
if the underwriter determines that a limitation on the number of shares to be
underwritten is required, the underwriter may (subject to the allocation
priority set forth below) exclude from such registration and underwriting some
or all of the Registrable Securities which would otherwise be underwritten
pursuant to the notice described herein. The Company shall advise all Holders
that have requested inclusion of Registrable Securities in such underwritten
offering (the "Requesting Holders") promptly after such determination by the
underwriter, and the number of shares of securities that are entitled to be
included in the registration and underwriting (other than those to be sold for
the account of the Company) shall be allocated among the Requesting Holders (but
not among any other holders of securities of the Company) in proportion, as
nearly as practicable, to their respective holdings of Registrable Securities.
All expenses of the registration and offering (including transfer taxes on
shares being sold by the Requesting Holders), except for the fees and expenses
of counsel for the Requesting Holders shall be borne by the Company, except that
the Requesting Holders shall bear underwriting discounts and selling commissions
attributable to their Registrable Securities being registered. Without in any
way limiting the types of registrations to which this paragraph 7(a) shall
apply, in the event that the Company shall effect a shelf registration under
Rule 415 promulgated under the Securities Act, or any other similar rule or
regulation ("Rule 415"), the Company shall take all necessary action, including,
without limitation, the filing of post-effective amendments, to permit the
Requesting Holders to include their shares in such registration in accordance
with the terms of this paragraph 7(a).
(b) Required Registration. If on any one occasion after the first
annual anniversary of the Effective Date and before the fifth annual anniversary
of the Effective Date, one or more of the Holders holding at least sixty percent
(60%) of the Registrable Securities then held by all of the Holders shall notify
the Company in writing that he or they intend to offer or cause to be offered
for public sale all or any portion of his or their Registrable Securities having
an aggregate proposed offering price of not less than $750,000.00, the Company
will notify all of the Holders of Registrable Securities who would be entitled
to notice of a proposed registration under paragraph 7(a) above of its receipt
of such notification from such Holder or Holders. Upon the written request of
any such Holder delivered to the Company within 15 days after delivery by the
Company of such notification pursuant to Section 10 hereof, the Company will use
its best efforts to cause such of the Registrable Securities as may be requested
by any Holders (including the Holder or Holders giving the initial notice of
intent to register hereunder) to be registered under the Securities Act in
accordance with the terms of this paragraph 7(b), which registration may be
under any form of registration statement eligible for use by the Company for
such purpose. All expenses of such registration and offering shall be borne by
the Company, except the reasonable fees and expenses of counsel for the Holders
and selling discounts and commissions, if any. If the Company shall furnish to
the Holders requesting a registration statement under this 7(b) a certificate
signed by the President of the Company stating that, in the good faith judgment
of the Board of Directors,
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it would not be in the best interests of the Company and its stockholders
generally for such registration statement to be filed, the Company shall have
the right to defer such filing for a period of not more than 90 days after the
receipt of the request for registration; provided, however, that the Company may
not utilize this right to defer more than once in any twelve-month period. The
Company shall not be required to cause a registration statement requested
pursuant to this paragraph 7(b) to become effective prior to 90 days following
the effective date of a registration statement initiated by the Company, if the
request for registration has been received by the Company subsequent to the
giving of written notice by the Company, made in good faith, to the Holders of
Registrable Securities to the effect that the Company is commencing to prepare a
Company-initiated registration statement (other than a registration effected
solely to implement an employee benefit plan or a transaction to which Rule 145
or any other similar rule of the Commission under the Securities Act is
applicable); provided, however, that the Company shall use its best efforts to
achieve such effectiveness promptly following such 90-day period if the request
pursuant to this paragraph 7(b) has been made prior to the expiration of such
90-day period. If so requested by any Holder in connection with a registration
under this paragraph, the Company shall take such steps as are required to
register such Holder's Registrable Securities for sale on a delayed or
continuous basis under Rule 415, and also take such steps as are required to
keep any registration effective until the earlier of (i) all of such Holder's
Registrable Securities registered thereunder are sold, (ii) the Registration
Securities are eligible for sale pursuant to Rule 144, or (iii) nine months from
the effective date of the Registration Statement covering such registerable
securities. The obligation of the Company hereunder shall be deemed satisfied
only when a registration statement covering all shares of Registrable Securities
specified in notices received as aforesaid shall have become effective and, if
the method of disposition is a firm commitment underwritten public offering, all
such shares have been sold pursuant thereto. In connection with such a firm
commitment underwriting, the Company shall have the right to include in the
registration statement therefor shares of Common Stock to be offered and sold
for the account of the Company; provided, however, that no Registrable Shares
shall be excluded from such registration and underwriting by reason of the
inclusion of any securities for the Company's account.
If the method of disposition is an underwritten public
offering, the Company may designate the managing underwriter of such offering,
subject to approval of the holders of a majority of the Registrable Securities
to be sold in such offering, which approval shall not be unreasonably withheld
or delayed.
(c) Registrable Securities. For the purposes of this Section 7, the
term Registrable Securities shall mean any Common Stock issued or issuable upon
exercise hereof (or any (i) Warrant(s) issued in replacement hereof or thereof),
(ii) any Purchase Warrants issued or issuable upon exercise thereof, (iii) any
Common Stock issued or issuable upon exercise of the Purchase Warrants, and (iv)
any Common Stock issued or issuable with respect to the Common Stock underlying
this Warrant, any other such Warrants or any Purchase Warrants by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization.
In connection with any registration statement which pertains to
Registerable Securities, the selling Holders shall (i) enter into any reasonable
underwriting agreement required by the proposed underwriter for the selling
Holders, if any, and (ii) immediately notify the Company, at any time when a
prospectus relating to the Holder's Registrable Securities is required to be
delivered under the Act, of the happening of any event relating to information
respecting such Holder as a result of which the prospectus which forms a part of
such registration statement contains an untrue statement of a material fact or
omits any material fact necessary to make the statements therein not misleading.
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<PAGE>
(d) Further Obligations of the Company. Whenever under the preceding
paragraphs of this Section 7 the Company is required hereunder to register any
Registrable Securities, it agrees that it shall also do the following:
(i) Use its best efforts to diligently prepare and file with
the Commission a registration statement and such amendments and supplements to
said registration statement and the prospectus used in connection therewith as
may be necessary to keep said registration statement effective and to comply
with the provisions of the Act with respect to the sale of securities covered by
said registration statement for the period necessary to complete the proposed
public offering;
(ii) Furnish to each selling Holder such copies of each
preliminary and final prospectus and such other documents as such Holder may
reasonably request to facilitate the public offering of his Registrable
Securities;
(iii) Enter into any reasonable underwriting agreement
required by the proposed underwriter for the selling Holders, if any;
(iv) Use its best efforts to register or qualify the
securities covered by said registration statement under the securities or
blue-sky laws of such jurisdictions as any selling Holder may reasonably
request, provided that the Company shall not be required to register or qualify
the securities in any jurisdictions which require it to qualify to do business
or subject itself to general service of process therein;
(v) Immediately notify each selling Holder, at any time when a
prospectus relating to his Registrable Securities is required to be delivered
under the Act, of the happening of any event as a result of which such
prospectus contains an untrue statement of a material fact or omits any material
fact necessary to make the statements therein not misleading, and, at the
request of any such selling Holder, prepare a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus will not contain any untrue statement of
a material fact or omit to state any material fact necessary to make the
statements therein not misleading;
(vi) Cause all such Registrable Securities to be listed on or
included in each securities exchange or quotation system on which similar
securities issued by the Company are then listed.
(vii) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission and make generally available
to its security holders, in each case as soon as practicable, but not later than
30 days after the close of the period covered thereby an earnings statement of
the Company which will satisfy the provisions of Section 11(a) of the Securities
Act; and
(viii) Obtain and furnish to each selling Holder, immediately
prior to the effectiveness of the registration statement (and, in the case of an
underwritten offering, at the time of delivery of any Registrable Securities
sold pursuant thereto), a cold comfort letter from the Company' s independent
public accountants in customary form and covering such matters of the type
customarily covered by cold comfort letters as the holders of a majority of the
Registrable Securities being sold reasonably request.
(e) Indemnification. Incident to any registration statement referred
to in this Section 7, and subject to applicable law, the Company will indemnify
and hold harmless each underwriter, each Holder of Registrable Securities
(including its respective partners, directors, officers, employees and
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agents) so registered, and each person who controls any of them within the
meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder (the
"Exchange Act"), from and against any and all losses, claims, damages, expenses
and liabilities, joint or several (including any investigation, legal and other
expenses incurred in connection with, and any amount paid in settlement of, any
action, suit or proceeding or any claim asserted), to which they, or any of
them, may become subject under the Act, the Exchange Act or otherwise, insofar
as such losses claims damages or liabilities arise out of or are based on (i)
any untrue statement or alleged untrue statement of a material fact contained in
such registration statement (including any related preliminary or definitive
prospectus, or any amendment or supplement to such registration statement or
prospectus), (ii) any omission or alleged omission to state in such document a
material fact required to be stated in it or necessary to make the statements in
it, in light of the circumstances under which made, not misleading, or (iii) any
violation by the Company of the Securities Act, any state securities or blue sky
laws or any rule or regulation thereunder in connection with such registration.
The indemnity agreement of the Company contained in this subsection 7(e) shall
not apply to amounts paid in settlement of any loss, claim, damage, expense or
liability if such settlement is effected without the consent of the Company
(which consent shall not be unreasonably withheld), nor shall the Company be
liable to any person for any loss, claim, damage, expense or liability arising
from any written information such person furnishes to the Company expressly for
use in connection with a registration statement or from the person's failure to
deliver, at the time required by the Act, a final or amended prospectus that
corrects any actual or alleged untrue statement or omission in any preliminary
prospectus. With respect to any untrue statement or omission or alleged untrue
statement or omission in the information furnished in writing to the Company by
such Holder expressly for use in such registration statement, such Holder will
indemnify and hold harmless each underwriter, the Company (including its
directors, officers, employees and agents), each other Holder of Registrable
Securities (including its respective partners directors, officers, employees and
agents) so registered, and each person who controls any of them within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act,
from and against any and all losses, claims, damages, expenses and liabilities,
joint or several, to which they, or any of them, may become subject under the
Securities Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise to the same extent provided in the
immediately preceding sentence. In no event, however, shall the liability of a
Holder for indemnification under this subparagraph 7(f) exceed the proceeds
received by such Holder from its sale of Registrable Securities under such
registration statement.
(f) Notice and Defense. Promptly after any indemnified party under
subsection 7(e) receives notice of the commencement of any action (including any
governmental action), such indemnified party shall, if it intends to make a
claim against any indemnifying party under subsection 7(e), deliver to the
indemnifying party a written notice describing the action. The indemnifying
party shall have the right to participate in and, to the extent the indemnifying
party so desires, jointly with any other indemnifying party similarly noticed,
to assume and control the defense with counsel mutually satisfactory to the
parties. An indemnified party shall have the right to retain its own counsel, at
the indemnifying party's expense, if an actual or potential conflict of interest
prevents representations of such indemnified party by the counsel retained by
the indemnifying party. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under subsection
7(e) to the extent of such prejudice.
8. Transfer to Comply with the Securities Act of 1933.
(a) This Warrant and the shares of Common Stock, Purchase Warrants,
or any other security issued or issuable upon exercise of this Warrant may not
be offered or sold except in compliance
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<PAGE>
with the Act and then only against receipt of an agreement of such person to
whom such offer or sale is made to comply with the provisions of this Section 8
with respect to any resale or other disposition of such securities; except that
no such agreement shall be required from any person purchasing shares of Common
Stock or Purchase Warrants pursuant to a registration statement effective under
the Act.
(b) The Holder agrees that, prior to the disposition of any shares
of Common Stock or Purchase Warrants purchased on the exercise hereof under
circumstances that might require registration of such securities under the Act,
the Holder shall give written notice to the Company, expressing his intention as
to the disposition to be made of such shares. Promptly upon receiving such
notice, the Company shall present copies thereof to its counsel. If, in the
opinion of such counsel, the proposed disposition does not require registration
under the Act or any similar federal or state statute then in force, of the
shares of Common Stock, Purchase Warrants, or any other security issuable or
issued upon the exercise of this Warrant, the Company shall, as promptly as
practicable, notify the Holder of such opinion, whereupon the Holder shall be
entitled to dispose of such shares of Common Stock, Purchase Warrants, or other
security issuable or issued upon the exercise hereof, all in accordance with the
terms of the notice delivered by the Holder to the Company.
(c) The Company may cause a legend in substantially the form set
forth on the first page of this Warrant on each Warrant and certificate
representing shares of Common Stock or any other security issued or issuable
upon exercise of this Warrant not theretofore distributed to the public or sold
to underwriters for distribution to the public pursuant to Section 7 hereof,
unless counsel for the Company is of the opinion as to any such certificate that
such legend is unnecessary.
9. Applicable Law. This Warrant shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
10. Notice. All notices and other communications provided for herein shall
be in writing and telecopied, mailed or to the intended recipient to the
following addresses: (i) if the Holder, to Paradise Valley Securities, Inc.,
11811 North Tatum Boulevard, Suite 4040, Phoenix, Arizona 85028; and (ii) if to
the Company, at its address appearing on page 1 of this Warrant. The Holder or
the Company may change its address for delivery of notice to such other address
as may be designated therefor by written notice to the other hereunder. All such
communications shall be deemed to have been duly given when transmitted by
telecopier or personally delivered or, in the case of a mailed notice, upon
receipt, in each case given or addressed as aforesaid.
11. Survival. The various rights and obligations of the Holder and of the
Company as set forth in Sections 7 and 8 herein shall survive the exercise and
surrender of this Warrant.
12. Successors and Assigns. All the covenants and provisions of this
Warrant shall bind and inure to the benefit of the Holder and the Company and
their respective successors and assigns.
13. Descriptive Headings. The descriptive headings of the several Sections
of this Warrant are inserted for convenience only and do not constitute a part
of this Warrant.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed and delivered.
PACIFIC BIOMETRICS, INC.
By: ________________________________________
Paul G. Kanan, President
Dated: ___________, 1996
Attest:
___________________________________
________________________, Secretary
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<PAGE>
ASSIGNMENT
(to be completed only upon assignment of Warrant)
FOR VALUE RECEIVED, the undersigned assigns and transfers to the Assignee
named below all of the rights of the undersigned under the Warrant, with respect
to the number of shares of Common Stock and the number of Purchase Warrants set
forth below:
Number of
Name of Number of Purchase
Assignee Address Shares Warrants
-------- ------- ------ --------
The undersigned does hereby irrevocably constitute and appoint
______________ as Attorney-in-fact to transfer such right on the books of the
Company, with full power of substitution.
Dated: ___________________, 199__.
_________________________________________
Signature
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<PAGE>
SUBSCRIPTION
(To be executed only upon exercise of Warrant)
PACIFIC BIOMETRICS INC.
1370 Reynolds Avenue, Suite 119
Irvine, California 92614
The undersigned hereby elects to purchase, pursuant to the provisions of
the within Warrant held by the undersigned, _________ _________________________
to shares of Common Stock of PACIFIC BIOMETRICS, INC., a Delaware corporation.
Payment of the Purchase Price per share accompanies this Subscription.
DATED: ____________________________.
____________________________________________
By: ________________________________________
Its: _______________________________________
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<PAGE>
October 9, 1996
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have been requested by Pacific Biometrics, Inc. (the "Company"), a Delaware
corporation, to furnish our opinion in connection with the registration
statement (the "Registration Statement") on Form SB-2 (Registration Number
333-11551), with respect to the registration under the Securities Act of 1933,
as amended (the "Act"), of 1,700,000 units, each such unit consisting of one
share of the Company's common stock, par value $.01 per share (the "Shares"),
and one Redeemable Common Stock Purchase Warrant (the "Warrants") of the
Company.
We have made such examination as we have deemed necessary for the purpose of
this opinion. Based upon such examination, it is our opinion that, when the
Registration Statement has become effective under the Act, the Shares, the
Warrants and the shares of common stock underlying the Warrants have been
issued, sold and paid for in the manner described in the Registration Statement,
the Shares and the shares of common stock underlying the Warrants will have been
validly issued and will be fully paid and non-assessable.
We hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to our name under the caption "Legal Matters" in
the prospectus included in the Registration Statement.
Very truly yours,
ROSENMAN & COLIN LLP
By: ________________________
A Partner
<PAGE>
* PORTIONS OF THIS DOCUMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT
LICENSE AGREEMENT
This License Agreement (the "License Agreement") is entered into effective
as of February 15, 1995 (the "Effective Date"), by and between Metra Biosystems,
Inc., a California corporation at 265 North Whisman Road, Mountain View,
California 94043 ("Metra") and BioQuant, Inc., a Michigan corporation at 1919
Green Road, Ann Arbor, Michigan 48105 ("BioQuant").
1. Background.
1.1 Metra has developed or has licensed proprietary antibody technology useful
in the quantitative measurement of pyridinium crosslinks in all body fluids.
1.2 BioQuant has developed or has licensed proprietary sweat patch technology
which is useful for the collection of perspiration samples. BioQuant has also
developed or has licensed a proprietary immunoassay technology that is useful
for the measurement of pyridinium crosslinks in perspiration samples.
1.3 BioQuant desires to acquire and Metra agrees to grant BioQuant a worldwide
license, expressly excluding Japan, its territories and holdings, under which
BioQuant will have the exclusive right to use Metra's antipyridinium antibody
technology to research and develop a sweat patch assay for the quantitative
determination of pyridinium crosslinks in perspiration samples which
incorporates such antipyridinium antibody technology, and to make, have made and
sell or otherwise distribute a sweat patch assay for the quantitative
determination of pyridinium crosslinks in perspiration samples which
incorporates such antipyridinium antibody technology.
1.4 Metra agrees to use its reasonable commercial effort to introduce BioQuant
to Metra's Japanese licensee, and to recommend that such licensee grant a
sublicense under Metra Technology within Japan.
2. Definitions.
2.1 "Improvement" shall mean (i) any unpatentable improvement or modification to
Know-How made by or on behalf of BioQuant during the term of this Agreement, and
(ii) any novel antibody first identified by BioQuant during the term of this
Agreement, which antibody is covered by a claim in one or more of the Patent
Rights as of the date of such identification. "Improvement" shall not, however,
include any assay system developed by or on behalf of BioQuant.
<PAGE>
2.2 "Know-How" shall mean at any time during the term of this License Agreement
Metra trade secrets and other confidential information relating to
antipyridinium crosslinks antibody technology useful for the quantitative
determination of pyridinium crosslinks in perspiration samples, including,
without limitation, design data and information, formulations, specifications,
developments, techniques, methods, processes,, apparatus, products and other
information and data, whether or not patentable, and shall expressly exclude any
subject matter which Metra is precluded from revealing to BioQuant by reason of
a contractual obligation to a third party to hold such subject matter
confidential. "Know-How" shall include regulatory filings made by Metra to the
United States Food and Drug Administration and its foreign equivalents deemed by
Metra to be relevant to the subject matter of this License Agreement.
2.3 "Manufacturing Costs" shall mean Metra's fully-absorbed costs of
manufacturing a Product, including the direct cost of labor, materials,
manufacturing overheads allocated to production on the basis of the direct labor
method, all calculated in accordance with generally accepted accounting
procedures.
2.4 "Metra Technology" shall mean the total of Patent Rights and Know-How.
2.5 "Patent Rights" shall mean all patents owned by Metra, and all applications
owned by Metra and all United States and foreign patents issuing from such
applications, including any additions, continuations or continuations-in-part,
divisions, reissues or extensions which relate to antipyridinium crosslinks
antibody technology useful for the quantitative determination of pyridinium
crosslinks in perspiration samples.
2.6 "Patient Report" shall mean assay results obtained for an individual patient
using the Product. The number of assays performed (single, duplicate, repeat,
etc.) in order to obtain such assay results for an individual patient at one
point in time may vary but shall be determined solely by BioQuant and shall
constitute one Patient Report.
2.7 "Product" shall mean BioQuant's immunoassay technology for the quantitative
determination of pyridinium crosslinks from perspiration samples which
incorporates Metra Technology.
2.8 "Research and Development-Related Costs" shall mean direct labor and
materials costs as well as fully-burdened overhead associated with (i) persons
working essentially exclusively on research, product development and regulatory
compliance activities, (ii) necessary research and development third parties
contracts, and (iii) consulting contracts related to the conduct of this License
Agreement.
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<PAGE>
* Omitted pursuant to a request for confidential treatment.
2.9 "Territory" shall mean the entire world, expressly excluding Japan, its
territories and holdings.
3. License.
3.1 Grant to BioQuant by Metra of Metra Technology. Metra hereby grants to
BioQuant an exclusive license throughout Territory under Metra Technology, to
use Metra Technology to research and develop Products and to use, make, have
made and sell or otherwise distribute Products which incorporate, in whole or in
part, Metra Technology (the "BioQuant License").
3.2 Grant to Metra by BioQuant of Improvements to Metra Technology.
(a) BioQuant hereby grants to Metra an irrevocable, nonexclusive,
fully-paid up, worldwide, royalty-free license, with right to sublicense, under
any Improvements within Section 2.1(i) to use such portion of Improvements to
research and develop products or services other than Products, and to make, have
made and sell or otherwise distribute such products or services.
(b) BioQuant hereby grants to Metra an irrevocable, nonexclusive,
fully-paid up, worldwide license, with right to sublicense, under any
Improvements within Section 2.1(ii) to use such portion of Improvements to
research and develop products or services other than Products, and to make, have
made, use and sell or otherwise distribute such products or services; provided,
however, that Metra shall pay to BioQuant a mutually-agreeable and
commercially-reasonable royalty on commercial sales of such products or services
which incorporate, in whole or in part, Improvements to Metra Technology
described in Section 2.1(ii).
3.3 Documentation. BioQuant shall inform Metra of and document (and shall make
such documentation available to Metra from time to time during regular business
hours and with reasonable notice) all inventions included within the Improvement
license granted under Section 3.2 BioQuant makes at the time of invention and
shall retain such documentation throughout the term of this License Agreement
and for three (3) years after the termination of this Agreement in order to
facilitate the administration of Section 3.2.
4. License Fee.
4.1 BioQuant shall pay to Metra [ * ] as a fee to license Metra Technology under
this Agreement. Such amount shall be paid to Metra as follows:
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<PAGE>
* Omitted pursuant to a request for confidential treatment.
(i) [ * ] within three (3) days following, the execution of this Agreement;
(ii) [ * ] upon the earlier of (i) the initiation of any clinical trial of
Product designed and conducted in compliance with the United States Food and
Drug Administration's or any equivalent international regulatory agency's
regulatory approval process, or (ii) the date seven months from the Effective
Date; and
(iii) [ * ] upon the earlier of (i) BioQuant's consummation after October
1, 1994 of capital financing(s) in the aggregate of not less than [ * ], or (ii)
the date sixteen months from the Effective Date.
5. Royalty.
5.1 Subject to Section 5.2 and Section 5.3, BioQuant shall pay to Metra a
royalty calculated at a rate of [ * ] (the "Royalty Rate") per Patient Report,
but expressly excluding any Patient Report made in conjunction with (i) a
clinical trial being conducted in any country within Territory prior to BioQuant
having received regulatory approval from the United States Food and Drug
Administration, or from an equivalent regulatory agency within such country, to
market Product within such country, (ii) a commercially-reasonable number of
free promotional Product not to exceed [ * ] of total Product sold in each of
the first two years only after the first commercial sale, and (iii) commencing
in the third (3rd) year after the first commercial sale of Product and for each
of the remaining years of the term of this License Agreement, a commercially
reasonable number of free Product intended for use by indigent patients not to
exceed [ * ] of total Product sold in any such year ("the Royalty Base").
5.2 In the event that during the period of time in which Section 5.4 is
effective Metra sells Metra's proprietary urine pyridinium crosslinks test kit
(40 per kit using 96 well microliter plate) to any third party reference
laboratory at a wholesale price less than [ * ] per test kit, in essentially the
same or lesser quantity as the Royalty Base reported during that same quarter
pursuant to Section 5.4 herein, Metra shall reduce the Royalty Rate during such
quarter by a percentage calculated as [the difference between [ * ] and the
actual wholesale price paid by such third party reference laboratory.] For
example, in the event that Metra sells Metra's test kit for [sixty dollars
($60.00)] Royalty Base shall be reduced during the relevant quarter by [ * ].
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<PAGE>
5.3 In the event that the BioQuant License converts to a nonexclusive license
pursuant to Section 15.2 herein and Metra thereafter enters into a licensing
arrangement with one or more third parties which conveys rights to all or a
substantial part of the subject matter of the BioQuant License and such third
party licensing arrangement includes a royalty rate more favorable than Royalty
Rate, Metra shall notify BioQuant of such event and the Royalty Rate shall be
adjusted commensurate with such royalty rate.
5.4 Royalty Reports. Within 45 days after the end of each of BioQuant's fiscal
quarters in which BioQuant, its representatives and distributors sell Products,
BioQuant shall deliver to Metra a report, signed by the President of BioQuant,
setting forth the Royalty Base and calculating the royalty payable to Metra with
respect to such quarter.
5.5 Payment. Concurrently with the making of each report required by Section
5.4, BioQuant shall pay to Metra the royalty payable for the quarter covered by
such report. All payments by BioQuant to Metra hereunder shall be in United
States dollars. A late fee of the lesser of (i) one and one-half percent (1.5%),
or (ii) the highest legal rate of interest of the amount due shall be assessed
per month on any amount not paid within 15 days of being due.
5.6 Records. BioQuant shall keep, and shall require its representatives and its
distributors to keep, complete, true and accurate books of account and records
in sufficient detail to properly determine the amounts payable to Metra under
this Agreement for at least three years following the end of the calendar
quarter to which they pertain. BioQuant shall make available, and shall require
its representatives and its distributors to make available, such books and
records for inspection, during business hours and upon reasonable notice, during
such three-year period by an independent accounting firm in accordance with the
provisions of Section 5.7.
5.7 Audit Rights. Metra shall have the right, upon reasonable notice and not
more frequently than annually, to have an independent accounting firm of its
choice, subject to BioQuant's approval and such approval shall not be
unreasonably withheld, and after such accounting firm and the employees of such
accounting firm intending to conduct such audit have signed BioQuant's standard
confidentiality agreement, audit the books and records of BioQuant relating to
Royalty Base and the calculation of royalties payable. The report to Metra of
such audit shall include only the determination that BioQuant's books and
records are accurate, or a report of the dollar amount of a detected inaccuracy.
In no event shall information proprietary to BioQuant be disclosed by the
auditors to Metra. In the event that, as a result of the audit, there is any
adjustments to royalties payable during the period covered by the audit, an
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amount equal to the difference between the royalties previously paid by BioQuant
to Metra with respect to royalties payable during the period covered by the
audit for such period shall (i) be credited against future royalties if the
adjustment results in a decrease in royalties payable during the period or (ii)
be paid by BioQuant to Metra if the adjustment results in an increase in
royalties payable during the period. The expenses of such audit shall be borne
by Metra; provided, however, that if the audit results in an adjustment to
actual royalties payable during the period of 10% or more, then the expenses of
such audit shall be borne by BioQuant.
6. Ownership of Inventions.
6.1 Inventions by BioQuant. Any invention and all intellectual property rights
therein, made by or for BioQuant, whether by BioQuant employees or third parties
on BioQuant's behalf, during the term of this Agreement, shall be owned by
BioQuant.
7. Proprietary Rights.
7.1 Except as expressly set forth in this License Agreement, (i) BioQuant shall
have no right, title and interest in and to the Metra Technology and (ii) Metra
shall have no right, title and interest in and to the Improvements to Metra
Technology.
8. Patent Issues.
8.1 Notice of Intent to File Patent Applications. During the term of this
Agreement and for a period of one (1) year thereafter, BioQuant shall notify
Metra in writing thirty (30) days prior to the filing of any patent application
which claims subject matter relating to antipyridinium antibody technology.
Metra shall provide, upon BioQuant's request and no more frequently than once
per quarter, a general good faith overview and update regarding the status of
any patent applications owned by Metra which relate to the subject matter of the
BioQuant License.
8.2 Metra Technology. Metra shall prosecute, in its sole discretion and at its
sole expense, patent applications within Metra Technology and BioQuant agrees to
cooperate fully, and at Metra's expense, in such prosecution. Metra shall
implement such procedures and undertake such actions as it deems necessary to
protect the Metra Technology against infringers and BioQuant agrees to cooperate
to the extent reasonable, and at Metra's expense, in such actions.
8.3 Right of BioQuant to Pursue Prosecution of Third Party Infringers.
Notwithstanding Section 8.2 herein, BioQuant may prosecute a claim alleging
infringement by a third party of Metra Technology in the event Metra fails to
commence the prosecution of such claim within thirty (30) days of receipt of
written
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notice by BioQuant requesting such prosecution. Any final judgment or any
settlement of a suit claiming third party infringement of Metra Technology
brought by BioQuant shall be the property of BioQuant. Any settlement of any
suit claiming third party infringement of Metra Technology shall require Metra's
consent, such consent not to be unreasonably withheld.
8.4 Improvements to Metra Technology. BioQuant shall prosecute, in its sole
discretion and at its sole expense, patent applications within Improvements to
Metra Technology. BioQuant shall implement such procedures and undertake such
actions as it deems necessary to protect the Improvements to Metra Technology
against infringers. In the event BioQuant fails to prosecute any patent
application or to maintain or to defend any patent within Improvements to Metra
Technology, Metra may assume such prosecution, maintenance or defense and
BioQuant agrees to take all steps reasonably necessary to assure Metra's ability
to assume such prosecution, maintenance or defense.
9. Publications
9.1 The parties each agree to allow the other party twenty (20) days to review
any publication, abstract or poster which includes any subject matter related to
Metra Technology, in the case of a Metra review, or Improvements to Metra
Technology, in the case of a BioQuant review, prior to the proposed submission
of any such publication or abstract, or presentation of any such poster, to
permit the filing of a patent application(s) or deletion of confidential
information. The reviewing party shall within such twenty (20) day period
provide the submitting (or presenting) party written notice of the specific
subject matter, if any, deemed by the reviewing party to be confidential to such
reviewing party, and the submitting (or presenting) party agrees to remove such
confidential subject matter from the proposed publication, abstract or poster
prior to publication if requested to do so by the reviewing party.
10. BioQuant's Use of Metra Regulatory Filings.
10.1 At BioQuant's request, Metra shall disclose to BioQuant and permit BioQuant
to reference in BioQuant's regulatory filings, Metra's United States and foreign
regulatory filings (i) which relate to the subject matter of the BioQuant
License hereunder, and (ii) access to which is reasonably required by BioQuant
to support its efforts to obtain regulatory approval of Products throughout the
Territory. Except as reasonably required in order to make regulatory filings in
support of Products, or as otherwise required by law, BioQuant may review
Metra's regulatory filings only at Metra premises and shall not make any copy or
other transcription thereof. Metra shall not be obligated to disclose to
BioQuant any such data which Metra is precluded from revealing by reason of a
contractual obligation existing as of the Effective Date; provided, however,
that any such
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obligation(s) existing as of the Effective Date are described on Exhibit A
attached hereto. Any disclosures made by Metra pursuant to this Section 10 shall
be deemed to constitute Confidential Information pursuant to Section 14 herein.
11. Warranty.
11.1 Metra represents and warrants that (i) it has full right, power and
authority to enter into this License Agreement and to grant the rights granted
to BioQuant hereunder, and (ii) it has not entered into, and during the term of
this License Agreement will not enter into, any agreement with any third party
that would conflict with the license granted to BioQuant herein.
11.2 BioQuant represents and warrants that (i) it has full right, power and
authority to enter into this License Agreement and to grant the rights granted
to Metra hereunder, and (ii) it has not entered into, and during the term of
this License Agreement will not enter into, any agreement with any third party
that would conflict with the license granted to Metra herein.
12. Intellectual Property Indemnity.
12.1 Intellectual Property Indemnity by Metra.
(i) No indemnity is provided hereunder for any third party claim of
infringement based on any use of Metra Technology granted under the BioQuant
License, or on any manufacture or distribution of products incorporating Metra
Technology granted under the BioQuant License.
(ii) THE FOREGOING STATES THE ENTIRE LIABILITY AND OBLIGATION OF METRA WITH
RESPECT TO INFRINGEMENT, OR CLAIMS OF INFRINGEMENT, BY METRA TECHNOLOGY OF ANY
THIRD PARTY INTELLECTUAL PROPERTY RIGHTS.
13. Limitation of Liability
13.1 IN NO EVENT SHALL EITHER PARTY TO THIS AGREEMENT BE LIABLE TO THE OTHER
PARTY TO THIS AGREEMENT FOR ANY LOSS OF BUSINESS PROFITS, INTERRUPTION OF
BUSINESS OR ANY SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES ARISING IN ANY WAY
OUT OF THIS AGREEMENT. THESE LIMITATIONS WILL APPLY NOTWITHSTANDING THE FAILURE
OF THE ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
14. Confidential Information.
14.1 Confidential Information. "Confidential Information" shall mean any
proprietary information, expressly including Know-How, which is specifically
designated as such, which is disclosed by either party to the other in any form
in connection with this License Agreement. Each party shall treat as
confidential all Confidential Information provided by the other party, shall not
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use such Confidential Information except as expressly set forth herein or
otherwise authorized in writing, shall implement reasonable procedures to
prohibit the disclosure, unauthorized duplication, misuse or removal of the
Confidential Information and shall not disclose such Confidential Information to
any third party. Without limiting the foregoing, each of the parties shall use
at least the same procedures and degree of care to prevent the disclosure of
Confidential Information as it uses to prevent the disclosure of its own
confidential information of like importance, and shall in any event use no less
than reasonable procedures and a reasonable degree of care.
14.2 Exceptions. Notwithstanding the above, neither party shall have liability
to the other with regard to any Confidential Information received from the other
party that:
(i) was generally known and available in the public domain at the time it
was disclosed, or becomes generally known and available in the public domain
through no fault of the receiver;
(ii) was known to the receiver at the time of disclosure as shown by the
files of the receiver in existence at the time of disclosure;
(iii) is disclosed with the prior written approval of the discloser;
(iv) was independently developed by the receiver without any use of the
Confidential Information and by employees or other agents of the receiver who
have not been exposed to the Confidential Information, provided that the
receiver can demonstrate such independent development by documented evidence
prepared contemporaneously with such independent development;
(v) becomes known to the receiver from a source other than the discloser
without breach of this License Agreement by the receiver and in a manner which
is otherwise not in violation of the discloser's rights;
(vi) is disclosed pursuant to the order or requirement of a court,
administrative agency, or other governmental body; provided, that the receiver
shall provide reasonable advance notice thereof to enable the discloser to seek
a protective order or otherwise prevent such disclosure.
14.3 Disclosure of Confidential Information to Third Parties. Notwithstanding
the foregoing, either party may disclose Confidential Information of the other
party to third parties with whom the disclosing party has entered or proposes to
enter into a business relationship, or as reasonably necessary in order to
secure regulatory and any other government approvals required in order to market
Products, provided that any such disclosure is made pursuant to a written
confidentiality agreement
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substantially similar to the provisions of this Section 14 and provided further
that the disclosing party promptly informs the other party of the nature of such
disclosure or potential disclosure.
15. Term, Termination.
15.1 This License Agreement shall become effective as of the Effective Date and
shall continue in force, unless earlier terminated in accordance with this
Section 15, until the expiration of the last to expire of the Patent Rights.
15.2 BioQuant License. The BioQuant License shall convert to a non-exclusive
license under Metra Technology upon the earlier of (i) seven (7) years from the
first commercial sale of Products, or (ii) ten (10) years from the Effective
Date. Prior to such conversion from such exclusive license to a non-exclusive
license and upon the request of either party, the parties shall negotiate in
good faith the terms and conditions of an extension of BioQuant's exclusive
license. If, despite such good faith negotiations, the parties are unable to
reach a mutually acceptable agreement within sixty (60) days following request
for negotiations under this Section 15.2, the BioQuant License shall become
non-exclusive. Metra may enter into negotiations with third parties prior to or
concurrent with such good faith negotiations with BioQuant.
15.3 Termination for Cause. This License Agreement may be terminated by either
party upon written notice if the other party (a) materially breaches any
material term or condition of this License Agreement and fails to remedy the
breach within thirty (30) days after being given written notice thereof, or (b)
is dissolved or liquidated or if the assets and/or business of such other party
are placed in the hands of a trustee, receiver or assignee for the benefit of
creditors, unless such act is reversed within fifteen (15) days.
15.4 Termination by Metra of the BioQuant License for BioQuant's Failure to
Exploit Metra Technology. The BioQuant License may be terminated by Metra
immediately upon written notice to BioQuant in the event of either of the
following:
15.4(a) BioQuant fails to invest at least one hundred thousand dollars
($100,000) annually into Research and Development-Related Costs directly related
to Metra Technology during the period of time between the Effective Date and
such time as BioQuant files a submission seeking regulatory approval from the
United States Food and Drug Administration to market Product ("Regulatory
Approval"); or
15.4(b) BioQuant fails to invest at least forty thousand dollars ($40,000)
annually into Research and Development-Related Costs directly related to Metra
Technology during the period of
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time between a submission pursuant to Section 15.4(a) and approval of such
submission; or
Any compensation made by BioQuant to a third party for Research and
Development-Related Costs in the form of BioQuant capital stock shall be valued
for the purposes of calculating the investments required of BioQuant under
Sections 15.4(a) and 15.4(b) herein at the fair market value at the time of such
payment.
15.4 Records. BioQuant shall keep complete, true and accurate books of account
and records in sufficient detail to properly determine the dollar amounts
invested into Research and Development-Related Costs directly related to Metra
Technology under this License Agreement for at least three years following the
end of the calendar quarter to which they pertain.
15.5 Audit Rights. Metra shall have the right, upon reasonable notice and not
more frequent than annually, to have an independent accounting firm of its
choice, subject to BioQuant's approval and such approval shall not be
unreasonably withheld, audit the books and records of BioQuant relating to
investment in Research and Development-Related Costs directly related to Metra
Technology under this License Agreement, provided that each of the auditors sign
BioQuant's standard confidentiality agreement. The accounting records relating
to any given accounting period may be audited no more than one time, except in
the event the initial audit report results in a downward adjustment reducing the
amount BioQuant invested in Research and Development-Related Costs directly
related to Metra Technology under this License Agreement in which case a second
audit relating to the same accounting period may be conducted but only by an
independent accounting firm. The expenses of such second audit shall be borne by
Metra; provided, however, that if an audit conducted by an independent
accounting firm results in an adjustment reducing the amount of Research and
Development-Related Costs directly related to Metra Technology under this
License Agreement during the accounting period of 5% or more, then the expenses
of such audit shall be borne by BioQuant.
15.6 Return of Materials. Within ten (10) days after the expiration or
termination of this License Agreement, each party shall return any Confidential
Information received from the other party.
15.7 Effect of Termination. The provisions of sections 2, 3.2, 3.3, 5.4, 5.5,
5.6, 5.7, 6, 7, 8, 9, 11, 12, 13, 14 and 19 shall survive the termination or
expiration of this License Agreement.
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* Omitted pursuant to a request for confidential treatment.
16. BioQuant Disparagement of Metra Products.
16.1 BioQuant, its agents and sublicensees, shall not promote or market Products
through the disparagement of other products developed or sold by Metra, or by
direct comparison of the negative characteristics of such products with
Products. In the event that Metra believes that at any time during the term of
this Agreement such disparagement or such comparison has occurred, Metra shall
notify BioQuant in writing of the nature of such alleged disparagement or
comparison. Metra shall in such notice propose a method(s) by which BioQuant may
cure such alleged disparagement or comparison satisfactory to Metra, such
proposed cure not to include direct monetary damages to Metra. In the event the
parties are unable to agree upon such a cure, or BioQuant is unable or unwilling
to effect such a cure, then either party may institute dispute resolution
mechanisms pursuant to Section 19.1 herein. Nothing in this Section 16.1 shall
be construed to limit BioQuant's ability to make product comparisons for
purposes of securing regulatory approvals in the United States or elsewhere, or
to promote and market a Product by reference to a label approved by the United
States Food and Drug Administration or its foreign counterparts.
17. Supply of Materials by Metra to BioQuant
17.1 Metra shall use its best efforts to supply certain agreed upon reagents to
BioQuant solely to support BioQuant's product development and Product
manufacturing efforts, at a cost to BioQuant computed as Metra's fully-burdened
Manufacturing Costs plus [ * ]. Metra shall use its best efforts to place a
quantity of Metra's polyclonal rabbit antipyridinium crosslinks antibody
sufficient to insure BioQuant a three (3) year supply of such reagent under the
control of a mutually-agreeable third party at BioQuant's request and expense.
BioQuant and Metra shall jointly contract with such third party and such third
party shall be authorized to release control of such reagent to BioQuant only
with Metra's written authorization which may be withheld only in the event that
(i) BioQuant is not current in regards to any of its payment obligations which
arise under the terms of this Agreement, (ii) the amount of reagent being
requested for release is greater than one hundred and twenty percent (120%) of
the forecasted order, or (iii) Metra has provided BioQuant notice pursuant to
Sections 19.2 and 19.6 of Metra's allegation of a breach by BioQuant of any
provision of this Agreement.
17.2 Upon execution of this Agreement, and within ten (10) days after the end of
each quarter thereafter, BioQuant shall provide Metra with a written, good
faith, and reasonable forecast, on a rolling basis, of the reagents for which
BioQuant expects to submit orders for the following year. BioQuant shall be
bound to
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order, and Metra shall be obligated to use its best efforts to supply, no less
than eighty percent (80%) of BioQuant's annual forecasted order for each
reagent. In the event that Metra is unwilling or unable to meet its supply
obligations to BioQuant for two (2) consecutive quarters, Metra shall promptly
take all steps necessary to establish an alternative source of supply for
BioQuant on terms and conditions no less favorable to BioQuant than those set
forth herein. In the event Metra is unable to establish a satisfactory
alternative source of supply within a reasonable period of time, Metra shall
grant to BioQuant the right to manufacture the reagents.
18. Technological Support. Metra may, at its sole discretion, provide
technological support to BioQuant during the period of time after the Effective
Date and prior to BioQuant having received regulatory approval from the United
States Food and Drug Administration, or an equivalent international regulatory
agency, in a manner to be mutually agreed upon by the parties and for a fee of
$60.00 per hour. However, at the point in time that BioQuant pays Metra two
hundred fifty thousand dollars ($250,000) pursuant to Section 4.1 herein, any
technological support provided by Metra pursuant to this Section 16 shall be at
no charge to BioQuant.
19. Miscellaneous.
19.1 Governing Law. This License Agreement shall be covered by and interpreted
under the laws of the State of California, without regard to conflict of laws
provisions.
19.2 Dispute Resolution. Any dispute or claim arising out of or relating to this
License Agreement shall be resolved as follows: (i) for a period of thirty (30)
days after a dispute arises the respective chief executive officers of the
parties shall negotiate in good faith in an effort to resolve the dispute, and
(ii) if the dispute has not been resolved at the close of such thirty-(30) day
period, the matter will be finally settled by binding arbitration in San Jose,
California, under the Commercial Rules of Arbitration of the American
Arbitration Association, by one arbitrator appointed in accordance with said
rules; provided that if the parties cannot agree on who is to serve as the
arbitrator, the dispute shall be resolved by a panel of three arbitrators,
wherein each party shall appoint one arbitrator and those arbitrators shall in
turn jointly appoint the third arbitrator. Judgment on an award rendered by an
arbitrator or arbitrators may be entered in any court having jurisdiction
thereof. Notwithstanding the foregoing, the parties may apply to any court of
competent jurisdiction for preliminary or interim equitable relief without
breach of this arbitration provision.
19.3 Costs. Each party shall bear its own costs in connection with the
negotiation, documentation and enforcement of this
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License Agreement except as otherwise specifically provided herein.
19.4 Force Majeure. If the performance of this License Agreement or any
obligations hereunder is prevented, restricted or interfered with by reason of
fire or other casualty or accident, strikes or labor disputes, war or other
violence, any law, order, proclamation, ordinance, demand or requirement of any
government agency, or any other act or condition beyond the control of the
parties hereto, the party so affected, upon giving prompt notice to the other
party, shall be excused from such performance (other than the obligation to pay
money) during such prevention, restriction or interference.
19.5 Assignment. The provisions hereof shall be binding upon and inure to the
benefits of the parties, their successors and permitted assigns. This Agreement
or any rights or obligations arising hereunder may be assigned by either party
upon written notice to the other; provided, however, that BioQuant may only
assign this Agreement to a competitor of Metra in the area of assaying bodily
fluids for the determination of biochemical markers for bone metabolism with the
prior written consent of Metra, which consent shall not be unreasonably
withheld.
19.6 Notices. All notices, requests, consents and other communications under
this License Agreement shall be in writing and (i) delivered by hand, or (ii)
mailed by first class registered mail, return receipt requested, postage
prepaid, or (iii) sent via facsimile transmission, or (iv) shipped through a
private courier system designated for overnight delivery, and shall be addressed
to the appropriate party as follows:
Metra Biosystems, Inc. BioQuant, Inc.
265 North Whisman Rd. 1919 Green Road
Mountain View, Ca. 94043 Ann Arbor, Mi. 48105
Attn: President Attn: President
415/903-9100 - phone 313/995-2176 - phone
313/903-0550 - fax 415/995-0500 - fax
or to such other address or person as the parties may from time to time
designate by written notice delivered as specified above to the other. Notices
shall be effective upon receipt.
19.7 Severability. In the event that any provision of this License Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this License Agreement shall continue in full force and
effect without said provision.
19.8 Waiver. The failure of either party to enforce at any time the provisions
of this License Agreement shall in no way be constituted to be a present or
future waiver of such provisions, and shall not in any way affect the right of
either party to
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enforce each and every such provision thereafter. Any waiver by a party of its
rights hereunder shall be effective only if evidenced by a written instrument
executed by a duly authorized representative of such party.
19.9 Modification. No alteration, amendment, waiver, cancellation or any other
change in any term or condition of this License Agreement shall be valid or
binding on either party unless the same shall have been mutually assented to in
writing by both parties.
19.10 Independent Contractors. The relationship of Metra and BioQuant hereunder
is that of independent contractors, and nothing herein shall be construed to (i)
give either party the right to direct or control the day-to-day activities of
the other, or (ii) constitute the parties as partners, joint venturers,
co-owners or otherwise as participants in a joint or common undertaking.
19.11 Entire Agreement. The terms and conditions herein contained constitute the
entire agreement between the parties and supersede all previous agreements and
understandings, whether oral or written, between the parties hereto with respect
to the subject matter hereof, and no agreement or understanding varying or
extending the same shall be binding upon either party hereto unless in a written
document signed by both parties.
19.12 Section Headings. The section headings contained in this License Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this License Agreement.
19.13 Counterparts. This License Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this License Agreement
to be signed by duly authorized officers or representatives as of the date first
above written.
METRA BIOSYSTEMS, INC.
By:___________________________
Print name____________________
Title:________________________
BIOQUANT, INC.
By:___________________________
Print name____________________
Title:________________________
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PACIFIC BIOMETRICS, INC.
1996 STOCK INCENTIVE PLAN
SECTION 1. Purpose
The purpose of the Pacific Biometrics, Inc. 1996
Stock Incentive Plan (the "Plan") is to enable Pacific Biometrics,
Inc. (the "Company") and its subsidiaries (as defined below) to
provide employees, officers, directors, consultants and advisors the
opportunity to acquire a proprietary interest in the Company and to
benefit from the appreciation in the value of its common shares and
thereby to enhance the ability of the Company to attract and retain
employees and other persons of exceptional ability who, by their
participation in the Plan, will have a greater incentive to contribute
to the Company's long-term success and growth. For purposes of the
Plan, a "subsidiary" means any subsidiary corporation as defined in
Section 424(f) of the Internal Revenue Code of 1986, as amended, (the
"Code").
SECTION 2. Types of Awards
2.1 Awards under the Plan may be in the form of
(i) incentive stock options or non-qualified stock options ("Stock
Options"); (ii) Stock Appreciation Rights; (iii) Restricted Stock;
(iv) Performance Shares; (v) Loans; and/or (vi) Tax Offset Payments.
2.2 An eligible person may be granted one or more
types of awards, which may be independent or granted in tandem. If
two awards are granted in tandem the grantee may exercise (or
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otherwise receive the benefit of) one award only to the extent he
or she relinquishes the tandem award.
SECTION 3. Administration
3.1 The Plan shall be administered by the
Compensation Committee of the Company's Board of Directors (the
"Board") or such other committee of directors as the Board shall
designate (the "Committee"), which shall consist of not less than two
disinterested persons (as such term is defined in Rule 16b-3 under the
Securities Exchange Act of 1934 (the "Act") or any successor rule) who
shall serve at the pleasure of the Board. In addition, from and after
the first meeting of the stockholders of the Company occurring after
December 31, 1999 at which directors are to be elected, all members of
the Committee shall be "outside directors" within the contemplation of
Section 162(m)(4)(C)(i) of the Code. The President of the Company
shall also be a member of the Committee, ex-officio, whether or not he
is otherwise eligible to be a member of the Committee. The Committee
shall be appointed annually by the Board, which may at any time and
from time to time remove any members of the Committee, with or without
cause, appoint additional members to the Committee and fill vacancies,
however caused, in the Committee. A majority of the members of the
Committee shall constitute a quorum. All determinations of the
Committee shall be made by a majority of its members present at a
meeting duly called and held except that the Committee may delegate to
any one of its members the authority of the Committee with
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respect to the grant of Options to persons who shall not be officers
and/or directors of the Company and who are not, and in the judgment
of the Committee may not be reasonably expected to become, a "covered
employee" within the meaning of Section 162(m)(3) of the Code. Any
decision or determination of the Committee reduced to writing and
signed by all of the members of the Committee (or by the member of the
Committee to whom authority has been delegated) shall be fully as
effective as if it had been made at a meeting duly called and held.
3.2 The Committee shall have the authority to grant
awards to eligible persons under the Plan; to adopt, alter and repeal
such administrative rules, guidelines and practices governing the Plan
as it shall deem advisable; to interpret the terms and provisions of
the Plan and any award granted under the Plan; and to otherwise
supervise the administration of the Plan. In particular, and without
limiting its authority and powers, the Committee shall have the
authority:
(a) to determine whether and to what extent
any award or combination of awards will be granted hereunder,
including whether any awards will be granted in tandem with each
other;
(b) to select the persons to whom awards will
be granted;
(c) to determine the number of shares of the
common stock of the Company (the "Stock") to be covered by each
award granted hereunder;
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<PAGE>
(d) to determine the terms and conditions of
any award granted hereunder, including, but not limited to, any
vesting or other restrictions based on performance and such other
factors as the Committee may determine, and to determine whether the
terms and conditions of the award are satisfied;
(e) to determine the treatment of awards upon
an employee's retirement, disability, death, termination for cause
or other termination of employment;
(f) to determine pursuant to a formula or
otherwise the Fair Market Value of the Stock on a given date; Fair
Market Value shall mean the value of one (1) share of Common Stock,
determined as follows:
(i) If the Common Stock is not listed or
admitted to trading on a stock exchange, the last sale price
of the Common Stock in the over-the-counter market on the date
of valuation, or,
(ii) If the Common Stock is then listed or
admitted to trading on any stock exchange, the closing sale
price on the date of valuation on the principal stock
exchange on which the Common Stock is then listed or admitted
to trading.
If no closing sale price is quoted on such
day, or if no sale takes place on such day on such principal
exchange, as the case may be, then the closing sale price on
the over-the-counter market or the closing sale price of the
Common Stock on such exchange on the next preceding day on
which a
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<PAGE>
sale occurred or closing sale price was reported, as the case
may be, shall be the Fair Market Value. During such times as
there is not a market price available, the Fair Market Value
shall be determined by the Board or the Committee in good
faith, which determination shall be conclusive and binding on
all interested parties.
(g) to determine whether the amount of any
dividends declared with respect to the number of shares covered by an
award (i) will be paid to the holder currently or (ii) will be
deferred and deemed to be reinvested or (iii) will otherwise be
credited to such holder, or that the holder has no rights with respect
to such dividends;
(h) to determine whether to what extent, and
under what circumstances Stock and other amounts payable with respect
to an award will be deferred either automatically or at the election
of a holder, including providing for and determining the amount (if
any) of deemed earnings on any deferred amount during any deferral
period;
(i) to provide that the shares of Stock
received as a result of an award shall be subject to a right of first
refusal, pursuant to which the holder shall be required to offer to
the Company any shares that the holder wishes to sell, subject to such
terms and conditions as the Committee may specify;
(j) to amend the terms of any award,
prospectively or retroactively; provided, however, that no
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<PAGE>
amendment shall impair the rights of the award holder without his
or her consent;
(k) to substitute new Stock Options for
previously granted Stock Options, or for options granted under other
plans, in each case including previously granted options having higher
option prices; and
(l) to allow an option holder to exercise
his or her option prior to its expiration and pay for the acquired shares
with currently owned shares, while at the same time receiving
replacement options, at the then current market price, for the same
remaining term as the option exercised, or pay for the acquired shares
with a portion of the acquired shares.
3.3 All determinations made by the Committee
pursuant to the provisions of the Plan shall be final and binding on
all persons, including the Company and Plan participants.
3.4 The Committee may from time to time delegate to
one or more officers of the Company any or all of its authority
granted hereunder except with respect to awards granted to persons
subject to Section 16 of the Act. The Committee shall specify the
maximum number of shares that the officer or officers to whom such
authority is delegated may award.
SECTION 4. Stock Subject to Plan
4.1 The total number of shares of Stock reserved
and available for distribution under the Plan shall be 1,000,000
(subject to further adjustment as provided below). Such shares may
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consist of authorized but unissued shares or treasury shares. The
exercise of a Stock Appreciation Right for cash, the payment of any
other award in cash shall not count against this share limit.
4.2 To the extent an option terminates without
having been exercised, or an award terminates without the holder
having received payment of the award, or shares awarded are forfeited,
the shares subject to such award shall again be available for
distribution in connection with future awards under the Plan. At no
time will the number of shares issued under the Plan plus the number
of shares covered by outstanding awards under the Plan exceed the
number of shares authorized under the Plan.
4.3 In the event of any merger, reorganization,
consolidation, sale of substantially all assets, recapitalization,
Stock dividend, Stock split, spin-off, split-up, split-off,
distribution of assets or other change in corporate structure
affecting the Stock, a substitution or adjustment, as may be
determined to be appropriate by the Committee in its sole discretion,
shall be made in the aggregate number of shares reserved for issuance
under the Plan, the number of shares subject to outstanding awards and
the amounts to be paid by employees or the Company, as the case may
be, with respect to outstanding awards.
SECTION 5. Eligibility; Non-Employee Directors
5.1 Officers, directors, employees, consultants and
advisors of the Company or a subsidiary are eligible to be granted
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awards under the Plan (the "Participants"). The Participants under the
Plan shall be selected from time to time by the Committee, in its sole
discretion, from among those eligible Participants.
5.2 Promptly after the attendance of each meeting
of the Board of Directors, each non-employee director of the Company
attending such meeting shall be granted an Option under the Plan
covering shares of Common Stock having a Fair Market Value equal to
$1,000 on the date of grant. All such Option grants are subject to the
limitation set forth in this Plan as determined by the Committee.
Options shall vest and become exercisable immediately upon the grant
thereof.
SECTION 6. Stock Options
6.1 The Stock Options awarded under the Plan may be
of two types: (i) Incentive Stock Options within the meaning of
Section 422 of the Code or any successor provision thereto; and (ii)
Non-Incentive Stock Options. To the extent that any Stock Option does
not qualify as an Incentive Stock Option, it shall constitute a
Non-Qualified Stock Option.
6.2 Subject to the following provisions, Stock
Options awarded under the Plan shall be in such form and shall have
such terms and conditions as the Committee may determine:
(a) Option Price. The option exercise price
per share of Stock purchasable under a Stock Option shall be
determined by the Committee. Each Option shall state the Exercise
Price, which price shall be 100% of the Fair Market Value on the
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date of grant in the case of incentive stock options, provided,
however, that, in the case of a Participant who owns more than 10% of
the total combined voting power of the Common Stock at the time an
Option which is an incentive stock option is granted to him, the
initial per share option price shall not be less than 110% of the Fair
Market Value of a share of the Common Stock on the date of grant. The
aggregate Fair Market Value of the shares of the Common Stock for
which any Participant may be granted incentive stock options which are
exercisable for the first time in any calendar year (whether under the
terms of the Plan or any other stock option plan of the Company) shall
not exceed $100,000. In the case of non-incentive stock options, the
exercise price shall not be less than 85% of the Fair Market Value on
the date of the grant; provided, however, that, in the case of a
non-incentive stock option granted to a person who is, or in the
judgment of the Committee may reasonably be expected to become, a
"covered employee" within the meaning of Section 162(m)(3) of the
Code, and in the case of non-employee director's options, the initial
per share option price shall not be less than the Fair Market Value of
the Common Stock on the date of grant.
(b) Option Term. The term of each Stock
Option shall be fixed by the Committee. All Options under this Plan
expire not later than the tenth (10th) anniversary of the date of
grant.
(c) Exercisability. Stock Options shall be
exercisable at such time or times and subject to such terms and
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conditions as shall be determined by the Committee. If the Committee
provides that any Stock Option is exercisable only in installments,
the Committee may waive such installment exercise provisions at any
time in whole or in part.
(d) Method of Exercise. Stock Options may be
exercised in whole or in part at any time during the option period by
giving written notice of exercise to the Company specifying the number
of shares to be purchased, accompanied by payment of the purchase
price. Payment of the purchase price shall be made in such manner as
the Committee may provide in the award, which may include cash
(including cash equivalents), delivery of shares of Stock already
owned by the optionee or subject to awards hereunder, through the
delivery of irrevocable instructions to a broker to deliver promptly
to the Company an amount equal to the purchase price, or by any other
manner permitted by law and determined by the Committee, or any
combination of the foregoing. The Committee may provide that all or
part of the shares received upon the exercise of a Stock Option which
are paid for using Restricted Stock or Performance Shares shall be
restricted or deferred in accordance with the original terms of the
award in question. The Committee shall determine acceptable methods
for providing notice of exercise for tendering shares of Stock and for
delivery of irrevocable instructions to a broker and may impose such
limitations and prohibitions on the use of Stock or irrevocable
instructions to a broker to exercise as it deems appropriate.
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(e) No Shareholder Rights. An optionee shall
have neither rights to dividends or other rights of a shareholder with
respect to shares subject to a Stock Option until the optionee has
given written notice of exercise and has paid for such shares.
(f) Surrender Rights. The Committee may
provide that options may be surrendered for cash upon any terms and
conditions set by the Committee.
(g) Non-transferability. No Stock Option
shall be transferable by the optionee other than by will or by the
laws of descent and distribution. During the optionee's lifetime, all
Stock Options shall be exercisable only by the optionee.
(h) Termination of Employment. If an
optionee's employment with the Company or a subsidiary terminates by
reason of death, disability, retirement, voluntary or involuntary
termination or otherwise, the Stock Option shall be exercisable to the
extent determined by the Committee. The Committee may provide that,
notwithstanding the option term fixed pursuant to Section 6.2(b), a
Stock Option which is outstanding on the date of an optionee's death
shall remain outstanding for an additional period after the date of
such death.
6.3 (a) Notwithstanding the provisions of Section
6.2, no Incentive Stock Option shall (i) have an option price which is
less than 100% of the Fair Market Value of the Stock on the date of
the award of the Stock Option, (ii) be exercisable more than ten years
after the date such Incentive Stock Option is awarded or (iii) be
awarded more than ten years after the effective date of
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the Plan. No Incentive Stock Option shall be granted to an employee
who, at the time the option is granted, owns stock possessing more
than 10% of the total combined voting power of all classes of stock of
the Company or of its subsidiary, unless the option price, at the time
of the award, is at least 110% of the Fair Market Value of the stock
subject to the option and such option is not exercisable after the
expiration of five years from the date of the award.
6.3 (b) The initial per share option price of any
option which is a Non-Incentive Stock Option shall not be less than
85% of the Fair Market Value of a share of the Common Stock on the
date of the grant; provided, however, that, in the case of a
Non-Incentive Stock Option granted to a person who is, or in the
judgment of the Committee may reasonably be expected to become, a
"covered employee" within the meaning of Section 162(m)(3) of the
Code, the initial per share option price shall not be less than the
Fair Market Value of a share of the Common Stock on the date of grant.
6.4 (a) The aggregate Fair Market Value on the date
of grant of the shares of the Common Stock for which any Participant
may be granted Incentive Stock Options which are exercisable for the
first time in any calendar year (whether under the terms of the Plan
or any other stock option plan of the Company) shall not exceed
$100,000.
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(b) No Participant shall, during any fiscal year of
the Company, be granted Options to purchase more than 1,000,000 shares
of the Common Stock.
SECTION 7. Stock Appreciation Rights
7.1 A Stock Appreciation Right shall entitle the
holder thereof to receive payment of an amount, in cash, shares of
Stock or a combination thereof, as determined by the Committee, equal
in value to the excess of the Fair Market Value of the shares as to
which the award is granted on the date of exercise over an amount
specified by the Committee. Any such award shall be in such form and
shall have such terms and conditions as the Committee may determine.
7.2 The Committee may provide that a Stock
Appreciation Right may be exercised only within the 60-day period
following occurrence of a Change of Control (as defined in Section
15.2). The Committee may also provide that in the event of a Change of
Control the amount to be paid upon the exercise of a Stock
Appreciation Right shall be based on the Change of Control Price (as
defined in Section 15.3).
SECTION 8. Restricted Stock
Subject to the following provisions, all awards of
Restricted Stock shall be in such form and shall have such terms and
conditions as the Committee may determine:
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(a) The Restricted Stock award shall specify the
number of shares of Restricted Stock to be awarded, the price, if any,
to be paid by the recipient of the Restricted Stock and the date or
dates on which, or the conditions upon the satisfaction of which, the
Restricted Stock will vest. The vesting of Restricted Stock may be
conditioned upon the completion of a specified period of service with
the Company or a subsidiary, upon the attainment of specified
performance goals or upon such other criteria as the Committee may
determine.
(b) Stock certificates representing the Restricted
Stock awarded to a Participant shall be registered in the
Participant's name, but the Committee may direct that such
certificates shall be held by the Company on behalf of the
Participant. Except as may be permitted by the Committee, no share of
Restricted Stock may be sold, transferred, assigned, pledged or
otherwise encumbered by the Participant until such share has vested in
accordance with the terms of the Restricted Stock award. At the time
Restricted Stock vests, a certificate for such vested shares shall be
delivered to the Participant (or his or her designated beneficiary in
the event of death), free of all restrictions.
(c) The Committee may provide that the Participant
shall have the right to vote or receive dividends on Restricted Stock.
The Committee may provide that Stock received as a dividend on, or in
connection with a stock split of Restricted Stock, shall be subject to
the same restrictions as the Restricted Stock.
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(d) Except as may be provided by the Committee, in
the event of a Participant's termination of employment before all of
his or her Restricted Stock has vested, or in the event any conditions
to the vesting of Restricted Stock have not been satisfied prior to
any deadline for the satisfaction of such conditions set forth in the
award, the shares of Restricted Stock which have not vested shall be
forfeited, and the Committee may provide that (i) any purchase price
paid by the Participant shall be returned to the Participant or (ii) a
cash payment equal to the Restricted Stock's Fair Market Value on the
date of forfeiture, if lower, shall be paid to the Participant.
(e) The Committee may waive, in whole or in part,
any or all of the conditions to receipt of, or restrictions with
respect to, any or all of the Participant's Restricted Stock.
SECTION 9. Performance Share Awards
Subject to the following provisions, all awards of
Performance Shares shall be in such form and shall have such terms and
conditions as the Committee may determined:
(a) The Performance Shares award shall specify the
number of Performance Shares to be awarded to any Participant and the
duration of the period (the "Performance Period") after which, and the
terms pursuant to which, the Performance Shares will be issued to the
Participant. The Committee may condition the award of Performance
Shares, or receipt of Stock or cash at the end of the Performance
Period, upon the attainment of specified
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performance goals or such other criteria as the Committee may
determine.
(b) Except as may be permitted by the Committee,
Performance Share awards may not be sold, assigned, transferred,
pledged or otherwise encumbered during the Performance Period.
(c) At the expiration of the Performance Period,
the Participant (or his or her designated beneficiary in the event of
death) shall receive (i) certificates for the number of shares of
Stock equal to the number of shares covered by the Performance Share
award, (ii) cash equal to the fair market value of such Stock or (iii)
a combination of shares and cash, as the Committee may determine.
(d) Except as may be provided by the Committee, in
the event of a Participant's termination of employment before the end
of the Performance Period, his or her Performance Share award shall be
forfeited.
(e) The Committee may waive, in whole or in part,
any or all of the conditions to receipt of, or restrictions with
respect to, Stock or cash under a Performance Share award.
SECTION 10. Loans
The Committee may provide that the Company shall
make, or arrange for, a loan or loans to an employee with respect to
the exercise of any Stock Option awarded under the Plan, with respect
to the payment of the purchase price, if any, of any Restricted Stock
awarded hereunder, or with respect to any taxes
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arising from an award hereunder; provided, however, that the Company
shall not loan to an employee more than the excess of the purchase or
exercise price of an award (together with the amount of any taxes
arising from such award) over the par value of any shares of Stock
awarded. The Committee shall have full authority to decide whether a
loan will be made hereunder and to determine the amount, term and
provisions of any such loan, including the interest rate to be
charged, whether the loan will be with or without recourse against the
borrower, any security for the loan, the terms on which the loan is to
be repaid and the conditions, if any, under which the loan may be
forgiven.
SECTION 11. Tax Offset Payments
The Committee may provide for a Tax Offset Payment
by the Company to the employee in an amount specified by the
Committee, which shall not exceed the amount necessary to pay the
federal, state, local and other taxes payable with respect to any
award and receipt of the Tax Offset Payment, assuming the employee is
taxed at the maximum tax rate applicable to such income. The Tax
Offset Payment may be paid in cash, Stock or a combination thereof, as
determined by the Committee.
SECTION 12. Purchase for Investment
12.1 Unless the shares to be issued upon the
exercise of an Option by a Participant shall be registered prior to
the issuance thereof under the Securities Act of 1933, as amended,
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such Participant will, as a condition of the Company's obligation to
issue such shares, be required to give a representation in writing
that he or she is acquiring such shares for his or her own account as
an investment and not with a view to, or for sale in connection with,
the distribution of any thereof.
SECTION 13. Tax Withholding
13.1 Each Participant shall, no later than the date
as of which the value of an award first becomes includable in the
Participant's gross income for applicable tax purposes, pay to the
Company, or make arrangements satisfactory to the Committee regarding
payment of, any federal, state, local or other taxes of any kind
required by law to be withheld with respect to the award. The
obligations of the Company under the Plan shall be conditional on such
payment or arrangements, and the Company (and, where applicable, any
subsidiary), shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment of any kind otherwise due to
the Participant.
13.2 To the extent permitted by the Committee, and
subject to such terms and conditions as the Committee may provide, a
Participant may irrevocably elect to have the withholding tax
obligation, or any additional tax obligation with respect to any
awards hereunder, satisfied by (i) having the Company withhold shares
of Stock otherwise deliverable to the Participant with respect to the
award or (ii) delivering to the Company, shares of unrestricted Stock.
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13.3 In the event of the death of a Participant, a
condition of exercising any Option shall be the delivery to the
Company of such tax waivers and other documents as the Committee shall
determine.
SECTION 14. Amendments and Termination
The Board may discontinue the Plan at any time and
may amend it from time to time. No amendment or discontinuation of the
Plan shall adversely affect any award previously granted without the
Participant's written consent. Amendments may be made without
shareholder approval except as required to satisfy Rule 16b-3 under
the Act (or any successor rule), Section 162(m) of the Code or other
regulatory requirements. The Plan will terminate no later than July 9,
2006.
SECTION 15. Change of Control
15.1 In the event of a Change of Control, unless
otherwise determined by the Committee at the time of grant or by
amendment (with the holder's consent) of such grant:
(a) all outstanding Stock Options and all
outstanding Stock Appreciation Rights awarded under the Plan shall
become fully exercisable and vested;
(b) the restrictions and deferral limitations
applicable to any outstanding Restricted Stock and Deferred Stock
awards under the Plan shall lapse and such shares and awards shall be
deemed fully vested; and
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(c) to the extent the cash payment of any
award is based on the Fair Market Value of Stock, such Fair Market
Value shall be the Change of Control Price.
15.2 A "Change of Control" shall be deemed to occur
on:
(a) The date that any person or group deemed
a person under Sections 3(a)(9) and 13(d)(3) of the Act, other than
the Company and its subsidiaries as determined immediately prior to
that date, in a transaction or series of transactions has become the
beneficial owner, directly or indirectly (with beneficial ownership
determined as provided in Rule 13d-3, or any successor rule, under
such Act) of 20% or more of the outstanding securities of the Company
having the right under ordinary circumstances to vote at an election
of the Board;
(b) the date on which one-half or more of the
members of the Board shall consist of persons other than Current
Directors (for these purposes, a "Current Director" shall mean any
member of the Board as of the effective date of the Plan and any
successor of a Current Director whose nomination or election has been
approved by a majority of the Current Directors then on the Board); or
(c) the date of approval by the shareholders
of the Company of an agreement providing for (A) the merger or
consolidation of the Company with another corporation where the
shareholders of the Company, immediately prior to the merger or
consolidation, would not beneficially own, immediately after the
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merger or consolidation, shares entitling such shareholders to 50% or
more of all votes (without consideration of the rights of any class of
stock to elect directors by a separate class vote) to which all
shareholders of the corporation issuing cash or securities in the
merger or consolidation would be entitled in the election of directors
or where the members of the Board, immediately prior to the merger or
consolidation, would not, immediately after the merger or
consolidation, constitute a majority of the Board of Directors of the
corporation issuing cash or securities in the merger or consolidation
or (B) the sale or other disposition of all or substantially all the
assets of the Company.
15.3 "Change of Control Price" means the highest
price per share paid for the Company's Stock in any transaction
reported on any national stock exchange or in the over-the-counter
market, or paid or offered in any transaction related to a Change of
Control at any time during the 90-day period ending with the Change of
Control. Notwithstanding the foregoing sentence, in the case of Stock
Appreciation Rights granted in tandem with Incentive Stock Options,
the Change of Control Price shall be the highest price paid on the
date on which the Stock Appreciation Right is exercised.
15.4 In the event that the Committee determines
that, in connection with the acquisition by the Company or a
Subsidiary of another corporation which will become a Subsidiary or
division of the Company (such corporation being hereafter referred
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to as an "Acquired Subsidiary"), Options may be granted hereunder to
employees and other personnel of an Acquired Subsidiary in exchange
for then outstanding options to purchase securities of the Acquired
Subsidiary. Such Options may be granted at such option prices, may be
exercisable immediately or at any time or times either in whole or in
part, and may contain such other provisions not inconsistent with the
Plan, or the requirements set forth in Section 14 hereof that certain
amendments to the Plan be approved by the stockholders of the Company,
as the Committee, in its discretion, shall deem appropriate at the
time of the granting of such Options.
SECTION 16. General Provisions
16.1 Each award under the Plan shall be subject to
the requirement that, if at any time the Committee shall determine
that (i) the listing, registration or qualification of the Stock
subject to the award or related thereto upon any securities exchange
or under any state or federal law, or (ii) the consent or approval of
any government regulatory body or (iii) an agreement by the recipient
of an award with respect to the disposition of Stock, is necessary or
desirable (in connection with any requirement or interpretation of any
federal or state securities law, rule or regulation) as a condition
of, or in connection with, the granting of such award or the issuance,
purchase or delivery of Stock thereunder, such award shall not be
granted or exercised, in whole or in part, unless such listing,
registration, qualification,
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consent, approval or agreement shall have been effected or obtained
free of any conditions not acceptable to the Committee.
16.2 Nothing set forth in this Plan shall prevent
the Board from adopting other or additional compensation arrangements.
Neither the adoption of the Plan nor any award hereunder shall confer
upon any Participant or employee of the Company, or of a subsidiary,
any right to continued employment.
16.3 Determinations by the Committee under the Plan
relating to the form, amount and terms and conditions of awards need
not be uniform, and may be made selectively among persons who receive
or are eligible to receive awards under the Plan, whether or not such
persons are similarly situated.
16.4 No member of the Board or the Committee, nor
any officer or employee of the Company acting on behalf of the Board
or the Committee, shall be personally liable for any action,
determination or interpretation taken or made with respect to the
Plan, and all members of the Board or the Committee and all officers
or employees of the Company acting on their behalf shall, to the
extent permitted by law, be fully indemnified and protected by the
Company in respect of any such action, determination or
interpretation.
SECTION 17. Effective Date of Plan
The Plan became effective upon approval by the
Company's shareholders on July 9, 1996.
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EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") dated as of
October __, 1996 between Pacific Biometrics, Inc., a Delaware
corporation (the "Company"), and Ellen A. Rudnick (the "Executive").
ARTICLE I
EMPLOYMENT
The Company hereby employs Executive, and Executive
accepts employment with the Company, upon the following terms and
conditions:
1.1 (a) Employment. The Company hereby employs
Executive, and Executive agrees to serve, as the Chairman of the
Company during the Term of this Agreement. Subject to the Board of
Directors of the Company, the Executive shall actively manage, and
have responsibility for and supervision over, business development
activities, investor relations and such other duties as shall be
designated by the Board of Directors. The Executive agrees to devote
her full business time and attention and best efforts to the affairs
of the Company during the Term of this Agreement; provided, however,
that, to the extent that such activities do not otherwise violate the
provisions of this Agreement or interfere with the performance of her
duties hereunder, the Executive may devote such time as shall be
reasonably necessary to perform outside consulting services; provided,
further, that such consulting services do not
<PAGE>
exceed 42 days per year and are not deemed a conflict of interest as
determined by the Board of Directors.
(b) Board of Directors. The Company agrees that
during the Term it will use its best efforts to cause the Executive to
be nominated and elected to the Company's Board of Directors.
1.2 Term. The employment of the Executive by the
Company under the terms and conditions of this Agreement will commence
on the date hereof and continue until October , 1998 (the "Term")
unless terminated sooner in accordance with the provisions of Article IV.
ARTICLE II
COMPENSATION
2.1 (a) Annual Salary. During the Term the Company
shall pay to the Executive an annual salary of $140,000 (the "Base
Salary"), payable in equal installments every two weeks. Executive
shall be entitled to an annual performance based increase in the Base
Salary as determined by the Board of Directors a compensation
committee thereof.
(b) Bonus. After the first anniversary of this
Agreement, Executive may be awarded an annual incentive bonus in such
amount as may be deemed appropriate by the Board of Directors or
compensation committee thereof.
(c) Stock Options. In connection with the
negotiation of this Agreement, the Company granted to Executive on
July 9, 1996 an option to purchase 80,000 shares of the Company's
common stock, $.01 par value per share, at $3.45 per share. Such
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options shall vest equally over a four year period commencing on July
9, 1997 (i.e. 20,000 shares per year over four years). In the event
that the Company is acquired by, or merged into, another entity, or
engages in a similar business combination or reorganization, all stock
options shall accelerate and become fully vested upon the earlier to
occur of the execution of definitive agreements relating to any of the
foregoing transactions or the consummation of any such transaction.
2.2 Reimbursement of Expenses. The Executive shall
be entitled to receive prompt reimbursement of all reasonable expenses
incurred by the Executive in performing services hereunder, including
all expenses of a cellular telephone and travel, entertainment and
living expenses while away from home on business at the request of, or
in the service of, the Company, provided that such expenses are
incurred and accounted for in accordance with the policies and
procedures established by the Company.
2.3 Benefits. The Company shall pay the Executive as
additional salary the annual cost of a disability insurance policy
which provides for payments equal to the maximum percentage of the
Base Salary allowable during the term of disability which may be
obtained at reasonable cost to the Company, with payments commencing
three months after the commencement of the disability. The Executive
shall be entitled to participate in and be covered by all health,
insurance, pension, 401(k), stock purchase, stock option and any other
employee plans and benefits established by the Company (collectively
referred to herein as the "Company Benefit
3
<PAGE>
Plans") for its full-time employees generally, subject to meeting
applicable eligibility requirements. If no health benefits are offered
to employees generally, Executive shall be entitled to a reasonable
allowance for health insurance or reimbursement of health insurance
premiums paid directly by Executive with respect to a health plan for
Executive and his dependent family members.
2.4 Vacations and Holidays. During the Term, the
Executive shall be entitled to an annual vacation leave of a minimum
of four weeks at full pay. The Executive shall be entitled to such
holidays as are established by the Company for all employees and such
other religious holidays as is customary pursuant to Executive's
religious practice.
ARTICLE III
CONFIDENTIALITY AND NONDISCLOSURE
3.1 Confidentiality. The Executive will not during
her employment by the Company or thereafter at any time disclose,
directly or indirectly, to any person or entity or use, or permit the
use of, any trade secrets or confidential information relating to the
Company. "Confidential Information" shall include all information
reasonably expected to be kept confidential, including, without
limitation of the generality of the foregoing, trade secrets,
know-how, production processes, customer lists, supply arrangements,
business and financial plans and projections, marketing plans and
advertising arrangements, the terms of any license agreement relating
to any of the foregoing, and all
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information denominated as "confidential" and is made available
only on a restricted basis.
3.2 Return of Company Material. The Executive shall
promptly deliver to the Company on termination of the Executive's
employment with the Company, for whatever the reason, or at any time
the Company may so request, all Company memoranda, notes, records,
reports, manuals, drawings, computer software, and all documents
containing Confidential Information belonging to the Company,
including all copies of such materials which the Executive may then
possess or have under Executive's control.
3.3 Non-Competition; Non-Solicitation. (a) During
the Term of Executive's employment and for a two-year period
thereafter (the "Non-Compete Period") the Executive will not, directly
or indirectly, without the express written approval of the Board of
Directors: (i) own, manage, operate, join, control, or participate in
or be connected with, as an officer, employee partner, stockholder,
director, adviser, consultant, or agent (whether paid or unpaid), any
business, which is at the time engaged in any activities which,
directly or indirectly, compete with the business of the Company (a
"Competitive Business") provided that the Company continues to pay to
Executive, in a timely manner, the amounts required pursuant to
Section 4.2 of this Agreement; the foregoing provision being also
intended to prohibit the Executive from acquiring or holding in excess
of 5% of any issue of stock or securities of any Company which is a
Competitive Business which has any securities listed on a national
securities exchange or quoted
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in the daily listing of over-the-counter market securities; (ii)
recruit, solicit or otherwise induce or influence any proprietor,
partner, stockholder, lender, director, officer, employee, sales
agent, joint venturer, investor, lessor, supplier, customer,
consultant, agent, representative or any other person which has a
business relationship with the Company to discontinue, reduce or
modify such employment, agency or business relationship with the
Company, or (iii) employ or seek to employ or cause any Competitive
Business to employ or seek to employ any person or agent who is then
(or was at any time within 90 days prior to the date the Executive or
the Competitive Business employs or seeks to employ such person)
engaged or retained by the Company.
(b) In the event that Executive breaches her
obligations in any respect under this Section 3.3, the Company, in
addition to pursuing all available remedies under this Agreement, at
law or otherwise, and without limiting its right to pursue the same
may cease all payments due to the Executive under this Agreement.
(c) Since a breach of the provisions of this Section
3.3 could not adequately be compensated by money damages, the Company
shall be entitled, in addition to any other right and remedy available
to it, to an injunction restraining such breach or a threatened
breach, and in either case no bond or other security shall be required
in connection therewith, and Executive hereby consents to the issuance
of such injunction. Executive agrees that the provisions of this
Section 3.3 are necessary and reasonable to protect the Company in the
conduct of its business. If any restriction contained in this Section
3.3 shall be deemed to be
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invalid, illegal, or unenforceable by reason of the extent, duration,
or geographical scope thereof, or otherwise, then the court making
such determination shall have the right to reduce such extent,
duration, geographical scope, or other provisions hereof, and in its
reduced form such restriction shall then be enforceable in the manner
contemplated hereby.
3.4 Copyrights, Patents, Etc. Any interest in patents, patent
applications, inventions, technological innovations, copyrights,
copyrightable works, developments, discoveries, designs, and processes
("Inventions") which Executive now or hereafter during the period she
is employed by the Company under this Agreement or otherwise and for
six months thereafter may own, conceive of, or develop and either
relating to the fields in which the Company may then be engaged or
contemplates being engaged or conceived of or developed utilizing the
time, material, facilities, technology or information of the Company,
shall belong to the Company. As soon as Executive owns, conceives of,
or develops any Invention, she agrees immediately to communicate such
fact in writing to the Company, and without further compensation, but
at the Company's expense (except as noted in clause (a) of this
Section 3.4), forthwith upon request of the Company, Executive shall
execute all such assignments and other documents (including
applications for patents, copyrights, trademarks, and assignments
thereof) and take all such other action as the Company may reasonably
request in order (a) to vest in the Company all Executive's right,
title, and interest in and to such Inventions,
7
<PAGE>
free and clear of liens, mortgages, security interests, pledges,
charges, and encumbrances ("Liens") (Executive to take such action at
his expense as is necessary to remove all such Liens) and (b), if
patentable or copyrightable, to obtain patents or copyrights
(including extensions and renewals) therefor in any and all countries
in such name as the Company shall determine.
ARTICLE IV
TERMINATION
4.1 Termination. (a) The Board of Directors may
terminate the Executive's employment hereunder as follows:
(1) upon the death of the Executive, this
Agreement shall immediately terminate, whereupon Executive or
her estate, as the case may be, shall be entitled to receive
her Base Salary and bonus at the rate provided in Section 2.1
to the date on which termination shall take effect;
(2) upon a determination of Permanent
Disability; "Permanent Disability" shall mean a physical or
mental incapacity as a result of which the Executive becomes
totally unable to continue the performance of her duties
hereunder for a period of 180 consecutive days or an
aggregate of 270 days in any consecutive 24 month period. A
determination of Permanent Disability shall be subject to the
certification of a qualified medical doctor agreed to by the
Company and the Executive or, in the event of the Executive's
incapacity to designate a doctor, the Executive's legal
representative. In the absence of agreement between the
Company and the Executive, each party shall nominate a
qualified medical
8
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doctor and the two doctors so nominated shall select a third
doctor, who shall make the determination as to the occurrence
and continuance of a Permanent Disability; or
(3) for Cause. "Cause" shall mean only the following:
(i) the willful and continued failure by the
Executive to substantially perform her duties
hereunder (other than such failure resulting from
the Executive's incapacity due to physical or mental
illness);
(ii) willful misconduct by the Executive (which
includes a willful, material breach of this Agreement by
the Executive);
(iii) conviction of a felony;
(iv) theft from the Company or misuse of
Company funds or assets; or
(v) the imposition of a final order issued by
any regulatory authority against the Company which
prohibits the Executive from holding an executive
position with the Company.
For purposes of this Agreement, no act, or failure to
act, on the Executive's part shall be considered "willful"
unless done, or omitted to be done, by the Executive in bad
faith and without a reasonable belief that such action or
omission by the Executive was in the best interests of the
Company.
4.2 Benefits. (a) If the Executive's
employment hereunder is terminated by the Company for Cause,
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neither party shall have any further obligations hereunder except for
(i) obligations accruing prior to the date of termination, and (ii)
obligations or covenants contained herein that extend beyond the term
of this Agreement.
(b) If the Executive's employment hereunder is
terminated by the Company without Cause or as the result of a change
in control of the Company, the Executive shall be entitled to receive
immediate payment for all debt owed by the Company to Execute,
together with interest thereon, plus the Company shall continue to pay
Executive's Base Salary plus bonus and all benefits for a period of
nine months from such date of termination. In addition, Executive's
stock options acquired subsequent to July 1, 1996 shall immediately
vest. All options acquired prior to the date of this Agreement shall
not be affected by Executive's termination pursuant to any provision
of this Agreement. Executive shall be entitled to exercise all vested
options received subsequent to July 1, 1996 for a period of 90 days
from such date of termination; provided, however, such exercise shall
not extend the expiration date of any option. Further, the Company
covenants and agrees that it shall provide, out of available funds, a
loan to Executive for the purpose of permitting Executive to exercise
such option. The loan will mature in three years with interest payable
in cash or stock payable quarterly at the rate of 7% per annum and
will be collateralized by the shares of stock received by Executive
upon exercise of the options. A "change in control" shall mean either
of the following events: (i) a third party obtains control of the
Company and fails to assume this Agreement, or (ii) there is
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a change in the current majority of the Board of Directors, except
that director nominees approved by the Board from time to time
subsequent to the date hereof shall be considered members of the
current majority of the Board.
ARTICLE V
ASSUMPTION OF OBLIGATIONS BY SUCCESSOR TO COMPANY
5.1 Assumption of Obligations. The Company will
require any successor or assign (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially
all of the business and/or assets of the Company, by agreement in form
and substance satisfactory to the Executive, expressly, absolutely and
unconditionally to assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required
to perform it if no such succession or assignment had taken place. Any
failure of the Company to obtain such agreement prior to the
effectiveness of any such succession or assignment shall be a material
breach of this Agreement. (If at any time during the Term of this
Agreement the Executive is employed by any corporation, a majority of
the voting securities of which is then owned by the Company, "Company"
as used in this Agreement shall in addition include such employer.) In
such event, the Company agrees that it shall pay or shall cause such
employer to pay any amounts owed to the Executive pursuant to this
Agreement.
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ARTICLE VI
GENERAL PROVISIONS
6.1 Notice. For purposes of this Agreement, notices
and all other communications provided for in the Agreement shall be in
writing and shall be deemed to have been duly given when delivered or
mailed by United States registered mail, return receipt required,
postage prepaid, as follows:
If to the Company:
Pacific Biometrics, Inc.
1370 Reynolds Avenue
Suite 119
Irvine, California 92714
Attn.: Chairman, Compensation Committee of
Board of Directors
If to the Executive:
Ellen A. Rudnick
1316 Woodland Lane
Riverwoods, IL 60015
or such other address as either party may have furnished to the other
in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
6.2 No Waivers. No provision of this Agreement may
be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing signed by the Executive and the
Company. No waiver by either party hereto at any time of any breach by
the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall
be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time.
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6.3 Governing Law. This Agreement shall be governed by
and construed in accordance with the internal laws of the State of
Delaware without regard to its conflict of law provisions.
6.4 Severability or Partial Invalidity. The
invalidity or unenforceability of any provisions of this Agreement
shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
6.5 Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed to be an
original but all of which together will constitute one and the same
instrument.
6.6 Entire Agreement. This Agreement constitutes the
entire agreement of the parties and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings, and
negotiations between the parties with respect to the subject matter
hereof. This Agreement is intended by the parties as the final
expression of their agreement with respect to such terms as are
included in this Agreement and may not be contradicted by evidence of
any prior or contemporaneous agreement. The parties further intend
that this Agreement constitutes the complete and exclusive statement
of its terms and that no extrinsic evidence may be introduced in any
judicial proceeding involving this Agreement.
6.7 Assignment. Subject to the provisions of Article IV
hereof, this Agreement and the rights, duties, and obligations
hereunder may not be assigned or delegated by any party without the
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prior written consent of the other party. Any such assignment or
delegation without the prior written consent of the other party shall
be void and be of no effect. Notwithstanding the foregoing provisions
of this Section 6.7, the Company may assign or delegate its rights,
duties, and obligations hereunder to any person or entity which
succeeds to all or substantially all of the business of the Company
through merger, consolidation, reorganization, or other business
combination or by acquisition of all or substantially all of the
assets of the Company; provided that such person assumes the Company's
obligations under this Agreement in accordance with Section 5.1.
6.8 Beneficial Interests. This Agreement shall inure
to the benefit of and be enforceable by the Executive's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while
any amounts are still payable to her hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the Executive's estate.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date first above written.
PACIFIC BIOMETRICS, INC.
By:
-------------------------------
Paul G. Kanan, President and Chief
Executive Officer
EXECUTIVE
----------------------------------
ELLEN A. RUDNICK
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EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") dated as of
October __, 1996 between Pacific Biometrics, Inc., a Delaware
corporation (the "Company"), and Paul G. Kanan (the "Executive").
ARTICLE I
EMPLOYMENT
The Company hereby employs Executive, and Executive
accepts employment with the Company, upon the following terms and
conditions:
1.1 (a) Employment. The Company hereby employs
Executive, and Executive agrees to serve, as the President and Chief
Executive Officer of the Company during the Term of this Agreement.
Subject to the Board of Directors of the Company, the Executive shall
actively manage, and have responsibility for and supervision over, the
business activities and affairs of the Company, and he shall, manage,
supervise and direct its and their officers, employees and agents. The
Executive agrees to devote his full business time and attention and
best efforts to the affairs of the Company during the Term of this
Agreement.
(b) Board of Directors. The Company agrees that
during the Term it will use its best efforts to cause the Executive to
be nominated and elected to the Company's Board of Directors.
<PAGE>
1.2 Term. The employment of the Executive by the
Company under the terms and conditions of this Agreement will commence
on the date hereof and continue until October ______, 1998 (the "Term")
unless terminated sooner in accordance with the provisions of Article
IV.
ARTICLE II
COMPENSATION
2.1 (a) Annual Salary. During the Term the Company
shall pay to the Executive an annual salary of $180,000 (the "Base
Salary"), payable in equal installments every two weeks. Executive
shall be entitled to an annual performance based increase in the Base
Salary as determined by the Board of Directors or compensation
committee thereof.
(b) Bonus. After the first anniversary of this
Agreement, Executive may be awarded an annual incentive bonus in such
amount as may be deemed appropriate by the Board of Directors or
compensation committee thereof.
(c) Stock Options. In connection with the
negotiation of this Agreement, the Company granted to Executive on
July 9, 1996 an option to purchase 80,000 shares of the Company's
Common Stock, $.01 par value per share, at an exercise price of $3.45
per share. Such options shall vest equally over a four year period
commencing on July 9, 1997 (i.e. 20,000 shares per year over four
years). In the event that the Company is acquired by, or merged into,
another entity, or engages in a similar business
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<PAGE>
combination or reorganization, all such options shall accelerate and
become fully vested upon the earlier to occur of the execution of
definitive agreements relating to any of the foregoing transactions or
the consummation of any such transaction.
2.2 Reimbursement of Expenses. The Executive shall
be entitled to receive prompt reimbursement of all reasonable expenses
incurred by the Executive in performing services hereunder, including
all expenses of a cellular telephone and travel, entertainment and
living expenses while away from home on business at the request of, or
in the service of, the Company, provided that such expenses are
incurred and accounted for in accordance with the policies and
procedures established by the Company.
2.3 Benefits. The Company shall pay the Executive as
additional salary the annual cost of a disability insurance policy
which provides for payments equal to the maximum percentage of the
Base Salary allowable during the term of disability which may be
obtained at reasonable cost to the Company, with payments commencing
three months after the commencement of the disability. The Executive
shall be entitled to participate in and be covered by all health,
insurance, pension, 401(k), stock purchase, stock option and any other
employee plans and benefits established by the Company (collectively
referred to herein as the "Company Benefit Plans") for its full-time
employees generally, subject to meeting applicable eligibility
requirements. If no health benefits are offered to employees
generally, Executive shall be entitled to a
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<PAGE>
reasonable allowance for health insurance or reimbursement of health
insurance premiums paid directly by Executive with respect to a health
plan for Executive and his dependent family members.
2.4 Vacations and Holidays. During the Term, the
Executive shall be entitled to an annual vacation leave of a minimum
of four weeks at full pay. The Executive shall be entitled to such
holidays as are established by the Company for all employees and such
other religious holidays as is customary pursuant to Executive's
religious practice.
ARTICLE III
CONFIDENTIALITY AND NONDISCLOSURE
3.1 Confidentiality. The Executive will not during
his employment by the Company or thereafter at any time disclose,
directly or indirectly, to any person or entity or use, or permit the
use of, any trade secrets or confidential information relating to the
Company. "Confidential Information" shall include all information
reasonably expected to be kept confidential, including, without
limitation of the generality of the foregoing, trade secrets,
know-how, production processes, customer lists, supply arrangements,
business and financial plans and projections, marketing plans and
advertising arrangements, the terms of any license agreement relating
to any of the foregoing, and all information denominated as
"confidential" and is made available only on a restricted basis.
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<PAGE>
3.2 Return of Company Material. The Executive shall
promptly deliver to the Company on termination of the Executive's
employment with the Company, for whatever the reason, or at any time
the Company may so request, all Company memoranda, notes, records,
reports, manuals, drawings, computer software, and all documents
containing Confidential Information belonging to the Company,
including all copies of such materials which the Executive may then
possess or have under Executive's control.
3.3 Non-Competition; Non-Solicitation. (a) During
the Term of Executive's employment and for a two-year period
thereafter (the "Non-Compete Period") the Executive will not, directly
or indirectly, without the express written approval of the Board of
Directors: (i) own, manage, operate, join, control, or participate in
or be connected with, as an officer, employee partner, stockholder,
director, adviser, consultant, or agent (whether paid or unpaid), any
business, which is at the time engaged in any activities which,
directly or indirectly, compete with the business of the Company (a
"Competitive Business") provided that the Company continues to pay to
Executive, in a timely manner, the amounts required pursuant to
Section 4.2 of this Agreement; the foregoing provision being also
intended to prohibit the Executive from acquiring or holding in excess
of 5% of any issue of stock or securities of any Company which is a
Competitive Business which has any securities listed on a national
securities exchange or quoted in the daily listing of over-the-counter
market securities;
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<PAGE>
(ii) recruit, solicit or otherwise induce or influence any proprietor,
partner, stockholder, lender, director, officer, employee, sales
agent, joint venturer, investor, lessor, supplier, customer,
consultant, agent, representative or any other person which has a
business relationship with the Company to discontinue, reduce or
modify such employment, agency or business relationship with the
Company, or (iii) employ or seek to employ or cause any Competitive
Business to employ or seek to employ any person or agent who is then
(or was at any time within 90 days prior to the date the Executive or
the Competitive Business employs or seeks to employ such person)
engaged or retained by the Company.
(b) In the event that Executive breaches his
obligations in any respect under this Section 3.3, the Company, in
addition to pursuing all available remedies under this Agreement, at
law or otherwise, and without limiting its right to pursue the same
may cease all payments due to the Executive under this Agreement.
(c) Since a breach of the provisions of this Section
3.3 could not adequately be compensated by money damages, the Company
shall be entitled, in addition to any other right and remedy available
to it, to an injunction restraining such breach or a threatened
breach, and in either case no bond or other security shall be required
in connection therewith, and Executive hereby consents to the issuance
of such injunction. Executive agrees that the provisions of this
Section 3.3 are necessary and reasonable to protect the Company in the
conduct of its business. If any restriction contained in this Section
3.3 shall be deemed to be
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<PAGE>
invalid, illegal, or unenforceable by reason of the extent, duration,
or geographical scope thereof, or otherwise, then the court making
such determination shall have the right to reduce such extent,
duration, geographical scope, or other provisions hereof, and in its
reduced form such restriction shall then be enforceable in the manner
contemplated hereby.
3.4 Copyrights, Patents, Etc. Any interest in
patents, patent applications, inventions, technological innovations,
copyrights, copyrightable works, developments, discoveries, designs,
and processes ("Inventions") which Executive now or hereafter during
the period he is employed by the Company under this Agreement or
otherwise and for six months thereafter may own, conceive of, or
develop and either relating to the fields in which the Company may
then be engaged or contemplates being engaged or conceived of or
developed utilizing the time, material, facilities, technology or
information of the Company, shall belong to the Company. As soon as
Executive owns, conceives of, or develops any Invention, he agrees
immediately to communicate such fact in writing to the Company, and
without further compensation, but at the Company's expense (except as
noted in clause (a) of this Section 3.4), forthwith upon request of
the Company, Executive shall execute all such assignments and other
documents (including applications for patents, copyrights, trademarks,
and assignments thereof) and take all such other action as the Company
may reasonably request in order (a) to vest in the Company all
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<PAGE>
Executive's right, title, and interest in and to such Inventions, free
and clear of liens, mortgages, security interests, pledges, charges,
and encumbrances ("Liens") (Executive to take such action at his
expense as is necessary to remove all such Liens) and (b), if
patentable or copyrightable, to obtain patents or copyrights
(including extensions and renewals) therefor in any and all countries
in such name as the Company shall determine.
ARTICLE IV
TERMINATION
4.1 Termination. (a) The Board of Directors may
terminate the Executive's employment hereunder as follows:
(1) upon the death of the Executive, this Agreement
shall immediately terminate, whereupon Executive or his
estate, as the case may be, shall be entitled to receive his
Base Salary and bonus at the rate provided in Section 2.1 to
the date on which termination shall take effect;
(2) upon a determination of Permanent Disability;
"Permanent Disability" shall mean a physical or mental
incapacity as a result of which the Executive becomes totally
unable to continue the performance of his duties hereunder
for a period of 180 consecutive days or an aggregate of 270
days in any consecutive 24 month period. A determination of
Permanent Disability shall be subject to the certification of
a qualified medical doctor agreed to by the Company and the
Executive or, in the event of the Executive's incapacity to
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<PAGE>
designate a doctor, the Executive's legal representative. In
the absence of agreement between the Company and the
Executive, each party shall nominate a qualified medical
doctor and the two doctors so nominated shall select a third
doctor, who shall make the determination as to the occurrence
and continuance of a Permanent Disability; or
(3) for Cause. "Cause" shall mean only the following:
(i) the willful and continued failure by the
Executive to substantially perform his duties
hereunder (other than such failure resulting from
the Executive's incapacity due to physical or mental
illness);
(ii) willful misconduct by the Executive (which
includes a willful, material breach of this Agreement by
the Executive);
(iii) conviction of a felony;
(iv) theft from the Company or misuse of
Company funds or assets; or
(v) the imposition of a final order issued by
any regulatory authority against the Company which
prohibits the Executive from holding an executive
position with the Company.
For purposes of this Agreement, no act, or failure to
act, on the Executive's part shall be considered "willful"
unless done, or omitted to be done, by the Executive in bad
faith and without a reasonable belief that such action or
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<PAGE>
omission by the Executive was in the best interests of the
Company.
4.2 Termination Benefits. (a) If the Executive's
employment hereunder is terminated by the Company for Cause, neither
party shall have any further obligations hereunder except for (i)
obligations accruing prior to the date of termination, and (ii)
obligations or covenants contained herein that extend beyond the term
of this Agreement.
(b) If the Executive's employment hereunder is
terminated by the Company without Cause or as the result of a change
in control of the Company, the Executive shall be entitled to receive
immediate payment for all debt owed by the Company to Executive,
together with interest thereon, plus the Company shall continue to pay
the Executive's Base Salary plus bonus and all benefits for a period
of nine months from such date of termination. In addition, Executive's
stock options acquired subsequent to July 1, 1996 shall immediately
vest. All options acquired prior to the date of this Agreement shall
not be affected by Executive's termination pursuant to any provision
of this Agreement. Executive shall be entitled to exercise all vested
options received subsequent to July 1, 1996 for a period of 90 days
from such date of termination; provided, however, such exercise shall
not extend the expiration date of any option. Further, the Company
covenants and agrees that it shall provide, out of available funds, a
loan to Executive for the purpose of permitting Executive to exercise
such
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<PAGE>
option. The loan will mature in three years with interest payable in
cash or stock payable quarterly at the rate of 7% per annum and will
be collateralized by the shares of stock received by Executive upon
exercise of the options. A "change in control" shall mean either of
the following events: (i) a third party obtains control of the Company
and fails to assume this Agreement, or (ii) there is a change in the
current majority of the Board of Directors, except that director
nominees approved by the Board from time to time subsequent to the
date hereof shall be considered members of the current majority of the
Board.
ARTICLE V
ASSUMPTION OF OBLIGATIONS BY SUCCESSOR TO COMPANY
5.1 Assumption of Obligations. The Company will
require any successor or assign (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially
all of the business and/or assets of the Company, by agreement in form
and substance satisfactory to the Executive, expressly, absolutely and
unconditionally to assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required
to perform it if no such succession or assignment had taken place. Any
failure of the Company to obtain such agreement prior to the
effectiveness of any such succession or assignment shall be a material
breach of this Agreement. (If at any time during the Term of this
Agreement the Executive is employed by any corporation, a majority of
the voting securities of which is then
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<PAGE>
owned by the Company, "Company" as used in this Agreement shall in
addition include such employer.) In such event, the Company agrees
that it shall pay or shall cause such employer to pay any amounts owed
to the Executive pursuant to this Agreement.
ARTICLE VI
GENERAL PROVISIONS
6.1 Notice. For purposes of this Agreement, notices
and all other communications provided for in the Agreement shall be in
writing and shall be deemed to have been duly given when delivered or
mailed by United States registered mail, return receipt required,
postage prepaid, as follows:
If to the Company:
Pacific Biometrics, Inc.
1370 Reynolds Avenue
Suite 119
Irvine, California 92714
Attn.: Chairman, Compensation Committee of
Board of Directors
If to the Executive:
Paul G. Kanan
24091 Pinehurst Lane
Laguna Niguel, California 92677
or such other address as either party may have furnished to the other
in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
6.2 No Waivers. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing signed by the Executive and the
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<PAGE>
Company. No waiver by either party hereto at any time of any breach by
the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall
be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time.
6.3 Governing Law. This Agreement shall be governed by
and construed in accordance with the internal laws of the State of
Delaware without regard to its conflict of law provisions.
6.4 Severability or Partial Invalidity. The
invalidity or unenforceability of any provisions of this Agreement
shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
6.5 Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed to be an
original but all of which together will constitute one and the same
instrument.
6.6 Entire Agreement. This Agreement constitutes the
entire agreement of the parties and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings, and
negotiations between the parties with respect to the subject matter
hereof. This Agreement is intended by the parties as the final
expression of their agreement with respect to such terms as are
included in this Agreement and may not be contradicted by evidence
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<PAGE>
of any prior or contemporaneous agreement. The parties further intend
that this Agreement constitutes the complete and exclusive statement
of its terms and that no extrinsic evidence may be introduced in any
judicial proceeding involving this Agreement.
6.7 Assignment. Subject to the provisions of Article
IV hereof, this Agreement and the rights, duties, and obligations
hereunder may not be assigned or delegated by any party without the
prior written consent of the other party. Any such assignment or
delegation without the prior written consent of the other party shall
be void and be of no effect. Notwithstanding the foregoing provisions
of this Section 6.7, the Company may assign or delegate its rights,
duties, and obligations hereunder to any person or entity which
succeeds to all or substantially all of the business of the Company
through merger, consolidation, reorganization, or other business
combination or by acquisition of all or substantially all of the
assets of the Company; provided that such person assumes the Company's
obligations under this Agreement in accordance with Section 5.1.
6.8 Beneficial Interests. This Agreement shall inure
to the benefit of and be enforceable by the Executive's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while
any amounts are still payable to him hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to the Executive's
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<PAGE>
devisee, legatee, or other designee or, if there be no such
designee, to the Executive's estate.
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date first above written.
PACIFIC BIOMETRICS, INC.
By: _______________________________________
Ellen A. Rudnick, Chairman
EXECUTIVE
______________________________________
PAUL G. KANAN
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EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") dated as of
October __, 1996 between Pacific Biometrics, Inc., a Delaware
corporation (the "Company"), and G. Russell Warnick (the "Executive").
ARTICLE I
EMPLOYMENT
The Company hereby employs Executive, and Executive
accepts employment with the Company, upon the following terms and
conditions:
1.1 Employment. The Company hereby employs
Executive, and Executive agrees to serve, as the Chief Scientific
Officer and Founder of the Company during the term of this Agreement.
Subject to the Board of Directors of the Company, the Executive shall
be responsible for management of all product development activities,
including research and development, regulatory, clinical and
manufacturing start-up activities and such other services as may be
delegated by the Board of Directors, provided that such duties shall
be reasonably consistent with those duties assigned to executive
officers of organizations comparable to the Company. The Executive
agrees to devote his full business time and attention and best efforts
to the affairs of the Company during the Term of this Agreement;
provided, however, that, to the extent that such activities do not
otherwise violate the provisions of this Agreement or interfere with
the performance of
<PAGE>
his duties hereunder, the Executive may continue to serve as the
Chairman of the Board of Directors and President of Pacific Biometrics
Research Foundation and perform such duties as are customary with
respect to such positions. The Executive shall not be permitted to
perform any outside consulting services unless the Company is unable
to pay his Base Salary and bonus, in an amount equal to at least
$110,000. Notwithstanding the foregoing, the Executive shall be
allowed to hold positions in appropriate professional organizations
and conduct such activities as are reasonably related to Executive's
profession and prior practice (i.e. lecturing, conducting seminars and
workshops) and receive honoraria in connection therewith.
1.2 Term. The employment of the Executive by the
Company under the terms and conditions of this Agreement will commence
on the date hereof and continue until October , 1998 (the "Term")
unless terminated sooner in accordance with the provisions of Article
IV.
ARTICLE II
COMPENSATION
2.1 (a) Annual Salary. During the Term the Company
shall pay to the Executive an annual salary of $90,000 (the "Base
Salary"), payable in equal installments every two weeks. Executive
shall be entitled to such annual increase in the Base Salary as
determined by the Board of Directors or compensation committee
thereof.
2
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(b) Bonus. Executive shall be entitled to
receive a bonus equal to an aggregate of $50,000 as follows: (i)
$10,000 upon commencement of the pilot clinical trials in connection
with the Osteopatch product; (ii) $15,000 upon commencement of
clinical trials to support the 510(k) submission to the United States
Food and Drug Administration ("FDA") in connection with the Osteopatch
product; (iii) $10,000 at the time of the 510(k) filing in connection
with the Osteopatch product; and (iv) $15,000 upon FDA approval of the
Osteopatch product. Upon completion of clause (iii) above, an
additional bonus based on milestones commensurate with the Company's
priorities and objectives shall be established. In addition, Executive
shall be entitled to receive a cash bonus, payable upon receipt of
funds by the Company from customers, equal to two and one-half percent
of the amount received from the first eligible laboratory contract or
other service contract and one percent of the amount received from
each subsequent contract entered into with the same client, provided
that such laboratory contracts or other service contracts are
originated exclusively through the efforts of Executive. The Executive
will not be permitted to assist in the pricing of such contracts on
behalf of the Company.
(c) Stock Options. In connection with the
execution of this Agreement, the Company granted to Executive on July
9, 1996 an option to purchase 80,000 shares of the Company's common
stock, $.01 par value per share, at an exercise price of $3.45 per
share. Such options shall vest either (i) equally over
3
<PAGE>
a four year period commencing on July 9, 1997 (i.e. 20,000 shares per
year for four years); or (ii) earlier as follows: (a) 60,000 of such
options shall vest immediately upon FDA approval of the Company's
Osteopatch product and (b) 20,000 of such options shall vest
immediately upon FDA approval of any application submitted by the
Company with respect to its SalivaSac product.
2.2 Reimbursement of Expenses. The Executive shall
be entitled to receive prompt reimbursement of all reasonable expenses
incurred by the Executive in performing services hereunder, including
all expenses of travel, entertainment and living expenses while away
from home on business at the request of, or in the service of, the
Company, provided that such expenses are incurred and accounted for in
accordance with the policies and procedures established by the
Company.
2.3 Benefits. The Company shall pay the Executive as
additional salary the annual cost of a disability insurance policy
which provides for payments equal to the maximum percentage of the
Base Salary allowable during the term of disability which may be
obtained at reasonable cost to the Company, with payments commencing
three months after the commencement of the disability. The Executive
shall be entitled to participate in and be covered by all health,
insurance, pension, 401(k), stock purchase, stock option and any other
employee plans and benefits established by the Company (collectively
referred to herein as the "Company Benefit Plans") for its full-time
employees generally, subject to meeting
4
<PAGE>
applicable eligibility requirements. If no health benefits are offered
to employees generally, Executive shall be entitled to a reasonable
allowance for health insurance or reimbursement of health insurance
premiums paid directly by Executive with respect to a health plan for
the benefit of Executive and his dependent family members.
2.4 Vacations and Holidays. During the Term, the
Executive shall be entitled to an annual vacation leave of a minimum
of four weeks at full pay. The Executive shall be entitled to such
holidays as are established by the Company for all employees and such
other religious holidays as is customary pursuant to Executive's
religious practice.
ARTICLE III
CONFIDENTIALITY AND NONDISCLOSURE
3.1 Confidentiality. The Executive will not during
his employment by the Company or thereafter at any time disclose,
directly or indirectly, to any person or entity or use, or permit the
use of, any trade secrets or confidential information relating to the
Company. "Confidential Information" shall include all information
reasonably expected to be kept confidential, including, without
limitation of the generality of the foregoing, trade secrets,
know-how, production processes, customer lists, supply arrangements,
business and financial plans and projections, marketing plans and
advertising arrangements, the terms of any license agreement relating
to any of the
5
<PAGE>
foregoing, and all information denominated as "confidential" and
is made available only on a restricted basis.
3.2 Return of Company Material. The Executive shall
promptly deliver to the Company on termination of the Executive's
employment with the Company, for whatever the reason, or at any time
the Company may so request, all Company memoranda, notes, records,
reports, manuals, drawings, computer software, and all documents
containing Confidential Information belonging to the Company,
including all copies of such materials which the Executive may then
possess or have under Executive's control.
3.3 Non-Competition; Non-Solicitation. (a) During
the Term of Executive's employment and for a period of nine
months thereafter (the "Non-Compete Period"), the Executive will
not, directly or indirectly, without the express written consent
of the Board of Directors: (i) own, manage, operate, join,
control, or participate in or be connected with, as an officer,
employee partner, stockholder, director, adviser, consultant, or
agent (whether paid or unpaid), any business, which is at the
time engaged in any activities which, directly or indirectly,
compete with the business of the Company (a "Competitive
Business") provided that the Company continues to pay to
Executive, in a timely manner, the amounts required pursuant to
Section 4.2 of this Agreement; the foregoing provision being also
intended to prohibit the Executive from acquiring or holding in
excess of 5% of any issue of stock or securities of any Company
6
<PAGE>
which has any securities listed on a national securities exchange or
quoted in the daily listing of over-the-counter market securities.
(b) During the Term of Executive's employment and
for a period of two years thereafter, the Executive will not, directly
or indirectly, without the express written consent of the Board of
Directors: (i) recruit, solicit or otherwise induce or influence any
proprietor, partner, stockholder, lender, director, officer, employee,
sales agent, joint venturer, investor, lessor, supplier, customer,
consultant, agent, representative or any other person which has a
business relationship with the Company to discontinue, reduce or
modify such employment, agency or business relationship with the
Company, (ii) employ or seek to employ or cause any Competitive
Business to employ or seek to employ any person or agent who is then
(or was at any time within one year prior to the date the Executive or
the Competitive Business employs or seeks to employ such person)
engaged or retained by the Company or (iii) develop, or cause to be
developed, products competitive with the Company's Osteopatch and
SalivaSac products.
(c) In the event that Executive breaches his
obligations in any respect under this Section 3.3, the Company, in
addition to pursuing all available remedies under this Agreement, at
law or otherwise, and without limiting its right to pursue the same
may cease all payments due to the Executive under this Agreement.
7
<PAGE>
(d) Since a breach of the provisions of this Section
3.3 could not adequately be compensated by money damages, the Company
shall be entitled, in addition to any other right and remedy available
to it, to an injunction restraining such breach or a threatened
breach, and in either case no bond or other security shall be required
in connection therewith, and Executive hereby consents to the issuance
of such injunction. Executive agrees that the provisions of this
Section 3.3 are necessary and reasonable to protect the Company in the
conduct of its business. If any restriction contained in this Section
3.3 shall be deemed to be invalid, illegal, or unenforceable by reason
of the extent, duration, or geographical scope thereof, or otherwise,
then the court making such determination shall have the right to
reduce such extent, duration, geographical scope, or other provisions
hereof, and in its reduced form such restriction shall then be
enforceable in the manner contemplated hereby.
3.4 Copyrights, Patents, Etc. Any interest in
patents, patent applications, inventions, technological innovations,
copyrights, copyrightable works, developments, discoveries, designs,
and processes ("Inventions") which Executive now or hereafter during
the period he is employed by the Company under this Agreement or
otherwise and for six months thereafter may own, conceive of, or
develop and either relating to the fields in which the Company may
then be engaged or contemplates being engaged or conceived of or
developed utilizing
8
<PAGE>
the time, material, facilities, technology or information of the
Company, shall belong to the Company. As soon as Executive owns,
conceives of, or develops any Invention, he agrees immediately to
communicate such fact in writing to the Company, and without further
compensation, but at the Company's expense (except as noted in clause
(a) of this Section 3.4), forthwith upon request of the Company,
Executive shall execute all such assignments and other documents
(including applications for patents, copyrights, trademarks, and
assignments thereof) and take all such other action as the Company may
reasonably request in order (a) to vest in the Company all Executive's
right, title, and interest in and to such Inventions, free and clear
of liens, mortgages, security interests, pledges, charges, and
encumbrances ("Liens") (Executive to take such action at his expense
as is necessary to remove all such Liens) and (b), if patentable or
copyrightable, to obtain patents or copyrights (including extensions
and renewals) therefor in any and all countries in such name as the
Company shall determine.
ARTICLE IV
TERMINATION
4.1 Termination. (a) The Board of Directors may
terminate the Executive's employment hereunder as follows:
(1) upon the death of the Executive, this
Agreement shall immediately terminate, whereupon
Executive or his estate, as the case may be, shall
be entitled to receive his Base Salary and bonus at the
9
<PAGE>
rate provided in Section 2.1 to the date on which
termination shall take effect;
(2) upon a determination of Permanent
Disability; "Permanent Disability" shall mean a
physical or mental incapacity as a result of which
the Executive becomes totally unable to continue the
performance of his duties hereunder for a period of
180 consecutive days or an aggregate of 270 days in
any consecutive 24 month period. A determination of
Permanent Disability shall be subject to the
certification of a qualified medical doctor agreed
to by the Company and the Executive or, in the event
of the Executive's incapacity to designate a doctor,
the Executive's legal representative. In the absence
of agreement between the Company and the Executive,
each party shall nominate a qualified medical doctor
and the two doctors so nominated shall select a
third doctor, who shall make the determination as to
the occurrence and continuance of a Permanent
Disability; or
(3) for Cause. "Cause" shall mean only the
following:
(i) the willful and continued
failure by the Executive to substantially
perform his duties hereunder (other than
such failure resulting from the Executive's
incapacity due to physical or mental
illness);
10
<PAGE>
(ii) personal dishonesty;
(iii) willful misconduct by the Executive
(which includes a willful, material breach of this
Agreement by the Executive);
(iv) continued incompetence in the
performance of Executive's duties;
(v) conviction of a crime;
(vi) theft from the Company or misuse of
Company funds or assets; or
(viii) a willful violation of any
law, rule or regulation, or the imposition
of a final order issued by any regulatory
authority against the Company which
prohibits the Executive from holding an
executive position with the Company.
For purposes of this Agreement, no act, or failure
to act, on the Executive's part shall be considered "willful"
unless done, or omitted to be done, by the Executive in bad
faith and without a reasonable belief that such action or
omission by the Executive was in the best interests of the
Company.
4.2 Termination Benefits. (a) If the Executive's
employment hereunder is terminated by the Company for Cause,
neither party shall have any further obligations hereunder except
for (i) obligations accruing prior to the date of termination,
11
<PAGE>
and (ii) obligations or covenants contained herein that extend beyond
the term of this Agreement.
(b) If the Executive's employment hereunder is
terminated by the Company without Cause or as the result of a change
in control of the Company, the Executive shall be entitled to receive
his Base Salary and all benefits for a period of nine months from such
date of termination. Additionally, the Executive shall be indemnified
by the Company with respect to any personal guarantee of Company
indebtedness or Company leasehold obligations the Executive may still
be obligated on at the date of termination. A "change in control"
shall mean either of the following events: (i) a third party obtains
control of the Company and fails to assume this Agreement, or (ii)
there is a change in the current majority of the Board of Directors,
except that director nominees approved by the Board from time to time
subsequent to the date hereof shall be considered members of the
current majority of the Board.
ARTICLE V
ASSUMPTION OF OBLIGATIONS BY SUCCESSOR TO COMPANY
5.1 Assumption of Obligations. The Company will
require any successor or assign (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially
all of the business and/or assets of the Company, by agreement in form
and substance satisfactory to the Executive, expressly, absolutely and
unconditionally to assume and agree to
12
<PAGE>
perform this Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession or
assignment had taken place. Any failure of the Company to obtain such
agreement prior to the effectiveness of any such succession or
assignment shall be a material breach of this Agreement. (If at any
time during the Term of this Agreement the Executive is employed by
any corporation, a majority of the voting securities of which is then
owned by the Company, "Company" as used in this Agreement shall in
addition include such employer.) In such event, the Company agrees
that it shall pay or shall cause such employer to pay any amounts owed
to the Executive pursuant to this Agreement.
ARTICLE VI
GENERAL PROVISIONS
6.1 Notice. For purposes of this Agreement, notices
and all other communications provided for in the Agreement shall be in
writing and shall be deemed to have been duly given when delivered or
mailed by United States registered mail, return receipt required,
postage prepaid, as follows:
If to the Company:
Pacific Biometrics, Inc.
1370 Reynolds Avenue
Suite 119
Irvine, California 92714
Attn.: Chairman, Compensation Committee of
Board of Directors
If to the Executive:
G. Russell Warnick
13
<PAGE>
24415 SE 156th
Issaquah, WA 98027
or such other address as either party may have furnished to the other
in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
6.2 No Waivers. No provision of this Agreement may
be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing signed by the Executive and the
Company. No waiver by either party hereto at any time of any breach by
the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall
be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time.
6.3 Governing Law. This Agreement shall be governed
by and construed in accordance with the internal laws of the
State of Delaware without regard to its conflict of law
provisions.
6.4 Severability or Partial Invalidity. The
invalidity or unenforceability of any provisions of this Agreement
shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
6.5 Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed to be an
14
<PAGE>
original but all of which together will constitute one and the
same instrument.
6.6 Entire Agreement. This Agreement constitutes the
entire agreement of the parties and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings, and
negotiations between the parties with respect to the subject matter
hereof. This Agreement is intended by the parties as the final
expression of their agreement with respect to such terms as are
included in this Agreement and may not be contradicted by evidence of
any prior or contemporaneous agreement. The parties further intend
that this Agreement constitutes the complete and exclusive statement
of its terms and that no extrinsic evidence may be introduced in any
judicial proceeding involving this Agreement.
6.7 Assignment. Subject to the provisions of Article
IV hereof, this Agreement and the rights, duties, and obligations
hereunder may not be assigned or delegated by any party without the
prior written consent of the other party. Any such assignment or
delegation without the prior written consent of the other party shall
be void and be of no effect. Notwithstanding the foregoing provisions
of this Section 6.7, the Company may assign or delegate its rights,
duties, and obligations hereunder to any person or entity which
succeeds to all or substantially all of the business of the Company
through merger, consolidation, reorganization, or other business
15
<PAGE>
combination or by acquisition of all or substantially all of the
assets of the Company; provided that such person assumes the Company's
obligations under this Agreement in accordance with Section 5.1.
6.8 Beneficial Interests. This Agreement shall inure
to the benefit of and be enforceable by the Executive's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while
any amounts are still payable to his hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the Executive's estate.
16
<PAGE>
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date first above written.
PACIFIC BIOMETRICS, INC.
By __________________________________
Paul G. Kanan, President and Chief
Executive Officer
___________________________________
G. Russell Warnick
17
<PAGE>
EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") dated as of
October __, 1996 between Pacific Biometrics, Inc., a Delaware corporation
(the "Company"), and Elizabeth Teng Leary, Ph.D. (the "Executive").
ARTICLE I
EMPLOYMENT
The Company hereby employs Executive, and Executive
accepts employment with the Company, upon the following terms and conditions:
1.1 Employment. The Company hereby employs Executive, and Executive agrees to
serve, as Vice President and Director of Laboratories of the Company during the
term of this Agreement. Subject to the Board of Directors of the Company, the
Executive shall provide such services as delegated by the Board of Directors,
provided that such duties shall be reasonably consistent with those duties
assigned to executive officers of organizations comparable to the Company. The
Executive agrees to devote her full business time and attention and best efforts
to the affairs of the Company during the Term of this Agreement.
1.2 Term. The employment of the Executive by the Company
under the terms and conditions of this Agreement will commence on the
date hereof and continue until October , 1998
<PAGE>
(the "Term") unless terminated sooner in accordance with the provisions
of Article IV.
ARTICLE II
COMPENSATION
2.1 (a) Annual Salary. During the Term the Company shall
pay to the Executive an annual salary of $85,000 (the "Base Salary"), payable
in equal installments every two weeks. Executive shall be entitled to an annual
increase in the Base Salary as determined by the Board of Directors or
compensation committee thereof.
(b) Bonus. Executive shall be entitled to receive the
following bonuses: (i) $3,750, payable quarterly for achieving the laboratory
quarterly contribution budget attached hereto as Schedule "A", provided that, in
the event such budget is exceeded, Executive's bonus shall be increased by the
same percentage of such excess over budgeted amounts; (ii) $5,000 upon the
promotion and hire of a laboratory manager; and (iii) $10,000 upon successful
completion of United States Food and Drug Administration ("FDA") clinical trials
for the Company's Osteopatch product. In addition, Executive shall be entitled
to such other bonuses as may be established by the Company's Board of Directors
or compensation committee thereof.
(c) Stock Options. In connection with the execution of
this Agreement, the Company granted to Executive on July 9, 1996 an option to
purchase 80,000 shares of the Company's common stock, $.01 par value per share,
at an exercise price of
2
<PAGE>
$3.45 per share. Such options shall vest either (i) equally over a
four year period commencing on July 9, 1997 (i.e. 20,000 shares per
year over four years) or (ii) earlier as follows: (a) 40,000 of such
options shall vest immediately upon FDA approval of the Company's
Osteopatch product and (b) 40,000 of such options shall vest
immediately once the Company's laboratory operations achieve twelve
month results of $4.5 million in revenues and $1.4 million in net
profits.
2.2 Reimbursement of Expenses. The Executive shall
be entitled to receive prompt reimbursement of all reasonable expenses
incurred by the Executive in performing services hereunder, including
all expenses of travel, entertainment and living expenses while away
from home on business at the request of, or in the service of, the
Company, provided that such expenses are incurred and accounted for in
accordance with the policies and procedures established by the
Company.
2.3 Benefits. The Company shall pay the Executive as
additional salary the annual cost of a disability insurance policy
which provides for payments equal to the maximum percentage of the
Base Salary allowable during the term of disability which may be
obtained at reasonable cost to the Company, with payments commencing
three months after the commencement of the disability. The Executive
shall be entitled to participate in and be covered by all health,
insurance, pension, 401(k), stock purchase, stock option and any other
employee plans and benefits established by the Company
3
<PAGE>
(collectively referred to herein as the "Company Benefit Plans") for
its full-time employees generally, subject to meeting applicable
eligibility requirements. If no health benefits are offered to
employees generally, Executive shall be entitled to a reasonable
allowance for health insurance or reimbursement of health insurance
premiums paid directly by Executive with respect to a health plan for
the Executive and dependent family members.
2.4 Vacations and Holidays. During the Term, the
Executive shall be entitled to an annual vacation leave of a minimum
of four weeks at full pay. The Executive shall be entitled to such
holidays as are established by the Company for all employees and such
other religious holidays as is customary pursuant to Executive's
religious practice.
ARTICLE III
CONFIDENTIALITY AND NONDISCLOSURE
3.1 Confidentiality. The Executive will not during
her employment by the Company or thereafter at any time disclose,
directly or indirectly, to any person or entity or use, or permit the
use of, any trade secrets or confidential information relating to the
Company. "Confidential Information" shall include all information
reasonably expected to be kept confidential, including, without
limitation of the generality of the foregoing, trade secrets,
know-how, production processes, customer lists, supply arrangements,
business and financial plans and projections, marketing plans and
advertising arrangements,
4
<PAGE>
the terms of any license agreement relating to any of the foregoing,
and all information denominated as "confidential" and is made
available only on a restricted basis.
3.2 Return of Company Material. The Executive shall
promptly deliver to the Company on termination of the Executive's
employment with the Company, for whatever the reason, or at any time
the Company may so request, all Company memoranda, notes, records,
reports, manuals, drawings, computer software, and all documents
containing Confidential Information belonging to the Company,
including all copies of such materials which the Executive may then
possess or have under Executive's control.
3.3 Non-Competition; Non-Solicitation. (a) During
the Term of Executive's employment and for a period of nine
months thereafter (the "Non-Compete Period") the Executive will
not, directly or indirectly, without the express written consent
of the Board of Directors: own, manage, operate, join, control,
or participate in or be connected with, as an officer, employee
partner, stockholder, director, adviser, consultant, or agent
(whether paid or unpaid), any business, which is at the time
engaged in any activities which, directly or indirectly, compete
with the business of the Company (a "Competitive Business")
provided that the Company continues to pay to Executive, in a
timely manner, the amounts required pursuant to Section 4.2 of
this Agreement; the foregoing provision being also intended to
prohibit the Executive from acquiring or holding in excess of 5%
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<PAGE>
of any issue of stock or securities of any Company which has any
securities listed on a national securities exchange or quoted in the
daily listing of over-the-counter market securities.
(b) During the Term of Executive's employment and
for a period of two years thereafter the Executive will not directly
or indirectly without the express written consent of the Board of
Directors: (i) recruit, solicit or otherwise induce or influence any
proprietor, partner, stockholder, lender, director, officer, employee,
sales agent, joint venturer, investor, lessor, supplier, customer,
consultant, agent, representative or any other person which has a
business relationship with the Company to discontinue, reduce or
modify such employment, agency or business relationship with the
Company, or (ii) employ or seek to employ or cause any Competitive
Business to employ or seek to employ any person or agent who is then
(or was at any time within one year prior to the date the Executive or
the Competitive Business employs or seeks to employ such person)
engaged or retained by the Company.
(c) In the event that Executive breaches her
obligations in any respect under this Section 3.3, the Company, in
addition to pursuing all available remedies under this Agreement, at
law or otherwise, and without limiting its right to pursue the same
may cease all payments due to the Executive under this Agreement.
(d) Since a breach of the provisions of this Section
3.3 could not adequately be compensated by money damages, the
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<PAGE>
Company shall be entitled, in addition to any other right and remedy
available to it, to an injunction restraining such breach or a
threatened breach, and in either case no bond or other security shall
be required in connection therewith, and Executive hereby consents to
the issuance of such injunction. Executive agrees that the provisions
of this Section 3.3 are necessary and reasonable to protect the
Company in the conduct of its business. If any restriction contained
in this Section 3.3 shall be deemed to be invalid, illegal, or
unenforceable by reason of the extent, duration, or geographical scope
thereof, or otherwise, then the court making such determination shall
have the right to reduce such extent, duration, geographical scope, or
other provisions hereof, and in its reduced form such restriction
shall then be enforceable in the manner contemplated hereby.
3.4 Copyrights, Patents, Etc. Any interest in
patents, patent applications, inventions, technological innovations,
copyrights, copyrightable works, developments, discoveries, designs,
and processes ("Inventions") which Executive now or hereafter during
the period she is employed by the Company under this Agreement or
otherwise and for six months thereafter may own, conceive of, or
develop and either relating to the fields in which the Company may
then be engaged or contemplates being engaged or conceived of or
developed utilizing the time, material, facilities, technology or
information of the Company, shall belong to the Company. As soon as
Executive owns,
7
<PAGE>
conceives of, or develops any Invention, she agrees immediately to
communicate such fact in writing to the Company, and without further
compensation, but at the Company's expense (except as noted in clause
(a) of this Section 3.4), forthwith upon request of the Company,
Executive shall execute all such assignments and other documents
(including applications for patents, copyrights, trademarks, and
assignments thereof) and take all such other action as the Company may
reasonably request in order (a) to vest in the Company all Executive's
right, title, and interest in and to such Inventions, free and clear
of liens, mortgages, security interests, pledges, charges, and
encumbrances ("Liens") (Executive to take such action at his expense
as is necessary to remove all such Liens) and (b), if patentable or
copyrightable, to obtain patents or copyrights (including extensions
and renewals) therefor in any and all countries in such name as the
Company shall determine.
ARTICLE IV
TERMINATION
4.1 Termination. (a) The Board of Directors may
terminate the Executive's employment hereunder as follows:
(1) upon the death of the Executive, this
Agreement shall immediately terminate, whereupon
Executive or her estate, as the case may be, shall
be entitled to receive her Base Salary and bonus at
the rate provided in Section 2.1 to the date on
which termination shall take effect;
8
<PAGE>
(2) upon a determination of Permanent
Disability; "Permanent Disability" shall mean a
physical or mental incapacity as a result of which
the Executive becomes totally unable to continue the
performance of her duties hereunder for a period of
180 consecutive days or an aggregate of 270 days in
any consecutive 24 month period. A determination of
Permanent Disability shall be subject to the
certification of a qualified medical doctor agreed
to by the Company and the Executive or, in the event
of the Executive's incapacity to designate a doctor,
the Executive's legal representative. In the absence
of agreement between the Company and the Executive,
each party shall nominate a qualified medical doctor
and the two doctors so nominated shall select a
third doctor, who shall make the determination as to
the occurrence and continuance of a Permanent
Disability; or
(3) for Cause. "Cause" shall mean only the
following:
(i) the willful and continued
failure by the Executive to substantially
perform her duties hereunder (other than
such failure resulting from the Executive's
incapacity due to physical or mental
illness);
(ii) personal dishonesty;
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(iii) willful misconduct by the Executive
(which includes a willful, material breach of this
Agreement by the Executive);
(iv) continued incompetence in the
performance of Executive's duties;
(v) conviction of a crime;
(vi) theft from the Company or misuse of
Company funds or assets; or
(viii) a willful violation of any
law, rule or regulation, or the imposition
of a final order issued by any regulatory
authority against the Company which
prohibits the Executive from holding an
executive position with the Company.
For purposes of this Agreement, no act, or failure
to act, on the Executive's part shall be considered "willful"
unless done, or omitted to be done, by the Executive in bad
faith and without a reasonable belief that such action or
omission by the Executive was in the best interests of the
Company.
4.2 Termination Benefits. If the Executive's
employment hereunder is terminated by the Company for Cause, neither
party shall have any further obligations hereunder except for (i)
obligations accruing prior to the date of termination, and (ii)
obligations or covenants contained herein that extend beyond the term
of this Agreement.
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(b) If the Executive's employment hereunder is
terminated by the Company without Cause or as the result of a change
in control of the Company, the Executive shall be entitled to receive
her Base Salary and all benefits for a period of nine months from such
date of termination. Additionally, the Executive shall be indemnified
by the Company with respect to any personal guarantee of Company
indebtedness or Company leasehold obligations the Executive may still
be obligated on at the date of termination. A "change in control"
shall mean either of the following events: (i) a third party obtains
control of the Company and fails to assume this Agreement, or (ii)
there is a change in the current majority of the Board of Directors,
except that director nominees approved by the Board from time to time
subsequent to the date hereof shall be considered members of the
current majority of the Board.
ARTICLE V
ASSUMPTION OF OBLIGATIONS BY SUCCESSOR TO COMPANY
5.1 Assumption of Obligations. The Company will
require any successor or assign (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially
all of the business and/or assets of the Company, by agreement in form
and substance satisfactory to the Executive, expressly, absolutely and
unconditionally to assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required
to perform it if no such succession or assignment had taken place. Any
failure of the
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Company to obtain such agreement prior to the effectiveness of any
such succession or assignment shall be a material breach of this
Agreement. (If at any time during the Term of this Agreement the
Executive is employed by any corporation, a majority of the voting
securities of which is then owned by the Company, "Company" as used in
this Agreement shall in addition include such employer.) In such
event, the Company agrees that it shall pay or shall cause such
employer to pay any amounts owed to the Executive pursuant to this
Agreement.
ARTICLE VI
GENERAL PROVISIONS
6.1 Notice. For purposes of this Agreement, notices
and all other communications provided for in the Agreement shall be in
writing and shall be deemed to have been duly given when delivered or
mailed by United States registered mail, return receipt required,
postage prepaid, as follows:
If to the Company:
Pacific Biometrics, Inc.
1370 Reynolds Avenue
Suite 119
Irvine, California 92714
Attn.: Chairman, Compensation Committee of
Board of Directors
If to the Executive:
Elizabeth Teng Leary, Ph.D.
17252 13th Avenue, N.W.
Seattle, WA 98177
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or such other address as either party may have furnished to the other
in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
6.2 No Waivers. No provision of this Agreement may
be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing signed by the Executive and the
Company. No waiver by either party hereto at any time of any breach by
the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall
be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time.
6.3 Governing Law. This Agreement shall be governed
by and construed in accordance with the internal laws of the
State of Delaware without regard to its conflict of law
provisions.
6.4 Severability or Partial Invalidity. The
invalidity or unenforceability of any provisions of this Agreement
shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
6.5 Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed to be an
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original but all of which together will constitute one and the
same instrument.
6.6 Entire Agreement. This Agreement constitutes the
entire agreement of the parties and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings, and
negotiations between the parties with respect to the subject matter
hereof. This Agreement is intended by the parties as the final
expression of their agreement with respect to such terms as are
included in this Agreement and may not be contradicted by evidence of
any prior or contemporaneous agreement. The parties further intend
that this Agreement constitutes the complete and exclusive statement
of its terms and that no extrinsic evidence may be introduced in any
judicial proceeding involving this Agreement.
6.7 Assignment. Subject to the provisions of Article
IV hereof, this Agreement and the rights, duties, and obligations
hereunder may not be assigned or delegated by any party without the
prior written consent of the other party. Any such assignment or
delegation without the prior written consent of the other party shall
be void and be of no effect. Notwithstanding the foregoing provisions
of this Section 6.7, the Company may assign or delegate its rights,
duties, and obligations hereunder to any person or entity which
succeeds to all or substantially all of the business of the Company
through merger, consolidation, reorganization, or other business
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combination or by acquisition of all or substantially all of the
assets of the Company; provided that such person assumes the Company's
obligations under this Agreement in accordance with Section 5.1.
6.8 Beneficial Interests. This Agreement shall inure
to the benefit of and be enforceable by the Executive's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while
any amounts are still payable to her hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the Executive's estate.
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date first above written.
PACIFIC BIOMETRICS, INC.
By__________________________________
Paul G. Kanan, President and Chief
Executive Officer
__________________________________
Elizabeth Teng Leary, Ph.D.
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EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Pre-effective
Amendment No. 1 to Form SB-2 (File No. 333-11551); (1) of our report, which
includes an explanatory paragraph with respect to matters raising substantial
doubt as to the entity's ability to continue as a going concern, as described in
Note 18 of the notes to the Consolidated Financial Statements, dated September
5, 1996 on our audits of the consolidated balance sheet as of June 30, 1996 and
the consolidated statements of operations and cash flows for each of the two
years in the period ended June 30, 1996 and for the period from inception
(December 1992) to June 30, 1996 and the consolidated statement of stockholders'
deficit for the period from inception (December 1992) to June 30, 1996 of
Pacific Biometrics, Inc.; (2) of our report, which includes an explanatory
paragraph with respect to matters raising substantial doubt as to the entity's
ability to continue as a going concern, as described in Note 11 of the notes to
the Financial Statements, dated September 5, 1996 on our audits of the balance
sheet as of June 30, 1996 and the statements of operations and cash flows for
each of the two years in the period ended June 30, 1996 and for the period from
inception (October 1985) to June 30, 1996 and the statement of stockholders'
deficit for the period from inception (October 1985) to June 30, 1996 of
Bioquant, Inc.; and, (3) of our report, dated September 5, 1996 on our audit of
the statement of operations for the seven month period from July 1, 1994 to
January 31, 1995 of Pacific Biometrics, Inc. We also consent to the references
to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Seattle, Washington
October 10, 1996
