<PAGE>
As filed with the Securities and Exchange Commission on April 17, 1998
Registration No. 333-11551
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
POST-EFFECTIVE AMENDMENT NO. 2
ON FORM S-3
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)
-----------------
Paul G. Kanan, President
PACIFIC BIOMETRICS, INC. Pacific Biometrics, Inc.
1370 Reynolds Avenue 1370 Reynolds Avenue
Irvine, CA 92614 Irvine, CA 92614
(714) 263-9933 (714) 263-9933
(Name, address and telephone number (Name, address and
of principal executive offices and telephone number
principal place of business) of agent for service)
-----------------
Copy to:
Neil S. Belloff, Esq.
Proskauer Rose LLP
1585 Broadway
New York, New York 10036
(212) 969-3000
-----------------
Approximate Date of Proposed Sale to the Public: As soon as
practicable after the Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
-----------------
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
<PAGE>
PACIFIC BIOMETRICS, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Form S-3 Item Number Caption Location in Prospectus
- ------------------------------------------------------- -------------------------------------------------------
<S> <C>
1. Forepart of the Registration Statement and Outside Front Cover Page
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover
Prospectus
3. Summary Information, Risk Factors and Ratio of Prospectus Summary; Risk Factors
Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Plan of Distribution
6. Dilution Dilution
7. Selling Security Holders Not Applicable
8. Plan of Distribution Cover Page; Plan of Distribution
9. Description of Securities to be Registered Description of Securities; Plan of Distribution
10. Interests of Named Experts and Counsel Legal Matters; Experts
11. Material Changes The Company
12. Incorporation of Certain Information by Incorporation of Certain Documents by reference
Reference
13. Disclosure of Commission Position on Commission Position on Indemnification
Indemnification for Securities Act Liabilities
</TABLE>
<PAGE>
PROSPECTUS
Pacific Biometrics, Inc.
1,700,000 Redeemable Warrants
------------------------
This prospectus relates to the Redeemable Warrants (the "Warrants") of
Pacific Biometrics, Inc., a Delaware corporation (the "Company"), issued in
connection with the Company's initial public offering of its securities in
October 1996. Each Warrant entitled the registered holder thereof to purchase,
at any time until January 31, 1998 (the "Expiration Date"), one share of common
stock, par value $.01 per share (the "Common Stock"), at an exercise price of
$12.00, subject to adjustment. In December 1997, the Company agreed to extend
the Expiration Date to June 30, 1998. 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. See "Description of
Securities--Warrants."
The Common Stock and Warrants are each quoted on the National
Association of Securities Dealers Automated Quotation ("Nasdaq") Small Cap
Market under the symbols "PBMI" and "PBMIW", respectively. On April 16, 1998,
the closing bid and last sale price of the Common Stock and Warrants were $3.375
and $3.375 and $0.1875 and $0.1875, respectively.
------------------------
THESE ARE SPECULATIVE SECURITIES AND AN INVESTMENT IN THESE SECURITIES
INVOLVES A HIGH DEGREE OF RISK, IS SUBJECT TO 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 11.
------------------------
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.
April 17, 1998
<PAGE>
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports and
other information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
NW, Washington D.C. 20549 and at the Commission's regional offices at 7 World
Trade Center, 13th floor, New York, New York 10048, and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained from the Public Reference Section of the Commission at prescribed
rates. Information with respect to the operation of the Commission's public
reference facilities may be obtained by calling the Commission at
1-800-SEC-0330. 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. The Company furnishes its stockholders with annual reports
containing audited financial statements examined by the Company's independent
public accountants and makes available its quarterly reports containing
unaudited financial information for each of the first three quarters of each
fiscal year. The Company's Web site address is http://www.pacbio.com.
2
<PAGE>
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 the Company's periodic reports filed with the Commission and
incorporated herein by reference thereto. All references to the "Company"
contained herein refer to the Company and its wholly-owned subsidiaries, unless
the context otherwise requires.
THE COMPANY
General
The Company develops diagnostic and laboratory products and provides
laboratory services in the fields of cardiovascular disease and osteoporosis
laboratory testing. The Company's strategy is to focus on the development of
cost-effective, non-invasive diagnostic tests and improved laboratory techniques
in order to achieve early diagnosis, prevention, and therapeutic monitoring. The
Company plans to (i) finalize development and commercialize a patented skin
patch product that measures bone loss markers in human perspiration (the
"Osteopatch(TM)"); (ii) expand its specialty reference laboratory business; and
(iii) evaluate the feasibility of non-invasive glucose testing using
SalivaSac(R), its patented saliva collection device.
Bone diseases and disorders, including osteoporosis, are a significant
health problem worldwide. An estimated 25 million Americans, and more than 75
million persons worldwide, suffer from osteoporosis. Although the National
Osteoporosis Foundation estimates that the costs associated with osteoporosis
exceed $10 billion annually in the U.S., medical intervention usually occurs
only after symptoms such as pain or fractures appear and when treatment is
generally too late to be effective. The Company believes that over fifty new
therapeutic products are under development and that the osteoporosis therapeutic
market, currently estimated at $2 billion annually, will grow significantly.
Thus, there is a need for diagnostic tools and assessments that will identify
those at risk, allow for early treatment and enhance the physician's ability to
monitor the effectiveness of such treatment.
The Company's specialty reference laboratory has developed an expertise
in the emerging field of osteoporosis laboratory assessments through its work
with diagnostic manufacturers of assays(1) 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).
- ----------
(1) A system by which the amount of a biological substance is measured;
includes, e.g., immunoassays, the measurement of a substance from its
interaction with a specific antibody.
3
<PAGE>
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(2)
collection device, the Osteopatch(TM), and obtained exclusive rights to
antibodies for the detection of bone loss markers in perspiration. These
technologies provide the Company with the opportunity to develop a unique
diagnostic tool, coupled with a laboratory analytical service, which should
prove to be a useful indicator of bone loss. The Osteopatch(TM) product
development effort is the Company's primary focus at this time.
Recent Developments
In February 1998, the Company announced that it had completed all
510(k) pre-market notification filings for a test to measure an indicator of
bone resorption using the Company's proprietary skin patch system.
Osteopatch(TM) is the first application of the Company's skin patch system. The
Osteopatch(TM) system consists of a patented transdermal sweat collection
device, proprietary assays for the detection of biochemical markers of bone
loss(3) in sweat, and a proprietary method for laboratory analysis. A combined
total of over 200 patients at 14 facilities were evaluated in the clinical
utility study used to support the Company's 510(k) notifications application
with the U.S. Food and Drug Administration (the "FDA") submitted on February 9,
1998. According to the FDA's office of Device Evaluation Annual Report, during
1995, the average 510(k) review time was approximately six months. The preceding
statements regarding the Company's FDA submission involves risks and
uncertainties. There can be no assurance that the Company's 510(k) notifications
will be accepted or that the review process will be completed in a timely
manner, either of which events could have a material adverse effect on the
Company.
Osteoporosis is one of the fastest growing and debilitating diseases
affecting the aging population today. New ways of preventing, diagnosing and
managing the disease are urgently needed. The disease is characterized by low
bone mass and deterioration of bone structure that can lead to bone fracture.
According to the National Osteoporosis Foundation (the "NOF"), 28 million people
in the U.S. are at risk of osteoporosis, which figure is projected to grow to 41
million by the year 2015. Additionally, the NOF estimates that the U.S.
spends approximately $14 billion annually on osteoporosis related fractures.
In December 1997, the Company executed a definitive agreement with
Sudormed, Inc.("Sudormed"), which provides the Company an exclusive worldwide
license to all medical
- ----------
(2) Movement of substances from blood across the skin (dermis), chiefly in
sweat; transdermal also refers to the movement of substances from the
surface of the skin to the underlying tissues and blood.
(3) Certain specific molecules produced from the degradation of bone
proteins, which are delivered to blood and then to urine and sweat; the
amount of the bone molecules measured in these fluids in a specified
interval is related to the amount of bone degraded or lost in that
time.
4
<PAGE>
diagnostic applications of Sudormed's skin patch technology. In addition, the
license allows for the development of all other potential applications of such
technology, except for those relating to alcohol and drugs of abuse. Sudormed is
the licensor of the skin patch technology for the application of measuring bone
loss markers in sweat which is the basis for the Company's Osteopatch(TM)
system.
In exchange for the rights described above, the Company will pay
Sudormed approximately $3 million over a fifteen month period plus an ongoing
royalty payment based on the amount of sales of products developed under this
license. Such payments include a lump-sum payment of $1.6 million in December
1998. Through this license, the Company believes that it will be able to expand
the use of the skin patch technology, thereby broadening its platform
technology, building on its research expertise from the Osteopatch(TM)
development, and strengthening its position in the non-invasive testing
marketplace.
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
cholesterol measurements and related risk factors for coronary heart disease.
The Company, through an affiliated foundation, is one of twelve Centers for
Disease Control ("CDC") reference network laboratories for the standardization
of cholesterol testing. The Company intends to expand the marketing of its
specialty laboratory services to pharmaceutical and diagnostic clients in its
areas of expertise. In addition, through the development and commercialization
of the Osteopatch(TM), the Company will expand its business opportunities into
clinical laboratory analysis of bone markers. The Company anticipates that its
laboratory facilities will be positioned to capture a significant portion of the
analysis revenues which will be associated with the Osteopatch(TM) product.
Saliva is a useful body fluid for diagnostic purposes but is difficult
to handle in the laboratory because it contains mucopolysaccharides(4),
particulate matter, blood contamination, enzymes(5) 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(6) of medical interest. The Company has a patented saliva collection
and processing device called the SalivaSac(R). The SalivaSac(R) is a small
device consisting of a semipermeable outer membrane and containing a small
quantity of a substance such as salt or sugar that acts as an
- ----------
(4) Large proteins which are decorated with several long chained
polysaccharides (chains of sugars); such molecules are common in saliva
and account for its viscous, sticky nature.
(5) Proteins whose function is to degrade other biological molecules.
(6) A chemistry term denoting a biological substance or drug that is
measured to indicate some physiological or health state; e.g., glucose
is the analyte of interest in monitoring treatment of diabetics.
5
<PAGE>
osmotic driver.(7) When the device is placed in the mouth it rapidly fills with
saliva that is filtered as it passes through the semipermeable membrane.(8) 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 applications of this technology for
diabetes. While previous attempts by others to correlate saliva glucose with
blood glucose have been unsuccessful, the Company has had encouraging
preliminary results using the SalivaSac(R) device as it appears to exclude
substances that interfere with accurate glucose measurements.
In addition to developing applications for the SalivaSac(R), the
Company will seek to license the SalivaSac(R) to others for applications in
markets that the Company does not intend to serve itself. The Company does not
believe that any products developed using SalivaSac(R) will be available for
regulatory approval or test marketing prior to the end of fiscal 1998.
In December 1997, the Company entered into a Technical Development and
License Agreement with ActiMed Laboratories, Inc. ("ActiMed"). This agreement
provides the Company with exclusive worldwide rights to ActiMed's patented
analyte detection technology in the field of saliva glucose testing. This
technology will be combined with the Company's patented SalivaSac(R) technology
to develop a saliva glucose testing system, with applications in screening for
and monitoring of diabetes.
In addition to, and in consideration of, receiving rights to ActiMed's
proprietary technology for non-invasive saliva glucose testing, the Company has
entered into a development program with ActiMed for the purpose of developing
two potential products. The Company will fund the development based on a
mutually agreed budget by ActiMed and the Company. One potential product, a
screening product, is intended to detect diabetes in the general population
using a saliva sample in a single use, disposable, non-instrumented device which
incorporates the Company's SalivaSac(R) technology and ActiMed's thin film and
dye technology. A second potential product, incorporating the same technologies
plus a hand held meter, is intended to produce detailed quantitative
measurements of glucose levels to enable diabetics to monitor glucose levels
throughout the day. This collaboration will start in the third quarter of fiscal
1998. The Company will pay ActiMed a royalty based on future sales of products
developed under this arrangement.
- ----------
(7) A substance (usually a sugar or a salt) that, when dissolved,
establishes an osmotic gradient. An osmotic gradient is a physical
situation in which one side of a membrane has a high concentration of
salt or sugar, and the other side has a smaller concentration. As a
consequence, water flows from the low concentration side to the high
side. In this way, small molecules and water can be carried through a
semipermeable membrane.
(8) A membrane that is permeable to (can be penetrated by) water and small
molecules, but not large molecules; such a membrane is thus capable of
filtering larger molecules from smaller ones.
6
<PAGE>
There can be no assurance, however, that either of these products will be
successfully developed, or if developed, will be approved for use by the FDA,
achieve market acceptance or contribute significantly to the Company's revenues
or profits.
The Company also acquired the rights to a sample preparation device
which it markets under the name SPINPRO(R). SPINPRO(R) simplifies and improves
the methods used for performing certain tests in the laboratory. By reducing
the number of manual steps involved in the testing process, the laboratory can
save labor costs and achieve more consistent and accurate results. The first
application of this device is for the testing of HDL cholesterol. SPINPRO(R) is
distributed by Sigma Diagnostics ("Sigma"), a division of Sigma Chemical Co., a
major distributor of diagnostic reagents and products, to laboratories in the
U.S. and Europe. The Company was required to make a minimum royalty payment in
June 1996 under the SPINPRO(R) license agreement in order to maintain
exclusivity of the technology. The Company elected not to make such payment and
believes that the loss of exclusivity, of which the Company has not yet been
notified, will not have a material adverse effect on the business or prospects
of the Company.
During fiscal 1997, the Company received notification of the
termination of its manufacturing agreement relating to the manufacture of the
SPINPRO(R) product. As a result of this termination, the Company has reimbursed
the manufacturer for the value of molds and production equipment. As of December
31, 1997, the remaining inventory, molds and production equipment, had been
relocated to a storage facility. The Company is currently evaluating its
alternatives for continuing production of the SPINPRO(R) product.
Production of SPINPRO(R) units is currently suspended as a result of
the termination of a manufacturing agreement with the Company's prior supplier
of the SPINPRO(R) product. The expected relocation of SPINPRO(R) manufacturing
may further delay production while new manufacturing and supply arrangements are
negotiated, however, such disruptions are not anticipated to have a material
effect on the Company's operations or financial condition, since SPINPRO(R)
revenues have not been material to date.
On September 26, 1997 the Company received from the former manufacturer
of SPINPRO(R) a demand for arbitration in connection with alleged breaches of
the contract relating to the manufacture of SPINPRO(R). The Company does not
believe that the claims have any merit and believes that the ultimate outcome of
this proceeding will not have a material impact on the Company. The Company is
vigorously contesting such claims and has filed counterclaims against the former
manufacturer. The Company has also filed for arbitration against a former vendor
relating to SPINPRO(R), seeking damages for alleged breach of contract with
respect to the manufacture of molds for SPINPRO(R) parts.
In August 1997, the Company announced an agreement with Segix Italia,
S.p.A. ("Segix") for a market and technical evaluation of the Company's
Osteopatch(TM) diagnostic system for the Italian market. At the end of the
evaluation period (May 1998), Segix has the option to exercise an exclusive long
term supply and distribution agreement with the Company for the Italian market.
Exercise of Segix's option to execute the supply and distribution agreement will
give the Company access to the Italian market through Segix's 70 person direct
sales force.
7
<PAGE>
On February 20, 1998, the Company consummated the sale of 925,000
shares of Series A Convertible Preferred Stock (the "Preferred Stock") with an
institutional investor for an aggregate purchase price of $1,850,000. In
addition, the Company granted such institutional investor an option (the
"Option") to purchase an additional 625,000 shares of Preferred Stock until May
20, 1998 for a purchase price of $1,250,000. The Preferred Stock is convertible
into shares of the Company's Common Stock at the option of the holder at any
time on a one-for-one basis, subject to adjustment for stock splits, dividends
and the like. The Preferred Stock provides for a cumulative cash dividend
payable quarterly in arrears at an annual rate of 8%. The Company has the right
to force conversion of the Preferred Stock in the event the price per share of
the Common Stock is $8.00 or more for twenty consecutive trading days. The
Company has agreed to use commercially reasonable efforts to effect the
registration of the Common Stock into which the Preferred Stock is convertible
no later than August 18, 1998. The holders of the Preferred Stock, as a class,
have the right to designate one director to the Board of Directors of the
Company. The holder of the Preferred Stock has designated Terry Giles, a current
Board member, as its nominee to the Board. Other than acting in his capacity as
legal counsel, Mr. Giles has no affiliation with the current holder of the
Preferred Stock. The Company will use the proceeds of the sale of the Preferred
Stock and exercise of the Option, if any, to ensure timely payment of the
Company's obligations to Sudormed with respect to the licensing by the Company
of the patch technology for all applications other than drugs of abuse, and for
general working capital purposes.
On March 18, 1998, the Company and its subsidiaries entered into a Loan
and Security Agreement (the "Loan and Security Agreement") relating to a $1
million term loan (the "Loan") with Silicon Valley Bank (the "Bank"). The
Company can draw loan advances through March 6, 1999, after which the Loan (plus
accrued interest) will be repaid in forty-eight (48) equal monthly installments
through March 6, 2003. The Loan bears interest at the per annum rate of one
percent over the prime rate announced by the Bank. The Loan is collateralized by
substantially all of the Company's presently existing and hereafter acquired
assets including, but not limited to, the Company's goods, equipment, inventory,
contract rights, general intangibles and accounts (the "Collateral"). The
Company is required to maintain adequate insurance covering the Collateral and
is required to deliver to the Bank certain financial statements and other
reports. Moreover, the Company must comply with certain minimum financial
standards and ratios, including a minimum stated net worth and a liquidity
coverage ratio, and other non-financial restrictions. Upon any event of default,
as defined in the Loan, the Bank may declare all outstanding Loan advances and
all accrued interest thereon immediately due and payable, and may also claim,
recover and sell the Collateral.
In connection with the Loan, the Company granted the Bank a warrant
(the "Bank Warrant") to purchase 15,094 shares of the Company's Common Stock
until March 6, 2003 for an exercise price of $3.3125 per share (which was the
market price per share of the Company's Common Stock on the date of the grant
determined using a five day average price per share). In lieu of exercising the
Bank Warrant, the Bank may convert the Bank Warrant pursuant to a cashless
exercise feature, in whole or in part, into a number of shares of the Company's
Common Stock determined by dividing the difference between the exercise price
and the then current fair market value of the Company's Common Stock by the then
current fair market value of such Common Stock and multiplying the result by the
number of Bank Warrants exercised. The
<PAGE>
Company is required to provide notice to the Bank before conducting certain
activities affecting the Company's Common Stockholders including, the
declaration of any dividend, the offer of additional shares for subscription pro
rata to stockholders, the reclassification or recapitalization of the Company's
Common Stock, and the merger or consolidation of the Company. The Company will
use the proceeds of the Loan and exercise of the Bank Warrants, if any, to
finance a portion of the Company's recent acquisition from Sudormed of the
rights to a proprietary skin patch technology.
The Company owns or is the exclusive licensee of rights under thirteen
issued U.S. patents and four pending U.S. patents with respect to the Company's
Osteopatch(TM) system, Sudormed's skin patch technology and the Company's
SalivaSac(R) technology.
THE MERGER TRANSACTIONS
The Company conducts its business through its wholly-owned
subsidiaries, Pacific Biometrics, Inc., a Washington corporation ("PBI-WA") and
BioQuant, Inc., a Michigan corporation ("BioQuant"). On June 28, 1996, the
Company completed the mergers (the "Mergers") whereby BioQuant and PBI-WA became
wholly-owned subsidiaries of the Company in separate stock-for-stock exchange
transactions. In January 1995, Pacific Biometrics, Inc., a Washington
corporation ("Old PBI") and Merchant House Scientific, Inc. ("MHS") were merged
into PBI/MHS Consolidation Corporation, a Washington corporation ("PBI/MHS"),
which subsequently changed its name to Pacific Biometrics, Inc. The Company
believes that the synergies among PBI-WA and BioQuant, through the technical
expertise and research capabilities of their respective personnel, will expedite
current development of the Osteopatch(TM) product and the development of
SalivaSac(R) diagnostic applications, completion of clinical trials of these
devices and receipt of FDA approval of these devices and their applications.
Additionally, the Company anticipates that its laboratory facilities will be
positioned to capture a significant portion of the analysis revenues which will
be associated with the Osteopatch(TM) product.
The Company's principal executive office is located at 1370 Reynolds
Avenue, Suite 119, Irvine, California 92614. The telephone number is (714)
263-9933.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered................................... 1,700,000 Warrants to purchase an aggregate of 1,700,000
shares of Common Stock.
Terms of Warrants.................................... Each Warrant is exercisable at any time until January
31, 1998, which Expiration Date has been extended by the
Company to June 30, 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
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
event of any stock splits or other similar events). The
Warrants are redeemable by the Company under certain
conditions, upon at least 30 days prior written notice,
at $.10 per Warrant. See "Description of Securities--
Redeemable Warrants."
Common Stock Outstanding
Prior to Exercise of Warrants(1)................... 3,709,671 Shares
Common Stock Outstanding
After Exercise of Warrants(2)...................... 5,409,671 Shares
Use of Proceeds...................................... The Company intends to apply the proceeds, if any,
received from the exercise of Warrants to working
capital for general corporate purposes and continued
implementation of the Company's business plan. See "Use
of Proceeds."
Nasdaq Small Cap Market
Symbols(3):
Common Stock....................................... "PBMI"
Warrants........................................... "PBMIW"
Risk Factors......................................... Investment in the Common Stock and Warrants involves a
high degree of risk and substantial dilution. See "Risk
Factors" and "Dilution."
</TABLE>
- ----------------------
(1) Does not include Common Stock issuable upon exercise of outstanding
options and warrants to purchase shares of Common Stock, reserved for
issuance under the Company's stock option plan, or shares of Common
Stock issuable upon conversion of outstanding Preferred Stock.
(2) Assumes issuance of 1,700,000 shares of Common Stock upon exercise of
the Warrants offered hereby. See "Plan of Distribution."
(3) A Nasdaq listing does not provide any assurance that an active trading
market will be maintained.
10
<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, 1997 was approximately $1,577,000 and
for the six month period ended December 31, 1997 was approximately $1,565,000.
The Company's accumulated deficit at December 31, 1997 was approximately
$13,300,000, 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. 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 eighteen months. Revenues, if
any, that the Company may receive in the next eighteen 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 revenues received in connection with the
Osteopatch(TM) product upon approval by the FDA. There can be no assurance,
however, that the Company will be able to establish any such relationships or
enter into any such license agreements or that the FDA will approve the
Osteopatch(TM) product. 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.
11
<PAGE>
2. Early Stage of Development; Regulatory and Technological
Uncertainties. The Company is at an early stage of development. Except for
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 under development. In connection with the Osteopatch(TM),
human clinical trials have been completed and a 510(k) application had been
submitted to the FDA on February 9, 1998. The other two products are being
developed for use with the SalivaSac(R) technology and technology acquired from
ActiMed with regard to glucose screening and measurement for possible
applications for diabetes related products. While the Company believes that the
results attained to date in such studies relating to SalivaSac(R) support
further research and development of these potential products, such results are
not necessarily indicative of results that will be obtained in human clinical
trials or that will ultimately be accepted by the FDA.
The potential medical diagnostic products currently under development
and other potential applications of the Company's technology currently under
examination 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.
3. Future Capital Needs; Uncertainty of Additional Funding. The Company
will require substantial additional funds in order to continue the research and
development programs and preclinical testing of its potential diagnostic
products and to conduct clinical trials and marketing of such products that may
be developed. The Company's capital requirements depend on numerous factors,
including the progress of its research and development programs, the progress of
preclinical and clinical testing, the time and costs involved in obtaining
regulatory approvals, the cost of filing, prosecuting, defending and enforcing
any patent claims and other intellectual property rights, competing
technological and market developments, changes in the Company's existing license
and supply relationships, the ability of the Company to establish collaborative
arrangements, the development of commercialization activities and arrangements,
and the purchase of additional capital equipment. Other than the Company's
laboratory revenues and nominal revenues from sales of the SPINPRO(R) product,
the Company has no current source of revenues or capital other than through
exercise of the Warrants. Based upon its current plans, the Company believes
that its anticipated cash flows from operations, together with the proceeds
12
<PAGE>
from the Preferred Stock sale and remaining proceeds received from the Company's
initial public offering ("IPO") completed in November 1996 and existing debt
arrangements, will be sufficient to meet the Company's operating expenses and
capital requirements for approximately the next nine months. The previous
sentence is considered a forward-looking statement for purposes of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995 that
involves risks and uncertainties that could cause actual results to differ
materially. Such statement is based on, among other things, assumptions made by,
and information currently available to management, including management's own
knowledge and assessment of the Company's industry, competition and current
regulatory environment. Additionally, the adequacy of the Company's available
cash equivalents and revenue from operations to sustain current and anticipated
levels of operations are subject to a number of variables including maintaining
and increasing existing laboratory revenues and profitability, performance of
products in clinical trials, the level and timing of research and development
costs necessary to obtain FDA clearance of the Osteopatch(TM) and other products
under development, the costs and timing associated with commercial production
and marketing of such products, the execution of definitive agreements with key
partners, intensified competition, third party reimbursement, technology
obsolescence prior to successful commercialization, and the acceptability of
terms related to anticipated sources of debt or equity capital.
If the Company's current and projected needs change due to
unanticipated events or otherwise, the Company may be required to obtain
additional capital. The Company intends to seek such additional funding through
public or private financings or collaborative or other arrangements with
corporate partners. There can be no assurance, however, that additional
financing will be available from any of these sources, or if available, will be
available on acceptable terms. If adequate funds are not available, the Company
may be required to delay, scale back or eliminate one or more of its research
and development programs, including but not limited to the development of the
Osteopatch(TM), or to obtain funds through entering into arrangements with
collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies or potential products that the Company
would not otherwise relinquish.
4. 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
13
<PAGE>
developing diagnostic processes for the diseases or disorders targeted by the
Company's collaborative programs.
5. Dependence on Licenses. The Company has licensed technologies
developed by various companies and research institutes and universities with
respect to the development of the Osteopatch(TM), other "patch" related
products and SalivaSac(R) applications. The Company has entered into
arrangements with Sudormed with respect to the Osteopatch(TM) and other patch
related development projects, and ActiMed, with respect to development of
SalivaSac(R) applications. The Company was required to make a minimum royalty
payment in June 1996 under the SPINPRO(R) license agreement in order to maintain
exclusivity of the technology on which the SPINPRO(R) product is based. 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. Pursuant to
the terms of the foregoing license agreements, the Company is obligated to
exercise diligence in bringing potential products to market and to make certain
royalty payments. 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(TM) product from the owner of the patents covering such
technology pursuant to arrangements requiring minimum quarterly royalty
payments. The termination or cancellation of any of the Company's material
licensing arrangements would have a material adverse effect on the Company's
business, financial condition and results of operations.
6. Uncertainty of Protection of Patents and Intellectual Property
Rights; Risk of Patent Infringement Liability. The Company's success depends on
its ability to obtain future patents, protect existing patents, licenses,
intellectual property rights, trade secrets, and to operate without infringing
upon the proprietary rights of others and prevent others from infringing on the
intellectual property rights of the Company. In addition, the Company has
exclusive licenses from third parties under various U.S. patents and pending
U.S. patent applications to the technology covered in whole or in part by the
claims therein. Since a patent may be invalid or circumvented by alternative
technologies, there can be no assurance as to the breadth of protection that any
such patents may afford the Company. In the event the Company is held liable for
patent infringement, insurance may not cover any or all of the infringement
damages and as such, any infringement liability would adversely affect the
business, financial condition and results of operations of the Company.
There can be no assurance that any patent applications relating to the
Company's potential products or processes will result in patents being issued,
or that resulting patents, if any, or existing patents, will provide protection
against competitors who successfully challenge the Company's patents, obtain
patents that may have an adverse effect on the Company's ability to conduct
business, or are able to circumvent the Company's patent position. It is
possible that other parties have conducted research or made discoveries of
processes that preceded the Company's discoveries, which could prevent the
Company from obtaining patent protection of these discoveries. A substantial
number of patents have been applied for by and issued to other
14
<PAGE>
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.
7. No Significant 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 and marketing staff. The Company has made
limited investment in marketing, product sales and 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.
8. 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
15
<PAGE>
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 limits (which are currently $1 million per
occurrence) or product recall could have a material adverse effect on the
Company's business, financial condition and results of operations.
9. Government Regulation and Product Approval. The 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 the Osteopatch(TM) and its other
products currently under development will be classified as "Class II" medical
devices allowing the Company to use the more expedient 510(k) notification
procedure, there can be no assurance that the FDA will not require the Company
to submit the more cumbersome and lengthy pre-market approval ("PMA")
application. The Company will attempt to market its products pursuant to Section
510(k) of the Food, Drug and Cosmetic Act (the "FDC Act"), which would require
filing a 510(k) submission, but not a PMA application. According to the FDA's
Office of Device Evaluation Annual Report, during 1995, the average 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, and the Company has submitted on February 9,
1998 a 510(k) notification with respect to the Osteopatch(TM). 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, 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")(9) 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
- ----------
(9) Modified amino acids that make up the cross-links in collagen
molecules, which are released into the blood stream during resorption
and serve as bone markers.
16
<PAGE>
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 under 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
17
<PAGE>
such regulations will not be modified, making it increasingly difficult for the
Company to operate its business as it presently anticipates.
10. Risks Inherent in International Transactions. The Company plans to
market its products to customers both in the U.S. and abroad, however, the
Company currently has only one potential foreign distribution arrangement with
respect to distribution of the Osteopatch(TM) in Italy through Segix. There can
be no assurance that such distribution agreement will be executed upon
completion of test marketing in May 1998. Further, 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.
11. Uncertainty of Market Acceptance. The commercial success of the
Company's products will depend upon their acceptance by the medical community
and third-party payors as clinically useful, cost-effective and safe. Pyridinium
crosslinks to measure bone loss, the technology used with the Company's
Osteopatch(TM), is a relatively new technology. Market acceptance will depend on
several factors, including the establishment of clinical utility of these
biochemical markers, the receipt of regulatory clearances in the U.S. and
elsewhere, the development of diagnostic tests that can be processed using
commercially available automated systems, the availability of third-party
reimbursement, extensive physician education and the approval and commercial
acceptance of therapies for the treatment of osteoporosis. There can be no
assurance that the Company's products will gain market acceptance. Failure to
achieve market acceptance would have a material adverse effect on the Company's
business, financial condition and results of operations.
18
<PAGE>
12. Manufacturing Limitations. The Company currently does not have the
capability to manufacture products under the current Good Manufacturing
Practices regulations ("GMP") promulgated by the FDA. Accordingly, the Company
intends to outsource its manufacturing requirements relating to the
Osteopatch(TM) and the chemical reagent 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 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
Sudormed, the licensor of the technology relating to the Osteopatch(TM), for the
production of the Osteopatch(TM) product. The supply agreement requires minimum
annual purchases of the Osteopatch(TM) product. Failure to purchase the required
annual minimum amounts would result in a default under the license agreement
relating to the technology incorporated into the Osteopatch(TM). Loss of such
license, loss of the supplier or failure of the supplier to comply with GMP will
have a material adverse effect on the Company's business, financial conditions
and results of operations. The Company has no reason to believe that it will not
be able to meet the minimum purchase requirements under its existing supply
arrangements.
13. 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
19
<PAGE>
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.
14. 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.
15. 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. The Company is currently
dependent on Sudormed for the supply and manufacture of the Company's skin patch
related products, including the Osteopatch(TM). Sudormed subcontracts its supply
and manufacturing obligations to Minnesota Mining and Manufacturing Company
("3M"). The Company believes its current relationships with both Sudormed and 3M
are satisfactory. However, if such 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.
16. Dependence on Major Customers. Revenues received from laboratory
operations are generally pursuant to short-term contracts. 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
20
<PAGE>
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. One customer
individually accounted for approximately 35.9 percent of the Company's total
sales in fiscal 1997 and another customer individually accounted for
approximately 29.5 percent of the Company's total sales in fiscal 1996. Sales to
the Company's five largest customers represented approximately 76.8 percent and
63.0 percent of total sales in fiscal 1997 and fiscal 1996, respectively. As the
Company's laboratory operations grow, the Company expects that its dependence on
any one or group of customers will diminish.
17. 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. The Company does not maintain key
person life insurance on any of its key employees.
18. Effective Control by Principal Stockholders. The officers and
directors of the Company currently beneficially own approximately 39.0 percent
of the Common Stock (including options and warrants held by such persons) of the
Company and will have the ability to significantly influence the election of all
of the directors of the Company and otherwise significantly influence the
affairs of the Company.
19. Arbitrary Determination of Exercise Price. The exercise price of
the Warrants was arbitrarily determined by the Company and the underwriter of
the Company's IPO 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 exercise 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.
20. Absence of Dividends. The Company has not paid any cash dividends
on its Common Stock and does not anticipate paying any such cash dividends on
its Common Stock in the foreseeable future. Earnings, if any, will be retained
to finance future growth. The Company will be required to pay dividends on its
Preferred Stock. The Company will be required to pay dividends on its Preferred
Stock.
21. 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 Company recently
issued 925,000 shares of Preferred Stock and granted an
21
<PAGE>
option to purchase an additional 625,000 shares of Preferred Stock. The issuance
of additional 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 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."
22. 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 upon exercise of the Warrants. An investment in such securities will
result in substantial dilution to such investors and an increase 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.
23. Underwriter's Purchase Warrant. The Company has granted the
underwriter of the Company's IPO a warrant (the "Underwriter's Purchase
Warrant") to purchase 170,000 shares of Common Stock at an exercise price of
$5.70 per share. During the four-year term (commencing from October 29, 1997)
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 exercising
Warrants will be reduced.
24. Volatility of Trading Market. The market price for the Company's
securities has been and may continue to 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.
22
<PAGE>
25. Future Sales of Common Stock Under Rule 144 or Otherwise. All of
the Company's issued and outstanding shares of Common Stock as of the date of
this Prospectus, are eligible for sale under rule 144 promulgated under the
Securities Act of 1933, as amended (the "Securities Act"). In general, under
Rule 144, a person (or persons whose shares are aggregated) who has satisfied a
one-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 two-year holding
period. Accordingly, the 1,700,359 shares beneficially held by management will
be subject to the volume limitations described above so long as such persons are
deemed affiliates of the Company.
26. Current Prospectus and State Registration Required to Exercise
Warrants. Purchasers of the Warrants will be able to exercise the Warrants only
if a current prospectus relating to the securities underlying the Warrants is
then in effect and only if such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states in which the
various holders of Warrants reside. Although the Company will use its best
efforts to maintain the effectiveness of a current prospectus covering the
securities underlying the Warrants, there can be no assurance that the Company
will be able to do so. The Company will be unable to issue Common Stock to those
persons desiring to exercise their Warrants if a current prospectus covering the
Common Stock 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."
27. Possible Delisting of Securities from Nasdaq Small Cap Market;
Disclosure Relating to Low-Priced Stocks. On August 22, 1997, the Commission
approved new listing maintenance requirements applicable to the Nasdaq Small Cap
Market. These changes went into effect on February 23, 1998 and materially
enhance the threshold criteria necessary to maintain listing on the Nasdaq Small
Cap Market. The Company's failure to meet such new 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. To qualify for
continued inclusion in the Nasdaq Small Cap Market under the new rules, a
company will have to maintain (a) either $2,000,000 in net tangible assets
(total assets minus total liabilities and goodwill); market capitalization of
$35,000,000; or net income of $500,000 in the most recently completed fiscal
year or in two of the last three most recently completed fiscal years; and (b) a
market value of the public float of $1,000,000. In addition, continued inclusion
requires two market-makers and a minimum bid price of $1.00. 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
23
<PAGE>
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 of the Company's
securities 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 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 the Company's securities may find
it more difficult to sell their securities. The Company's securities are
currently outside the definitional scope of a penny stock under the rules.
USE OF PROCEEDS
The proceeds to the Company from the exercise of the Warrants offered
hereby are estimated to be up to $20,400,000, not including expenses hereof of
approximately $45,000. The Company anticipates that the proceeds received upon
exercise of the Warrants, if any, will be applied substantially to working
capital for general corporate purposes and further implementation of the
Company's business plan, but has not allocated any such proceeds for a specific
purpose and will make such determination when and if any proceeds are received
upon exercise of the Warrants.
24
<PAGE>
DILUTION
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
upon exercise of the Warrants. An investment in such securities will result in
substantial dilution to such investors and an increase 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.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
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 with respect to its Common Stock in the foreseeable future.
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.
Common Stock
The Company is authorized to issue 30,000,000 shares of Common Stock,
$.01 par value per share, of which 3,709,671 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 continue to control a significant portion of the votes and,
accordingly, they are able to significantly influence the election of all of the
Company's directors. All of the outstanding shares of Common Stock are, and the
Common Stock issuable upon exercise of the Warrants, upon issuance and when paid
for, will be duly authorized, validly issued, fully paid and non-assessable.
25
<PAGE>
Warrants
The Company has authorized the issuance of up to 1,700,000 Warrants and
has reserved an equivalent number of shares of Common Stock at a price of $12.00
per share. The Warrants are exercisable at any time after the original date of
their issuance through January 31, 1998, which Exercise Date has been extended
to June 30, 1998 unless earlier redeemed. The Warrants are redeemable by the
Company at $.10 per Warrant, upon thirty days' notice, at any time, 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 are 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 and
paid for 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 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
26
<PAGE>
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 equal to $5.70. 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 and may limit a
stockholder's ability to receive a premium on their shares of Common Stock by
discouraging takeover and tender offer bids. The Company recently issued 925,000
shares of Preferred Stock and granted an option to purchase an additional
625,000 shares of Preferred Stock. See "The Company--Recent Developments."
Underwriter's Purchase Warrant
The Company sold 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 such 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 November 1996.
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.
27
<PAGE>
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.
COMMISSION POSITION ON INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company, 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
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
registered hereunder, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
PLAN OF DISTRIBUTION
The Company has agreed to indemnify the underwriter of the Company's
IPO against certain liabilities, including liabilities under the Securities Act.
The Company has sold to the underwriter of the Company's IPO, for nominal
consideration, a warrant to purchase up to 170,000 shares of Common Stock. The
warrant has an exercise price per share of $5.70, is exercisable beginning on
October 29, 1997 for a period of four years, and contain certain anti-dilution,
registration rights, net issuance and exercise provisions. 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
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
28
<PAGE>
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.
The exercise price of the Warrants 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 such underwriter believed 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 certain provisions
of Regulation M of the Securities Exchange Act of 1934 (the "Exchange Act"), in
the event that the Company engages the underwriter of the Company's IPO to
assist in soliciting exercise of the Warrants, such underwriter will be
prohibited from engaging in any market making activities with regard to the
Company's securities for the period from either one or five business days (or
such other applicable period as Regulation M 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 such underwriter may have to receive a fee for the exercise of
Warrants following such solicitation. As a result, the underwriter of the
Company's IPO may be unable to continue to make a market in the Company's
securities during certain periods while the Warrants are exercisable.
LEGAL MATTERS
The legality of the issue of the securities underlying the Warrants has
been previously passed upon for the Company by Proskauer Rose LLP, 1585
Broadway, New York, New York.
EXPERTS
The consolidated balance sheet as of June 30, 1997 and the consolidated
statements of operations, stockholders' equity and cash flows for the fiscal
years ended June 30, 1997 and 1996, incorporated by reference in this
prospectus, have been incorporated herein in reliance upon the report of Coopers
& Lybrand L.L.P., independent accountants given upon the authority of the firm
as experts in accounting and auditing.
29
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement (the
"Registration Statement") under the Securities Act with respect to the Warrants
covered 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 the securities offered
hereby, 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or portions thereof, filed by the Company with
the Commission pursuant to the Exchange Act are incorporated by reference in
this Prospectus:
(a) Current Report on Form 8-K filed with the Commission on March
27, 1998 (File No. 0-21537);
(b) Current Report on Form 8-K filed with the Commission on
February 27, 1998 (File No. 0-21537);
(c) Quarterly Report on Form 10-QSB for the second fiscal quarter
ended December 31, 1997 filed with the Commission on February 17, 1998 (File No.
0-21537);
(d) Quarterly Report on Form 10-QSB for the first fiscal quarter ended
September 30, 1997 filed with the Commission on November 14, 1997 (File No.
0-21537);
(e) Annual Report on Form 10-KSB for the fiscal year ended June
30, 1997, filed on September 29, 1997 (File No. 0-21537);
(f) Proxy Statement of the Company dated October 13, 1997 filed
with the Commission on October 13, 1997 (File No. 0-21537); and
30
<PAGE>
(g) The information in respect of the Company's Common Stock and
Warrants under the caption "Description of Registrant's Securities to be
Registered" contained in the Registration Statement on Form 8-A, filed on
October 12, 1996 (File No. 0-21537).
All documents subsequently filed by the Company pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to the filing of a post
effective amendment hereto indicating that all securities offered hereby have
been sold or which deregisters all securities then remaining unsold, shall be
deemed to be incorporated by reference in this Prospectus and to be a part of
this Prospectus from the respective dates of filings of such documents.
Any statement contained herein or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated herein by reference modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company undertakes to provide, without charge, to each person,
including any beneficial owner, to whom this Prospectus is delivered, upon the
written or oral request of such person, a copy of any and all of the documents
incorporated herein by reference (other than exhibits to such documents unless
such exhibits are specifically incorporated by reference herein). Requests for
such documents should be directed to the Chief Financial Officer of the Company
at 1370 Reynolds Avenue, Suite 119, Irvine, California 92614. Telephone requests
for such copies should be directed to the Chief Financial Officer at (714)
263-9933.
----------------
31
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES TO WHICH THIS PROSPECTUS
RELATES SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY INFERENCE THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE OF THIS PROSPECTUS.
List of Trademarks
SalivaSac(R), SPINPRO(R), and Osteopatch(TM) are trademarks of the
Company.
32
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The expenses payable by the Registrant in connection with the
registration of the issuance and distribution of the Company's Common Stock upon
exercise of the Warrants are estimated as follows:
<TABLE>
<S> <C>
Printing and Engraving Expenses.................. $ 7,500
Legal Fees and Expenses.......................... $ 20,000
State Securities Qualification Fees.............. $ 7,000
Accounting Fees and Expenses..................... $ 10,000
Miscellaneous.................................... $ 500
---------
Total........................................ $ 45,000 (1)
=========
</TABLE>
- ------------
(1) Does not include director and officer liability insurance premiums of
$165,000 previously paid in connection with the Company's IPO.
Item 15. 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
II-1
<PAGE>
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 16. Exhibits
1.1 -- Revised Form of Underwriting Agreement.*
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 Proskauer Rose LLP*
23.1 -- Consent of Proskauer Rose LLP (included in Exhibit 5.1 of this
Registration Statement.)
23.2 -- Consent of Coopers & Lybrand L.L.P., independent accountants.
25.1 -- Powers of Attorney appear on the signature page in Part II of
the Registration Statement filed on September 6, 1996.*
- --------------
* Previously filed.
II-2
<PAGE>
Item 17. 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.
II-3
<PAGE>
(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-4
<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 S-3 and authorized this Post-
Effective Amendment No. 2 to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in Irvine, California on the
16th day of April, 1998.
PACIFIC BIOMETRICS, INC.
By: s/Paul G. Kanan
---------------------------
Paul G. Kanan, President
In accordance with the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 2 to Registration Statement has been signed by the
following persons in the capacities and on the dates stated:
<TABLE>
<S> <C> <C>
s/Paul G. Kanan President, Chief Executive April 16, 1998
- ---------------------------------------- Officer and Director
Paul G. Kanan
* s/Ellen A. Rudnick Chairman of the Board of April 16, 1998
- ---------------------------------------- Directors
Ellen A. Rudnick
s/Peter Ludlum Vice President Finance, April 16, 1998
- ------------------------------------------- Chief Financial Officer
Peter Ludlum (principal accounting officer)
and Secretary
* s/Mary L. Campbell Treasurer and Director April 16, 1998
- --------------------------------------
Mary L. Campbell
* s/Douglas S. Harrington Director April 16, 1998
- --------------------------------------
Douglas S. Harrington, M.D.
* s/Craig M. Goldstone Director April 16, 1998
- --------------------------------------
Craig M. Goldstone
* s/Terry Giles Director April 16, 1998
- --------------------------------------
Terry Giles
</TABLE>
- ----------
*Executed by Paul G. Kanan pursuant to a Power of Attorney contained in the
Signature Page in connection with the Registration Statement filed on September
6, 1996.
II-5
<PAGE>
EXHIBIT INDEX
Exhibit Number
<TABLE>
<S> <C>
1.1 -- Revised Form of Underwriting Agreement.*
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 Proskauer Rose LLP*
23.1 -- Consent of Proskauer Rose LLP (included in Exhibit 5.1 of
this Registration Statement.)
23.2 -- Consent of Coopers & Lybrand L.L.P., independent accountants.
25.1 -- Powers of Attorney appear on the signature page in Part II of
the Registration Statement filed on September 6, 1996.*
</TABLE>
- --------------
* Previously filed.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Post-Effective Amendment No.
2 on Form S-3 (File no. 333-11551) to the registration statement on Form SB-2 of
Pacific Biometrics, Inc. of our report dated September 26, 1997, on our audits
of the consolidated financial statements of Pacific Biometrics, Inc. as of June
30, 1997 and for the years ended June 30, 1997 and 1996, which report is
included in the Annual Report on Form 10-KSB. We also consent to the reference
to our firm under the caption "Experts".
Coopers & Lybrand L.L.P.
Newport Beach, California
April 14, 1998
