<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1996
REGISTRATION NO. 333-11551
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PACIFIC BIOMETRICS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 8731 93-1211114
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION NUMBER)
ORGANIZATION)
------------------------
PACIFIC BIOMETRICS, INC. PAUL G. KANAN, PRESIDENT
1370 REYNOLDS AVENUE PACIFIC BIOMETRICS, INC.
IRVINE, CA 92614 1370 REYNOLDS AVENUE
(714) 263-9933 IRVINE, CA 92614
(NAME, ADDRESS AND TELEPHONE NUMBER (714) 263-9933
OF PRINCIPAL EXECUTIVE OFFICES AND (NAME, ADDRESS AND TELEPHONE NUMBER
PRINCIPAL PLACE OF BUSINESS) 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
FORM SB-2 LOCATION
ITEM NUMBER AND CAPTION IN PROSPECTUS
- ------------------------------------------ -------------------------------------
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
<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 29, 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. 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.
------------------------
THESE ARE SPECULATIVE SECURITIES AND 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 DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
---------- ---------------------- -----------
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 shares of
Common Stock at $5.70 per share, exercisable over a four-year period
commencing one year from the date of this Prospectus (the 'Underwriters's
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
[PHOTOGRAPH]
[DESCRIPTION TO BE SUPPLIED]
OSTEOPATCH(Trademark)
[PHOTOGRAPH]
[DESCRIPTION TO BE SUPPLIED]
OSTEOPATCH(Trademark)
[PHOTOGRAPH]
[DESCRIPTION TO BE SUPPLIED]
SPINPRO(Registered) HDL
[PHOTOGRAPH]
[DESCRIPTION TO BE SUPPLIED]
SALIVASAC(Registered)
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(Trademark)'); (ii) expand its specialty reference laboratory
business; (iii) explore new applications and market opportunities for the
SPINPRO(Registered) product, its sample preparation device used to perform
certain laboratory tests; and (iv) evaluate the feasibility of noninvasive
glucose testing using SalivaSac(Registered), 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 Procter & Gamble Company ('Procter & 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(Trademark), 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(Trademark) 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(Trademark), 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(Registered). SPINPRO(Registered) 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(Registered) 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(Registered) technology.
The Company is exploring applications for its proprietary
SalivaSac(Registered) 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(Trademark) product and the development of
SalivaSac(Registered) 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(Trademark) 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)... 1,948,389 Shares
COMMON STOCK OUTSTANDING
AFTER OFFERING(2)...... 3,648,389 Shares
USE OF PROCEEDS.......... The Company intends to apply the net proceeds of
approximately $6,575,250 from this Offering primarily
for Osteopatch(Trademark) product development
activities, repayment of the Bridge Loan, laboratory
equipment and working capital. See 'Use of Proceeds.'
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,
154,365 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 issuable pursuant to the
Underwriter's 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>
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------ FOR THE PERIOD FROM INCEPTION
1995 1996 TO JUNE 30, 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 1,284,285 2,984,285(3) 999,479 2,699,479(3)
----------- ----------- -------------- ------------ --------------
----------- ----------- -------------- ------------ --------------
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
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>
YEAR ENDED JUNE 30, 1996 FOR THE PERIOD FROM
--------------------------------------- INCEPTION TO
UNAUDITED JUNE 30, 1996
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..... 1,284,285 2,984,285(3) 999,479 2,699,479(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.
8
<PAGE>
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(Registered) 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(Registered) 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,
results attained in preclinical studies are not necessarily indicative of
results that will be obtained in human clinical trials.
9
<PAGE>
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(Registered)
product, the Company has no current source of revenues or capital beyond the
proceeds of this Offering. Based upon its current plans, which the Company
anticipates will include commencing human clinical trials on the
Osteopatch(Trademark) 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(Trademark), 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. Possible Inability to Meet Obligations. Historically, the Company has
had difficulty in meeting its obligations as they come due. 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.'
Additionally, the Company was required to make a minimum royalty payment in June
1996 under the SPINPRO(Registered) license agreement in order to maintain
exclusivity of the technology. The Company elected not to utilize its sparse
resources 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 or give the Company's
competitors any material advantage. Further, the Company had borrowed an
aggregate of $660,000 from certain stockholders, which borrowings matured in May
1995. The Company did not have sufficient resources to satisfy its obligations
to these stockholders, however, no demand was made by such stockholders for
repayment. Subsequent to June 30, 1996, $460,000 of such borrowings were
converted into 142,274 shares of Common Stock and the remaining $200,000 was
refinanced in connection with the Bridge Loan. See 'Certain Relationships and
Related Transactions.' Although the Company believes that the net proceeds of
this Offering, together with anticipated revenues, will be sufficient to meet
the Company's operating expenses and capital requirements for approximately
eighteen months, there can be no assurance that such funds will, in fact, be
sufficient or that the Company will be able to meet all of its obligations as
they come due.
6. 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
10
<PAGE>
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.'
7. 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 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.
8. 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. 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(Trademark) 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.
9. 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
11
<PAGE>
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 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.
10. 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.
11. 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.
12. 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
12
<PAGE>
PMA application. According to the FDA's Office of Device Evaluation Annual
Report, during 1995, the average 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.'
13
<PAGE>
13. 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--Government
Regulation.'
14. 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(Trademark), 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.
15. 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(Trademark) 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
14
<PAGE>
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(Trademark) for the production of the
Osteopatch(Trademark) product. The supply agreement requires minimum annual
purchases of the Osteopatch(Trademark) 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(Trademark). 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.
16. 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.'
17. 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.
18. 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.'
19. 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.'
20. 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 entered 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.
21. 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.
22. 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'.
23. 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.
24. 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.'
25. 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>
26. Underwriter's Purchase Warrant. Upon completion of this Offering, the
Company will grant the Underwriter a warrant to purchase 170,000 shares of
Common Stock at an exercise price of $5.70 per share. The Underwriter's 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 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
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 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 Purchase Warrant is exercised, the percentage of the Company's
Common Stock held by investors purchasing in this Offering will be reduced. See
'Underwriting.'
27. 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.'
28. 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.'
29. Future Sales of Common Stock Under Rule 144 or Otherwise. Of the
1,948,389 issued and outstanding shares of Common Stock as of the date of this
Prospectus, 623,236 shares are 'restricted securities,' as that term is defined
under Rule 144 promulgated under the Securities Act of 1933, as amended (the
'Securities Act'). Of the total shares outstanding, 1,522,097 shares are subject
to the restrictions contained in certain agreements with the Underwriter and
officers, directors and certain stockholders of the Company restricting the sale
or other disposition of such persons' Common Stock for 12 months (180 days with
respect to 263,356 shares) following the date of this Prospectus without the
prior written consent of the Underwriter. Subsequent to such 12 month
restriction, there will be 427,551 restricted shares which will be eligible for
sale under Rule 144 prior to or during August 1998. 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.
Accordingly, the 1,258,741 shares held by management will be subject to the
volume limitations described above so long as such persons are deemed affiliates
of the Company. See 'Shares Eligible for Future Sale' and 'Principal
Stockholders.'
30. 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
17
<PAGE>
Stock to those persons desiring to exercise their Warrants if a current
prospectus covering the Common Stock 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.'
31. 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.
32. 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(Trademark) 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 revenues 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 revenues 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; 1,739,215
shares outstanding; 3,439,215 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:
<TABLE>
<S> <C> <C>
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
-----
-----
</TABLE>
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... 1,948,389 53.4% $ 4,968,313 38.1% $2.55
New investors.......... 1,700,000 46.6% $ 8,075,000 61.9% $4.75
--------- ------- ----------- -------
Total.................. 3,648,389 100.0% $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 Purchase Warrant and currently outstanding options and warrants
(including the Bridge Warrants), for which an aggregate of 3,649,744 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(Trademark) diagnostic product. The Company
is also conducting research relating to the feasibility of developing products
utilizing SalivaSac(Registered).
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(Registered) 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 $1,662,118
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(Registered) 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(Trademark), 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(Registered) 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(Trademark).
Net Loss. Net loss increased by $5,566,859, or 202.9 percent to $8,310,604
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(Trademark)
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(Trademark) 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(Registered) 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(Registered) 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(Registered) 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 $159,445. 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 $10,005
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 revenues 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 Procter & 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(Registered), 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(Registered) that facilitates the collection of saliva without
contamination from enzymes, food particles, mucopolysaccharides, blood, and
other particulate matter. The SalivaSac(Registered) 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(Trademark) product and the
development of SalivaSac(Registered) 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(Trademark)
product.
The Company's strategy is to (i) finalize development and commercialize the
Osteopatch(Trademark); (ii) expand its specialty reference laboratory business;
(iii) explore new applications and market opportunities for the
SPINPRO(Registered); and (iv) evaluate the feasibility of noninvasive glucose
testing using, SalivaSac(Registered).
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) idiopathic 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 gastrointestinal
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(Registered). 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 Procter & 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(Trademark) 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(TRADEMARK)
The Company holds exclusive worldwide rights to the use of a transdermal
perspiration collection device, the Osteopatch(Trademark), 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(Trademark) 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(Trademark) 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(Trademark)
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(Trademark)
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, Procter &
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(Registered) 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(Trademark) and that its
revenues will increase proportionately with market acceptance of the
Osteopatch(Trademark), since the perspiration collected from the
Osteopatch(Trademark) 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(Trademark)
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(Trademark), 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(REGISTERED)
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(Registered). The SalivaSac(Registered) 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(Registered) device as it appears to
exclude substances that interfere with accurate glucose measurements. In
addition to developing applications for the SalivaSac(Registered), the Company
will seek to license the SalivaSac(Registered) 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(Registered) will be available for regulatory approval or test
marketing prior to 1998.
SPINPRO(REGISTERED)
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(Registered)' and has registered the name
as a Company trademark.
The Company has introduced its first SPINPRO(Registered) 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(Registered) 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(Registered) technology. The Company was required to make a minimum
royalty payment in June 1996 under the SPINPRO(Registered) 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(Trademark)
as the standard collection and diagnostic device for risk assessment and
management of therapy for osteoporosis and to develop applications for the
SalivaSac(Registered) 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(Trademark),
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(Trademark) 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(Trademark) 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(Trademark) 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(Trademark) 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(Trademark) 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(Trademark). 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(Registered) 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(Registered) 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(Registered) 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(Registered) 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(Trademark) 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(Trademark) 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(Trademark) 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(Trademark).
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:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- -------------------------------------------
<S> <C> <C>
Ellen A. Rudnick............... 45 Chairman
Paul G. Kanan.................. 50 President, CEO and Director
G. Russell Warnick............. 52 Chief Scientific Officer and Founder
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
</TABLE>
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 develop-ment. 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
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
- ---------------------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Ellen Rudnick
Chairman............................... 1996 -- -- $117,500(1) --
Paul G. Kanan
President and Chief Executive Officer.. 1996 -- -- $117,500(1) --
</TABLE>
- ------------------
(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 entered 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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<PAGE>
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. Any such loan
by the Company will be collateralized by the shares of Common Stock underlying
such options, and the proceeds of the sale of such shares must be used to
satisfy such person's obligations to the Company. 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 154,365 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
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<PAGE>
representing more than 10 percent of the total combined voting power of all
classes of stock of the Company. The 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>
AMOUNT AND PERCENTAGE OF
OUTSTANDING COMMON STOCK
------------------------------------------------
NUMBER OF PRIOR TO OFFERING AFTER OFFERING
NAME OF BENEFICIAL OWNER 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 1,948,389 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 3,648,389 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.
40
<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 3,408,793 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 154,365 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(Registered) product.
41
<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(Registered) 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 whereby
42
<PAGE>
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(Registered) 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 1,948,389 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 2,005,000 Warrants (including 255,000 Warrants that may be issued upon
exercise of the Underwriter's over-allotment option) 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
44
<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 PURCHASE WARRANT
The Company has agreed to sell to the Underwriter warrants to purchase from
the Company an aggregate of up to 170,000 shares of Common Stock exercisable at
$5.70 per share. The Underwriter's Purchase Warrant and the shares underlying
such warrant 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 out-standing 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 3,648,389
shares of Common Stock outstanding (3,903,389 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 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, 623,236 shares of Common Stock are deemed to be 'restricted securities,'
as that term is defined under Rule 144 promulgated under the Securities Act. Of
the total shares currently outstanding, 1,522,097 shares are subject to the
restrictions contained in certain agreements with the Underwriter and officers,
directors and certain stockholders of the Company restricting the sale or other
disposition of such person's Common Stock for 12 months (180 days with respect
to 263,356 shares) following the date of this Prospectus without the prior
written consent of the Underwriter. Subsequent to such 12 month restrictions,
there will be 427,551 restricted shares eligible for sale under Rule 144 prior
to or during August 1998.
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 (36,484 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. Accordingly, the 1,258,741 shares held by management will be subject to
the volume limitations described above so long as such persons are deemed
affiliates of the Company.
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
46
<PAGE>
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.
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 563,356 shares of Common Stock (including
300,000 shares underlying the Bridge Warrants) 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, a warrant to purchase up to 170,000 shares of Common Stock on the
closing date of this Offering. The warrant 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 warrant may not be sold, transferred,
assigned, or hypothecated, except to the officers who are also shareholders of
the Underwriter, or partners, subject to certain conditions. During the terms of
such warrant, 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 warrant may adversely affect the terms on which the Company can obtain
<PAGE>
additional financing, and the holders of such warrant can be expected to
exercise such warrant 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
warrant.
47
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.
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
<PAGE>
Statements, of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
48
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(Registered), SPINPRO(Registered), PBI Plus(Trademark) and
Osteopatch(Trademark) are trademarks of the Company. Fosamax(Registered) is a
registered trademark of Merck & Co.
49
<PAGE>
[This page intentionally left blank]
<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, 1,739,215 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........................... 1,284,285 988,415 999,479
----------- ----------- ---------------
----------- ----------- ---------------
</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 TOTAL
--------- ---------- ---------- ------------ ----------- ------------ ------------
<S> <C> <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 $ 255,000
Cash received in
satisfaction of
subscription
receivable.......... 161,000 161,000
Net loss............. $ (199,455) (199,455)
--------- ---------- ---------- ------------ ----------- ------------ ------------
Balance, June 30,
1993.............. 511,862 5,119 (84,000) 494,881 (199,455) 216,545
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 84,000
Cash received in
satisfaction of
subscription
receivable.......... 38,578 38,578
Stockholder loans
converted to
equity.............. 310,000 310,000
Common stock issued
for cash............ $ 10.55 4,739 47 49,953 50,000
Net loss............. (732,874) (732,874)
--------- ---------- ---------- ------------ ----------- ------------ ------------
Balance, June 30,
1994.............. 579,162 5,735 (16,978) 909,821 (932,329) (33,751)
Services provided in
satisfaction of
subscription
receivable.......... 16,978 16,978
Stockholder loans
converted to
equity.............. 324,963 324,963
Common stock issued
for services and
loan guarantees..... $ 1.68 47,867 479 80,021 80,500
Common stock issued
in connection with
acquisition of
Pacific Biometrics,
Inc. (a Washington
corporation)........ $ 0.77 189,061 1,891 143,109 145,000
Common stock issued
for cash............ $ 13.13 42,181 422 553,478 553,900
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) (1,664,190)
--------- ---------- ---------- ------------ ----------- ------------ ------------
Balance, June 30,
1995.............. 858,271 2,019,919 (2,596,519) (576,600)
Common stock issued
for cash............ $ 7.91 45,500 360,000 360,000
Common stock issued
for services........ $ 3.45 135,080 466,026 466,026
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............ $ 8.46 700,384 7,003 5,919,997 5,927,000
Net loss............. (7,560,863) (7,560,863)
--------- ---------- ---------- ------------ ----------- ------------ ------------
Balance, June 30,
1996.............. 1,739,215 $ 17,392 $ $8,755,553 $(10,157,382) $ (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:
Assets acquired:
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
---------
---------
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:
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
-----------
-----------
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:
1996 1995
------------ ------------
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)
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. 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.
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)
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:
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
--------
--------
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 $159,445.
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.
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.
F-11
<PAGE>
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 accrued 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 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
F-12
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES--(CONTINUED)
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
----------- ----------- ---------------
----------- ----------- ---------------
</TABLE>
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:
<TABLE>
<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:
EXERCISE PRICE OPTIONS
------------------ -------
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..........................
-------
-------
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 underlying common
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)
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:
YEAR ENDED
JUNE 30,
----------
1997...... $156,120
1998...... 15,061
--------
$171,181
--------
--------
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:
NUMBER OF ESTIMATED
YEAR ISSUED SHARES FAIR VALUE
---------------------------------------- --------- ----------
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
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.
In 1996, the Company acquired BioQuant through an exchange of common stock
as described in Note 1. The Company issued 700,364 shares of common stock to the
stockholders of BioQuant in connection with this acquisition.
F-16
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, although management believes that the planned proceeds of the offering
will be sufficient to fund the Company's operations for approximately 18 months,
there can be no assurance that such funds will, in fact, be sufficient or that
the Company will be able to meet all of its obligations as they come due. 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 A 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 TOTAL
------- -------- -------- -------- --------- ---------- ---------- ----------- ----------- -----------
<S> <C> <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 -- $ 625,000
Preferred stock,
Class A........ $2.00 -- -- 125,000 $ 250,000 -- -- -- -- 250,000
Preferred stock,
Class B........ $0.13 -- -- -- -- 428,700 $ 46,650 7,550 -- 54,200
Common stock..... -- -- -- -- -- -- -- -- -- --
Stock repurchased
and canceled
between December
1986 and November
1990.............. $0.58 -- -- -- -- (116,100) (12,060) (55,026) -- (67,086)
Stock issued for
services between
December 1987 and
March 1991........ $0.37 -- -- -- -- 35,750 8,345 4,835 -- 13,180
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 -- -- -- -- 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 -- -- 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 -- -- -- -- -- -- 210,073
Common stock issued
for license
agreement in
October 1993...... $0.06 -- -- -- -- 210,375 12,623 -- -- 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) (1,448,165)
-------- -------- -------- --------- ---------- ---------- ----------- ----------- -----------
Balance, June 30,
1994........... -- 403,979 210,073 -- -- 554,527 1,224,935 -- (1,448,165) (13,157)
Issuance of Class B
convertible
preferred stock... $1.74 -- -- 363,840 634,098 -- -- -- -- 634,098
Financing costs
paid in connection
with issuance of
convertible
preferred
stock Class B..... -- -- -- -- (26,725) -- -- -- -- (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) (589,359)
-------- -------- -------- --------- ---------- ---------- ----------- ----------- -----------
Balance, June 30,
1995........... -- 403,979 210,073 363,840 597,373 560,242 1,234,935 -- (2,037,524) 4,857
Issuance of Class B
convertible
preferred stock... $2.00 -- -- 149,000 298,000 -- -- -- -- 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) (749,741)
-------- -------- -------- --------- ---------- ---------- ----------- ----------- -----------
Balance, June 30,
1996........... -- -- $ -- -- $ -- 1 $2,340,381 $ -- $(2,787,265) $ (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:
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
--------
--------
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:
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
----------
----------
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:
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
---------
---------
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, although management believes that the planned proceeds
of the offering will be sufficient to fund the Company's operations for
approximately 18 months, there can be no assurance that such funds will, in
fact, be sufficient or that the Company will be able to meet all of its
obligations as they come due. 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
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)
-----------
-----------
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:
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
-----------
-----------
The provision for income taxes was as follows for the period from July 1,
1994, to January 31, 1995:
Current provision....................... $
Deferred provision...................... 180,116
Change in valuation allowance........... (180,116)
-----------
Provision for income taxes............ $ 0
-----------
-----------
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
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<PAGE>
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<PAGE>
[PHOTOGRAPH]
[DESCRIPTION TO BE SUPPLIED]
[PHOTOGRAPH]
[DESCRIPTION TO BE SUPPLIED]
[PHOTOGRAPH]
[DESCRIPTION TO BE SUPPLIED]
[PHOTOGRAPH]
[DESCRIPTION TO BE SUPPLIED]
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 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
PAGE
----
Prospectus Summary............................. 3
Summary Combined 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
------------------------------------
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:
<TABLE>
<S> <C>
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.................... $ 10,000
Accounting Fees and Expenses............................ $105,000
Miscellaneous........................................... $ 33,071
--------
Total................................................. $450,000
--------
--------
</TABLE>
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. This exchange of securities was exempt
from the registration provisions of the Securities Act pursuant to Section 4(2)
thereof as a transaction by an issuer not
II-1
<PAGE>
involving a public offering based on the fact that such exchange involved a
limited number (i.e., less than 50) of existing stockholders of BioQuant.
(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. This exchange of securities was exempt
from the registration provisions of the Securities Act pursuant to Section 4(2)
thereof as a transaction by an issuer not involving a public offering based on
the fact that such exchange involved a limited number (i.e., less than 50) of
existing stockholders of PBI-WA.
(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. This issuance of securities was exempt from the registration
provisions of the Securities Act pursuant to Section 4(2) thereof as a
transaction by an issuer not involving a public offering based on the fact that
such issuance involved a limited number (i.e., three individuals) of accredited
investors.
(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. This offering of securities was exempt from the
registration provisions of the Securities Act pursuant to Rules 505 and 506 of
Regulation D promulgated thereunder based on the fact that such securities were
only offered and sold to 'accredited investors' as defined in Rule 501 of
Regulation D.
(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. This transaction was exempt from the registration provisions of the
Securities Act pursuant to Section 4(2) thereof as a transaction by an issuer
not involving a public offering based on the fact that such issuance involved an
individual who was an accredited investor.
(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. This issuance of securities was not subject
to the registration provisions of the Securities Act since it did not involve an
offer or sale of securities.
(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. This transaction was exempt from the registration provisions of
the Securities Act pursuant to Section 4(2) thereof as a transaction by an
issuer not involving a public offering based on the fact that such issuance
involved an individual who was an accredited investor.
(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. This transaction was exempt
from the registration provisions of the Securities Act pursuant to Section 4(2)
thereof as a transaction by an issuer not involving a public offering based on
the fact that such issuance involved an individual who was an accredited
investor.
(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. This issuance
of securities was not subject to the registration provisions of the Securities
Act since it did not involve an offer or sale of securities.
II-2
<PAGE>
(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. This issuance of securities was not subject to the
registration provisions of the Securities Act since it did not involve an offer
or sale of securities.
(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 Teng Leary--
3,260. This transaction was exempt from the registration provisions of the
Securities Act pursuant to Section 4(2) thereof as a transaction by an issuer
not involving a public offering based on the fact that such issuance involved an
individual who was an accredited investor.
(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. This transaction was exempt from the registration
provisions of the Securities Act pursuant to Section 4(2) thereof as a
transaction by an issuer not involving a public offering based on the fact that
such issuance involved an individual who was an accredited investor.
(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. This issuance of securities was not subject to the registration
provisions of the Securities Act since it did not involve an offer or sale of
securities.
(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. This issuance of securities was not subject
to the registration provisions of the Securities Act since it did not involve an
offer or sale of securities.
(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. This transaction was exempt from the registration provisions of the
Securities Act pursuant to Section 4(2) thereof as a transaction by an issuer
not involving a public offering based on the fact that such issuance involved an
individual who was an accredited investor.
(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. These issuances of securities were not subject to the
registration provisions of the Securities Act since they did not involve an
offer or sale of securities.
(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 were not subject to the registration provisions of the
Securities Act as grants of securities for no consideration.
ITEM 27. EXHIBITS
<TABLE>
<S> <C>
1.1 -- Revised Form of Underwriting Agreement.
3.1 -- Certificate of Incorporation of the Registrant.*
3.2 -- Amended and Restated By-Laws of the Registrant.*
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
4.1 -- Specimen Stock Certificate.*
4.2 -- Specimen Warrant Certificate.*
4.3 -- Form of Warrant Agreement.*
4.4 -- Revised Form of Underwriter's 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 -- Employment Agreement, dated October 14, 1996, by and between Registrant
and Ellen A. Rudnick.
10.19 -- Employment Agreement, dated October 14, 1996 by and between Registrant
and Paul G. Kanan.
10.20 -- Employment Agreement, dated October 23, 1996 by and between Registrant
and G. Russell Warnick.
10.21 -- Employment Agreement, dated October 22, 1996 by and between Registrant
and Elizabeth Teng Leary, Ph.D.
10.22 -- Clinical Laboratory Agreement, dated March 8, 1995, by and between
Warner-Lambert Company and Registrant.
10.23 -- Clinical Laboratory Agreement, dated March 7, 1996 by and between
Parke-Davis Pharmaceutical Research and Registrant.
10.24 -- Clinical Laboratory Agreement, dated March 7, 1996, by and between
Parke-Davis Pharmaceutical Research and Registrant.
21.1 -- Subsidiaries.*
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
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 filed on September 6, 1996.*
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:
(1) 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
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. 2 TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN IRVINE, CALIFORNIA ON THE 28TH 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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------- ------------------------------- ----------------
<S> <C> <C>
/s/ PAUL G. KANAN President, Chief Executive October 28, 1996
Paul G. Kanan Officer and Director
* Chairman of the Board of October 28, 1996
Ellen A. Rudnick Directors
* Secretary and Director October 28, 1996
Douglas S. Harrington, M.D.
* Treasurer and Director October 28, 1996
Mary L. Campbell
* Director October 28, 1996
Craig M. Goldstone
* Director October 28, 1996
Terry Giles
</TABLE>
- ------------------
*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.
- ---------- -------------------------------------------------------------------------------------------- -----------
<S> <C> <C>
1.1 -- Revised 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 -- Revised Form of Underwriter's 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 -- Employment Agreement, dated October 14, 1996, by and between Registrant and Ellen A.
Rudnick.
10.19 -- Employment Agreement, dated October 14, 1996 by and between Registrant and Paul G.
Kanan.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- -------------------------------------------------------------------------------------------- -----------
<S> <C> <C>
10.20 -- Employment Agreement, dated October 23, 1996 by and between Registrant and G. Russell
Warnick.
10.21 -- Employment Agreement, dated October 22, 1996 by and between Registrant and Elizabeth
Teng Leary, Ph.D.
10.22 -- Clinical Laboratory Agreement, dated March 8, 1995, by and between Warner-Lambert
Company and Registrant.
10.23 -- Clinical Laboratory Agreement, dated March 7, 1996 by and between Parke-Davis
Pharmaceutical Research and Registrant.
10.24 -- Clinical Laboratory Agreement, dated March 7, 1996, by and between Parke-Davis
Pharmaceutical Research and Registrant.
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 filed on September 6, 1996.*
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 Warrants") to purchase
170,000 shares of Common Stock (the "Underwriter's Warrant Shares"), as more
fully described in Section 3 herein, and in such Underwriter's Warrants. The
Unit Securities, the Underwriter's Warrants, and the Underwriter's Warrant
Shares 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
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
<PAGE>
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 Warrants for the
purchase of 170,000 shares of Common Stock (which is equal to 5% of the total
number of the securities comprising the Firm Units sold in the Offering), at an
exercise price of $5.70 per Share (120% of the Offering Price). The
Underwriter's 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 (which antidilution rights shall be no more
favorable to the Underwriter than such rights set forth in the Warrants
included in the Units sold to the public), provisions relating to registration
rights (both on demand and, until the seventh anniversary of the Effective
Date, unlimited "piggy back" registration rights) with respect to the shares of
Common Stock included within the Underwriter's 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 Warrants
(or of any of the shares of Common Stock subject thereto) shall be made except
to certain directors, officers, and employees and shareholders of the
Underwriter after one year from the Effective Date. The Underwriter's 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 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.
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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 and (ii) the shares 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, 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
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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 Skv 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 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
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<PAGE>
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.
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
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<PAGE>
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 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 consent of the Underwriter, file a Registration Statement on Form S-8
during the 90-day period following the Effective Date.
<PAGE>
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
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 shares 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 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.
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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.
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
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<PAGE>
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 not 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 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.
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
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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 and the
Underwriter's Warrants 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.
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.
<PAGE>
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.
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
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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 a 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
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
<PAGE>
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 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
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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.
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.
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<PAGE>
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
thereof 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 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
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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 forma
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 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
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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 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.
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.
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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 thereof 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 thereof 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
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.
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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 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
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<PAGE>
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 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).
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<PAGE>
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 bv 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.
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
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<PAGE>
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:
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<PAGE>
SCHEDULE 4.17A
TO
UNDERWRITING AGREEMENT
LOCK-UP AGREEMENT
Each director and each officer of the Company shall enter into a Lock-Up
Agreement. Set forth below is the name of each stockholder who shall enter into
a Lock-Up Agreement described in Section 4.17:
Name
Enterprise Development Fund I.L.P.
Millennium Partners, L.P.
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<PAGE>
SCHEDULE 4.17B
LOCK-UP AGREEMENT
______________, 1996
Paradise Valley Securities, Inc.
11811 North Tatum Boulevard, Suite 4040
Phoenix, Arizona 85028
Re: Pacific Biometrics, Inc.
Gentlemen:
I am a director, officer and/or stockholder of Pacific Biometrics,
Inc., a Delaware corporation (the "Company"). I understand that you propose to
make an Initial Public Offering ("IPO") of securities of the Company. I
acknowledge that such action by you will be of material benefit to the Company
and the undersigned.
In consideration of the foregoing, and in order to induce you to act as
set forth above, I confirm my agreement that during the Lock-Up Period
(hereinafter defined) I will not, without your prior written approval, offer
for sale, sell, pledge, hypothecate or otherwise dispose of, directly or
indirectly, any of the shares of the Company's common stock, or any security
exercisable for or convertible into shares of such stock, which I may own
legally or beneficially (collectively, "Shares"), in any manner whatsoever,
whether pursuant to Rule 144 of the Securities and Exchange Commission ("SEC")
or otherwise. As used herein, the term "Lock-Up Period" means the 365 days from
the effective date of the registration statement filed with the SEC in
connection with the IPO.
I further understand that the Company will execute an underwriting
agreement with you concerning the proposed IPO and that such agreement will
provide that the Company will take such steps as may be necessary to enforce
the foregoing provisions and restrict the sale or transfer of the Shares as
provided herein including, but not limited to, notification to the Company's
transfer agent regarding any such restrictions; and I hereby agree to and
authorize any such actions and acknowledge that the Company and you are relying
upon this agreement in taking any such actions.
Very truly yours,
- ----------------------------
Print name:
Number of shares owned
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<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 PURCHASE WARRANT
PACIFIC BIOMETRICS, INC.
170,000 Shares of Common Stock
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 shares of the Company's common stock, $.01 par value (the
"Common Stock"), at a price of $5.70 per share (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 term
"Effective Date" as used in this Warrant means October _, 1996, the effective
date of the Registration Statement.
This Warrant is the "Underwriter's Warrant" issued pursuant to the
Underwriting Agreement dated October _, 1996 relating to the initial public
offering of the Units described in the Registration Statement 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 share), 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 share 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 shares 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 shares so purchased and, unless this Warrant shall have
expired, a new Warrant representing the number of shares, 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.
2. Restrictions on Transter 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
<PAGE>
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.
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 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 shares of Common Stock that may thereafter be
purchased upon the exercise of the rights represented hereby shall be increased
in proportion
-2-
<PAGE>
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 shares 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 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.
-3-
<PAGE>
(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 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 shares of Common Stock 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 shares of Common Stock
or other securities purchasable thereunder as such price and number of shares
were expressed in the Warrants when initially issued.
7. Registration Rights Under the Securities Act of 1933.
(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
-4-
<PAGE>
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, 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
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<PAGE>
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),
and (ii) any Common Stock issued or issuable with respect to the Common Stock
underlying this Warrant (or any replacement 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.
(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;
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(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 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
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<PAGE>
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(e) 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 representation 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 or any other security
issued or issuable upon exercise of this Warrant may not be offered or sold
except in compliance 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 pursuant to a registration statement effective
under the Act.
(b) The Holder agrees that, prior to the disposition of any shares of
Common Stock 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 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
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<PAGE>
dispose of such shares of Common Stock 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.
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, _______ ______________ shares of
Common Stock of PACIFIC BIOMETRICS, INC., a Delaware corporation.
Payment of the Purchase Price per share accompanies this Subscription.
DATED: _______________.
__________________________________________
By: ______________________________________
_____________________________________
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<PAGE>
EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") dated as of
October 14, 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 13, 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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<PAGE>
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
4
<PAGE>
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, and in the event of termination by the
Company without cause, such Non-Compete Period shall be limited to nine
months 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
5
<PAGE>
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; (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
6
<PAGE>
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, 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
7
<PAGE>
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;
(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
8
<PAGE>
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) 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
9
<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 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
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<PAGE>
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 owned by the Company, "Company"
as used in this Agreement shall in addition include such employer.) In
such event, the Company agrees
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<PAGE>
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:
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
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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 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.
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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 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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IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date first above written.
PACIFIC BIOMETRICS, INC.
By: S/ Paul G. Kanan
Paul G. Kanan, President and Chief
Executive Officer
EXECUTIVE
S/ Ellen A. Rudnick
ELLEN A. RUDNICK
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EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") dated as of October 14,
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 13, 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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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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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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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, and in the event of termination by the Company without cause,
such Non-Compete Period shall be limited to nine months 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
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<PAGE>
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; (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
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<PAGE>
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 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
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<PAGE>
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
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
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<PAGE>
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);
(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.
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<PAGE>
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, 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
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<PAGE>
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 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
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<PAGE>
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:
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.
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<PAGE>
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 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
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<PAGE>
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 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
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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 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: s/ Ellen A. Rudnick
Ellen A. Rudnick, Chairman
EXECUTIVE
s/ Paul G. Kanan
PAUL G. KANAN
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<PAGE>
EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") dated as of
October 23, 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 product development activities assigned by the
President and CEO, 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
<PAGE>
interfere with the performance of 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 per year. 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 22, 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
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<PAGE>
Salary as determined by the Board of Directors or compensation committee
thereof.
(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 primarily 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
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common stock, $.01 par value per share, at an exercise price of $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 for four
years); or (ii) earlier as follows: (a) 30,000 of such options will vest
at the time of the FDA 510(K) submission; (b) 30,000 of such options
shall vest immediately upon FDA approval of the Company's Osteopatch
product; and (c) 20,000 of such options shall vest immediately upon FDA
approval of any application submitted by the Company with respect to its
SalivaSac product or other product approved by the President and CEO.
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
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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 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.
2.5 Indemnification. 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 this contract.
ARTICLE III
CONFIDENTIALITY AND NONDISCLOSURE
3.1 Confidentiality. The Executive will not during
his employment by the Company or thereafter at any time disclose,
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<PAGE>
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.
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
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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 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
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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.
(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. 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.
8
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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 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
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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 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
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<PAGE>
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) 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"
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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,
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. 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.
Additionally, the Executive's stock options will vest completely at the
date of termination.
12
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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.
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
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<PAGE>
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
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.
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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
prior written consent of the other party. Any
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<PAGE>
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 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.
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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 S/ Paul G. Kanan
Paul G. Kanan, President and Chief
Executive Officer
S/G. Russell Warnick
G. Russell Warnick
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EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") dated as of
October 22, 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 22, 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.
2.5 Indemnification. 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 this contract.
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
4
<PAGE>
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.
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")
5
<PAGE>
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 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
6
<PAGE>
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
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
7
<PAGE>
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, 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
8
<PAGE>
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 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
9
<PAGE>
resulting from the Executive's incapacity due
to physical or mental illness);
(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. If the Executive's
employment hereunder is terminated by the Company for Cause, neither
party shall have any further obligations hereunder except
10
<PAGE>
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
her Base Salary and all benefits for a period of nine months from such
date of termination. Additionally, the Executive's stock options will
vest completely 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
11
<PAGE>
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:
Elizabeth Teng Leary, Ph.D.
17252 13th Avenue, N.W.
Seattle, WA 98177
12
<PAGE>
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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<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
14
<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 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 s/ Paul G. Kanan
Paul G. Kanan, President and Chief
Executive Officer
s/ Elizabeth Teng Leary
Elizabeth Teng Leary, Ph.D.
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PROTOCOL: 981-53
CLINICAL LABORATORY AGREEMENT
THIS CLINICAL LABORATORY AGREEMENT ("Agreement") is made as of this 08 day
of March, 1995 by and between Warner-Lambert Company, a Delaware corporation
located at 201 Tabor Road, Morris Plains, New Jersey 07950 ("Warner") and
Pacific Biometrics, Inc , a Seattle corporation located at 1100 Eastlake Avenue
East, Seattle, WA 98109 ("Laboratory").
WHEREAS, Warner desires Laboratory to perform certain clinical laboratory
services in conjunction with the clinical study being conducted by or on behalf
of Warner in accordance with Warner's protocol number 981-53 and entitled "A
3-year, population-based, randomized, open-label study comparing the effect of
aggressive lipid lowering with atorvastatin versus usual care in
hypercholesterolemic patients with coronary artery disease at risk of adverse
outcomes" a copy of which is attached hereto as Exhibit A and incorporated
herein by reference (the "Protocol"); and
WHEREAS, Laboratory desires to perform such clinical laboratory services;
THEREFORE, in consideration of the mutual promises contained herein, the
parties agree as follows:
Section 1. Ownership of Data and Publication. Laboratory agrees that all
data, materials, plans, reports, ideas, inventions and discoveries generated
during or as a result of the performance of the Services (as defined herein)
shall be the exclusive property of Warner, and Laboratory agrees to execute any
documents or undertake any further actions suggested by Warner to evidence
transfer of title thereto.
Section 2. Scope of Services. Laboratory shall perform and complete the
clinical laboratory services described in and in accordance with the Protocol
and Exhibit B which is attached hereto and incorporated herein by reference.
Such services are hereinafter referred to as the "Services". Laboratory shall
exercise its reasonable and diligent efforts and professional expertise in
performing the Services. Laboratory shall not perform any services other than as
specifically set forth on the schedule of services and payments contained in
Exhibits A and B. without the prior written consent of Warner in the form of
Exhibit C (a "Consent", a copy of which is attached hereto), signed by all of
the following four individuals: (1) the Warner study manager; (2) the Warner
Director of CRD Finance; (3) the Warner technical operations representative; and
(4) an authorized representative of the Laboratory. No payments shall be made by
Warner to Laboratory for any services performed by Laboratory unless such
services are specifically enumerated in Exhibits A or B or are specifically
approved by a fully executed Consent.
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Section 3. Time Schedule. The parties agree that time is of the essence,
and Laboratory shall perform and complete the Services and provide Warner with
all data, information and reports required hereunder in accordance with the time
schedule set forth in Exhibit B, including, without limitation, providing in a
timely manner to Warner as required in Exhibit B, the data and reports required
hereunder in a form acceptable to Warner.
Section 4. Financial Arranqements. In consideration for the Services to be
performed by Laboratory, Warner shall pay Laboratory in accordance with the fee
schedule set forth in Exhibit B, provided, however, that upon complete execution
of this Agreement, Warner shall promptly pay to Laboratory the sum of
seventy-five thousand ($75,000) Dollars (the "Initial Payment") The Initial
Payment shall be credited against all fees accrued by Laboratory subsequent to
the date hereof. In no event shall the total fees paid to Laboratory exceed the
total budget amount set forth in Exhibit B.
All payments due hereunder shall be contingent upon continued completion of
the Services, including, without limitation, delivering all reports with respect
thereto (a) in accordance with this Agreement, (b) to the reasonable
satisfaction of Warner and (c) in accordance with the time schedule set forth in
Exhibit B.
Section 5. Authority. Laboratory hereby represents and warrants that it has
the power and authority to undertake the contractual commitments set forth in
this Agreement and that its execution of this Agreement and its performance of
the Services shall not constitute a breach or default under any agreement which
Laboratory has entered into with any third party.
Section 6. Performance Covenants. Laboratory shall render the Services in
accordance with professional standards currently prevailing in its industry and
will produce and provide services, expertise, materials, plans, reports, data
and information which are accurate, of the highest quality and suitable for
inclusion in Warner's drug marketing registrations. Laboratory shall only assign
personnel to perform Services who shall have the skills necessary to efficiently
and professionally fulfill the performance covenant contained in the preceding
sentence. In carrying out its responsibilities under this Agreement, Laboratory
covenants to perform the Services and maintain records and data during and
after the term of this Agreement in compliance with all applicable laws, rules
and regulations.
Section 7. Term. The term of this Agreement shall commence on the date
hereof and shall continue until six (6) months after the earlier of (a)
the date the Services are finally completed and all final reports and
data are furnished to Warner or (b) the date on which this Agreement is
terminated as provided herein. The representations, warranties and
covenants contained in this Agreement, as well as those rights and
obligations contained in the terms of this Agreement which by their
intent or meaning have validity beyond the term hereof, including,
without limitation,
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-3- PROTOCOL: 981-53
Sections 1, 9, 10 and 1l, shall survive the termination or expiration of this
Agreement.
Section 8. Termination. This Agreement shall, at the option of Warner,
automatically and immediately terminate upon the occurrence of a "Termination
Event". A "Termination Event" shall mean the voluntary or involuntary filing of
a petition for bankruptcy, insolvency or placing in receivership of Laboratory.
This Agreement may be terminated by Warner at any time in the exercise of its
sole discretion upon fifteen (15) days prior written notice to Laboratory. Upon
receipt of notice, Laboratory agrees to promptly terminate conduct of the
Services. In the event of termination hereunder, other than as a result of a
material breach by Laboratory, Warner shall pay Laboratory for any Services
performed by Laboratory prior to receipt of the notice of termination or the
occurrence of a Termination Event, whichever is earlier. Any unexpended funds
previously paid by Warner to Laboratory shall be immediately refunded to Warner.
Section 9. Confidentiality. Both during and after the term of this
Agreement, Laboratory shall not disclose to any third party and shall otherwise
maintain in confidence and use only for the purposes contemplated in this
Agreement (a) all data, information, materials, plans, reports and ideas which
are disclosed by or on behalf of Warner to Laboratory and (b) all data,
information, materials, plans, reports and ideas which are generated as a result
of the performance of Services. The preceding obligations shall not apply to
data, information, materials, plans, reports and ideas which have entered the
public domain through no fault of Laboratory or where Warner gives its prior
written consent to its use or disclosure. Laboratory agrees to return all such
data, information, materials, plans, reports and ideas and all copies or
reproductions thereof and all notes, reports, excerpts, and extracts relating
thereto, to Warner immediately upon the expiration or termination of this
Agreement or at an earlier date at the request of Warner.
Section 10. Indemnity. Laboratory shall defend, indemnify, and hold Warner
and its officers, directors, employees and affiliates harmless from, against,
for and in respect of any and all damages, liabilities, losses, costs and
expenses (including, without limitation, reasonable attorneys fees and amounts
paid in settlement) arising out of or relating to Laboratory's negligent
performance of the Services, provided, however, that Laboratory shall not be
liable for any damages, losses, costs or expenses arising solely out of the
willful misconduct of Warner.
Section 11. Audit. Warner is hereby granted the right to examine
Laboratory's relevant raw data, records, facilities and other information during
normal business hours. Warner is hereby further granted the right to discuss
with any Laboratory officers, employees, agents or representatives any aspect of
this Agreement or the Services, both during and after the term of this
Agreement, solely to permit Warner to confirm that the Services are or have
<PAGE>
-4- PROTOCOL: 981-53
been performed in compliance with all applicable laws, rules and regulations and
the terms and conditions of this Agreement.
Section 12. Assignment. This Agreement shall not be assigned by either
party hereto without the prior written consent of the other party, except that
Warner may assign this Agreement in whole or in part to any of its affiliates
who shall be substituted directly in whole or in part for it hereunder. Except
as otherwise provided herein, this Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
Section 13. Notices. Any notice or report required or permitted to be given
or made under this Agreement by one of the parties hereto to the other shall be
in writing and sent to the other party by hand or mailed by first class
(postage prepaid) or by facsimile copy at its address indicated below or to such
other address as the addressee shall have theretofore furnished in writing to
the addressor:
If to Warner:
Parke-Davis Pharmaceutical Research Division
Warner-Lambert Company
2800 Plymouth Road
Ann Arbor, MI 48105
Attention: President
with a copy to:
Warner-Lambert Company
201 Tabor Road
Morris Plains, NJ 07950
Attention: Counsel, Pharmaceuticals, North America
If to Laboratory:
Pacific Biometrics, Inc.
1100 Eastlake Avenue East
Seattle, WA 98109
Attention: Elizabeth Teng Leary, Ph.D., Vice President
Director of Laboratories
Section 14. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Michigan without reference
to conflicts of laws rules or principles.
Section 15. Entire Agreement. The terms and provisions contained in this
Agreement constitute the entire agreement between the parties and supersede all
previous communications, representations, agreements or understandings, either
oral or written, between the parties hereto with respect to the subject matter
hereof, and no agreement or understanding varying or
<PAGE>
-5- PROTOCOL: 981-53
extending this Agreement shall be binding upon either party hereto unless in a
writing which specifically refers to this Agreement and which is signed by duly
authorized officers or representatives of the respective parties. The provisions
of the Agreement not specifically amended thereby shall remain in full force and
effect.
Section 16. Non-waiver. Any waiver of the terms of this Agreement must be
in a writing signed by the waiving party. The waiver by either of the parties to
this Agreement of any breach of any provision hereof by the other party shall
not be construed to be a waiver of any succeeding breach of such provision or a
waiver of the provision itself.
Section 17. Severability. If and to the extent that any court or tribunal
of competent jurisdiction holds any of the terms, provisions or conditions or
parts thereof of this Agreement, or the application hereof to any circumstances,
to be invalid or to be unenforceable in a final nonappealable order, the
remainder of this Agreement and the application of such term, provision or
condition or part thereof to circumstances other than those as to which it is
held invalid or unenforceable shall not be affected thereby, and each of the
other terms, provisions and conditions of this Agreement shall be valid and
enforceable to the fullest extent of the law.
Section 18. Agency. The relationship of the parties under this Agreement is
that of independent contractors. Neither party shall be deemed to be the agent
of the other, nor shall the parties be deemed to be partners or joint venturers,
and neither is authorized to take any action binding upon the other.
Section 19. Use of Names. Laboratory shall not use the name of Warner or
any of Warner's affiliates, employees, or subsidiaries or reference any of
Warner's products in any Laboratory promotions, public statements or public
disclosures without the prior express written consent of an authorized
representative of Warner.
Section 20. U.S. Generic Drug Enforcement Act. Laboratory represents that
it and its employees, affiliates and agents have never been (a) debarred or (b)
convicted of a crime for which a person can be debarred, under Section
306 (a) or 306(b) of the Generic Drug Enforcement Act of 1992 ("Section 306(a)
or (b)"). Laboratory represents that it has never been and, to the best of its
knowledge after due inquiry, none of its employees, affiliates or agents has
ever been (a) threatened to be debarred or (b) indicted for a crime or otherwise
engaged in conduct for which a person can be debarred, under Section 306(a) or
(b). Laboratory agrees that it will promptly notify Warner in the event of any
such debarment, conviction, threat or indictment. The terms of the preceding
sentence shall survive the termination or expiration of this Agreement.
Section 21. Counterparts and Headings. This Agreement may be executed in
any number of counterparts, each of which shall be
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deemed to be an original and all of which together shall be deemed to be one and
the same instrument. All headings in this Agreement are inserted for convenience
of reference only and shall not affect its meaning or interpretation.
IN WITNESS WHEREOF, Warner and Laboratory have executed this Clinical
Laboratory Agreement as of the day and year first above written.
Pacific Biometries, Inc.
By: /s/ Elizabeth Teng Leary
Name: Elizabeth Teng Leary, Ph.D.
Title: Vice President
Director of Laboratories
WARNER-LAMBERT COMPANY
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
<PAGE>
CLINICAL LABORATORY AGREEMENT
THIS CLINICAL LABORATORY AGREEMENT ("Agreement") is made as of this 7th day of
March, 1996 by and between Parke-Davis Pharmaceutical Research, a division of
Warner-Lambert Company, a Delaware corporation with offices at 201 Tabor Road,
Morris Plains, New Jersey 07950 ("Warner") and Pacific Biometrics, Inc. ("PBI"
or "Laboratory"), 1100 Eastlake Ave. East, Seattle, WA 98109.
WHEREAS, Warner desires Laboratory to perform certain clinical laboratory
services in conjunction with the clinical study being conducted by or on behalf
of Warner in accordance with Warner's protocol number CI 981-69: An assessment
of the cost-effectiveness of treating to NCEP goals with atorvastatin as
compared to fluvastatin, lovastatin, and simvastatin in patients with CHD and/or
peripheral vascular disease a copy of which is attached hereto as Exhibit A and
incorporated herein by reference (the "Protocol"); and
WHEREAS, Laboratory desires to perform such clinical laboratory services;
THEREFORE, in consideration of the mutual promises contained herein, the parties
agree as follows:
1.0 OWNERSHIP OF DATA AND PUBLICATION:
Laboratory agrees that all data, materials, plans, reports, ideas, inventions
and discoveries generated during or as a result of the performance of the
Services (as defined herein) shall be the exclusive property of Warner, and
Laboratory agrees to execute any documents or undertake any further actions
requested by Warner to evidence transfer of title thereto.
2.0 SCOPE OF SERVICES:
Laboratory shall perform and complete the clinical laboratory services described
in and in accordance with the Protocol and Schedule A which are attached hereto
and incorporated herein by reference. Such services are hereinafter referred to
as the "Services." Laboratory shall exercise its reasonable and diligent efforts
and professional expertise in performing the Services. Laboratory shall not
perform any services other than as specifically set forth on the schedule of
services and payments contained in Schedule A without the prior written consent
of Warner in the form of Exhibit B (a "Consent", a copy of which is attached
hereto), signed by all of the following four individuals: (l) the Parke-Davis
Senior Director of Clinical Research Administration; (2) the Parke-Davis
Director of Planning and Contracting; (3) the Parke-Davis Senior Vice President
of Worldwide Clinical Research; and (4) an authorized representative of the
Laboratory. No payments shall be made by Warner to Laboratory for any services
performed by Laboratory unless such services are specifically enumerated in
Exhibit A and Schedule A or are specifically approved by a fully executed
Consent.
<PAGE>
3.0 TIME SCHEDULE:
The parties agree that time is of the essence, and Laboratory shall perform and
complete the Services and provide Warner with all data, information and reports
required hereunder in accordance with the time schedule set forth in Schedule A,
including, without limitation, providing in a timely manner to Warner as
required in Schedule A, the data and reports required hereunder in a form
acceptable to Warner.
4.0 FINANCIAL ARRANGEMENTS:
In consideration for the Services to be performed by Laboratory, Warner shall
pay Laboratory in accordance with the fee schedule set forth in Schedule A. In
no event shall the total fees paid to Laboratory exceed the total budget amount
set forth in Schedule A.
All payments due hereunder shall be contingent upon continued completion of the
Services, including, without limitation, delivering all reports with respect
thereto (a) in accordance with this Agreement, (b) to the reasonable
satisfaction of Warner and (c) in accordance with the time schedule set forth in
Schedule A. All invoices for payment shall be forwarded to the following
individual:
George Regan
Parke-Davis Pharmaceutical Research Division
2800 Plymouth Road
Ann Arbor, MI 48105
5.0 AUTHORITY:
Laboratory hereby represents and warrants that it has the power and authority to
undertake the contractual commitments set forth in this Agreement and that its
execution of this Agreement and its performance of the Services shall not
constitute a breach or default under any agreement which Laboratory has entered
into with any third party.
6.0 PERFORMANCE COVENANTS:
Laboratory shall render the Services in accordance with professional standards
currently prevailing in its industry and will produce and provide services,
expertise, materials, plans, reports, data and information which are accurate,
of the highest quality and suitable for inclusion in Warner's drug marketing
registrations. Laboratory shall only assign personnel to perform Services who
shall have the skills necessary to efficiently and professionally fulfill the
performance covenant contained in the preceding sentence. In carrying out its
responsibilities under this Agreement, Laboratory covenants to perform the
Services and maintain records and data during and after the term of this
Agreement in compliance with all applicable laws, rules and regulations.
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<PAGE>
7.0 TERM:
The term of this Agreement shall commence on the date hereof and shall continue
until six (6) months after the earlier of (a) the date the Services are finally
completed and all final reports and data are furnished to Warner or (b) the
date on which this Agreement is terminated as provided herein. The
representations, warranties and covenants contained in this Agreement, as well
as those rights and obligations contained in the terms of this Agreement which
by their intent or meaning have validity beyond the term hereof, including,
without limitation, Sections 1, 9, 10 and 11, shall survive the termination or
expiration of this Agreement.
8.0 TERMINATION:
This Agreement shall automatically and immediately terminate upon the occurrence
of a "Termination Event." A "Termination Event" shall mean the voluntary or
involuntary filing of a petition for bankruptcy, insolvency or placing in
receivership of Laboratory. This Agreement may be terminated by Warner at any
time in the exercise of its sole discretion upon thirty (30) days prior written
notice to Laboratory. Upon receipt of notice, Laboratory agrees to promptly
terminate conduct of the Services. In the event of termination hereunder, other
than as a result of a material breach by Laboratory, Warner shall pay Laboratory
for any Services performed by Laboratory prior to receipt of the notice of
termination or the occurrence of a Termination Event, whichever is earlier. Any
unexpended funds previously paid by Warner to Laboratory shall be immediately
refunded to Warner. Either party may also terminate this Agreement on thirty
(30) days prior written notice in the event the other party breeches this
Agreement, unless such other party cures breech within such thirty (30) day
period.
9.0 CONFIDENTIALITY:
Both during and after the term of this Agreement, Laboratory shall not disclose
to any third party and shall otherwise maintain in confidence and use only for
the purposes contemplated in this Agreement (a) all data, information,
materials, plans, reports and ideas which are disclosed by or on behalf of
Warner to Laboratory and (b) all data, information, materials, plans, reports
and ideas which are generated as a result of the performance of Services. The
preceding obligations shall not apply to data, information, materials, plans,
reports and ideas which have entered the public domain through no fault of
Laboratory or where Warner gives its prior written consent to its use or
disclosure. Laboratory agrees to return all such data, information, materials,
plans, reports and ideas and all copies or reproductions thereof and all notes,
reports, excerpts, and extracts relating thereto, to Warner immediately upon the
expiration or termination of this Agreement or at an earlier date at the request
of Warner.
10.0 INDEMNITY:
Laboratory shall defend, indemnify, and hold Warner and its officers, directors,
employees and affiliates harmless from, against, for and in respect of any and
all damages, liabilities, losses, costs, and expenses (including, without
limitation, reasonable attorneys fees and amounts paid in settlement) arising
out of or relating to any suit, action, or
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<PAGE>
proceeding brought by a third party regarding the data, information, materials,
plans, reports or ideas produced hereunder or the performance of the Services,
provided, however, that Laboratory shall not be liable for any damages, losses,
costs or expenses arising solely out of the willful misconduct of Warner.
11.0 AUDIT:
Warner is hereby granted the right to examine Laboratory's relevant raw data,
records, facilities and other information during normal business hours. Warner
is hereby further granted the right to discuss with any Laboratory officers,
employees, agents or representatives any aspect of this Agreement or the
Services, both during and after the term of this Agreement, solely to permit
Warner to confirm that the Services are or have been performed in compliance
with all applicable laws, rules and regulations and the terms and conditions of
this Agreement.
12.0 ASSIGNMENT:
This Agreement shall not be assigned by either party hereto without the prior
written consent of the other party, except that Warner may assign this Agreement
in whole or in part to any of its affiliates who shall be substituted directly
in whole or in part for it hereunder. Except as otherwise provided herein, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and permitted assigns.
13.0 NOTICES:
Any notice or report required or permitted to be given or made under this
Agreement by one of the parties hereto to the other shall be in writing and sent
to the other party by hand or mailed by first class (postage prepaid) or by
facsimile copy at its address indicated below or to such other address as the
addressee shall have theretofore furnished in writing to the addressor:
If to Warner:
Parke-Davis Pharmaceutical Research Division
Warner-Lambert Company
2800 Plymouth Road
Ann Arbor, MI 48105
Attention: Carol Norton
Director, Planning and Contracting
Fax: 313-998-2709
with a copy to:
Warner-Lambert Company
201 Tabor Road
Morris Plains, NJ 07950
Attention: Counsel, Pharmaceuticals, North America
Fax: 201-540-3117
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<PAGE>
If to Laboratory:
Pacific Biometrics, Inc.
1100 Eastlake Ave. East
Seattle, WA 98109
Attention: Elizabeth Teng Leary, Ph.D.
Vice President, Director of Laboratories
Fax: 206-233-0198
14.0 GOVERNING LAW:
This Agreement shall be governed by and construed in accordance with the laws of
the State of Michigan without reference to conflicts of laws rules or
principles.
15.0 ENTIRE AGREEMENT:
The terms and provisions contained in this Agreement constitute the entire
agreement between the parties and supersede all previous communications,
representations, agreements or understandings, either oral or written between
the parties hereto with respect to the subject matter hereof, and no agreement
or understanding varying or extending this Agreement shall be binding upon
either party hereto unless in a writing which specifically refers to this
Agreement and which is signed by duly authorized officers or representatives of
the respective parties. The provisions of the Agreement not specifically amended
thereby shall remain in full force and effect.
16.0 NON-WAIVER:
Any waiver of the terms of this Agreement must be in writing signed by the
waiving party. The waiver by either of the parties to this Agreement of any
breach of any provision hereof by the other party shall not be construed to be a
waiver of any succeeding breach of such provision or a waiver of the provision
itself.
17.0 SEVERABILITY:
If and to the extent that any court or tribunal of competent jurisdiction holds
any of the terms, provisions or conditions or parts thereof of this Agreement,
or the application hereof to any circumstances, to be invalid or to be
unenforceable in a final nonappealable order, the remainder of this Agreement
and the application of such term, provision or condition or part thereof to
circumstances other than those as to which it is held invalid or unenforceable
shall not be affected thereby, and each of the other terms, provisions and
conditions of this Agreement shall be valid and enforceable to the fullest
extent of the law.
18.0 AGENCY:
The relationship of the parties under this Agreement is that of independent
contractors. Neither party shall be deemed to be the agent of the other, nor
shall the parties be deemed
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<PAGE>
to be partners or joint venturers, and neither is authorized to take any action
binding upon the other.
19.0 USE OF NAMES:
Laboratory shall not use the name of Warner or any of Warner's affiliates,
employees, or subsidiaries or reference any of Warner's products in any
Laboratory promotions, public statements or public disclosures without the prior
express written consent of an authorized representative of Warner.
20.0 U.S. GENERIC DRUG ENFORCEMENT ACT:
Laboratory represents that it and its employees, affiliates and agents have
never been (a) debarred or (b) convicted of a crime for which a person can be
debarred, under Section 306(a) or 306(b) of the Generic Drug Enforcement Act of
1992 ("Section 306(a) or (b)"). Laboratory represents that it has never been
and, to the best of its knowledge after due inquiry, none of its employees,
affiliates or agents has ever been (a) threatened to be debarred or (b) indicted
for a crime or otherwise engaged in conduct for which a person can be debarred,
under Section 306(a) or (b). Laboratory agrees that it will promptly notify
Warner in the event of any such debarment, conviction, threat or indictment. The
terms of the preceding sentence shall survive the termination or expiration of
this Agreement.
21.0 COUNTERPARTS AND HEADINGS:
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original and all of which together shall be deemed to
be one and the same instrument. All headings in this Agreement are inserted for
convenience of reference only and shall not affect its meaning or
interpretation.
IN WITNESS WHEREOF, Warner and Laboratory have executed this Agreement as of the
day and year first above written.
PACIFIC BIOMETRICS, INC WARNER-LAMBERT COMPANY
/s/ Elizabeth Teng Leary /s/ Robert Zerbe
Elizabeth Teng Leary, Ph.D. Robert Zerbe, M.D.
Vice President, Director of Senior Vice President,
Laboratories Worldwide Clinical Research
/s/ Ronald Cresswell
Ronald Cresswell, Ph.D.
Chairman, Pharmaceutical Research and
Development
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<PAGE>
CLINICAL LABORATORY AGREEMENT
THIS CLINICAL LABORATORY AGREEMENT ("Agreement") is made as of this 7th day of
March, 1996 by and between, Parke-Davis Pharmaceutical Research, a division of
Warner-Lambert Company, a Delaware corporation with offices at 201 Tabor Road,
Morris Plains, New Jersey 07950 ("Warner") and Pacific Biometrics, Inc. ("PBI"
or "Laboratory"), located at 1100 Eastlake Ave. East, Seattle, WA 98109.
WHEREAS, Warner desires Laboratory to perform certain clinical laboratory
services in conjunction with the clinical study being conducted by or on behalf
of Warner in accordance with Warner's protocol number CI 981-70: An assessment
of the cost-effectiveness of treating to NCEP goals with atorvastatin as
compared to fluvastatin, lovastatin, and simvastatin in patients with risk
factors for CHD a copy of which is attached hereto as Exhibit A and incorporated
herein by reference (the "Protocol"); and
WHEREAS, Laboratory desires to perform such clinical laboratory services;
THEREFORE, in consideration of the mutual promises contained herein, the parties
agree as follows:
1.0 OWNERSHIP OF DATA AND PUBLICATION:
Laboratory agrees that all data, materials, plans, reports, ideas, inventions
and discoveries generated during or as a result of the performance of the
Services (as defined herein) shall be the exclusive property of Warner, and
Laboratory agrees to execute any documents or undertake any further actions
requested by Warner to evidence transfer of title thereto.
2.0 SCOPE OF SERVICES:
Laboratory shall perform and complete the clinical laboratory services described
in and in accordance with the Protocol and Schedule A which are attached hereto
and incorporated herein by reference. Such services are hereinafter referred to
as the "Services." Laboratory shall exercise its reasonable and diligent efforts
and professional expertise in performing the Services. Laboratory shall not
perform any services other than as specifically set forth on the schedule of
services and payments contained in Schedule A without the prior written consent
of Warner in the form of Exhibit B (a "Consent", a copy of which is attached
hereto), signed by all of the following four individuals: (1) the Parke-Davis
Senior Director of Clinical Research Administration; (2) the Parke-Davis
Director of Planning and Contracting; (3) the Parke-Davis Senior Vice President
of Worldwide Clinical Research; and (4) an authorized representative of the
Laboratory. No payments shall be made by Warner to Laboratory for any services
performed by
<PAGE>
Laboratory unless such services are specifically enumerated in Exhibit A and
Schedule A or are specifically approved by a fully executed Consent.
3.0 TIME SCHEDULE:
The parties agree that time is of the essence, and Laboratory shall perform and
complete the Services and provide Warner with all data, information and reports
required hereunder in accordance with the time schedule set forth in Schedule A,
including, without limitation, providing in a timely manner to Warner as
required in Schedule A, the data and reports required hereunder in a form
acceptable to Warner.
4.0 FINANCIAL ARRANGEMENTS:
In consideration for the Services to be performed by Laboratory, Warner shall
pay Laboratory in accordance with the fee schedule set forth in Schedule A. In
no event shall the total fees paid to Laboratory exceed the total budget amount
set forth in Schedule A.
All payments due hereunder shall be contingent upon continued completion of the
Services, including, without limitation, delivering all reports with respect
thereto (a) in accordance with this Agreement, (b) to the reasonable
satisfaction of Warner and (c) in accordance with the time schedule set forth in
Schedule A. All invoices for payment shall be forwarded to the following
individual:
George Regan
Parke-Davis Pharmaceutical Research Division
2800 Plymouth Road
Ann Arbor, MI 48105
5.0 AUTHORITY:
Laboratory hereby represents and warrants that it has the power and authority to
undertake the contractual commitments set forth in this Agreement and that its
execution of this Agreement and its performance of the Services shall not
constitute a breach or default under any agreement which Laboratory has entered
into with any third party.
6.0 PERFORMANCE COVENANTS:
Laboratory shall render the Services in accordance with professional standards
currently prevailing in its industry and will produce and provide services,
expertise, materials, plans, reports, data and information which are accurate,
of the highest quality and suitable for inclusion in Warner's drug marketing
registrations. Laboratory shall only assign personnel to perform Services who
shall have the skills necessary to efficiently and professionally fulfill the
performance covenant contained in the preceding sentence. In carrying out its
responsibilities under this Agreement, Laboratory covenants to perform the
Services and maintain records and data during and after the term of this
Agreement in compliance with all applicable laws, rules and regulations.
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<PAGE>
7.0 TERM:
The term of this Agreement shall commence on the date hereof and shall
continue until six (6) months after the earlier of (a) the date the Services
are finally completed and all final reports and data are furnished to Warner or
(b) the date on which this Agreement is terminated as provided herein. The
representations, warranties and covenants contained in this Agreement, as well
as those rights and obligations contained in the terms of this Agreement which
by their intent or meaning have validity beyond the term hereof, including,
without limitation, Sections 1, 9, 10 and 11, shall survive the termination or
expiration of this Agreement.
8.0 TERMINATION:
This Agreement shall automatically and immediately terminate upon the occurrence
of a "Termination Event." A "Termination Event" shall mean the voluntary or
involuntary filing of a petition for bankruptcy, insolvency or placing in
receivership of Laboratory. This Agreement may be terminated by Warner at any
time in the exercise of its sole discretion upon thirty (30) days prior written
notice to Laboratory. Upon receipt of notice, Laboratory agrees to promptly
terminate conduct of the Services. In the event of termination hereunder, other
than as a result of a material breach by Laboratory, Warner shall pay Laboratory
for any Services performed by Laboratory prior to receipt of the notice of
termination or the occurrence of a Termination Event, whichever is earlier. Any
unexpended funds previously paid by Warner to Laboratory shall be immediately
refunded to Warner. Either party may also terminate this Agreement on thirty
(30) days prior written notice in the event the other party breeches this
Agreement, unless such other party cures breech within such thirty (30) day
period.
9.0 CONFIDENTIALITY:
Both during and after the term of this Agreement, Laboratory shall not disclose
to any third party and shall otherwise maintain in confidence and use only for
the purposes contemplated in this Agreement (a) all data, information,
materials, plans, reports and ideas which are disclosed by or on behalf of
Warner to Laboratory and (b) all data, information, materials, plans, reports
and ideas which are generated as a result of the performance of Services. The
preceding obligations shall not apply to data, information, materials, plans,
reports and ideas which have entered the public domain through no fault of
Laboratory or where Warner gives its prior written consent to its use or
disclosure. Laboratory agrees to return all such data, information, materials,
plans, reports and ideas and all copies or reproductions thereof and all notes,
reports, excerpts, and extracts relating thereto, to Warner immediately upon the
expiration or termination of this Agreement or at an earlier date at the request
of Warner.
10.0 INDEMINITY:
Laboratory shall defend, indemnify, and hold Warner and its officers, directors,
employees and affiliates harmless from, against, for and in respect of any and
all damages, liabilities, losses, costs, and expenses (including, without
limitation, reasonable attorneys fees and amounts paid in settlement) arising
out of or relating to any suit, action, or
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proceeding brought by a third party regarding the data, information, materials,
plans, reports or ideas produced hereunder or the performance of the Services,
provided, however, that Laboratory shall not be liable for any damages, losses,
costs or expenses arising solely out of the willful misconduct of Warner.
11.0 AUDIT:
Warner is hereby granted the right to examine Laboratory's relevant raw data,
records, facilities and other information during normal business hours. Warner
is hereby further granted the right to discuss with any Laboratory officers,
employees, agents or representatives any aspect of this Agreement or the
Services, both during and after the term of this Agreement, solely to permit
Warner to confirm that the Services are or have been performed in compliance
with all applicable laws, rules and regulations and the terms and conditions of
this Agreement.
12.0 ASSIGNMENT:
This Agreement shall not be assigned by either party hereto without the prior
written consent of the other party, except that Warner may assign this Agreement
in whole or in part to any of its affiliates who shall be substituted directly
in whole or in part for it hereunder. Except as otherwise provided herein, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and permitted assigns.
13.0 NOTICES:
Any notice or report required or permitted to be given or made under this
Agreement by one of the parties hereto to the other shall be in writing and sent
to the other party by hand or mailed by first class (postage prepaid) or by
facsimile copy at its address indicated below or to such other address as the
addressee shall have theretofore furnished in writing to the addressor:
If to Warner:
Parke-Davis Pharmaceutical Research Division
Warner-Lambert Company
2800 Plymouth Road
Ann Arbor, MI 48105
Attention: Carol Norton
Director, Planning and Contracting
Fax: 313-998-2709
with a copy to:
Warner-Lambert Company
201 Tabor Road
Morris Plains, NJ 07950
Attention: Counsel, Pharmaceuticals, North America
Fax: 201-540-3117
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<PAGE>
If to Laboratory:
Pacific Biometrics, Inc.
1100 Eastlake Ave. East
Seattle, WA 98109
Attention: Elizabeth Teng Leary, Ph.D.
Vice President, Director of Laboratories
Fax: 206-233-0198
14.0 GOVERNING LAW:
This Agreement shall be governed by and construed in accordance with the laws of
the State of Michigan without reference to conflicts of laws rules or
principles.
15.0 ENTIRE AGREEMENT:
The terms and provisions contained in this Agreement constitute the entire
agreement between the parties and supersede all previous communications,
representations, agreements or understandings, either oral or written between
the parties hereto with respect to the subject matter hereof, and no agreement
or understanding varying or extending this Agreement shall be binding upon
either party hereto unless in a writing which specifically refers to this
Agreement and which is signed by duly authorized officers or representatives of
the respective parties. The provisions of the Agreement not specifically amended
thereby shall remain in full force and effect.
16.0 NON-WAIVER:
Any waiver of the terms of this Agreement must be in writing signed by the
waiving party. The waiver by either of the parties to this Agreement of any
breach of any provision hereof by the other party shall not be construed to be a
waiver of any succeeding breach of such provision or a waiver of the provision
itself.
17.0 SEVERABILITY:
If and to the extent that any court or tribunal of competent jurisdiction holds
any of the terms, provisions or conditions or parts thereof of this Agreement,
or the application hereof to any circumstances, to be invalid or to be
unenforceable in a final nonappealable order, the remainder of this Agreement
and the application of such term, provision or condition or part thereof to
circumstances other than those as to which it is held invalid or unenforceable
shall not be affected thereby, and each of the other terms, provisions and
conditions of this Agreement shall be valid and enforceable to the fullest
extent of the law.
18.0 AGENCY:
The relationship of the parties under this Agreement is that of independent
contractors. Neither party shall be deemed to be the agent of the other, nor
shall the parties be deemed
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<PAGE>
to be partners or joint venturers, and neither is authorized to take any action
binding upon the other.
19.0 USE OF NAMES:
Laboratory shall not use the name of Warner or any of Warner's affiliates,
employees, or subsidiaries or reference any of Warner's products in any
Laboratory promotions, public statements or public disclosures without the prior
express written consent of an authorized representative of Warner.
20.0 U.S. GENERIC DRUG ENFORCEMENT ACT:
Laboratory represents that it and its employees, affiliates and agents have
never been (a) debarred or (b) convicted of a crime for which a person can be
debarred, under Section 306(a) or 306(b) of the Generic Drug Enforcement Act of
1992 ("Section 306(a) or (b)"). Laboratory represents that it has never been
and, to the best of its knowledge after due inquiry, none of its employees,
affiliates or agents has ever been (a) threatened to be debarred or (b) indicted
for a crime or otherwise engaged in conduct for which a person can be debarred,
under Section 306(a) or (b). Laboratory agrees that it will promptly notify
Warner in the event of any such debarment, conviction, threat or indictment. The
terms of the preceding sentence shall survive the termination or expiration of
this Agreement.
21.0 COUNTERPARTS AND HEADINGS:
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original and all of which together shall be deemed to
be one and the same instrument. All headings in this Agreement are inserted for
convenience of reference only and shall not affect its meaning or
interpretation.
IN WITNESS WHEREOF, Warner and Laboratory have executed this Agreement as of the
day and year first above written.
PACIFIC BIOMETRICS, INC WARNER-LAMBERT COMPANY
/s/ Elizabeth Teng Leary /s/ Robert Zerbe
Elizabeth Teng Leary, Ph.D. Robert Zerbe, M.D.
Vice President, Director of Senior Vice President,
Laboratories Worldwide Clinical Research
/s/ Ronald Cresswell
Ronald Cresswell, Ph.D.
Chairman, Pharmaceutical Research and
Development
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