<PAGE>
As filed with the Securities and Exchange Commission on April 17, 2000
Registration No. 333-
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
____________________
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
____________________
CARESIDE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 3841 23-2863507
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
6100 Bristol Parkway, Culver City, CA 90230
(310)338-6767
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
___________________
W. Vickery Stoughton
Chairman of the Board of Directors and
Chief Executive Officer
Careside, Inc.
6100 Bristol Parkway
Culver City, CA 90230
(310) 338-6767
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
____________________
With copies to:
Barry M. Abelson, Esq.
Julia D. Corelli, Esq.
Pepper Hamilton LLP
3000 Two Logan Square
Philadelphia, PA 19103
(215) 981-4000
____________________
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, 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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(C) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum
Title of Each Class of Securities Amount to be Offering Price Aggregate Amount of
to be Registered Registered Per Share Offering Price Registration
- ---------------------------------- ------------ -------------- -------------- ------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 3,248,510 (1) $ 9.625 (2) $31,266,908.75 (2) $8,254.46
</TABLE>
(1) All of the shares of Common Stock offered hereby are being sold for the
accounts of selling stockholders named herein. See "Selling Stockholders"
herein.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(c) under the Securities Act
based upon the average of the high and low sale prices for the Common
Stock on April 14, 2000, as reported on the American Stock Exchange.
____________________
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, as amended, or until this Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
-2-
<PAGE>
Subject to Completion dated April 17, 2000
3,248,510 Shares Of Common Stock
[LOGO OF CARESIDE]
The selling stockholders named in this prospectus are offering 3,248,510
shares of our common stock. The selling stockholders may sell these shares from
time to time in brokers' transactions, negotiated transactions, or otherwise at
prices current at the time of sales. We will not receive any proceeds from
these sales.
All expenses of the registration of these shares (other than brokerage
commissions and transfer taxes, which will be paid by the selling stockholders)
will be paid by us. We estimate that the expenses will be $ 75,000.00.
Our common stock is listed on the American Stock Exchange under the symbol
"CSA." On April 13, 2000, the closing sale price of our common stock as reported
by the American Stock Exchange was $10 1/2 per share.
Investing in our common stock involves significant risks. See "Risk
Factors" beginning on page 6.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Selling
Public Commissions Stockholders
------ ----------- ------------
<S> <C> <C> <C>
Per share................................ See Text Above See Text Above See Text Above
Total.................................... See Text Above See Text Above See Text Above
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING SECURITYHOLDERS IDENTIFIED IN THIS PROSPECTUS MAY NOT SELL THESE
SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
April __, 2000
<PAGE>
================================================================================
_________________
TABLE OF CONTENTS
_________________
<TABLE>
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 6
Special Note Regarding Forward-Looking Statements......................... 12
Use of Proceeds........................................................... 13
Price Range of Common Stock and Dividends................................. 13
Dividend Policy........................................................... 13
Capitalization............................................................ 14
Dilution.................................................................. 15
Selected Financial Data................................................... 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 17
Business.................................................................. 21
Management................................................................ 43
Principal Stockholders.................................................... 52
Certain Transactions...................................................... 53
Description of Capital Stock.............................................. 56
Shares Eligible for Future Sale........................................... 63
Selling Stockholders...................................................... 65
Plan of Distribution...................................................... 70
Legal Matters............................................................. 71
Experts................................................................... 71
Where You Can Get More Information........................................ 72
Index to Financial Statements............................................. F-1
</TABLE>
================================================================================
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights information from this prospectus. Because
this is a summary, it does not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including the "Risk Factors" section, the financial
statements and the notes to those financial statements.
Careside
Careside has developed and is selling a proprietary blood testing system
called the Careside system. It is designed to decentralize laboratory
operations. The system consists of a testing instrument called the Careside
Analyzer and disposable test cartridges, and the Careside Connect, a computer
link designed to facilitate data interchange. It also consists of a proprietary
hematology testing device called the H-2000, which we recently acquired.
The Careside system performs blood tests in the same location as the
patient, or what is commonly called point-of-care testing. Blood testing is a
significant part of routine and critical patient care. Today, almost all blood
testing is done by sending the blood samples to hospital or commercial
laboratories. Because of transportation time and several processing steps, these
central laboratories generally take between 4 and 24 hours to provide test
results to the doctor. We believe that the Careside system provides the platform
for solving the limitations of central blood testing laboratories and redefines
the market for point-of-care testing. Here are the reasons why:
. Cost-Effective Results -- Our system is designed to provide test
results that are cost competitive with both hospital and commercial
laboratories.
. Rapid Test Results -- Our system produces test results within 10 to 15
minutes from the time the blood is drawn from the patient.
. Comprehensive Test Menu -- We believe that our planned menu of tests
represents over 80% of all blood tests ordered on an out-patient
basis, including all of the most commonly ordered blood tests.
. Ease of Use -- Our system is designed for use by non-technical
personnel, with only simple training.
. Industry Standard Technology -- Our system uses the same test methods
and technology as large testing devices in hospital and commercial
laboratories.
. Embedded Quality Assurance/Quality Control -- Our system captures all
data required to comply with regulations governing laboratory
operations, including those under the Clinical Laboratory Improvement
Amendments of 1988.
. Ability for Practice Enhancement -- By providing rapid test results
for a broad menu of tests, our system will enable doctors to treat
patients more quickly, see more patients, improve office productivity
and improve patient satisfaction and quality of care. In addition,
healthcare providers can increase their revenue by performing and
billing for tests themselves.
Our goal is to make decentralized testing with the Careside system the
standard for routine and critical care blood testing
The Careside System Status
The FDA has cleared or exempted the Careside Analyzer for 37 blood tests
for professional laboratory use and the H-2000 is cleared or exempted for 16
blood tests. Thus, as of early April 2000, the FDA had cleared or exempted the
Careside system for 53 different blood tests, which represents most of the
routine blood tests ordered by physicians. In addition, the FDA has cleared the
Careside Analyzer as a "point-of-care" device. This clearance means that
properly trained non-technical personnel can operate the Careside Analyzer,
eliminating the need for a lab specialist to oversee each test. We will seek the
same designation for the H-2000 in 2000.
<PAGE>
In December 1999, we initiated the first of a number of product
installations in pilot sites. These pilots involve assessing both the economic
opportunity provided to the customer from the use of the Careside system and
refining an instruction manual which is intended to provide customers with the
information they need to operate a lab using the Careside system. By year end
1999, two of four planned pilots were initiated. The first was started at a
small group practice that had never run a lab. The second was with a larger
group currently operating a lab. We plan additional pilot site marketing studies
in 2000. These studies will demonstrate our system's cost-effectiveness and how
potential customers will use it. We launched the sale of the Careside system in
December 1999 and as of April 2000 have begun installations in California,
Kentucky, Arizona, Texas, with other states scheduled to follow.
Market Opportunity
The lack of timely test results from central laboratories has given rise to
a growing market for point-of-care tests. According to 1997 industry data and
estimates, the worldwide product market for testing of blood and other bodily
fluids and tissues was $18.3 billion in 1997 and was expected to grow to $20
billion in 2000. Based on their prior industry experience, our senior management
believes that the Careside system's 53 test menu will address over 38% of this
market. The rest of the market includes complex and specialized tests not
performed by the Careside system. The U.S. and Canadian market is approximately
40% of the worldwide market. Our marketing efforts are targeted towards
converting U.S. and Canadian blood testing to point-of-care testing.
We define the potential market for our products as being virtually wherever
blood is drawn from patients for standardized blood tests. Based on industry
data and estimates, we believe the addressable worldwide market for our blood
tests is expected to be $7.6 billion in 2000 and is expected to grow at 16% per
year thereafter. The key U.S. markets we have targeted are as follows:
. Hospitals: There are over 6,500 acute care and specialty hospitals in
the United States that require laboratory-testing services. These
services are usually provided by a central hospital laboratory that
has to be maintained on a 24-hour basis and staffed by specially
trained lab personnel.
. Physician Groups: The American Medical Association states that there
are 27,100 physician groups in the United States. We estimate that
21,000 of these groups have three or more doctors. We believe that for
groups of three or more physicians the Careside system will offer
cost-effective improvements in daily office routine, greater
convenience, enhanced patient satisfaction and new revenue
opportunities.
. Nursing Homes: According to the American Healthcare Association, in
1999 there were 15,574 nursing homes in the United States comprised of
more than 1.6 million licensed beds. The average occupancy rate was
over 92%, with each nursing home averaging nearly 100 patients.
Nursing homes currently pay a premium to laboratories to receive
timely results. The Careside system would benefit nursing homes by
helping them earn revenue from Medicare and other payers, and reduce
costs by decreasing the Nursing Home's reliance on central
laboratories.
. Home Care: The number of home care visits increased from 70 million in
1990 to an estimated 306 million in 1997. On average, 30% of home care
patients visited each week require laboratory testing. There are
currently over 20,000 home care agencies in the United States, and
9,600 of them are Medicare certified. Currently, all home care
agencies rely on commercial labs for blood testing. Home care agencies
would benefit from increased revenue opportunities by using the
Careside system to conduct blood testing in their base offices.
. Other: Field military hospitals, ships, employee health clinics, drop-
in clinics, surgi-centers, dialysis units and other alternate sites
all represent potential customer opportunities for Careside.
Early History
SmithKline Beecham Clinical Laboratories, Inc. conducted extensive surveys
of the point-of-care market beginning in 1993. As a result, in 1994, SmithKline
started our predecessor business to develop the technology we use. We acquired
-2-
<PAGE>
this business in November 1996. Several senior members of SmithKline's
management team, including the President of SmithKline Beecham Clinical
Laboratories, worked on this point-of-care project at SmithKline. They are now
part of the executive management team of Careside. In June 1999, Careside
completed its initial public offering. Our publicly-traded common stock is
listed on the American Stock Exchange under the ticker symbol "CSA," and our
publicly-traded warrants under the symbol "CSA.WS". In December 1999, we
acquired Texas International Laboratories, Inc. ("TIL"). TIL owned and marketed
a proprietary hematology testing device, renamed the H-2000, which is now part
of the Careside system.
Careside was incorporated in the State of Delaware in July 1996 under the
name Exigent Diagnostics, Inc. In May 1998, we changed our name to Careside,
Inc. Our principal executive offices are located at 6100 Bristol Parkway, Culver
City, California 90230 and our telephone number is (310) 338-6767.
-3-
<PAGE>
The Offering
<TABLE>
<S> <C>
Shares offered by selling stockholders: . . . . . . . . . . . . . . . . . . . . . . 3,248,510 (1)
Use of Proceeds: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . We will not receive any of the
proceeds from the sale of shares of
common stock by the selling
stockholders
</TABLE>
(1) Of these shares, approximately
. 1,706,984 are shares of common stock held by the selling stockholders,
. 384,615 shares of common stock are issuable upon exercise of
warrants exercisable at $5.20 per share,
. 340,237 shares of common stock are issuable upon exercise of warrants
exercisable at $6.76,
. 101,305 shares of common stock issuable upon exercise of warrants
exercisable at $8.77 per share,
. 154,247 shares of common stock are issuable upon exercise of our
contingent warrants, which are exercisable at $.01 per share if the
closing price of our common stock falls below $7.50 per share for 15
consecutive days during the period from August 15, 2000 to November
15, 2000 and
. 235,294 shares of common stock issuable upon exercise of a warrant in
connection with a bridge loan and
. 325,828 shares of common stock are issuable upon conversion of shares
of our Series A Convertible Preferred Stock and exercise of warrants
received on conversion.
-4-
<PAGE>
Summary Financial Data
The following table presents summary financial information for Careside and
the predecessor business at SmithKline Beecham Chemical Laboratories, Inc. You
should read this data together with the financial statements and related notes
included in this prospectus (amounts in thousands except share data). The pro
forma as adjusted balance sheet data reflects the effect of the sale of
1,184,091 shares of common stock at $8.77 per share in a private placement and
the exercise of 1,154 options and the purchase of 2,839 shares under our
Employee Stock Purchase Plan.
<TABLE>
<CAPTION>
Predecessor Business Careside, Inc.
-------------------- --------------
-------------------------------------------------------------------
Period from Period from
Ten months Inception (July Inception (July
Year Ended Ended 10, 1996) to Years ended 10, 1996) to
December 31, October 31, December 31, December 31 December 31,
---------------------------------------------------------------------
1995 1996 1996 1997 1998 1999 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue $ - $ - $ - $ 61 $ 61
Cost of Sales - - - 31 31
--------- ---------- ---------- ---------- ----------
Gross Profit - - - 30 30
Operating expenses
Research and development $ 2,110 $ 3,055 1,562 5,896 8,298 8,252 24,008
Sales and marketing - 85 249 1,205 1,539
General and administration 585 224 55 555 601 1,448 2,659
---------- --------- ---------- ---------- ---------- ---------- ----------
Operating loss $ (2,695) $ (3,279) (1,617) (6,536) (9,148) (10,875) (28,176)
=========== ==========
Goodwill Amortization - - - (37) (37)
Net interest income/(expense) (21) 205 212 (679) (283)
---------- ---------- ---------- ---------- ----------
Net loss (1,638) (6,331) (8,936) (11,591) (28,496)
Dividend on Series A Preferred - - - (55) (55)
---------- ---------- ---------- ---------- ----------
Net loss to common shareholders $ (1,638) $ (6,331) $ (8,936) $ (11,646) $ (28,551)
========== ========== ========== ========== ==========
Net loss per share $ (2.25) $ (2.04) $ (1.93) $ (1.88)
========== ========== ========== ==========
Shares used in computing
net loss per share 728,465 3,098,980 4,629,916 6,210,496
</TABLE>
<TABLE>
<CAPTION>
Careside, Inc.
December 31, 1999
---------------------
Balance Sheet Data: Pro Forma
As Adjusted
Actual (unaudited)
------ ----------
<S> <C> <C>
Cash and cash equivalents............................................................. $4,905 $ 14,471
Total assets.......................................................................... 14,389 23,955
Long-term liabilities................................................................. 1,096 1,096
Deficit accumulated during development stage.......................................... (28,496) (28,496)
Total stockholders' equity............................................................ 9,079 18,646
</TABLE>
-5-
<PAGE>
RISK FACTORS
An investment in our common stock involves many risks. These risks may be
substantial and are inherent in the business of Careside. You should carefully
consider the following information about these risks, together with the other
information in this prospectus, before buying common stock.
If any of the following risks actually occur, our business and prospects
could be materially adversely affected, the trading price of our common stock or
warrants could decline, and you might lose all or part of your investment.
We Have a Limited Operating History and Have only Recently Begun to Generate
Revenues
We have incurred net losses of approximately $28.5 million from inception
through December 31, 1999. We have generated only a small amount of revenue from
product sales and will continue to incur significant additional operating losses
until we have sold a sufficient number of Careside systems.
Additional Funding May Not Be Available
Additional funding for our activities may come from the exercise of our
outstanding warrants. We also may seek additional financing to build inventory
and to refinance our bridge loan. To support our current and any future funding
requirements, we may need to issue additional equity securities, incur more
debt, obtain added lease financing and/or seek third-party collaboration
opportunities. Additional funding may have unacceptable terms or may not be
available at all for reasons relating to lenders' or investors' views of medical
device or small capitalization companies.
If adequate funds are not available, we may be required to delay, reduce or
eliminate product development programs, or reduce our planned marketing and
sales activities, or to license to third parties rights to commercialize our
products or technologies.
We May Never Be Profitable
Even if we are able to generate revenue from sales of the Careside system,
we may never be profitable. There are several reasons why this might happen:
. We may not be able to reduce our manufacturing costs to acceptable
levels.
. We may have to lower our prices to remain competitive.
. We may experience delays in developing additional tests or product
upgrades.
. We may experience problems in production, distribution or marketing.
The Medical Community May Not Accept the Careside System
The Careside Analyzer and our patented test cartridges, the H-2000 and the
Careside Connect are our only products. We will not be able to operate
profitably unless these products achieve a significant level of market
acceptance. The following factors are the greatest risks to our market
acceptance:
We May Fail to Develop the Comprehensive Test Menu Needed to Sell Our
Product
If we are not able to fully develop the remaining components of our
proposed comprehensive test menu, customers may not buy our products. One of our
major selling points to potential customers will be the breadth of our menu.
We May Be Unable to Change How Tests are Ordered
We may not be able to demonstrate the economic or clinical benefits of the
Careside system sufficiently to convince members of the medical community to
change the way they order tests. Currently, physicians and hospitals typically
order blood tests from central laboratories.
-6-
<PAGE>
Managed Care Contracts May Limit Our Market Penetration
Our ability to sell to healthcare providers may be limited by managed care
relationships. Many health maintenance and managed care organizations have
exclusive contracts with laboratories that require participating or employed
physicians to send patient specimens only to contracted laboratories.
Consequently, such physicians may be precluded from using the Careside system
unless they obtain a waiver from the relevant health maintenance or managed care
organization.
We May Be Unable to Keep Pace With Changing Technology
Blood testing technology is evolving. Other companies may develop products
in response to technological changes that make our products noncompetitive.
CLIA May Discourage Healthcare Providers from Using Point-of-Care Testing
Careside system users will be required to be licensed under the Clinical
Laboratory Improvement Amendments of 1988. While the Careside system is designed
to make licensure easy, CLIA licensing requirements may make healthcare
providers reluctant to initiate, continue or expand patient testing using the
Careside system.
We May Not Be Able to Further Develop Our Products
In order for us to expand our test menu, we must complete the development
of one of the four types of disposable cartridges. Factors outside our control
may delay our proposed development schedules. These factors include:
. delays in regulatory clearance,
. technological difficulties,
. restrictions on access to proprietary technology of strategic
partners, and
. changes in the healthcare, regulatory or reimbursement environment.
Reductions in Third-Party Reimbursement For Tests May Hurt Our Business
Current reimbursement amounts for diagnostic tests from government
authorities, private health insurers and other third-party payers, such as
health maintenance organizations, may not be maintained. Any decrease in test
reimbursement amounts may reduce the demand for our products or force us to
lower our sales prices. In addition, legislative proposals to reform healthcare
and the trend toward managed healthcare in the United States may require lower
prices for our products. See "Business--Third Party Reimbursement" on page 39.
We Have Limited Sales, Marketing and Distribution Experience
We may not be able to recruit or retain direct sales and marketing
personnel who will successfully implement our marketing strategy. We intend to
distribute our products in the United States primarily through our own sales
force, and internationally through a limited number of distributors.
Establishing a sales and marketing capability will require substantial efforts
and significant resources.
Third-Party Distributors May Not Be Effective
We will depend on third party distributors to assist us in promoting
market acceptance and creating demand for our products. We have an exclusive
distribution arrangement with Quest Diagnostics Incorporated for the commercial
laboratory market in the United States and certain foreign countries. We have
also granted Fuji Photo Film Co. Ltd. a right of first refusal to distribute the
Careside system exclusively in Japan and non-exclusively in some of the other
Asian countries. We will need additional arrangements to distribute our products
worldwide. We may not be able to maintain these arrangements or enter into
additional distribution arrangements. In addition, we have little control over
the resources that the distributors will devote to the marketing of the Careside
system. See "Business--Marketing Strategy" on page 35 and "Certain
Transactions--SmithKline Beecham" on page 53.
-7-
<PAGE>
The Quest Diagnostics Relationship is Still in Formative Stages, Adding
Uncertainty to Our Commercial Laboratory Market
Quest Diagnostics acquired all of the stock of SmithKline Beecham Clinical
Laboratories, Inc. in July 1999 and has thus succeeded to our distribution
agreement with SBCL. We have had no prior business relationship with Quest
Diagnostics and continue to discuss with Quest Diagnostics their intentions with
respect to distribution of our products under this agreement. Just as SBCL
could, Quest Diagnostics may choose to distribute our products, terminate the
agreement or refrain from distributing our products in select areas.
Our Contract Manufacturers May Not Adequately Meet Our Future Product Demand
We will depend upon outside vendors to manufacture most of the Careside
system, including the Careside Analyzer and components of the disposable testing
cartridges. We will have only limited control over third-party manufacturers as
to quality control and timing of production and delivery. We cannot be certain
that outside manufacturers will be able to provide us with a sufficient number
of instruments and cartridge components on a timely basis.
Our Lack of Manufacturing Experience Could Reduce Our Ability to Assemble
Cartridges
We will be assembling the cartridges at Careside. We have never operated a
manufacturing/assembly business. We will need to assemble significant and
increasing quantities of test cartridges on a timely basis, while maintaining
strict quality standards. We have converted from manual production of cartridge
components and assembly to an automated system to produce cartridge components.
We may not be able to achieve and maintain product accuracy and reliability when
producing the cartridges in the quantities required, on a timely basis or at an
acceptable cost.
Our Third-Party Suppliers Could Interrupt Our Supply
Our contract manufacturers and suppliers may not be able to meet our
demand. We will purchase the materials used in the test cartridges from outside
suppliers. Each of our supply agreements has termination rights. Any
interruption in supply would adversely affect our schedule. See "Business--
Manufacturing and Supply" on page 38.
Our CEO and Other Key Personnel Are Critical To Our Success
The loss of key employees or unsuccessful recruiting efforts will harm us.
Competition for qualified and talented individuals with experience in point-of-
care testing is intense. Our success depends on our ability to retain the
services of Mr. Stoughton, our Chairman of the Board of Directors and Chief
Executive Officer, and Dr. Grove, Executive Vice President--Chief Technology
Officer. Mr. Stoughton has over 20 years experience as a senior executive of
several large hospitals and over four years experience as President of
SmithKline Beecham Clinical Laboratories, Inc. Dr. Grove managed research and
development activities at SmithKline Beecham Clinical Laboratories, Inc. for 12
years and has extensive experience in the development of diagnostic tests. We
also need to attract additional sales and marketing, research and development,
and experienced manufacturing personnel. See "Management--Employment Agreements"
on page 49.
We May Not Be Able to Manage Our Expanding Operations
We will need to expand our operations if we are successful in achieving
market acceptance for the Careside system. This expansion will result in
additional responsibilities for management and place significant demand upon our
management, our operating and financial systems and our resources. To
accommodate this growth and to compete effectively, we will need to implement
and improve our internal operating systems and controls, and to hire and train
additional personnel.
Our Competitors Have Advantages Over Us
Our business may fail because our market is highly competitive. Our primary
competitors are large diagnostic device manufacturers, commercial and hospital
laboratories and other point-of-care device manufacturers. The large device
manufacturers and commercial and hospital laboratories have significant
marketing, manufacturing, financial and managerial resources, and have
substantially greater research and development capabilities than we do. We
expect that manufacturers of conventional blood testing products used in
centralized laboratories will compete intensely with us to maintain their market
-8-
<PAGE>
share. Commercial and hospital laboratories may try to influence providers
against the Careside system to protect their revenue. Other point-of-care
companies have already sold their product in the marketplace. We anticipate
competition from these manufacturers in discrete tests using areas such as
critical care testing. Many of these companies offer tests that will cost less
than the Careside system and so may be attractive to some of our customers. See
"Business--Competition" on page 38.
Our Proprietary Technology is a Crucial Part of Our Business
The success of our business will depend on our ability to protect our
proprietary technology. Our business may fail if we are not able to do so.
We currently have three U.S. patents granted on our cartridge
technology. Six other patents have been filed to date and we expect to file
additional patents in the future. International patents have also been filed.
The six patents filed to date include one that was filed jointly with
International Technidyne Inc. and covers a reagent that was co-discovered. The
other five patents include one more cartridge patent and four device patents. We
cannot be certain that these additional patents will be granted or that our
patents will withstand any challenges by third parties.
Our Technology May Infringe on the Proprietary Rights of Third Parties
Universities and government laboratories, physicians and other
corporations are conducting substantial research in point-of-care diagnostic
blood testing technology. Given the nature of our industry, it is possible that
patent applications have been filed by others, and patents may be issued to
them, relating to specific diagnostic products and processes. Patent
applications in the U.S. are secret until the patent is issued. We cannot know
whether competing applications have been filed. A prior conflicting patent
application would detract from the value of our patents. In addition, if we use
technologies, products or processes covered by patent applications filed by
others, or by patents issued to others, we may have to obtain licenses. We may
not be able to obtain such licenses on reasonable terms, or at all.
We May Be Unable to Build Brand Loyalty Because Our Trademarks and Trade
Names May Not Be Protected
Our registered or unregistered trademarks or trade names may be challenged,
canceled, infringed, circumvented or declared generic or determined to be
infringing on other marks. We may not be able to protect our rights to these
trademarks and trade names, which we need to build brand loyalty. Brand
recognition is critical to our short term and long term marketing strategies,
especially as we commercialize future enhancements to our products. See
"Business--Patents and Proprietary Rights" on page 39.
Our Trade Secrets May Be Disclosed
We also rely on unpatented trade secrets to protect our proprietary
technology. We attempt to protect our proprietary technology through an employee
handbook and agreements with our executive officers. Our employees have not
signed confidentiality agreements. The confidentiality provisions in the
handbook and executives' agreements may not be enforceable under applicable law.
Other companies may independently develop or otherwise acquire equivalent
technology or gain access to our proprietary technology.
Our Proprietary Rights May Fail to Protect Our Business
We may have to resort to litigation to protect or defend our rights. This
could result in substantial costs and the diversion of management's attention.
If we lost any such litigation, we could lose our competitive position, be
required to obtain licenses from third parties or be prevented from
manufacturing, selling or using certain of our products.
We Do Not Own all Necessary Intellectual Property
Some of the intellectual property we use in developing our test
cartridges is owned by others, and in certain cases licensed on a non-exclusive
basis to us. We believe alternative technology does exist, but we cannot be sure
that we would be able to achieve access to any such technology. If our access to
our current technology terminated, our development efforts could be delayed
until we achieved access to the alternative technology. In that circumstance, we
cannot be sure that we
-9-
<PAGE>
would be able to achieve access to alternative sources of technology. If
alternative technology is unavailable, we would have to change our testing
methodologies. This would cause substantial delay and cost in the development of
our product.
Extensive Government Regulation May Increase Our Expenses and Cause Delays in
our Product Commercialization
Our products are medical devices subject to extensive regulation by the
FDA, similar agencies in other countries, and to a lesser extent, by state
regulatory authorities. See "Business -- Government Regulation" page 40. The
following are the greatest regulatory risks we face:
We May Incur Substantial Expenses to Comply With GMP and Other Manufacturing
Regulations
Our manufacturing facilities and processes will be required to comply with
strict federal regulations, including Good Manufacturing Practices, or GMP, and
quality system requirements, regarding validation and quality of manufacturing.
We have limited experience in complying with regulations governing our products
and manufacturing facilities. We must devote substantial resources and
management attention to monitoring and maintaining compliance with governmental
regulations. If we, or our manufacturing partners, violate applicable
regulations, we may be sanctioned and our production or distribution may be
suspended. In addition, the FDA may withdraw the approval or clearance to market
of any of our products.
We Need Additional FDA Pre-Market Clearances if We Significantly Modify Our
Products or Add to Our Test Menu
FDA regulations require rigorous laboratory and clinical testing to
establish product performance before commercial marketing. Significant
modifications to the Careside Analyzer will require new applications for
pre-market clearance. We cannot be certain that we will be able to obtain all
necessary approvals on a timely basis, or at all. Moreover, it is possible that
one or more of our products will be subjected to more extensive pre-market
clinical testing and FDA pre-market approval.
Significant Number of Shares Eligible for Future Sale Could Lower Market Price
As of the date of this prospectus, we have 8,797,665 shares of common
stock outstanding. Of these shares, 2,006,341 shares of common stock have been
registered and are freely tradable without restrictions or further registration
under the Securities Act. 1,706,984 outstanding shares are being registered in
this registration statement. Of the remaining 5,084,340 shares, 141,613 shares
may, absent registration, be sold into the public market under Rule 144
currently and 4,942,727 shares may be so sold on or after June 16, 2000. We
have also granted and have outstanding options to purchase 585,316 shares of
common stock. In addition, our current stock option plans and employee stock
purchase plan permit us to grant options for, or issue, an additional 741,397
shares of common stock in the future.
The resale of our outstanding non-traded common shares or of common shares
issuable upon exercise of our outstanding warrants and options into the public
market, subject to compliance with the Securities Act, could have a depressive
effect on the market price of our common stock.
Control of Careside By Our Management and Principal Stockholders Could Conflict
With Other Shareholders' Interests
The interests of our directors and executive officers, and our principal
stockholders could conflict with the interests of other Careside stockholders.
As of April 13, our directors and executive officers, together with the
principal stockholders of Careside, will own or control approximately 18.3% of
our outstanding common stock (excluding the effect of options and warrants).
Accordingly, these stockholders may be able to influence the outcome of
stockholder votes, including votes concerning the election of directors, certain
amendments to our charter and bylaws, and the approval of
-10-
<PAGE>
significant corporate transactions such as a merger or a sale of our assets.
This influence could have the effect of delaying, deferring or preventing a
change in control of Careside. See "Principal Stockholders" on page 52.
Future Issuances of Preferred Stock May Dilute Rights of common stockholders
Our Board of Directors has the authority to issue up to 4,837,086 shares of
preferred stock and to determine the price, privileges and other terms of such
shares. The Board may exercise this authority without the approval of the
stockholders. The rights of the holders of common stock may be adversely
affected by the rights of the holders of any preferred stock that may be issued
in the future. In addition, the issuance of preferred stock may make it more
difficult for a third party to acquire control of Careside. See "Description of
Capital Stock--Undesignated Preferred Stock" on page 60.
Statute, Charter and By-laws May Delay or Prevent an Acquisition of Careside
We will be subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law. Section 203 could delay or prevent a third
party or a significant stockholder from acquiring control of Careside. In
addition, our charter and by-laws may have the effect of discouraging, delaying
or preventing a merger, tender offer or proxy contest involving Careside. Any of
these anti-takeover provisions could lower the market price of the common stock.
See "Description of Capital Stock--Takeover Protection and Certain Charter and
By-Law Provisions" on page 60.
The Market Prices of Shares of common stock and Warrants May Be Volatile
The market prices of shares of common stock and warrants may be highly
volatile depending on many factors, including:
. the success of our new products or new products introduced by our
competitors,
. developments with respect to our patents andother proprietary rights,
. our ability to meet sales and earnings expectations of securities
analysts, and
. changes in general market conditions.
Warrants Can Be Redeemed on Short Notice
We could redeem warrants issued in connection with our initial public
offering (except for Representatives' Warrants) for $0.05 per warrant on 30
days' prior written notice, provided that the closing price of our common stock
has been at least $14.00 for the ten consecutive trading days immediately
preceding the date of notice of redemption. If we give notice of redemption, a
holder would be forced to sell or exercise the warrants or accept the redemption
price. This kind of redemption may occur immediately. See "Description of
Capital Stock--Publicly Traded Warrants" on page 57.
-11-
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus discuss future
events and developments, including our ability to generate revenue, income and
cash flows, or state other "forward-looking" information. We generally identify
these forward-looking statements by using the words "anticipate," "believe,"
"estimate," "expect," and similar expressions. These statements include, but are
not limited to, information about our cash available to fund our future
operations, future enhancements to our products, growth of the in vitro testing
and point-of-care testing markets, completion of the immunochemistry tests
cartridge, and the planned addition of further tests to our menu. Those
statements are subject to known and unknown risks, uncertainties and other
factors that could cause the actual results to differ materially from those
contemplated by the statements. Important factors that may cause actual results
to differ include those set forth under "Risk Factors" beginning on page 6.
We do not promise to update forward-looking information to reflect
actual results or changes in assumptions or other factors that could affect
those statements.
12
<PAGE>
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares by
the selling stockholders pursuant to this prospectus.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Our common stock is traded on the American Stock Exchange under the
symbol "CSA."
Set forth below are the high and low closing sale prices of our common
stock as reported on the American Stock Exchange for the periods indicated.
<TABLE>
<CAPTION>
MARKET PRICE
------------
1999 HIGH LOW
- ---- ---- ---
<S> <C> <C>
3rd Quarter (from July 21, 1999) (1).............................................. 6 7/16 4 7/8
4th Quarter....................................................................... 10 1/4 4 3/4
2000
1st Quarter....................................................................... 13 7/8 8 5/8
</TABLE>
(1) The date on which our common stock began to trade separately from the units
offered in our initial public offering.
DIVIDEND POLICY
We have never paid any cash dividends on our shares of common stock and
do not anticipate paying any cash dividends on our shares of common stock in the
foreseeable future. Currently, we intend to retain any future earnings for
reinvestment in our business. Any future determination to pay cash dividends
will be at the discretion of our Board of Directors and will be dependent upon
our financial condition, results of operations, capital requirements and other
factors our Board of Directors deems relevant.
13
<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 1999 for Careside:
. the actual capitalization of Careside at December 31, 1999; and
. the pro forma as adjusted capitalization which shows the effect of:
. the sale of 1,184,091 shares of common stock in the private placement
in March 2000 at the offering price of $8.77 per share and the net
proceeds of the offering,
. the exercise of 1,154 options in February 2000 at $.052 each, and
. the purchase of 2,839 shares under our Employee Stock Purchase Plan
in March 2000 for total proceeds of $22,000.
This table should be read in conjunction with our Financial Statements
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, 1999
-----------------
(amounts in thousands
except share data)
Pro Forma
Actual As Adjusted
(unaudited)
------ -----------
<S> <C> <C>
Current portion of long-term debt:
Equipment loan due finance company $ 316 $ 316
Note payable under bridge financing(1) 2,000 2,000
Capital lease 11 11
--------- ----------
Total current portion of long-term debt 2,327 2,327
Long-term debt:
Equipment loan due finance company 1,060 1,060
Obligation under capital lease 36 36
Stockholders' equity:
Preferred Stock, $.01 par value-- 5,000,000 shares 2 2
authorized; 162,914 shares Series A Convertible Preferred
Stock issued and outstanding (actual and pro forma as adjusted)
common stock, $.01 par value-- 50,000,000 shares 76 88
authorized; 7,609,581 shares issued and outstanding (actual) and
8,797,665 shares issued and outstanding (pro forma as adjusted) (2)
Additional paid-in capital 37,497 47,052 (3)
Deficit accumulated during development stage (28,496) (28,496)
--------- ----------
Total stockholders' equity 9,079 18,646
--------- ----------
Total capitalization $ 12,502 $ 22,069
========= ==========
</TABLE>
______________
(1) For a discussion of the note payable, see the description of the 1998
bridge financing under "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Certain Transactions--Financing Activities".
(2) Excludes 4,168,417 shares of common stock issuable upon exercise of options
and warrants. Also excludes an aggregate of 325,828 shares of common stock
issuable upon conversion of the Series A Convertible Preferred Stock and
exercise of warrants received on conversion. Also excludes 154,247 issuable
upon exercise of contingent warrants issued in our March 2000, private
placement.
(3) Gross proceeds of our March 2000 private placement closings were $10.4
million. Expenses were approximately $840,000.
14
<PAGE>
DILUTION
As of December 31, 1999, our pro forma net tangible book value was
$15,847,200, or $1.80 per pro forma share of common stock. Pro forma net
tangible book value per share represents our total tangible assets less total
liabilities, divided by the total number of shares of common stock outstanding,
after giving effect to the sale of 1,184,091 shares of common stock at $8.77 per
share in a private placement, the exercise of 1,154 stock options and the
purchase of 2,839 shares under our Employee Stock Purchase Plan.
After giving effect to:
. the exercise of contingent warrants to purchase 154,247 shares of
common stock at $0.01 per share;
. the exercise of the 162,914 warrants issued upon exercise of the
Series A Preferred stock at $9.00 per share,
. the exercise of the warrants issued to Wainwright in conjunction with
our recent private placement to purchase 101,305 shares of common
stock at $8.77 per share,
. the exercise of the warrants issued in our 1997 private placement to
purchase 384,615 shares of common stock at $5.20 per share,
. the exercise of the warrants issued in our 1998 private placement to
purchase 340,237 shares of common stock at $6.76 per share,
. the exercise of the S.R. One bridge loan warrant to purchase 235,294
shares of common stock at $6.375 per share, and
. the application of the net proceeds therefrom,
our as adjusted net tangible book value as of December 31, 1999 would have
been $24,003,413 or $2.36 per share. This represents an immediate increase
of $0.56 per share of common stock to existing stockholders and an
immediate dilution in as adjusted net tangible book value of $3.55 per
share of common stock to the warrantholders who exercised their warrants.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Warrant exercise price......................................................... $5.92
Pro forma net tangible book value per share before exercise of warrants........ $1.80
Increase in net tangible book value per share attributable to exercise of
Warrants....................................................................... $0.56
As adjusted net tangible book value per share after exercise
of warrants.................................................................... $2.36
Dilution in tangible book value per share to warrantholders who exercised
their warrants................................................................. $3.56
=====
</TABLE>
The above computations assume the exercise of all warrants and contingent
warrants to purchase the common stock offered under this prospectus. All of
these outstanding warrants are described in "Description of Capital Stock"
beginning on page 56. Of the remaining 1,869,898 shares of common stock being
offered under this prospectus, 162,914 shares are issuable upon conversion of
Series A Preferred Stock at an exercise price of $0.00 and 1,706,984 shares are
held out right by the selling stockholders.
15
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data of Careside and the predecessor
business at SmithKline Beecham Chemical Laboratories, Inc. should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and notes thereto (in
thousands except share data).
<TABLE>
<CAPTION>
- ----------------------------
Statement of Operations Data Predecessor Business Careside, Inc.
- ---------------------------- -------------------- --------------------------------------------------------------------
Period from Period from
Inception Inception
Year Ten Months (July 10, 1996) (July 10, 1996)
Ended Ended to Years ended to
December 31, October 31, December 31, December 31, December 31,
------------ ----------- -------------- -------------------------- -------------------
1995 1996 1996 1997 1998 1999 1999
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $ - $ - $ - $ 61 $ 61
Cost of Sales
- - - 31 31
----------- ----------- --------- --------- --------
Gross Profit - - - 30 30
Operating expenses
Research and development 2,110 3,055 1,562 5,896 8,298 8,252 24,008
Sales and marketing - 85 249 1,205 1,539
General and administration 585 224 55 555 601 1,448 2,659
--------- -------- ----------- ----------- --------- --------- --------
Operating loss $ (2,695) $ (3,279) (1,617) (6,536) (9,148) (10,875) (28,176)
========= ========
Goodwill Amortization - - - (37) (37)
Net interest income/(expense) (21) 205 212 (679) (283)
----------- ----------- --------- --------- --------
Net loss (1,638) (6,331) (8,936) (11,591) (28,496)
Dividend on Series A Preferred - - - (55) (55)
----------- ----------- --------- --------- --------
Net loss to common shareholders $ (1,638) $ (6,331) $ (8,936) $ (11,646) (28,551)
----------- ----------- --------- --------- --------
Net loss per share $ (2.25) $ (2.04) $ (1.93) $ (1.88)
=========== =========== ========= =========
Shares used in computing net loss per share 728,465 3,098,980 4,629,916 6,210,496
</TABLE>
<TABLE>
<CAPTION>
- ------------------
Balance Sheet Data
- ------------------ Predecessor Business Careside, Inc.
-------------------- --------------
December 31, December 31,
------------ -------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ - $ 31 $ 1,237 $ 3,927 $ 4,905
Total assets 307 1,193 3,140 7,911 14,389
Long-term debt - - - 2,045 1,096
Deficit accumulated during the development stage (3,670) (1,638) (7,969) (16,905) (28,496)
Total stockholders' equity (deficit) - (1,067) 2,438 4,149 9,079
</TABLE>
-16-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Development of the point-of-care technology used in the Careside system
began in 1994 at SmithKline Beecham Clinical Laboratories, Inc., a subsidiary of
SmithKline Beecham Corporation. In November 1996, we acquired the intellectual
property, equipment and other assets from SmithKline to continue the development
of point-of-care diagnostic technology and to create a commercial product. As
part of the consideration paid for the acquisition, SmithKline Beecham
Corporation became an equity owner in Careside.
Since November 1996, we have devoted substantially all of our resources
to research and development activities. We have incurred losses since inception.
As of December 31, 1999, the aggregate loss incurred was approximately $28.5
million. We expect to incur significant additional losses over at least the next
12 months as we continue product development activities, complete a pilot
marketing program and expand marketing efforts.
Results of Operations
Years Ended December 31, 1999 and 1998
Research and Development Expenses. Research and development expenses
remained basically unchanged for the year ended December 31, 1999 as compared to
the year ended December 31, 1998. Total expense for 1999 remained at
approximately $8.3 million. This reflects the Company's efforts to complete the
production design of the Careside Analyzer and to support additional test
submissions to the FDA.
Selling and Marketing Expenses. Selling and marketing expenses
increased to $1.2 million for 1999 compared to $249,000 in the same period in
1998. This increase reflects the preparations for the launch of the Careside
system in 1999, including the partial year effect of hiring sales force staff.
General and Administrative Expenses. General and administrative
expenses increased to $1.4 million for 1999 compared to $601,000 in the same
period in 1998. This increase reflects the increase in efforts related to
computer systems and software consulting, salaries for additional administrative
staff, and increased legal expense and investor relations efforts after the
initial public offering in 1999.
Net Interest Income (Expense). Interest income was $291,000 for the
year ended December 31, 1999 as compared to $234,000 for the same period in
1998. This reflects comparable levels of cash and cash equivalents available for
investment. Interest expense was $971,000 for 1999 compared to $22,000 in 1998.
This increase reflects interest paid on the line-of-credit to purchase equipment
initiated in late 1998, accrued interest on the S.R. One bridge loan, and the
non-cash interest charges associated with the cost of warrants granted to S.R.
One in connection with the bridge loan facility and its partial conversion to
preferred stock in 1999.
Goodwill. Goodwill amortization of $36,000 associated with the December
1999 acquisition of Texas International Laboratories was recorded for part of
one month in 1999. No such expense occurred in prior periods.
Net Loss. The net loss increased to approximately $11.6 million for the
twelve months ended December 31, 1999 compared to $8.9 million in the same
period in 1998. This increase reflects the increase in selling and marketing,
administrative expenses and interest expense on the line-of-credit to purchase
equipment and the S.R. One bridge loan.
Years Ended December 31, 1998 and 1997
Research and Development Expenses. Research and development expenses
increased to approximately $8.3 million for the year ended December 31, 1998
compared to approximately $5.9 million in the same period in 1997, an increase
of 41%. This increase reflects increased payments to third parties for the
development of the Careside Analyzer and increased staffing for additional test
development and submissions to the FDA.
-17-
<PAGE>
Selling and Marketing Expenses. Selling and marketing expenses
increased to $249,000 for the year ended December 31, 1998 compared to $85,000
in the same period in 1997, an increase of 192%. This increase reflects the
increase in the preliminary sales and marketing efforts and the full year effect
of marketing staff salaries.
General and Administrative Expenses. General and administrative
expenses increased to $601,000 for the year ended December 31, 1998 compared to
$555,000 in the same period in 1997, an increase of 8%.
Net Interest Income (Expense). Net interest income was approximately
the same for the year ended December 31, 1998 as compared to the same period in
1997 at $212,000 and $205,000, respectively. This reflects comparable levels of
cash and cash equivalents available for investment.
Net Loss. The net loss was approximately $8.9 million for the year
ended December 31, 1998 compared to approximately $6.3 million in the same
period in 1997, an increase of 41%. This increase reflects the increase in
research and development expenses and preliminary sales and marketing efforts.
Liquidity and Capital Resources
We have financed our operations since inception primarily through the
net proceeds generated from the issuance of common stock and preferred stock,
warrants, long-term debt and certain short-term borrowings that were
subsequently converted into equity securities. As of December 31, 1999, we have
received net proceeds aggregating approximately $36.8 million from these
transactions.
Net cash used in operating activities for the twelve months ended
December 31, 1999 was approximately $9.4 million. For the twelve months ended
December 31, 1999, cash used in operating activities represents the net loss for
the period offset by an increase in depreciation, accrued expenses and the
non-cash amortization of imputed interest in the S.R. One bridge loan and
warrants. Net cash used in operating activities was approximately $7.7 million
for the year ended December 31, 1998. This represents the net loss for the year
partially offset by an increase in accounts payable to the manufacturer of the
Careside Analyzer. Net cash used in operating activities was approximately $6.5
million for the year ended December 31, 1997. Cash used for operations was
primarily related to funding expansion of research and development activities as
well as the establishment of marketing, sales and administrative infrastructure.
Cash used in investing activities for the purchase of property and
equipment was approximately $3.8 million for the twelve months ended December
31, 1999 and $2.0 million and $0.9 million for the years ended December 31, 1998
and 1997, respectively. The cash was used primarily for the acquisition of
manufacturing equipment and laboratory equipment used in research and
development.
At December 31, 1999, our principal source of liquidity was
approximately $4.9 million in cash and cash equivalents.
In December 1998, we entered into an agreement with an equipment lease
financing company regarding a $2.5 million facility secured by specific
equipment. Each draw will be a separate loan under the facility. Approximately
$1.4 million of this facility was drawn by December 1999 and was secured by our
existing equipment. We anticipate drawing the remaining amount by mid-2000
which will be secured by manufacturing equipment for cartridge assembly which we
have purchased previously. Each equipment loan has a 48-month term and bears an
interest rate of approximately 14% per annum adjusted for an index rate based on
four-year U.S. Treasury Notes at the time of borrowing.
In addition, we entered into an agreement for bridge financing with
S.R. One, Limited in December 1998. Under this agreement, $1.5 million was
funded in December 1998 and $1.5 million was funded in January 1999. In June
1999, S.R. One, Limited agreed to convert $1 million of the $3 million loan,
together with accrued interest at the rate of 8% on $1 million, into shares of
Series A Convertible Preferred Stock. The conversion price was $6.375, which was
85% of the initial public offering price per unit. S.R. One received 162,914
shares of Series A Convertible Preferred Stock. Each share of Series A
Convertible Preferred Stock may in turn be converted, at the option of the
holder, into one share of our common stock and one warrant to purchase an
additional share of our common stock. All accrued and unpaid dividends with
respect to shares of Series A Convertible Preferred Stock that are converted by
S.R. One will also be converted into share and warrant units at $7.50 per unit.
The exercise price and other terms of the warrant received on the conversion
will be the same
-18-
<PAGE>
as the warrants included in units sold in the offering. The remaining $2 million
of the loan matures in April 2000. At that time, we expect either to repay the
$2 million balance on the bridge financing with the proceeds of a new loan or to
negotiate to convert the balance of it into preferred or common equity. The
annual interest rate on the remaining $2 million increased to 10% on July 1,
1999. S. R. One has the option to convert all or any portion of the remaining
loan, plus accrued interest thereon, into shares of Series A Convertible
Preferred Stock on the same basis as the previous $1 million conversion
discussed above.
We issued a bridge warrant to S.R. One, Limited in connection with the
bridge financing. The bridge warrant was initially exercisable for the number of
shares of common stock equal to $750,000 divided by 85% of our initial public
offering price of the common stock. The number of warrants doubled if the loan
was not repaid by June 30, 1999. As part of the conversion of a portion of the
bridge financing into shares of Series A Convertible Preferred Stock, the bridge
warrant was modified such that it will be exercisable in all events for the
number of shares of common stock which is equal to $1,500,000 divided by $6.375.
Upon completion of our initial public offering, the bridge warrant became
exercisable for 235,294 shares of common stock. The bridge warrant also has an
exercise price of 6.375 and became exercisable on December 31, 1999. It will
expire on June 16, 2003.
In March 2000, the Company completed the sale of an additional
1,184,091 shares of common stock in a private placement to 9 institutional
investors at a price of $8.77 per share, raising a gross amount of $10.4
million. Expenses of the transaction were approximately $840,000. Based on the
net proceeds from this transaction, plus existing sources of liquidity, which
contemplate that $2 million of bridge financing will be converted to equity, we
project adequate cash to fund planned operations into 2001. However, until the
$2 million of bridge financing has been converted and the Company has
successfully entered its targeted markets, there are uncertainties that may
impact the Company's ability to fund its planned operations and meet its
operational objectives.
To the extent that we need additional funds in connection with our
commercial product launch, we expect to borrow funds to complete our automated
cartridge assembly line and build sufficient cartridge inventory for launch and
subsequent sales. We also expect that the development of additional tests will
require research expenditures at a level lower than past spending for test
development. Sales and marketing activities will require hiring and training of
additional staff in 2000. This estimate of the period for which we expect our
available sources of cash to be sufficient to meet our funding needs is a
forward looking statement that involves risks and uncertainties. There can be no
assurance that we will be able to meet our capital requirements for this period.
In the event our capital requirements are greater than estimated, we may need to
raise additional capital to fund our research and development activities, to
scale-up manufacturing activities and to expand our sales and marketing efforts.
Our future liquidity and capital funding requirements will depend on numerous
factors, including the extent to which our products under development gain
market acceptance, the exercise of outstanding warrants to purchase common
stock, the timing of regulatory actions regarding our products, the costs and
timing of expansions of sales, marketing and manufacturing activities,
procurement and enforcement of patents important to our business, and the impact
of competitors' products. There can be no assurance that such additional capital
will be available on terms acceptable to us, if at all. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may include restrictive covenants. If adequate funds are not
available, we may be forced to curtail our operations significantly or to obtain
funds through entering into collaborative agreements or other arrangements on
unfavorable terms. Our failure to raise capital on acceptable terms could have a
material adverse effect on our business, financial condition or results of
operations.
Income Taxes
As of December 31, 1999, we had approximately $17.8 million and
$759,000 of net operating loss and research and development credit
carryforwards, respectively, for federal income tax purposes, which expire on
various dates between 2011 and 2014. These amounts reflect different treatment
of expenses for tax reporting than are used for financial reporting. The Tax
Reform Act of 1986 contains certain provisions that may limit our ability to
utilize net operating loss and tax credit carryforwards in any given year. We
experienced a change in ownership interest in excess of 50% as defined under the
Tax Reform Act upon the first closing of our 1997 equity financing. We do not
believe that this change in ownership will impact our ability to utilize our net
operating loss and tax credit carryforwards. There can be no assurance that
ownership changes in future periods will not significantly limit our use of
existing or future net operating loss and tax credit carryforwards.
-19-
<PAGE>
Year 2000 Compliance
We previously identified our Year 2000 risks in three major categories:
internal business operations software; software utilized within the Careside
Analyzer; and software used by our external suppliers and distributor. We did
not experience Year 2000 issues in any of the three categories. As a result no
additional costs were realized.
-20-
<PAGE>
BUSINESS
General
We have developed and sell a proprietary blood testing system. It is
designed to decentralize laboratory operations. The system provides
cost-effective, accurate test results within 10 to 15 minutes at the
point-of-care, for a comprehensive menu of routine blood tests. Because it
provides rapid test results, the Careside system can also perform blood tests
required for critical care testing. The Careside system performs chemistry,
electrochemistry, coagulation and hematology tests. We plan to offer
immunochemistry tests for the Careside system later in 2000. Tests in these five
different test categories comprise the vast majority of blood tests ordered. No
other point-of-care product currently in the market offers as broad a menu of
tests or combines these five test categories. Our goal is to make the Careside
system the standard for routine and critical care blood testing. If we are
successful, diagnostic information will travel more rapidly and healthcare costs
for physicians, providers and payers will be reduced.
The Careside system consists of the Careside Analyzer and disposable
test cartridges, the H-2000 and the Careside Connect. The H-2000 is a separate
hematology testing device. The Careside Connect, which is currently under
development, is a data interface which will link the testing devices and
facilitate electronic data interchange to customer information systems. It will
enable the electronic transmission of blood test results. We expect to release
the Careside Connect for sale in the summer 2000. We are currently developing
the software that will allow data interchange from the hematology testing device
to the Careside Analyzer.
The Careside system is easy to use and can be operated by a non-
technical person with appropriate training in connection with use of the device.
Its software will enable the user to capture all data required to comply with
the Clinical Laboratory Improvement Amendments of 1988. This law, commonly
called CLIA, governs quality assurance and quality control processes and
reporting for healthcare providers.
The FDA has granted pre-market clearance for the Careside Analyzer and
the H-2000, and pre-market clearance or exemption for 37 blood tests performed
by the Analyzer and a 16-parameter hematology test for the H-2000, as well as
tests for professional laboratory use. As part of our market strategy, we have
received FDA approval for point-of-care testing for the Careside Analyzer,
thereby enabling its use by non-technical personnel with appropriate training.
Similar approvals will be sought for the H-2000 this year.
We have utilized strategic partners with specific design expertise and
state-of-the-art technology in order to develop the Careside system rapidly, and
on a cost-effective basis. Much of our partners' expertise is in the area of
test reagents. Reagents are the materials within the test cartridges that react
with a patient's blood. The Careside system then performs the test by analyzing
the reaction between the reagent and the patient's blood. Currently, we have
agreements with:
. Fuji Photo Film Co., Ltd. for the supply of its dry film based
chemistry reagents (exclusive);
. International Technidyne Corporation for the joint development of
coagulation reagents;
. UMM Electronics, Inc. to design and manufacture the Careside
Analyzer;
In addition, we have design and manufacturing agreements for the H-2000,
clearing and reagent solutions with:
. Ysebaert to design and manufacture the H- 2000; and
. Aqua Solutions to manufacture certain hematology solutions.
Currently, we are negotiating a long-term agreement with Diagnostic
Reagents, Inc. to supply reagents for the test cartridges. We previously
contracted with Hauser, Inc. for the design of the Careside system and with
Battelle Memorial Institute for the design of the system's disposable test
cartridges and their automated assembly manufacturing system. Hauser designed
the outer appearance of the Careside Analyzer and has been contracted to modify
the outside appearance of the H-2000 with the goal of achieving an appearance
similar to the Careside Analyzer.
In 1993, SmithKline Beecham Clinical Laboratories, Inc. ("SBCL")
conducted extensive surveys of the point-of-care market. As a result, in 1994,
SBCL started our predecessor business to develop the technology we use today. In
November 1996, we acquired the assets and contracts used in the predecessor
business, including intellectual property, equipment and
-21-
<PAGE>
other assets from SmithKline to continue the development of point-of-care
diagnostic technology and to create a commercial product. This acquisition has
resulted in the development and commercial launch of the Careside Analyzer.
Several senior members of our management team worked on this
point-of-care project at SBCL, including Vickery Stoughton, our Chief Executive
Officer, and Thomas Grove, Executive Vice President--Chief Technology Officer.
SBCL has since been acquired by Quest Diagnostics Inc. We continue to have a
business relationship with Quest Diagnostics through a distribution and supply
agreement described in greater detail below. This agreement gives Quest
Diagnostics distribution rights in the United States and certain foreign
countries, including the right to use the Careside system in its commercial
laboratory business. Discussions with Quest Diagnostics concerning the
implementation of the contract were put aside because of consolidation
priorities within Quest Diagnostics and SBCL. Contract discussions between Quest
Diagnostics and Careside have recently been resumed; however, it is too early to
make any comments on the possible outcome of these ongoing discussions.
In June 1999, we completed our initial public offering. Our publicly
traded common stock is listed on the American Stock Exchange under the ticker
symbol CSA, and our publicly traded warrants under the symbol CSA.WS. In
December 1999, we acquired Texas International Laboratories, Inc. (TIL). TIL
owned and marketed a proprietary hematology-testing device that we have renamed
the Careside H-2000. Additional information on the TIL acquisition is included
below.
The Laboratory Testing Market
General
According to 1997 industry data and estimates, the worldwide market for
in vitro testing was $18.3 billion in 1997 and was expected to grow to $20
billion in 2000. In vitro testing is the testing of all bodily tissues and
fluids, including blood. Based on their experiences while at SmithKline, our
senior management believes that the Careside system's 53 test menu will address
over 38% of this market. The rest of the market includes complex and specialized
tests not performed by the Careside system. The United States and Canadian
market for in vitro testing is approximately 40% of the worldwide market. We
will seek to convert a reasonable portion of the United States and Canadian
blood testing market to point-of-care testing and then expand into the worldwide
market.
Hewlett Packard has calculated that the total U.S. market for
point-of-care testing was $1 billion in 1998 and is projected to grow at 16% per
year. These projections are based on the type of products that have been
introduced into the diagnostic blood testing market through the end of 1998. We
believe that the Careside system further expands the market opportunity because,
for the first time, it creates the ability to decentralize approximately 60% of
all tests performed in central labs by moving these tests and the lab operations
to decentralized settings. Furthermore, we believe that our product more than
doubles the U.S. market opportunity defined by Hewlett Packard, and that the
Careside system has an approximately three year head start on any competing
product. Therefore, we define the market opportunity to be virtually wherever
blood is drawn from patients for standardized blood tests. Based on industry
data and estimates, we believe the worldwide market for our blood tests is
expected to be $7.6 billion in 2000. The key targeted markets in the United
States that we identified are as follows:
. Hospitals: There are over 6,500 acute care and specialty hospitals
in the United States that require laboratory-testing services.
These services are usually provided by a central hospital
laboratory that has to be maintained on a 24-hour basis and staffed
by specially trained lab personnel.
. Physician Groups: The American Medical Association states that
there are 27,100 physician groups in the United States. We estimate
that 21,000 of these groups have three or more doctors. We believe
that for groups of three or more physicians the Careside system
will offer cost-effective improvements in daily office routine,
greater convenience, enhanced patient satisfaction and new revenue
opportunities.
. Nursing Homes: According to the American Healthcare Association, in
1999 there were 15,574 nursing homes in the United States
comprising more than 1.6 million licensed beds. The average
occupancy rate was over 92%, with each nursing home averaging
nearly 100 patients. Nursing homes currently pay a premium to
laboratories to receive timely results. The Careside system would
benefit nursing homes by
-22-
<PAGE>
helping them earn revenue from Medicare and other payers, and
reduce costs by decreasing the Nursing Home's reliance on central
laboratories.
. Home Care: The number of home care visits increased from 70 million
in 1990 to an estimated 306 million in 1997. On average, 30% of
home care patients visited each week require laboratory testing.
There are currently over 20,000 home care agencies in the United
States, and 9,600 of them are Medicare certified. Currently, all
home care agencies rely on commercial labs for blood testing. Home
care agencies would benefit from increased revenue opportunities by
using the Careside system to conduct blood testing in their base
offices.
. Other: Field military hospitals, ships, employee health clinics,
drop-in clinics, surgi-centers, dialysis units and other alternate
sites all represent potential customer opportunities for Careside.
Central Laboratory Processing
Most routine blood tests are sent to a central location, either a
commercial or hospital laboratory, for processing. In these central
laboratories, large blood analyzers reduce individual test costs by producing
high volumes of test results. Commercial laboratories provide approximately 27%
of all in vitro diagnostic testing services, hospital laboratories provide
approximately 63%, and the balance is provided in physicians' offices.
Commercial laboratories have been the low cost provider of blood
testing services due primarily to economies of scale in testing multiple samples
in large analyzers. Commercial laboratories' testing expenditures relate
predominantly to labor intensive functions such as distribution, customer
service, general administration, communication technology and preparation of the
blood sample. There are numerous steps involved in obtaining test results from
commercial laboratories. Blood samples are collected throughout the day from a
variety of sources including hospitals, physicians' offices, nursing homes and
home care agencies. The samples are transported to the laboratory, usually with
special care in packaging to preserve sample integrity. After the samples arrive
at the laboratory, several administrative tasks are necessary as thousands of
samples are processed daily. Each sample is split into tubes that are then
sorted for testing in multiple large analyzers. The high throughput analyzers
require the attention of highly skilled technicians to prepare reagents, prime
multiple pumps, calibrate, prepare and load blood samples, conduct centrifuge
operations, process measurement data and report results. This complex process
must be tightly controlled at each step to ensure both administrative and
analytical accuracy. Tests are generally run overnight and results are sent back
to the healthcare provider the following day. This factory-like process limits
the ability to provide test results in less than 24 hours. If results are
required sooner, certain laboratory operations must be interrupted, resulting in
significantly increased costs.
The process in hospital laboratories is very similar. Blood samples are
typically collected in the early morning with tests performed late morning and
early afternoon. Results are generally returned within four to five hours.
However, in many instances, hospitals must respond to critical patient
conditions and conduct tests on an immediate basis in order to support the
healthcare provider when a patient's condition is life threatening. A hospital
must be able to process these critical care tests 24 hours a day. This requires
the hospital laboratory to remain open whether or not any tests are being
conducted. With insufficient testing volume to absorb laboratory operating
expenses and capital costs, tests performed in hospital laboratories are more
expensive.
Many physicians' offices currently outsource their testing to
commercial or hospital laboratories. This practice is largely the result of the
enactment of the Clinical Laboratory Improvement Amendments in 1988. CLIA was an
attempt to ensure the quality and reliability of laboratory test results by
placing more stringent administrative and regulatory burdens on testing
conducted in the physician's office. Under CLIA, technicians conducting complex
tests must meet detailed proficiency requirements and must have established
well-defined quality assurance and quality control programs. As a result, for
most individual physicians, diagnostic testing became too burdensome and costly
to justify being done in the office.
Medicare and other third party insurance reimbursement for diagnostic
tests flow directly to the laboratories performing the testing, not the
healthcare professional ordering the test. Skilled lab technicians maintain
nearly all centralized laboratories, and run large batches of tests
simultaneously. There are considerable costs associated with performing
diagnostic analysis in such a centralized manner including:
-23-
<PAGE>
. High labor costs associated with:
. the skilled laboratory technicians required to operate large batch
testing machines;
. other central lab employees engaged in sample identification, bar-
coding and labeling, sample splitting, centrifuging and pipetting,
and racking and sorting of patient specimens;
. daily Quality Assurance and Quality Control processes on each
large analyzer and on the reagents used in the analyzers.
. Transportation costs attributed to transporting blood samples from
the point-of-care to the centralized laboratory location.
. Substantially higher equipment and other capital costs for large
batch testers.
Managed Care's Impact on Blood Testing
Managed care has put substantial pressure on healthcare providers to
reduce costs and to treat patients using clinical treatment protocols that have
been developed for many chronic and acute illnesses. These protocols frequently
contain diagnostic tests that are used to help avoid the occurrence of acute
episodes of illness. Diagnostic blood and urine testing are two of the major
tools used in these protocols for early detection and ongoing evaluation of
treatment efficacy. Although these pressures should increase testing volume,
managed care providers and other payers are becoming more stringent by only
reimbursing tests for which there is a clear medical need. We expect these
pressures to continue to cause healthcare providers to order individual
diagnostic tests instead of "panels," or pre-determined groups, of tests
performed at one time. Managed care providers and payers will reimburse all
tests in a panel only if there is a clear medical need for each. As managed care
pressures mount to perform only medically necessary tests, reimbursement rates
for individual tests will decrease, requiring the healthcare provider and the
testing laboratory to be even more cost-effective. Therefore, we believe that,
because the Careside system performs single reagent testing and offers packages
of tests that are based on third-party payer approved panels, it will be well
received by managed care organizations and other payers.
The lack of timely test results from central laboratories has given
rise to a growing market for point-of-care tests. The initial products in the
market have targeted point-of-care tests for use in emergency rooms or critical
care units. While immediate test results benefit the patient and the healthcare
provider, current point-of-care testing devices have added costs to the system
as the hospitals must continue to operate a central laboratory using equipment
that conducts the same critical care tests as well as a much broader menu of
tests required for routine care. Furthermore, current point-of-care devices have
not attempted to provide customers with the quality assurance and quality
control data storage and retrieval capabilities necessary for CLIA requirements.
We believe that an easy-to-use diagnostic blood testing system offering
a broad menu of accurate point-of-care tests with built-in quality assurance and
quality control features can respond to the substantial unmet needs in the
diagnostic testing marketplace. The Careside system is able to perform all of
the most commonly ordered out-patient blood tests. Consequently, it will enable
healthcare providers to decentralize laboratory services to the point-of-care
and outsource the less common tests as necessary.
Further, even with the focus on managed care, 70% of all testing is
reimbursed on a fee for service basis. A significant number of managed care
contracts with commercial labs that capitated testing services were signed years
ago. We believe that many commercial labs have lost money on these contracts,
and as they have come up for renewal they are being converted to fee for service
contracts, or the commercial labs are seeking significant increases in the
capitation commitments or not renewing the contract. It is our belief that these
factors will contribute significantly to making the Careside system a desired
alternative to central lab testing.
Careside's Solution
We believe that the Careside system provides the platform for solving
the limitations of central blood testing laboratories and redefines the market
for point-of-care testing. In addition, we believe the features of the Careside
system will enable healthcare providers not currently conducting blood tests to
start providing this service. The following are the reasons why:
-24-
<PAGE>
. Cost-Effective Results-- The Careside system is designed to provide
test results that are cost competitive with commercial laboratories,
the lowest cost alternative currently available in the market. This
is true even taking into consideration the initial purchase of the
Careside Analyzer and H-2000, laboratory set-up and training, and
ongoing costs associated with maintenance, cartridge and blood
drawing supplies.
. Rapid Test Results--The Careside system furnishes test results
within 10 to 15 minutes from the time blood is drawn from the
patient. The Careside system can test from one to six cartridges in
this time period. By comparison, 24 hours or more may elapse before
a healthcare provider has in hand the results of blood tests
performed at commercial laboratories, and four to five hours may
elapse before results are in the provider's hands for a blood test
performed at a hospital laboratory.
. Comprehensive Test Menu--The Careside system will offer a broad menu
of the most commonly ordered blood tests, including critical care
tests. The Careside system is designed to perform hematology,
chemistry, electrochemistry, coagulation and immunochemistry tests.
At the time of product launch, 53 tests, including sixteen
hematology tests, were launched into the market. This, we believe,
substantially exceeds the capabilities of any point-of-care system
currently on the market.
. Ease of Use--The Careside system can be easily operated and
maintained by non-technical personnel with appropriate training in
connection with use of the device. The test process does not require
separate centrifuging or sample splitting, and automatically doses
and mixes the patient's blood sample with reagents within the
cartridges or with the reagents in the H-2000. Data transfer is
easily acccomplished using the Careside Connect product to connect
data into local area networks or through the Internet.
. Industry Standard Technology--The Careside system uses many test
methods that are the same as those used in hospital and commercial
laboratories. The Careside system's technology is a miniaturization
of the technology in the largest testing devices utilized by
centralized laboratories, which is considered the best testing
technology.
. Embedded Quality Assurance and Quality Control--The Careside
Analyzer has operating software designed to assist in meeting the
quality assurance and quality control documentation requirements of
the Clinical Laboratory Improvement Amendments of 1988.
. Ability for Practice Enhancement-- The Careside system's rapid test
results enable a provider to make clinical decisions more quickly,
see more patients, eliminate time spent reviewing records and making
follow-up calls, and improve patient satisfaction and quality of
care. Healthcare providers can also increase their revenue by
performing and billing for tests themselves.
Currently it is the laboratory, not the physician, that gets paid for
performing blood tests. The Careside Analyzer, with 37 tests, and the H-2000,
with a 16-parameter test, are cleared for marketing in the United States. Our
commercial product launch occurred in the fourth quarter of 1999, at which time
53 tests were placed in the market as part of the Careside system. In addition
to the product launch, we have started or are starting pilot marketing studies
in physician offices, nursing homes, and a large health care system. These pilot
studies are intended to determine utilization patterns, demonstrate cost-
effectiveness and develop a "how-to" book. The how-to book will be a tool for
customers to follow in order to take the appropriate steps in establishing
diagnostic testing services using the Careside system. The outcome of these
studies will be used to improve the market strategy and tools used in the sales
process. The Careside system is being sold in the United States through our own
sales force. This effort will be enhanced with the conclusion of the pilot
studies expected in the second quarter of 2000. In addition to the testing
devices, the Careside system includes the Careside Connect, which takes data
from each of the testing devices, transforms the data into a standard format and
then enables it to be connected to a local area network or into the web. Having
this data connection capability greatly enhances the opportunity to sell the
Careside system to customers that are large enough to have electronic record
systems that support patient records and or lab operations. We believe that this
systematic commercial rollout improves the chances of having more rapid market
acceptance.
-25-
<PAGE>
Careside's Strategy
Our goal is to make point-of-care testing with the Careside system the
standard of care for routine and critical care blood testing. If we are
successful, diagnostic information will travel more rapidly and reduce
healthcare costs for physicians, providers and payers. The following are the key
elements of our strategy to achieve our objective:
Provide the Unique Point-of-Care Solution. Most point-of-care companies
have focused solely on the critical care testing market with a limited number of
tests. In contrast, we have developed the Careside system to replace large
analyzers and decentralize testing to the point-of-care. As an illustrative
analogy, we believe that centralized laboratory testing is like using a
mainframe computer, whereas point-of-care testing is like using a desktop
personal computer. Unlike the "mainframe computer-based" approach of large
hospital and commercial testing laboratories, the Careside system creates a
"personal computer-based" solution for blood testing. We believe this will
enable hospitals and other healthcare provider-sponsored laboratories to
substantially reduce their reliance on centralized testing services. Instead,
they could use decentralized point-of-care technology on a cost-effective basis
with test results available in minutes.
More complex tests that are not supportable by our decentralized
testing system, such as microbiology, genetic and other less common tests, could
then be referred outside the hospital to commercial laboratories or to a core
laboratory supporting multiple hospitals. Centralized laboratories that continue
to provide such complex testing would be able to streamline procedures. We
expect that this would lower the cost of complex testing. With lower costs of
centralized testing and the Careside system for decentralized testing, we expect
that the entire testing process will become more efficient and cost effective.
We intend to continue to build its test menu so as to have the broadest test
menu of any point-of-care system on the market. The Careside system and its
broad menu of tests is designed to combine the four different test categories of
chemistry, electrochemistry, coagulation and immunochemistry into a single
testing instrument and allow point-of-care testing for hematology tests with the
H-2000.
Satisfy Healthcare System Needs. The Careside system is designed to
meet the various needs of each of our targeted customer markets. Important
factors for hospitals will include quality of test result, ease of use, impact
on personnel, benefits to patients and whether it provides a better cost
alternative than the central hospital laboratory. For physician group practices,
the Careside system will offer improvements in daily office routine, greater
convenience, enhanced patient satisfaction, and new revenue opportunities. For
the nursing home and home care markets, which traditionally outsource testing
services, the Careside system will offer improved turnaround time on test
results, individualized testing, cost savings or revenue opportunities, and
improved patient services. We believe that the Careside system will enable each
of these types of healthcare providers to replace their centralized testing
services with decentralized point-of-care technology on a cost-effective basis.
In pursuing this strategy, we will continue to benefit from the over 20 years
experience of our Chief Executive Officer as a senior executive of several large
hospitals where hospital laboratory costs were a significant issue, as well as
his more than four years experience as President of SmithKline Beecham Clinical
Laboratories, Inc. See "Management."
Leverage Expertise of Strategic Partners. We expect to continue to work
with our strategic partners, such as Fuji Photo Film Co., Ltd., UMM Electronics,
Inc. who have already developed specific expertise and state-of-the-art
technology. Fuji supplies chemistry and electrochemistry test reagents for the
Careside system's proprietary test cartridges. UMM develops the software and
manufactures the device for our Careside Analyzer, and Ysebaert develops and
manufactures the H-2000. With these and other strategic partners, we expect to
be able to develop new tests on a rapid, cost-effective basis.
-26-
<PAGE>
Systematic Commercial Rollout. The Careside Analyzer, with 37 tests,
and the H-2000, with a 16 parameter test, are cleared for marketing in the
United States. Our commercial project launch occurred in the fourth quarter of
1999, at which time 53 tests were placed in the market as part of the Careside
system. In addition to the product launch, we have started or are starting pilot
marketing studies in physician offices, nursing homes, and a large health care
system. These pilot studies are intended to determine utilization patterns,
demonstrate cost-effectiveness and develop a "how-to" book. The how-to book will
be a tool for customers to follow in order to take the appropriate steps in
establishing diagnostic testing services using the Careside system. The outcome
of these studies will be used to improve the market strategy and tools in the
sales process. The Careside system is being sold in the United States through
our own sales force. This effort will be enhanced with the conclusion of the
pilot studies expected in March 2000. In addition to the testing devices, the
Careside system includes the Careside Connect, which takes data from each of the
testing devices, transforms the data into a standard format and then enables it
to be connected to a local area network or to the web. Having this data
connection capability greatly enhances the opportunity to sell the Careside
system to customers that are large enough to have electronic record systems that
support patient records and or lab operations. We believe that this systematic
commercial rollout improves the chances of having more rapid market acceptance.
-27-
<PAGE>
Status of CARESIDE Product Development
<TABLE>
<CAPTION>
====================================================================================================================================
REGULATORY TECHNOLOGY
PRODUCT STATUS PARTNER
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CARESIDE ANALYZER Cleared under Section 510(k) of the Food, Drug and Cosmetic Act for use in UMM Electronics, Inc.
licensed laboratories and for point-of care use (POC). Hauser, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
DISPOSABLE TEST Test cartridges are integral to approval of the tests listed below. Chemistry,
CARTRIDGES electrochemistry and coagulation cartridges have been developed. The Battelle
immunochemistry test cartridge is in development.
- ------------------------------------------------------------------------------------------------------------------------------------
Test Category Cleared/Exempt for Submitted Pending Planned 2000
------------- ------------------ ----------------- ------------
Laboratory and POC Use Marketing Clearance Submissions
---------------------- ------------------- -----------
- ------------------------------------------------------------------------------------------------------------------------------------
Chemistry Glucose Hemoglobin Fuji Photo Film Co., Ltd.
BUN (Urea Nitrogen) Lactate
Creatinine Cholinesterase
BUN/Creatinine Ratio Direct LDL-cholest.
Albumin Direct HDL-cholest.
A/G Ratio (calc.)
Creatine Kinase
Creatine Kinase MB
% CKMB (calc.)
Total Cholesterol
HDL-Cholesterol*
LDL-Cholesterol (calc.)
Cholesterol/HDL Chol Ratio
GGT
ALT
Total Bilirubin
Phosphorus
Total Protein
Total Calcium
Uric Acid
Triglycerides
LDH
Bilirubin, Direct
Ammonia*
Carbon Dioxide, Total
Anion Gap (CO2+Echem)
Magnesium
Osmolality
Alkaline Phosphatase
AST
ALT/AST Ratio
Amylase
- ------------------------------------------------------------------------------------------------------------------------------------
Electrochemistry Chloride Ionized Calcium Fuji Photo Film Co., Ltd.
Potassium
Sodium
- ------------------------------------------------------------------------------------------------------------------------------------
Coagulation PT* APTT International Technidyne
Fibrinogen Corporation
Thrombin Time
- ------------------------------------------------------------------------------------------------------------------------------------
Immunochemistry Theophylline Diagnostic Reagents, Inc.
Phenytoin
Digoxin
Phenobarbital
T4
T3 Uptake
Carbamazepine
====================================================================================================================================
</TABLE>
* Requires separate clearance or exemption for point-of-care.
-28-
<PAGE>
Status of CARESIDE Product Development
<TABLE>
<CAPTION>
====================================================================================================================================
PRODUCT STATUS OF DEVELOPMENT TECHNOLOGY PARTNER
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CARESIDE H-2000 FDA Cleared Ysebaert
16 parameter, 3 part differential
- ------------------------------------------------------------------------------------------------------------------------------------
16 parameter, 3 part differential
Hematology Tests All hematology tests have been FDA Aqua Solutions
WBC cleared under Section 510(k)
RBC
Platelet count
Lymphocyte
% Lymphocyte
Monocyte
% Monocyte
Granulocytes
% Granulocytes
Hematocrit
Hemoglobin
MCV
MCH
MCHC
RDW
MPV
PCT**
PDW**
====================================================================================================================================
</TABLE>
** For diagnostic use outside U.S., for quality control use within U.S.
<TABLE>
<CAPTION>
====================================================================================================================================
COMMUNICATION
PRODUCT STATUS OF DEVELOPMENT TECHNOLOGY PARTNER
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CARESIDE CONNECT provides an electronic link To be available Q3, 2000 Advanced Medical Information
between the Careside Analyzer and the Careside Technologies, Inc.
H-2000.
====================================================================================================================================
</TABLE>
-29-
<PAGE>
The Careside System
The Careside system is comprised of an instrument, the Careside
Analyzer, and a series of disposable, diagnostic test cartridges designed for
the accurate determination of a wide variety of commonly ordered chemistry,
electrochemistry, immunochemistry and coagulation tests. In addition, the
Careside system includes an optional separate hematology testing device
manufactured by a third party. The chart on page 28 summarizes the status of
tests that the Careside Analyzer is intended to perform.
The Careside Analyzer
The Careside Analyzer is approximately 14 inches tall by 12 inches wide
and 11 inches deep and weighs about 24 pounds. The exterior is made of high
impact resin plastic. The top of the Careside Analyzer consists primarily of a
touch screen, on an ergonometric angle, on which the user inputs patient,
physician and billing information, the tests to be conducted and any desired
commentary. Alternatively, a separate keyboard is available for use if the
operator so chooses. We believe that the Careside Analyzer's user interface
software is a significant strategic advantage. For example, its quality
assurance and quality control capabilities are equal to those required of
central laboratories. The quality assurance and quality control software stores
and interprets the quality control data generated using the embedded electronic
quality control system in the Careside Analyzer as well as the traditional wet
testing quality control approach for test cartridges. After testing, quality
control data is flagged when out of limits and plotted on graphs for easy
review. A set of five re-usable and proprietary quality control test cartridges
will be provided with each instrument which allow the user to perform automated,
electronic quality control for all electrochemistry, chemistry, coagulation and
immunochemistry tests. These reusable quality control test cartridges will
replace traditional quality control which involved running multiple levels of
commercial plasma specimens for all the tests on the system. The software
utilized by the Careside Analyzer is designed to govern testing of one patient
at a time, perform quality assurance and quality control documentation and
conduct the test ordering processes. It also contains a security system that is
compliant with the Clinical Laboratory Improvement Amendments of 1988. The user
interface system can be customized for each particular customer.
The process for using the Careside Analyzer is streamlined and
partially automated compared to conducting tests in large commercial blood
diagnostic testing laboratories. The Careside system can be operated by
non-technical personnel with appropriate training in connection with the use of
the device. The operator will first select one or more test cartridges from
inventory depending on the tests ordered by the attending healthcare provider.
Most cartridges will contain one test, but some cartridges will contain two or
three tests. Up to six cartridges of a single patient's blood can be tested at
the same time. See "--Disposable Test Cartridges." The Careside system is
currently capable of conducting a maximum of eight tests per patient in a single
10 to 15 minute test cycle. When the development of additional multi-test
cartridges is completed, the Careside system will be able to handle 13 tests in
a single 10 to 15 minute test cycle. To prepare a cartridge, the operator will
place a small amount of the patient's drawn blood into the test cartridge with a
pipette or other standard transfer device. The operator will then simply load
the test cartridges into the instrument. Any combination of cartridges can be
loaded in any order, thus enabling the operator flexibility to perform
individual tests or customized panels. This flexibility is designed to minimize
waste by allowing the operator to run only the tests ordered by the provider
rather than traditional pre-set panels that may contain unnecessary tests. This
feature is particularly responsive to the current and expected future
requirements of third-party payers. See "--Third-Party Reimbursement."
-30-
<PAGE>
[PHOTO 1] [PHOTO 2] [PHOTO 3]
After the operator inputs patient information and test orders, the
instrument will automatically perform the tests and record and display or print
the results. To perform the tests, the Careside Analyzer undertakes cycles for
heating, centrifuging and several types of reading. The cycle time from the
moment the cartridge is dosed with whole blood and placed into the Careside
Analyzer to final test result is approximately 10 to 15 minutes for chemistry,
electrochemistry, immunochemistry or coagulation tests, or any combination of
these tests. A standard Chem 7 panel, comprised of sodium, potassium, chloride,
carbon dioxide, glucose, creatinine and urea nitrogen tests, can be performed in
approximately ten minutes and will utilize five cartridges. Sodium, potassium
and chloride tests are on one cartridge as they are always ordered in
combination. At the conclusion of the test, the Careside Analyzer ejects the
cartridges into a waste container for later disposal in appropriate biohazard
vessels.
The Careside Analyzer provides test results to the healthcare
professional in several ways. A self-adhesive label can be printed with test
results for direct transfer to the patient's chart. Each Careside Analyzer also
incorporates a floppy disk drive so that information can be downloaded from the
instrument for analysis. An additional electronic output method is through use
of the rs-232 port on the rear of the machine. We are currently developing a
data interface, called the Careside Connect, which allows the electronic
transmission of blood test results in a standard data format. We expect to
release the Careside Connect for sale in the summer of 2000.
Disposable Test Cartridges
Each test cartridge is designed to facilitate the flow of the blood,
serum or plasma specimen onto chemicals packaged in the cartridge. These
chemicals, which are called reagents, react with the specimen and change. The
changes are then read by the Careside Analyzer to yield the test result. Each
test cartridge is designed for a single use. Its various channels and pools
assure proper reagent and specimen temperature equilibration, sample separation,
sample metering, sample dispensing, test incubation and facilitate result
detection. Each cartridge contains all reagents necessary to perform a reagent
measurement on a serum, plasma or whole blood sample for a particular test. The
proprietary cartridges are each approximately 2.5 inches long and 1.5 inches
wide and are comprised of layers of molded plastic with channels for application
of the sample to the reagent. When stored in refrigerators, the cartridges are
expected to have a maximum of an 18 month shelf life. The cartridges are placed
in the Careside Analyzer directly from the refrigerator after sample dosing. The
first four minutes of the test cycle warms the test cartridges to the
appropriate test temperature. If necessary, the Careside Analyzer then spins the
cartridges using centrifugal force to push the sample through small channels,
separating it into serum or plasma. Excess sample is deposited in an overflow
well. A measured amount of sample remains in the metering passage and is
dispensed onto the reagent film or mixed with wet reagent pushed from an
interior pouch. Each test cartridge is designed to be airtight to prevent
ventilation spoilage of the specimen sample.
The three basic types of measurements that will be made are spectral
transmittance, reflectance and electrochemical. In the case of the chemistry
cartridge, the Careside Analyzer's platter spins the cartridge containing the
dry film, which will turn color from reaction with the blood element, over
LED/photodiode pairs. The LED lights reflect through the colors of the reagent.
Multiple reflectance tests are performed to yield a result. In the case of
coagulation and immunochemistry tests, the cartridge is spun over the same
LED/photodiode pairs which shine through a small rectangular hollowed prism,
called a prismatic cuvette, built into the cartridge. The light transmission is
then read by the Careside Analyzer. In the case of
-31-
<PAGE>
electrochemistry, the test is done on whole blood, before the other cartridges
are centrifuged. For these tests, the Careside Analyzer contains ion specific
electrodes which interact with the proprietary electrochemistry cartridges to
yield the test result.
The disposable test cartridges have a number of key features that we
believe contribute to the Careside system's reliability, speed, low cost and
accuracy of analysis. These include:
. Unique Cartridge Design. Specimen preparation, calibration and
test performance are incorporated in an inexpensive plastic
cartridge. Where necessary, the cartridge design incorporates
storage and measured delivery of reagents and electrolytes for
mixing with the patient's sample prior to analysis. Cartridges
are loaded into the instrument manually and are designed so
that they can be inserted in only one direction to avoid
error.
. Ease of Sampling. Sampling is automatic and requires small
volumes using approximately 75 to 150 microliters (ul) of
whole blood, as compared to current approaches requiring much
larger amounts. The dosing process requires the tester to fill
the cartridge well to a point indicated on the cartridge. No
precise measurement of the blood sample is required by the
tester, as the cartridges' channels measure how much sample is
applied to the reagent.
. Built-in Centrifuge. Separation of plasma from whole blood, as
required for many tests, is accomplished in the cartridge
after placement in the Careside Analyzer, so that a separate
centrifugation step is unnecessary.
. Flexibility in Testing. One, two or three tests may be
contained in each cartridge. Single test cartridges and a
three test cartridge have been designed, manufactured and used
in testing. Two test cartridges have been designed, but have
not yet been manufactured and used in testing. The added cost
and complications of using test panels containing unnecessary
tests is avoided.
. Quality Assurance and Quality Control Features. All test
cartridges are bar-coded for test identification. The bar
codes contain the type of test cartridge, as well as a lot
number, expiration date and self-calibration information,
which are all CLIA requirements. The data from the cartridge's
bar code will be read and stored in the Careside Analyzer. As
each test is completed, it becomes part of the CLIA
documentation. Because each cartridge contains an identifying
bar code which is read by the instrument, the order in which
the cartridges are loaded is immaterial. The Careside system
will check that the ordered tests and the cartridges entered
in the device match.
Test Menu
The Careside Analyzer combines chemistry, electrochemistry, coagulation
and immunochemistry testing in a single testing instrument. In addition, the
Careside system offers the H-2000, a hematology testing device. We are not aware
of any point-of-care blood testing system on the market that has this combined
capability.
Chemistry Tests. Chemistry tests are used to assess general health
status as well as to diagnose and monitor diseases of the major organ systems
such as the heart, liver, kidney, blood, pancreas, endocrine and bone. The film
chemistry cartridges contain dry chemistry reagents which are stacked as
required for the test. Within a few minutes after the sample has been applied, a
colored dye is produced. The color intensity of the dye is measured by
reflectance and, through calibration information coded in the instrument and on
the test cartridge, a quantitative test result is generated.
We have recently executed a long-term supply agreement with Fuji Photo
Film Co., Ltd. for the use of its dry film chemistry reagent technology.
Although in dry form, the film uses the same technology as the wet reagent
technology used in high volume commercial analyzers. The agreement replaces an
earlier agreement with Fuji that was applicable only during the development
stage of the Careside system. The new agreement continues to provide us with an
exclusive supply of Fuji's dry film chemistry reagents for use in our
point-of-care system for more than 25 chemistry tests. We have agreed to
purchase our dry chemistry reagents exclusively from Fuji. See
"--Sales--International." Fuji is also developing four additional chemistry
tests at its expense. Any additional tests that Fuji develops may be available
to us over the period of the existing agreement, which runs through 2003 and
thereafter is automatically renewed on an annual basis.
-32-
<PAGE>
Electrochemistry Tests. Like chemistry tests, electrochemistry tests
produced by Fuji pursuant to its agreement with us, are used to assess general
health status and to diagnose and monitor diseases of the major organ systems
such as the heart, liver, kidney, blood, pancreas, endocrine and bone. The
electrochemistry cartridge contains an ion specific electrode slide. When the
slide reacts with the sample, it generates values that correlate to the
concentration of sodium, potassium and chloride in the sample. The test compares
an electrochemical signal generated from a reference solution to a similar
signal generated from the patient's blood. The reference solution is a liquid
contained in a pre-filled pouch embedded in the cartridge. One side of the ion
specific electrode slide is exposed to a reference solution during the testing
sequence and the other side is exposed to the patient's whole blood. The
Careside Analyzer reads the difference between the two, thereby generating the
test result.
Coagulation Tests. Coagulation testing assesses the ability of a
patient's blood to coagulate. Coagulation is the series of events that leads to
the formation of a blood clot. Tests of prothrombin time, or PT, and activated
partial thromboplastin time, or aPTT, are the primary coagulation tests used by
both physicians and hospitals.
Reagents from the coagulation test cartridge are contained inside a
small hollowed prism, called a prismatic cuvette, and in a pouch. Plasma is
delivered to the cuvette by pressurization of the membrane on the cartridge. A
second reagent, such as a buffer or calcium chloride, is added via the pouch.
Light is then transmitted through the cuvette. The coagulation reaction causes a
change in the cloudiness, or turbidity, of the plasma that is detected optically
by the Careside Analyzer. The time it takes for this optical change to occur is
reported out as the coagulation time.
We have co-developed coagulation reagent technology for the PT test and
we are co-developing coagulation reagent technology for the aPTT test with
International Technidyne Corporation. International Technidyne has agreed to
provide such reagent technology to Careside on an exclusive basis for use in
multiple test category blood testing devices such as the Careside Analyzer.
However, International Technidyne will retain the exclusive right to use the
technology in the field of point-of-care devices that perform only coagulation
testing. International Technidyne will also manufacture the coagulation reagent
and load it in the cuvette for us.
Immunochemistry Tests. Immunochemistry tests are used for the diagnosis
of drug effectiveness for heart, thyroid analysis and for other purposes. To
date, immunochemistry systems have had limited penetration in the point-of-care
market, because they are difficult to use, related instrumentation is expensive,
reagents are costly and assay times are long. We are in the process of
developing our immunochemistry test cartridge and are in the process of
performing our first validation studies using it.
The immunochemistry test cartridge is identical in form and function to
the coagulation test cartridge except that a much smaller sample size is
delivered to the prismatic cuvette. The reagents in the cuvette and pouch are
different for each immunochemistry test. The Careside Analyzer measures a rate
of change or endpoint in cloudiness depending on the test. The rate of change or
endpoint is converted from calibration information coded in the instrument and
on the test cartridge, generating a test result. We currently purchase
immunochemistry reagents from Diagnostic Reagents, Inc. and are currently
negotiating a long-term supply agreement with Diagnostic Reagents.
The H-2000. Hematology testing determines various attributes of a
patient's blood, such as how many platelets, monocytes or lymphocytes it has. In
December 1999, we acquired Texas International Laboratories (TIL) in an
all-stock acquisition. TIL was a privately held corporation owned by two
shareholders: Yves and Jean LeBihan. TIL was founded in 1983. Over the last
three years, it developed a new hematology analyzer, the Hematil-2000, which we
have renamed the Careside H-2000. This device was introduced to the market in
April 1999 as a high quality, low cost hematology analyzer that was designed for
both human and animal testing. We have signed a three year employment contract
with Jean LeBihan and a consulting agreement with Yves LeBihan for a similar
term. Jean has responsibility for veterinary market sales of our products and
will assist the sales force with the sale of the H-2000 into the human market.
Yves LeBihan, the original founder of TIL will continue work in developing
international sales and assist us in the development of future generations of
hematology products. The H-2000 is currently being sold into China, Mexico,
Brazil, Turkey, Egypt, Algeria, Korea and various South American countries
through specific distribution agreements.
The H-2000 weighs 37 lbs. and measures only slightly larger than a
cubic foot. It can provide 16 hematology diagnostic tests in approximately 2
minutes from the time whole blood is drawn from a patient. The H-2000 is
self-cleaning and automatic and can provide flagging of suspected abnormalities
in various cell populations. The architecture is an open system that allows the
H-2000 to operate with a number of different reagent brands, giving it a high
level of flexibility. Closed
-33-
<PAGE>
systems typically add costs to the process. Our strategy is to provide the low
cost alternative in hematology testing. Although the H-2000 is an open system
that allows the use of reagents manufactured by others, we plan to sell reagents
at attractive prices for H-2000 customers.
[PHOTO 1] [PHOTO 2] [PHOTO 3]
The H-2000 is easy to operate. A few drops of blood are drawn into the H-2000
through an aperture from either a normal test tube or a capillary tube used in a
finger prick. The blood is automatically distributed into counting chambers.
Reagents are mixed or used in counting chambers in combination with both optical
and electronic counting methods which perform up to four cross-referenced
measurements per sample, thereby ensuring accurate counts. The reagents and
cleaning fluids are flushed into a disposal bottle for standard blood sample
disposal.
The Careside Connect
We have partnered with Advanced Medical Information Technologies, Inc.,
also known as AdMIT, to develop a link between the Careside Analyzer and the
H-2000 and between the Careside system and other medical devices and information
systems. This cabled interface will enable users of the Careside Analyzer to
connect hematology devices (including the H-2000) and other diagnostic test
devices into the Careside Analyzer, thereby allowing the users to further avail
themselves of the Careside Analyzer's extensive ordering, data storage, clinical
records and quality assurance and quality control capabilities. AdMIT is
controlled by our recently hired Chief Information Officer, Dennis Reiger. We
will have exclusive rights to use the Careside Connect in the point-of-care
market for laboratory tests.
In addition to linking the Careside Analyzer and the H-2000 or other
diagnostic testing devices, the AdMIT product is being designed to be connected
directly into laboratory or clinical information systems, physician practice
management systems or other information systems, either directly through a local
area network or via the Internet.
Future Developments
We intend to have the broadest menu of any point-of-care blood testing
device and plan to continue to develop tests for the Careside system. At product
launch, the Careside system's menu included 53 tests, representing about 80% of
all blood tests ordered on an out-patient basis, including all of the most
commonly ordered out-patient blood tests. Even though our point-of-care
technology will not be capable of conducting every test potentially ordered by a
healthcare provider, we believe that, within five years, our planned menu will
provide over 90% of all out-patient tests in many clinical settings, and up to
60% of tests commonly ordered in in-patient settings. For tests not performed by
the Careside system, healthcare providers could order tests from either a
hospital laboratory or a commercial laboratory.
We plan to add enhancements to the Careside system within the next five
years, including the ability for the blood sample to be loaded from a test tube
into a test cartridge automatically. This will eliminate the need for a person
to handle an open tube containing the patient's blood. In addition, we are
evaluating alternative methods of immunochemistry testing, such as the use of
high precision latex beads for the development, within five years, of large
molecule immunochemistry tests. Also designed and under development is a
multi-test cartridge that will be able to perform two or more film tests
simultaneously on one cartridge. The Careside Analyzer's detection technology is
capable of extensive menu expansion. This gives us the ability to add
traditional chemistry, coagulation and small molecule immunochemistry tests such
as screening tests for drugs of
-34-
<PAGE>
abuse. We expect to develop additional tests in the large molecule
immunochemistry field such as prostate specific antigen for prostate cancer and
Troponin for heart attacks, as well as tests for infectious diseases such as
Strep A and Chlamydia.
Marketing Strategy
Our marketing strategy is to position the Careside system as the blood
testing system of choice by demonstrating to hospitals the benefits of
decentralized blood testing, and by providing other healthcare providers with a
profitable and cost-effective alternative to central laboratory testing.
Our key targeted market segments are as follows:
Hospitals. There are over 5,000 acute care hospitals in the United
States. Laboratory testing services required by hospitals are usually provided
by a central hospital laboratory, which services all of the hospital's testing
needs as well as the testing service needs of hospital physician groups.
Hospital laboratories are expensive to maintain because they have to be
maintained on a 24 hour basis, they require specially trained personnel to be
present at all times to operate high volume analyzers and they demand
significant amounts of capital to equip and maintain. Furthermore, hospitals are
often reimbursed by institutional payers for patient admissions based on
specific diagnoses reflecting the complexity of the care needed and a
predetermined payment for such care. While laboratory testing services are an
essential part of diagnosis and monitoring the beneficial results of treatment,
they also represent a cost to the hospital as it seeks to generate a profit by
completing the care and treatment of patients before their costs exceed the
level of reimbursement. The Careside system provides hospitals with the
opportunity to decentralize laboratory testing to the patient floors and
bedside, as routine and stat tests can be conducted at the time the patient is
being evaluated by providers. Consequently, the Careside system is expected to
enable some hospitals to eliminate their central laboratories or replace certain
costly analyzers and outsource non-routine testing not done on the Careside
Analyzer to a centralized laboratory.
Physician Groups. There are over 3,500 physician groups in the United
States with practices in excess of 35 doctors. Excluding radiology groups, the
target market for the Careside system is over 2,200 groups. Physicians usually
obtain their laboratory testing services from the hospital laboratories with
which the physicians are affiliated or from a commercial laboratory. In either
case, patient samples are collected from the physician's office and sent via
courier to the applicable laboratory, with results delivered to the physician,
either electronically, by fax or by telephone. For physician group practices,
the Careside system will offer improvements in daily office routine, greater
convenience, enhanced patient satisfaction and new revenue opportunities.
Nursing Homes. In 1994, the most recent year for which industry data
has been compiled, there were over 15,000 nursing homes in the United States
comprising more than 1.6 million licensed beds. The average occupancy rate was
over 92% with each nursing home averaging nearly 100 patients. Common diagnostic
tests ordered for nursing home patients are complete blood counts, Chem 7
panels, electrolytes, blood glucose, prostate specific antigen, therapeutic drug
monitoring and urinalysis. Nursing homes generally obtain their testing services
from commercial laboratories and encounter the same delays and reimbursement
issues as physicians. The Careside system provides a profit opportunity to the
nursing home by allowing it to conduct and bill for laboratory services, while
simultaneously enhancing the nursing home's ability to provide better care.
Home Care. Industry data shows that the number of home care agencies
and patients receiving home care services has grown significantly in recent
years. We believe significant growth in this market segment will continue.
Industry data reported that the total number of Medicare certified home care
agencies rose from 11,000 in 1989 to over 20,000 by the end of 1996. In 1996,
the Health Care Financing Administration estimated that 3.9 million Medicare
enrollees would receive home care services during 1997. This is twice the number
that received such services in 1990. The number of home care visits increased
from 70 million in 1990 to an estimated 306 million in 1997. On average, 30% of
home care patients visited each week require laboratory testing. Common
laboratory tests include, among others, Chem 7 panels, iron, blood glucose,
magnesium, prothrombin time and immunochemistry tests for monitoring
phenobarbital, phenytoin and digoxin. Patient samples are drawn from the
patient, gathered from the home care providers and delivered via courier to a
commercial laboratory for testing. Test results are made available the next day
or on a premium price basis by fax, telephone or written report delivered four
or five hours later. The Careside Analyzer is expected to enable the home
healthcare provider to draw the patient's sample, run the test and deliver the
results without having the sample delivered via courier to a commercial
laboratory.
-35-
<PAGE>
Pilot Program
In December 1999, we initiated the first of a number of product
installations in pilot sites. These pilots involve assessing both the economic
opportunity provided to the customer from the use of the Careside system and
refining an instruction manual which is intended to provide customers with the
information they need to operate a lab using the Careside system. By year end
1999, two of four planned pilots were initiated. The first was started at a
small group practice that had never run a lab. The second was with a larger
group currently operating a lab.
We have worked with an outside consultant/programmer to develop a
software system for modeling the economic opportunity of specific point of care
operations. This system is designed to develop a customer-specific economic
model based on historical test volumes and all lab cost that would be incurred
by using the Careside system. This software product has been made available to
the Careside sales force.
We will be launching further pilots in nursing homes and in a large
health care system in 2000. In all the pilots we will be looking at the most
cost effective start up process, the impact on customer productivity, patient
reactions to immediate test results, and any other benefits that might result.
In addition to the pilots, we launched the sale of the Careside system to the
market in December 1999 and have begun installing the system in California,
Kentucky, Arizona and Texas, with other states scheduled to follow.
At our commercial product launch we had the Careside Analyzer, the
H-2000 and 53 tests, including 16 hematology tests cleared by the FDA or exempt
from FDA approval. We expect to use the outcome of the pilot market studies to
further develop our marketing strategy. We believe that the Careside system's
planned menu represents virtually all routine blood tests ordered most of the
time on an outpatient basis. We are distributing the Careside system in the
United States through our own sales force.
Sales
Domestic
Careside has hired four regional sales directors in the United States.
These regions are divided into the Northeast, South, Midwest and West. As
contracts are signed, we will add to the sales force. We decided that the U.S.
market opportunity could be better addressed through our own sales force rather
than through distributors because the Careside system changes the routine blood
testing process by decentralizing lab operations. Selling decentralized lab
operations is substantially different than selling testing devices. The Clinical
Laboratory Improvement Amendments (CLIA) require all providers who provide
testing services to demonstrate quality control (QC) and quality assurance (QA)
processes that are standard to the industry. Prior to CLIA, only commercial and
hospital labs had demonstrated these standards. CLIA added both cost and
administrative difficulty to those labs that did not meet these operating
requirements. Our products are easy to use. They also address the regulatory
issues required by CLIA and greatly lower the cost of QA/QC processes by
automatically providing documentation required by CLIA. We are selling a lab
that can be operated at the point of care and our sales force has been trained
to prepare our customers to operate a lab using our products. This means
calibration of each test at the customer site, initial documentation for QA/QC
data files, and other preparation work that is related to lab operations. These
functions are not ones that distribution companies readily know how to perform.
Members of our senior management team originated with SmithKline Beecham, where
over 100 million tests a year, in over 150 testing sites were conducted. We are
familiar with lab operations, and based on this knowledge, developed a product
that currently has no equivalent. We have trained our sales force with the
knowledge needed to sell and install cost-effective lab systems in our customer
sites. These sites include hospitals, large physician group practices, managed
care organizations, home care agencies and nursing homes, either directly or
through institutional pharmaceutical service organizations which serve them.
Because we intend to target customers who order large volumes of tests, we
anticipate building a direct sales force of approximately 40 people over time.
We entered into a distribution agreement with SBCL which gave SBCL an
exclusive right, as a commercial laboratory, to use and domestically distribute
the Careside system within the commercial laboratory industry and the
non-exclusive rights to sell the Careside system to hospitals and healthcare
systems, other health care providers, managed care organizations and insurers.
The agreement also obligated SBCL, upon FDA clearance or exemption of 25
specified tests, to purchase a minimum number of Careside Analyzers and test
cartridges from us for the first five years following such FDA action. This
contract went through an amendment in early 1999 and we were in discussions
about contract initiation at the
-36-
<PAGE>
time SBCL was sold to Quest Diagnostics. During the remainder of 1999,
discussions with Quest Diagnostics were deferred as the Quest/SBCL merger and
consolidation planning took precedence over our contract negotiations.
Furthermore, Quest Diagnostics had not put into place the organization and
authority to deal with our contract until late December 1999. In January 2000,
we reopened contract discussions with Quest Diagnostics management. The
discussions are continuing. It is too early to determine whether Quest
Diagnostics will see the same opportunity that SBCL envisioned, and we expect
these discussions to continue for a number of months before a final decision is
made.
International
International markets are not affected by the same regulatory
requirements as in the U.S. market. Because we have received FDA clearance and
UL certification for the Careside Analyzer, the Careside system is ready to be
sold in almost all international markets once the appropriate documentation has
been made available to country authorities. In these territories, we will be
selling the product as opposed to a decentralized lab concept. Therefore we are
in discussions with potential distributors for a number of foreign territories.
Our strategy is to pick distributors that are selling products into the health
care market, but not competitive products. Further, we are in discussions with
country specific distributors as opposed to distributors that are more
international. Our distribution and supply agreement with SBCL gives SBCL the
same exclusive and non-exclusive distribution rights as it has in the United
States in any ten of the following countries where SBCL owns, operates or
manages a commercial laboratory on or before December 31, 2000: Great Britain,
Mexico, Spain, South Africa, Singapore, Malaysia, Indonesia, Australia, Chile,
Argentina, France and Germany. In addition, Fuji Photo Film Co., Ltd. has a
right of first refusal to be our distributor on an exclusive basis in Japan and
a non-exclusive basis in other Asian countries. The current agreement with Fuji
expires in 2003 and permits automatic annual renewals thereafter subject to
cancellation by either party. Discussions are currently underway for
distribution agreements in certain European countries and in the Middle East and
South Africa. In addition, the acquisition of TIL has brought distribution
opportunities with companies in China, Mexico, Turkey, and certain South America
countries. We are analyzing the possibility of adding the entire Careside system
to these distribution agreements.
Research and Development
After extensive review of available test technologies, we chose Fuji
Photo Film Co., Ltd. as our partner for chemistry and electrochemistry tests.
Fuji makes dry film based chemistry tests and uses them in large analyzers that
it produces and sells in Japan and Taiwan. In addition, Fuji has agreed to
supply this reagent technology during the Careside system's development stage
for more than 25 chemistry tests. Fuji has agreed to develop four additional
tests at its expense for the Careside system. See "--The Careside System--Test
Menu."
The utilization of third parties to develop our tests has allowed us to
focus on creating a platform for delivery of a highly efficient test system. For
hospital environments, the Careside Analyzer's software has a configuration
capability that facilitates a test order entry menu and security processes as
determined by laboratory management. Fields exist for extensive data capture
including patient, physician and billing information. All of these systems are
optional to the user other than the data requirements for compliance with the
Clinical Laboratory Improvement Amendments of 1988. In addition, the Careside
system easily accommodates test menu additions by downloading new test
algorithms into the device via a floppy disk. This eliminates the need to remove
the instrument from the field as new test capabilities receive FDA
clearance/approval.
We have entered into a series of research and development agreements
for our system. As is customary in the industry, these agreements are short term
and provide for termination for any reason by either party on relatively short
notice. Battelle Memorial Institute, a leader in developing industrial
technology, has designed the disposable testing cartridge according to
specifications which we provided. All applicable patent rights under this
contract have been assigned to us. To date, we have issued three U.S. patents.
See "--Patents and Proprietary Rights." Pursuant to our relationship with
Battelle, Battelle is also designing a cost-effective manufacturing process and
quality assurance methods, based on federal Good Manufacturing Practices
protocols, for the disposable cartridges.
UMM Electronics, Inc., a contract engineering and manufacturing firm,
performed the design and development work of the Careside Analyzer and continues
to provide development services for us to further enhance our product. Other
products developed by UMM include point-of-care blood glucose monitors,
point-of-care coagulation instruments, intravenous infusion pumps, dialysis
machines and infant care warmers. UMM is an FDA-registered manufacturer of
sophisticated medical products required to comply with federal GMP regulations.
-37-
<PAGE>
Hauser, Inc., an industrial design consultant, provided services for
the design and development of the entire Careside system. Hauser conducted focus
groups from each target market segment in order to obtain customer input on the
design features and to assist in the development of an instrument and software
systems involving user interaction. Currently, Hauser is providing packaging
design services.
We continue to pursue development work with other contract partners. We
are further developing coagulation reagent technology with International
Technidyne Corporation. We filed a joint patent application with ITC for a
coagulation reagent. In addition, we are utilizing the services of AdMIT to
develop the cabled interfaces between the Careside Analyzer and other medical
devices and information systems.
Manufacturing and Supply
We designed and outfitted a building in Culver City, California, of
approximately 16,000 square feet in December 1996 as our development facility
and offices. The building contains space for our automated assembly system which
Battelle Memorial Institute is designing. The assembly system will mount the
reagents in the test cartridges, and package and label the cartridges. This
facility has been set up to comply with all applicable state and federal
regulatory requirements, including registration with the state and federal
governments in accordance with applicable laws governing medical devices prior
to commercial distribution. The facility will be subject to periodic FDA
inspection to determine whether our manufacturing processes comply with federal
GMP regulations for medical devices.
We assemble and package at our Culver City facility all cartridges used
by the instrument. The cartridges are assembled in two main stages. Initially,
those components which are not sensitive to humidity, such as plastic parts, are
assembled in a normal humidity environment. The second stage of the cartridge
assembly process involves the mounting of dry film chemistry strips or pouched
reagents in the cartridges, which must be done in a low humidity environment to
preserve the film. This step will be performed in an automated assembly line at
our facility. We have purchased the equipment necessary for this process. In
addition, during the cartridge manufacturing process, our equipment must test
the pressure of the ultrasonic seal between the base plate and the upper plates
of the test cartridges. Our equipment allows for several inspection steps during
the assembly process. Battelle has assisted us in developing the fully automated
assembly line for the cartridges with these steps built in. The production
capacity of the pilot cartridge production line for chemistry and
immunochemistry is approximately 1,800 units per hour or 13,000 units per shift.
Depending on the specific tests ordered, our current facility, with additional
equipment, will support between $40 and $60 million of test cartridge sales
annually. The automated production line utilizes proprietary process technology,
designed by Battelle and owned by us, that is scalable to meet increasing
demand.
We outsource the manufacturing of the plastic components of our
cartridges. We use a third party to manufacture these components using injection
molding processes.
We have entered into an agreement with UMM Electronics, Inc. for the
manufacture of the Careside Analyzer at UMM Electronics' facility in
Indianapolis.
We source our chemistry, electrochemistry, coagulation and
immunochemistry reagents from Fuji, International Technidyne Corporation and
Diagnostic Reagents, Inc. See "--The Careside System--Test Menu."
Our hematology testing device, the H-2000, is manufactured by Ysebaert.
Competition
We principally compete with manufacturers of traditional diagnostic
testing equipment used by centralized laboratories and current point-of-care
diagnostic companies whose products perform testing for patients in critical
condition. Historically, most clinical testing has been performed in a
centralized laboratory setting. These laboratories provide analyses similar to
those to be conducted by our system and have traditionally been effective at
processing large panels of tests using skilled technicians and complex
equipment. While the Careside Analyzer is not designed to provide the same range
of tests, we believe that our products offer several advantages over centralized
laboratories, including lower costs, mobility, faster results, simplified
specimen preparation, reduced opportunity for error through decreased specimen
handling, ease of regulatory compliance and increased patient satisfaction.
-38-
<PAGE>
We are also aware of other companies with point-of-care analysis
devices. These companies have focused on the testing for critical care patients
or tests that are disease specific. Examples of disease specific tests are
glucose and digoxin which measure blood sugar levels in diabetic patients or
heart complications. In all cases, these companies perform a limited number of
tests and their systems are not designed to have their test menus increase.
Consequently, these devices add costs as the large analyzers in hospital or
commercial laboratories conduct these tests and many more. We believe that our
system offers distinct competitive advantages over these products, including the
ability to conduct tests in multiple test categories in a single device,
internal centrifugation, convenience and ease of use. Several companies,
including i-STAT Corporation, Abaxis, Inc., Diametrics Medical, Inc. and
PharmaNetics, Inc., are currently making or developing products that will
compete with our tests although not with our system. Some of these companies
also provide disease specific tests which we expect will be added later.
Some large pharmaceutical companies also have point-of-care blood
testing devices and could, given their resources, develop systems which compete
with the Careside system. Abbott Laboratories, Inc., Clinical Diagnostic Systems
(a division of Johnson & Johnson) and Roche Diagnostic Systems, Inc. all have
products which perform point-of-care testing. To date, we believe that none has
developed a point-of-care testing system comparable to our system.
Patents and Proprietary Rights
Our policy is to seek patent protection, both in the United States and
abroad, for each of the areas of invention embodied in our products. To date, we
have filed nine patent applications on various components of our technology with
the U.S. Patent and Trademark Office. We have also sought international patent
protection with respect to certain of these U.S. patents and patent
applications. One patent was filed with International Technidyne Corp. and
covers a coagulation reagent that was discovered jointly. The other eight
patents cover the technology that is built into the Careside Analyzer and the
test cartridges. To date we have been issued three U.S. patents. These patents
as well as those still pending form a very strong portfolio that protects our
development investment. One patent issued covers our invention of the
spectrophotometric analytical cartridge, which allows our product to perform
light transmission based tests, such as coagulation and immunochemistry in the
Careside Analyzer. Another patent covers the fundamental analytical reagent
cartridge invention that underlies all of our cartridge technology. A third
patent covers our electrochemistry cartridge. Four of the patent applications
cover inventions that are components of the Careside Analyzer, and one covers an
additional discovery in another type of cartridge.
Our agreements with Fuji Photo Film Co., Ltd., Battelle Memorial
Institute and International Technidyne Corporation, assign to us certain
proprietary rights that result from the research conducted under the agreements.
The Fuji agreement gives us non-exclusive rights to use Fuji's proprietary
technology in the Careside system outside of Japan. Only Fuji will sell our
system in Japan. The other agreements provide that the technology used in the
Careside system is owned either by us or jointly by us and our partner. These
agreements do not restrict us, if we choose, from seeking other suppliers of
competitive technologies. We will seek to protect any such proprietary rights
assigned to us by our technology partners. Battelle and International Technidyne
have agreed to share expenses or otherwise assist us in prosecuting patent
applications.
In addition to patent protection, if any, we will rely upon trade
secrets, know-how and continuing technological innovation. All of our employees
have signed confidentiality/non-disclosure agreements. Careside has also
protected its name by trademarking "Careside" and the name Analyzer.
Third-Party Reimbursement
In April 1998, the federal government instituted a policy that, in
connection with Medicare reimbursement for large panel testing, will only
reimburse four different panels of chemistry tests, the largest of which has 13
tests. The consequence of this policy has been that more single tests are
ordered as compared to large panels. The Careside system is currently capable of
conducting eight tests in a single 10 to 15 minute test cycle. The Careside
system is able to handle a 13-test panel in a single 10 to 15 minute test cycle.
The Careside system is also configured to easily test any combination of single
test cartridges with similar cycle times for up to six single tests per cycle.
Payers have stated that they will only reimburse for panels that are disease
specific. With this change in policy and reimbursement practice, the number of
tests reimbursed as part of panels has begun to drop. The Careside system, which
places primary focus on single and disease specific testing, is very
-39-
<PAGE>
competitive in light of these changes in payer practice related to test panels.
See "Risk Factors--Uncertainty Relating to Third-Party Reimbursement May Impact
Our Business."
Managed care provides physicians with incentives to treat patients
using clinical treatment protocols that have been developed for many chronic and
acute illnesses. These protocols frequently contain preventative diagnostic
interventions that are used to help avoid the occurrence of acute episodes of
illness. Diagnostic blood testing is one of the major tools used in these
protocols for early detection and for ongoing evaluation of treatment efficacy.
We believe that a diagnostic blood testing system that is cost effective and
adds convenience and rapid information will be well received by managed care
organizations and their physicians.
Even with the growth of managed care, more than 70% of all blood tests
continue to be reimbursed on a fee for service basis. This number has remained
steady in the commercial laboratory industry for the past three years. We
believe that in both the managed care and fee-for-service markets, our
point-of-care system will be responsive to incentives that drive the respective
markets. Many managed care entities dictate to their member physicians which
laboratories they must use for blood testing. Physicians have the opportunity to
utilize exceptions to these mandates to conduct in-office testing. The Careside
system enables physicians to offer laboratory testing services and take
advantage of these exceptions to the managed care organizations' policies. We
expect to facilitate this by working closely with the physicians and the managed
care organizations to demonstrate cost effectiveness and cost reduction from use
of our system. This is a critical component of the pilot site testing strategy
and is intended to position the Careside system as the new testing standard and
the blood testing system of choice over traditional laboratory testing methods.
Government Regulation
The FDA regulates the development, manufacture, and marketing of
medical devices including diagnostic tests. The FDA requires testing of the
Careside system in accordance with regulatory requirements in the laboratory
and, as appropriate, in clinical settings to establish product performance
before marketing. FDA clearance must be obtained before making certain types of
product changes. The Careside Analyzer and tests have received marketing
clearance for point-of-care and physician office laboratory use.
The FDA has regulations that set varying requirements for medical
devices according to potential risk class. Class I devices represent the lowest
potential risk devices and are therefore subject only to the general controls
that include establishment registration, product listing, the prohibition of
mislabeling or adulteration, and a requirement to comply with federal Good
Manufacturing Practices regulations. Pre-market notification is required for
some Class I clinical diagnostic devices. Class II devices present greater risk
than Class I devices and are subject to special controls, such as guidelines or
performance standards, as well as the same general controls that are applicable
to Class I devices. Class II devices require pre-market clearance to demonstrate
that the FDA accepts the manufacturer's claims that the device is substantially
equivalent to other legally marketed devices, and meets generally accepted
performance criteria that may be required to demonstrate that the device is safe
and effective. Class III devices present a higher level of risk and are
additionally subject to rigorous demonstration of safety and effectiveness
through the pre-market approval process.
For some Class I and most Class II devices, a pre-market notification
must be submitted to the FDA. Usually within 90 days of the receipt of this
notification, the FDA makes the determination whether the device submitted is
substantially equivalent to a legally marketed device. A legally marketed device
is one which was marketed prior to the passage of the Medical Device Amendments
of 1976, or a post-1976 device that has been determined by the FDA to be
substantially equivalent to previously cleared devices. A determination of
substantial equivalence requires several FDA findings: first, that the device
has the same intended use as the legally marketed device; and second, either
that the device has the same technological characteristics as the legally
marketed device or, if it does not, that the device is as safe and effective as
the legally marketed device and does not present different questions about
safety and effectiveness. Class III devices require extensive clinical testing
to prove safety and effectiveness, and submission of the resulting data to the
FDA as a pre-market approval application. The FDA ordinarily will refer a new
device pre-market approval application to an advisory panel of outside experts
for a recommendation on whether to approve the application or to request
additional testing. The Careside Analyzer and all 37 tests, along with the
16-parameter hematology test performed by the Careside H-2000, already cleared
or exempt by the FDA have been classified in Class II. Certain future tests,
such as prostate specific antigen, are expected to require pre-market approval.
-40-
<PAGE>
Where a pre-market approval application is required, FDA regulations
require the demonstration of safety and effectiveness, typically based upon
extensive clinical trials. Fulfilling the requirements of the pre-market
approval application are costly and both the preparation and review are time
consuming, commonly taking from one to several years. Before granting pre-market
approval, the FDA must inspect and find acceptable the proposed manufacturing
procedures and facilities. The pre-market approval regulations also require FDA
approval of most changes made after the tests have been approved.
Manufacturing Regulation
For products either cleared through the pre-market notification process
or approved through the pre-market approval process, our manufacturing facility
must also be and is registered with the FDA. The manufacture of products subject
to Section 510(k) of the Federal Food, Drug, and Cosmetic Act or to Section 515
pre-market approval requirements must be in accordance with quality system
regulations and current federal Good Manufacturing Practices regulations. We are
also subject to various post-marketing requirements, such as complaint handling
and reporting of adverse events. Pre-market approval products are also subject
to annual reports. The FDA typically inspects manufacturing facilities every two
years. We intend to seek and maintain ISO 9001 certification. As a result,
inspections by notified bodies may be more frequent.
The Careside Analyzer is being manufactured by UMM Electronics, Inc.
UMM is an FDA registered and inspected facility. UMM is also ISO 9001 certified.
In adherence to FDA and ISO 9001 requirements, UMM follows a structured design
control process. The H-2000 is being manufactured for Careside by Ysebaert in
France though Careside is the designated manufacturer under FDA regulations. The
Ysebaert facility is ISO 9002 certified.
Third-Party Safety
Third-party safety certification is not required for FDA marketing
permission, but will be required by our customers and to enter markets in other
countries. In this regard, we have obtained an Underwriters Laboratories, or UL,
listing for the instrument Careside Analyzer. UL has reviewed the Careside
Analyzer according to UL 3101-1 that is equivalent to the international standard
IEC 1010. The Careside Analyzer is also being designed to comply with
requirements that ultimately will facilitate marketing of the product in Europe
and Japan. These requirements include the Low Voltage Directive (73/23/EEC), the
Electromagnetic Compatibility Directive (89/336/EEC), and the In Vitro
Diagnostic Medical Device Directive (98/79/EC). The H-2000 is in the process of
UL review. We expect to receive UL certification for the H-2000 during 2000.
Clinical Laboratory Improvement Amendments of 1988
All medical testing in the United States is regulated by the Health
Care Financing Administration according to the complexity of the testing as
specified under the Clinical Laboratory Improvement Amendments of 1988. CLIA
regulations establish three categories of laboratory tests, for which regulatory
requirements become increasingly stringent as the complexity of the test rises:
(1) tests that require little or no operator skill, which allows for a
certificated waiver of the regulations; (2) tests of moderate complexity; and
(3) high complexity tests which require significant operator skill or training.
CLIA regulatory requirements apply to facilities such as clinical laboratories,
hospitals, and physician offices which perform laboratory tests. All
laboratories are subject to periodic inspection. In addition, all laboratories
performing tests of moderate or high complexity must register with HCFA or an
organization to whom HCFA has delegated such authority. They also must meet
requirements relating to personnel qualifications, proficiency testing, quality
assurance, and quality control. All of the tests for the Careside Analyzer were
categorized as moderate or less complexity. In practical terms, performing a
test of moderate complexity means that the individual supervising the test,
i.e., the physician, pathologist or laboratory director, must be appropriately
educated and trained, whereas the individual who operates the Careside Analyzer
requires either formal laboratory education or a high-school education and
training in the skills required to perform testing with the Careside Analyzer,
such as specimen collection and quality control.
State Regulation
We and our products are subject to a variety of state laws and
regulations in those states where our products are marketed, sold or used.
Thirteen states currently restrict or control, to varying degrees, the use of
medical devices such as the Careside system outside the clinical laboratory by
persons other than doctors or licensed technicians. For example, California, New
York and Florida all have unique requirements that define which steps in the
testing process can be performed by physicians, nursing or other personnel who
are not licensed technicians. We have designed our testing system to comply with
-41-
<PAGE>
these requirements, while minimizing the need for higher cost labor to run the
test process. However, these restrictions may add labor costs to the customer,
and such costs may hinder our ability to market our products in these locations.
Although we plan to seek interpretations, rulings or changes in relevant laws
and regulations to remove or ameliorate these restrictions, there can be no
assurance that we will be successful.
International Regulation
In addition to the United States market, we intend to pursue markets in
Asia and Europe through select strategic alliances. The recently published
European Community In Vitro Diagnostic Directive places our products within a
category that has a low regulatory burden. Manufacturers are allowed entry into
the market based upon self-certification that they complied with published
directives, similar to existing United States requirements, containing
performance, labeling, and other quality requirements. Japan has its own
requirements for in vitro diagnostics.
Product Liability and Property Insurance
Sale of our products entails risk of product liability claims. The
medical testing industry has historically been litigious, and we face financial
exposure to product liability claims in the event that use of our products
results in personal injury. We also face the possibility that defects in the
design or manufacture of our products might necessitate a product recall. There
can be no assurance that we will not experience losses due to product liability
claims or recalls in the future. We have purchased product liability insurance
in reasonable and customary amounts. Such insurance can be expensive, difficult
to obtain and may not be available in the future on acceptable terms, or at all.
No assurance can be given that product liability insurance can be maintained in
the future at a reasonable cost or in sufficient amounts to protect us against
losses due to liability. An inability to maintain insurance at an acceptable
cost or to otherwise protect against potential product liability could prevent
or inhibit the commercialization of our products. We believe that our insurance
coverage is adequate for the risks we face. However, a product liability claim
in excess of relevant insurance coverage or product recall could have a material
adverse effect on our business, financial condition and results of operations.
We have liability insurance covering our property and operations with
coverage and deductible amounts and exclusions that we believe are customary for
companies of our size and adequate for our industry. There can be no assurance
that our current insurance coverage is adequate or that we will be able to
maintain insurance at an acceptable cost or otherwise to protect against
liability.
Employees
Since our initial public offering in June 1999, we doubled the number
of employees to 74 as of March 31, 2000. A number of senior managers have
been added with expertise in marketing and sales, information resources,
materials management and product development. In addition, the acquisition of
TIL has enabled us to move into the veterinary market with experienced
management. With our current employee base we are positioned to move from a
research and development company into a company that is engaged in sales,
marketing, and manufacturing.
Properties
We lease approximately 16,000 square feet of space in Culver City,
California as our executive offices, for the research and development,
validation, manufacture and assembly of test cartridges and for product
development. We believe that the Culver City facility is suitable to expand to
$50 million in cartridge revenues and will adequately serve our needs for the
immediate future.
Legal Proceedings
We are not a party to any material legal proceedings.
-42-
<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Employees
The following table sets forth certain information concerning the
individuals who serve as our directors, executive officers and key employees:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Directors and Executive Officers:
W. Vickery Stoughton ................ 54 Chairman of the Board of Directors and Chief Executive Officer
Thomas H. Grove...................... 50 Executive Vice President--Chief Technology Officer, Secretary and Director
James R. Koch........................ 45 Chief Financial Officer, Treasurer, Executive Vice President and Director
Anthony P. Brenner (1)............... 42 Director
William F. Flatley (2)(3)............ 58 Director
Kenneth N. Kermes (2)................ 64 Director
C. Alan MacDonald (2)(3)............. 66 Director
Diana Mackie (1)..................... 52 Director
Philip B. Smith (1)(3)............... 64 Director
Key Employees:
Kenneth Asarch....................... 41 Vice President--Quality Systems and Regulatory Affairs
Grant Frazier........................ 38 Vice President--Marketing
Dennis E. Rieger..................... 54 Senior Vice President, Information Technology and Chief Information Officer
Sandra P. Twyon...................... 61 Vice President Operations
Marija N. Valentekovich.............. 68 Vice President--Manufacturing
</TABLE>
_____________
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Nominating Committee
Directors and Executive Officers
W. Vickery Stoughton, Chairman of the Board of Directors and Chief
Executive Officer. Mr. Stoughton has served as our Chairman of the Board of
Directors and the Chief Executive Officer since our formation in July 1996.
Prior to that, he served as President of SmithKline Beecham Diagnostics Systems
Co. (SBDS), a diagnostic services and product company, from October 1995 to July
1996, and was President of SmithKline Beecham Clinical Laboratories, Inc.
(SBCL), a provider of diagnostic laboratory services, from August 1992 to
September 1995. As President of SBDS, Mr. Stoughton had responsibility for SBCL,
SmithKline Beecham Clinical Laboratories International and SBDS's genetic
testing and point-of-care testing projects. In addition, Mr. Stoughton served as
Chief Executive Officer and Vice Chancellor for Health Affairs of Duke
University Hospital from 1991 to 1992, Chief Executive Officer of Toronto
Hospital in Toronto, Canada from 1981 to 1991, Chief Operating Officer of
Brigham and Women's Hospital in Boston from 1980 to 1981 and Chief Executive
Officer of Peter Bent Brigham Hospital in Boston from 1978 to 1980. Mr.
Stoughton holds a B.S. in Chemistry from St. Louis University and a M.B.A. from
the University of Chicago. He is currently a director of Sun Life Assurance
Company of Canada, a financial services company, and Biomira, Inc., a
pharmaceutical company.
Thomas H. Grove, Executive Vice President--Chief Technology Officer,
Secretary and Director. Dr. Grove has served as our Executive Vice President--
Chief Technology Officer, Secretary and as one of our directors since our
formation in July 1996. From April 1984 to July 1996, he served in a number of
management positions at SmithKline Beecham Clinical Laboratories, Inc. involving
research and development activities, including the position of Vice President of
Scientific Affairs from January 1991 to July 1996, where, among other things, he
was in charge of National Quality Control and Quality Assurance for SBCL. Dr.
Grove has received a number of awards, including a NATO Science Fellowship to
attend Oxford University from 1978 to 1979. He was also named Young Investigator
of the Year in 1980 by the American
-43-
<PAGE>
Association for Clinical Chemistry and was elected to the National Academy of
Clinical Biochemistry in 1977. Dr. Grove holds a B.S. in Biology from SUNY-
Albany and a Ph.D. in Biochemistry from Syracuse University.
James R. Koch, Chief Financial Officer, Treasurer, Executive Vice
President and Director. Mr. Koch has served as our Chief Financial Officer,
Treasurer, Executive Vice President and as one of our directors since July 1998.
Prior to joining us, Mr. Koch served as Vice President and Chief Financial
Officer of ILEX Oncology, Inc., a company which develops oncology drugs, from
August 1996 to July 1998. In addition, Mr. Koch served as Vice President,
Finance and Chief Financial Officer for two start-up specialty pharmaceutical
companies, Symphony Pharmaceuticals, Inc., from September 1993 to August 1996,
and Neose Pharmaceuticals, Inc., currently Neose Technologies, Inc., from
September 1991 to September 1993. His prior experience also includes ten years
in senior financial management positions with G.D. Searle Pharmaceutical, a
manufacturer of pharmaceutical products. Mr. Koch holds a B.S. in Mechanical
Engineering from General Motors Institute and a M.S. from the Krannert School of
Management at Purdue University.
Anthony P. Brenner, Director. Mr. Brenner has served as one of our
directors since November 1996. Since January 1998, he has served as a Managing
Director with Crosslink Capital, a venture capital firm, where he oversees
investment activities in the information and business services industries.
Prior to that, Mr. Brenner served as Senior Managing Director of Advanta
Partners LP, a private equity investment partnership, and as a member of the
Board of Directors of Advanta Corporation, a financial services company, from
1992 to 1996. In addition, since 1989 Mr. Brenner has served as President of
Cedar Point Partners, a private equity investment partnership. Mr. Brenner
earned a B.A. from Yale University and an M.B.A. from Stanford University.
William F. Flatley, Director. Mr. Flatley has served as one of our
directors since November 1996. Since July 1997, he has served as the President
and Chief Executive Officer of Executive Health Group, a provider of preventive
healthcare services to corporations. From 1980 to December 1994, he held a
number of senior management positions with Bristol-Myers Squibb Corporation, a
pharmaceutical company, including President of a multi-division medical device
business, the Health Care Group, and President of the Drackett Company, a
household products manufacturer. Mr. Flatley retired from Bristol-Myers Squibb
at the end of 1994 but continued to provide the company with certain consulting
services after his retirement. Mr. Flatley obtained a B.S. from Villanova
University and a M.B.A. from the Wharton School of the University of
Pennsylvania.
Kenneth N. Kermes, Director. Mr. Kermes has served as one of our
directors since February 1997. Since June 1998, he has served as a principal of
Riparian Partners Limited and of Bay View Equity Partners, two related
investment banking and private equity investment partnerships. Prior to that, he
served as Vice President of Business and Finance for the University of Rhode
Island from December 1994 to June 1998 and as Chief Financial Officer for
SmithKline Beecham Corporation from October 1986 to July 1989 and as Senior Vice
President and Group Directoe of Corporate Development from July 1989 to 1991.
From 1991 to 1994, Mr. Kermes was a consultant and an investor in the venture
capital industry. Mr. Kermes obtained a B.A. from Amherst College and attended
the New York University Graduate School of Business and the Harvard Business
School Advanced Management Program. In addition to Careside, Mr. Kermes serves
as director of four private, closely held manufacturing companies in the
Northeast.
C. Alan MacDonald, Director. Since 1999, Mr. MacDonald has served as
President of the Club Management Co., LLC. Prior to that he has served as one
of our directors since November 1996. Since October 1997, Mr. MacDonald has
served as a Managing Director of Directorship, Inc., a consulting firm
specializing in corporate governance issues. Prior to that, he served as General
Partner of the Marketing Partnership, Inc., a full service marketing consulting
firm, from January 1995 to July 1997 and as an acquisitions consultant with the
Noel Group, a venture capital firm, from July 1994 to December 1994.
In addition, he served as Chairman and Chief Executive Officer of Lincoln Snacks
Co., a caramelized popcorn snack company, from September 1992 to July 1994.
Mr. MacDonald holds a B.S. in Hotel Administration from Cornell University and
is a member of the Cornell Society of Hotelmen and the Dean's Advisory Committee
at Cornell. Mr. MacDonald is also a director of Lincoln Snacks Co., Lord Abbot,
J.B. Williams and Fountainhead Water Co.
Diana Mackie, Director. Ms. Mackie has served as one of our directors
since February 1997. As of January 24, 2000, Ms. Mackie has accepted the
position to co-lead the merger integration process for Glaxo SmithKline. From
June 1999 to January 21, 2000, she held the position of Vice President and
Director, Category Management, Dermatologicals, Phytomedicines and Vitamins,
SmithKline Beecham Consumer Healthcare (SBCH). From October 1997 to May 1999,
she held the position of Vice President for Strategy and Business Development at
SmithKline Beecham Healthcare Services, the business development division of
SmithKline Beecham Corporation, a position she has held since October 1997,
where her
-44-
<PAGE>
responsibilities include developing business plans, long-range strategy and
negotiating external alliances and investments. Prior to that, Ms. Mackie served
as Vice President, Group Business Initiatives for SBHS from November 1996 to
October 1997. From March 1996 to November 1996, she was General Manager of
Diversified Prescription Delivery, a pharmaceutical mail services company and a
wholly-owned subsidiary of Diversified Pharmaceutical Services, a pharmaceutical
benefit management group. From March 1993 to March 1996, she served as Vice
President, Strategy Development, SmithKline Beecham Pharmaceuticals, a
pharmaceutical company. Ms. Mackie holds a B.S. in Chemistry from the University
of Illinois, a M.B.A. from The Massachusetts Institute of Technology Sloan
School of Management and a M.S. in Polymer and Fiber Engineering from The
Massachusetts Institute of Technology.
Philip B. Smith, Director. Mr. Smith has served as one of our directors
since November 1996. Since June 1998, Mr. Smith has served as a Vice Chairman of
Laird & Co., LLC, a merchant bank. In addition, from 1991 until August 1998, Mr.
Smith served as a Vice Chairman with Spencer Trask Securities Incorporated, an
investment banking firm. Mr. Smith served in a number of other senior management
positions. From June 1986 to June 1988, Mr. Smith served as Managing Director of
Prudential Securities, an investment firm, in its merchant bank division. From
December 1967 to December 1972, Mr. Smith served as President and Chief
Executive Officer of Citicorp Venture Capital, a venture capital company which
he founded. Mr. Smith currently serves on the board of directors of Movie
Gallery, Inc., Digital Video Systems, Inc., and KLS Enviro Resources, Inc. Mr.
Smith has a B.S.E. from Princeton University and a M.B.A. from the Harvard
Business School.
Key Employees
Kenneth Asarch, Vice President--Quality Systems and Regulatory Affairs.
Dr. Asarch has served as our Vice President--Quality Systems and Regulatory
Affairs since November 1996. From June 1995 to October 1996, Dr. Asarch served
as Director of Regulatory Affairs for SmithKline Beecham Clinical Laboratories,
Inc. and SmithKline Beecham Diagnostics Systems Co. Prior to that, he served as
Director of Regulatory Affairs, Quality Assurance and Clinical Affairs with
Diagnostic Products Corporation, an immuno-diagnostic testing company, from
1987 to 1995, where his duties included overseeing the FDA regulatory clearance
and approval process for approximately 150 blood testing products. Dr. Asarch
holds a B.S. in Biochemistry from the University of California at Los Angeles
and doctoral degrees in both Clinical Pharmacy (Pharm.D.) and Pharmaceutical
Sciences (Ph.D.) from the University of Southern California.
Grant Frazier, Vice President--Marketing. Mr. Frazier has served as
our Vice President-Marketing since November 1999. Prior to joining us, Mr.
Frazier served as Vice President-Marketing & Business Development at Mobile
Technology Inc., a provider of magnetic resonance imaging, lithotripsy and
cancer therapy services. Mr. Frazier joined MTI in December 1991 and was
responsible for developing the first mobile radiation therapy cancer care
service deployed within the United States. He led this strategic business unit
until August 1998 before assuming his corporate marketing and business
development responsibilities. Mr. Frazier holds a B.S. in Industrial Engineering
from Stanford University and an M.B.A. from UCLA's Anderson School of
Management.
Dennis E. Rieger, Senior Vice President--Information Technology and
Chief Information Officer. Mr. Rieger joined us in December 1999. Mr. Rieger's
professional experience includes over 28 years in the high technology products
industry. Mr. Rieger is also serving as President and CEO of Advanced Medical
Information Technologies (AdMIT), a company he founded in 1992 that developed a
mobile, bedside clinical information system, and a new universal medical and
laboratory device data acquisition system. Prior to AdMIT, Mr. Rieger served as
President and Chief Operating Officer of Compare Data Systems, an insurance and
telecommunications software company, from 1987 to 1992; President of TRG, Inc.,
a technology based consulting and venture funding firm, from 1981 to 1987; and
held several management positions in research and development, strategic
planning and marketing at Apple Computer, Hewlett Packard and Procter and Gamble
from 1971 to 1981. Mr. Rieger has a B.Sc. in Computer Information Science, with
honors, from California State University at Sacramento, and served with the U.S.
NAVY. Mr. Rieger is also serving on the board of directors of two companies, an
embedded software products company and a publishing company, and is one of the
Industry Advisory Board members for the new Biomedical Engineering
Interdepartmental program at the UCLA School of Engineering and Applied Science.
Sandra P. Twyon, Vice President--Operations. Ms. Twyon joined us in
January 2000. Prior to that she held positions as Vice President for Patient
Services with the Mercy Health System in Pittsburgh, PA (1994-1999); Vice
President for Nursing at the Toronto Hospital in Toronto, Canada (1989-1993)
and Chairman of Nursing at Tufts New England Medical Center in Boston, MA
(1977-1989). In addition she was President and founder of the Center for Case
Management (1989-1992), an original developer of critical pathways which
consulted widely throughout the U.S. and Canada. Ms. Twyon received a B.S.
Degree from the College of Saint Rose and holds an M.S. from Boston College.
-45-
<PAGE>
Marija N. Valentekovich, Vice President--Manufacturing. Dr.
Valentekovich has served as our Vice President--Manufacturing since January 1998
when she came out of retirement to join us. Before that, Dr. Valentekovich
served as a Production Manager with Diagnostic Products Corporation from January
1989 to July 1997. Dr. Valentekovich received a M.S. in Chemical Engineering and
a Ph.D. in Physical Organic Chemistry, using radioisotope techniques, from the
University of Zagreb, Croatia.
Agreement Relating to Election of Directors
Each of our directors was nominated and elected pursuant to the terms
and conditions of a stockholders' agreement we entered into with our
stockholders and warrantholders in connection with two private placements of our
common stock in 1997 and 1998. Pursuant to this stockholders' agreement,
SmithKline Beecham Corporation was granted the right to nominate an individual
to our Board of Directors to serve as its representative. Spencer Trask
Securities Incorporated was also granted the right in the stockholders'
agreement to nominate one individual to our Board of Directors to serve as its
representative. Ms. Mackie was nominated as SmithKline's representative and Mr.
Smith as Spencer Trask's representative. Mr. Stoughton and Dr. Grove were also
nominated and elected to our Board of Directors pursuant to this stockholders'
agreement. In addition, the stockholders' agreement required that three
individuals who are independent of us and hold no more than five percent of our
common stock serve on our Board of Directors. The number of directors permitted
by the stockholders' agreement was increased from seven to nine with the consent
of Spencer Trask as called for in the stockholders' agreement. This
stockholders' agreement expired by its terms June 16, 1999.
Classified Board of Directors
The Board of Directors is divided into three classes. Each class
contains three directors. Directors within each class are elected to serve
three-year terms and one-third of the directors sit for election at each annual
meeting of our stockholders. Mr. Koch, Mr. Kermes and Mr. Smith serve in the
class whose term expires in 2000. Dr. Grove, Mr. Flatley and Ms. Mackie serve in
the class whose term expires in 2001. Mr. Stoughton, Mr. Brenner and Mr.
MacDonald serve in the class whose term expires in 2002. A classified board of
directors may have the effect of deterring or delaying any attempt by any group
to obtain control of us by a proxy contest since such third party would be
required to have its nominees elected at two separate annual meetings of our
Board of Directors in order to elect a majority of the members of our Board of
Directors. See "Description of Capital Stock--Takeover Protection and Certain
Charter and By-Law Provisions."
Director Compensation
Our non-employee directors receive an annual fee of $5,000 payable
semi-annually, plus $1,000 for each Board of Directors or committee meeting they
attend in person and $500 for those meetings they attend telephonically. Ms.
Mackie is precluded by SmithKline policy from receiving any fees or stock
options for her service as a director. We reimburse all reasonable expenses
incurred by the directors in attending Board of Directors or committee meetings.
In addition, the non-employee directors, other than the SmithKline
representative, Ms. Mackie, participate in our 1996 Incentive and Non-Qualified
Stock Option Plan. For each year prior to our initial public offering that Mr.
Brenner, Mr. Flatley, Mr. Kermes, Mr. MacDonald and Mr. Smith served as
directors, we granted each an annual option to purchase 2,163 shares of common
stock at the then applicable market price. The options granted after the end of
1996 were issued at $5.20 per share. The options granted after the end of 1997
were issued at $6.76 per share. The options granted after the end of 1998 were
issued at $7.50 per share. Options granted to non-employee directors for 1999
and beyond will be made under our 1998 Director Stock Option Plan. Under our
1998 Director Stock Option Plan, we will grant each non-employee director an
annual option to purchase 2,000 shares of common stock at the then applicable
market price. See " --Stock Option Plans" and "Certain Transactions."
Committees of the Board of Directors
The Compensation Committee of the Board of Directors presently consists
of Mr. Brenner, Ms. Mackie and Mr. Smith. The Compensation Committee makes
recommendations to the Board of Directors concerning salaries and incentive
compensation for our officers and employees other than our Chief Executive
Officer, whose compensation is determined by the Board of Directors after
consultation with the Compensation Committee. The Audit Committee of the Board
of Directors presently consists of Mr. Flatley, Mr. Kermes and Mr. MacDonald.
The Audit Committee reviews our financial statements and accounting practices,
makes recommendations to the Board of Directors regarding the selection of
independent auditors and reviews the results and scope of all audits and other
services provided by our independent auditors. The Nominating
-46-
<PAGE>
Committee of the Board of Directors presently consists of Mr. Flatley, Mr.
MacDonald and Mr. Smith.
Compensation Committee Interlocks and Insider Participation
Mr. Brenner, Ms. Mackie and Mr. Smith, the members of our Compensation
Committee, have not been, at any time since our formation, an officer or
employee of ours. In addition, none of our executive officers serves as a member
of the board of directors or compensation committee of any entity that has one
or more executive officers serving on our Board of Directors or Compensation
Committee. Cedar Capital Investors, an entity owned and controlled by Mr.
Brenner, provided certain financial consulting services to us immediately
following our formation and up to the completion of our private placement of
common stock in 1997. As consideration for such services, we reimbursed Cedar
Capital's out-of-pocket expenses and granted Cedar Capital an option to purchase
1,154 shares of common stock at an exercise price of $.052 per share. Ms.
Mackie, who is currently co-leading the merger integration process for Glaxo
SmithKline, was originally nominated to serve on the Board of Directors by
SmithKline Beecham Corporation pursuant to the terms of a stockholders'
agreement by and among us and our stockholders and warrantholders prior to the
offering. Mr. Smith, who served as a Vice Chairman of Spencer Trask Securities
Incorporated until August 1998, was nominated to serve on the Board of Directors
by Spencer Trask Securities and was formerly a partner in Exigent Partners L.P.
See "--Agreement Relating to Election of Directors" and "Certain Transactions."
Executive Compensation
The following table sets forth information regarding compensation
awarded to, earned by, or paid to our Chief Executive Officer and executive
officers whose salary and bonus exceeded $100,000 for all services rendered to
us during the years ended December 31, 1997, 1998 and 1999. No executive officer
who would otherwise have been includable in such table on the basis of salary
and bonus earned during the years ended December 31, 1997, 1998 and 1999 has
resigned or otherwise terminated employment during such years.
-47-
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards;
------------
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus(1) Options Compensation(2)
--------------------------- ---- ------ -------- ------- ---------------
<S> <C> <C> <C> <C> <C>
W. Vickery Stoughton 1999 $ 211,788 -- -- $20,797
Chairman of the Board of Directors and Chief 1998 $ 203,481 -- 9,135 $20,797
Executive Officer 1997 $ 195,281 $ 27,000 158,655 $20,547
Thomas H. Grove. 1999 $ 168,345 -- -- $ 8,603
Executive Vice President--Research 1998 $ 163,880 -- 5,529 $ 8,603
and Development 1997 $ 154,013 $ 25,000 79,327 $ 8,353
James R.Koch 1999 $ 162,000 -- 1,202 $ 5,000
Chief Financial Officer, Treasurer 1998 $ 64,242 -- 40,384 $15,000
Executive Vice President
</TABLE>
______________
(1) Bonus earned in 1997 and paid in 1998.
(2) Includes $4,750 contributed under our 401(k) Plan for the benefit of each
of Mr. Stoughton and Dr. Grove in 1997 and $5,000 for the benefit of each
of Mr. Stoughton and Dr. Grove in 1998 and 1999. Also includes $15,797 and
$3,603 of premiums paid for life insurance for Mr. Stoughton and Dr. Grove,
in each year, respectively.
Stock Options Granted to Executive Officers During 1999
The following table sets forth information regarding options for the
purchase of common stock that were granted to certain executive officers during
the year ended December 31, 1999:
Option Grants in 1999
<TABLE>
<CAPTION>
Number of Percent of Potential Realizable
Shares Total Value at Assumed
Underlying Options Exercise or Annual Rates of Stock
Options Granted Base Price Price Appreciation for
Granted to Employees Per Share Expiration Option Term (4)
---------------
Name (1) in 1999 (2) (3) Date 5% 10%
---- --- ----------- --- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
James R. Koch..................... 1,202 1.4% $ 8.01 01/10/09 $ 6,055 $ 15,345
</TABLE>
___________
(1) All options were granted before our initial public offering and were under
our 1996 Incentive and Non-Qualified Stock Option Plan. The listed grant
vested or will vest 20% on December 31, 1999, 2000, 2001, 2002 and 2003.
(2) Based on an aggregate of 84,202 shares of common stock underlying options
granted to employees in 1999.
(3) Options were granted at fair market value, as determined by our Board of
Directors, based on all factors available to them on the date of grant.
These factors included our history and prospects, as well as the history
and prospects of our industry, an assessment of our past and present
operations and financial performance, the prospects for our future
earnings, the present state of our development, the possibility at the time
of an initial public offering by us and market prices of publicly traded
common stocks of comparable companies in recent periods.
(4) Assumes stock price appreciation of 5% and 10% compounded annually from the
date the respective options were granted to their expiration date, as
mandated by the rules of the Securities and Exchange Commission, and does
not represent our estimate or projection of the future appreciation of our
stock price. Actual gains, if any, on stock option
-48-
<PAGE>
exercises and common stock holdings, are dependent upon the timing of such
exercise and the future performance of the common stock and may be greater
or less than the potential realizable value set forth in the table.
The following table sets forth certain information regarding options
held as of December 31, 1999 by certain executive officers. None of such
executive officers exercised options during the year ended December 31, 1999.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised
Underlying Unexercised In-The-Money Options at
Options at Fiscal Year-End Fiscal Year-End (1)
-------------------------- -------------------
Name Exercisable Unexercisable Exercisable Unexercisable
----- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
W. Vickery Stoughton........................................ 157,403 10,387 $678,692 $30,596
Dr. Thomas H. Grove......................................... 79,085 5,771 $353,463 $18,382
James R. Koch............................................... 36,265 5,321 $108,133 $14,709
</TABLE>
__________
(1) The value of the underlying securities is based on the $9.75 per share
closing price of the Company's common stock on December 31,1999 (the last
trading day in 1999), minus the applicable per share exercise price.
Employment Agreements
We are party to employment agreements with each of Mr. Stoughton, Dr.
Grove and Mr. Koch. On the anniversary date of each employment agreement, the
agreement is automatically extended for three-year rolling terms unless either
party, at least 60 days prior to the annual extension date, gives notice that
the employment agreement shall not be extended or otherwise terminates the
agreement. Mr. Stoughton, Dr. Grove and Mr. Koch may resign upon 90 days notice
to us. Under the employment agreements, each of Mr. Stoughton, Dr. Grove or Mr.
Koch will be entitled to have his base salary, bonus and stock options continue
to accrue through the end of the then current term if he is terminated without
cause, or becomes disabled. "Cause" includes disloyalty, dishonesty, fraud,
conviction of a felony or the disclosure of confidential information. He will
also be entitled to such amounts if he terminates his employment agreement as a
result of a reduction in his duties, our breach of the employment agreement or a
transaction resulting in our sale. The employment agreements prohibit Mr.
Stoughton, Dr. Grove and Mr. Koch from engaging in the point-of-care diagnostics
business during the term of such employment agreements. However, if we terminate
employment without cause or if the employee terminates his employment following
our breach of the agreement or because of a change of control, the non-compete
clause terminates.
Under their respective employment agreements, Mr. Stoughton serves as
our Chairman of the Board of Directors and Chief Executive Officer, and
currently earns an annual base salary of $260,000, Dr. Grove serves as Executive
Vice President--Research and Development, and currently earns an annual base
salary of $200,000, and Mr. Koch serves as our Chief Financial Officer,
Treasurer and Executive Vice President, and currently earns an annual base
salary of $200,000. In addition, Mr. Koch received a $15,000 relocation
allowance in connection with entering into his employment agreement. At the
discretion of our Board of Directors, an annual bonus may be paid to Mr.
Stoughton, Dr. Grove and Mr. Koch. In each case, we may agree to future raises
and other compensation for each of Mr. Stoughton, Dr. Grove and Mr. Koch. In
addition, Mr. Stoughton, Dr. Grove and Mr. Koch are eligible to receive stock
options pursuant to the 1996 Incentive and Non-Qualified Stock Option Plan, the
1996 Key Executive Stock Option Plan and the 1998 Incentive and Non-Qualified
Stock Option Plan. Such executive officers are also entitled to reimbursement
for certain travel and entertainment expenses incurred in connection with the
performance of their duties.
Stock Option Plans
We currently have four stock option plans in place: the 1996 Incentive
and Non-Qualified Stock Option Plan, the 1996 Key Executive Stock Option Plan,
the 1998 Incentive and Non-Qualified Stock Option Plan and the 1998 Director
Stock Option Plan. These plans provide for the grant of stock options to
purchase up to 1,201,923 shares of common stock. As of April 13, 2000, we have
granted options to purchase 604,185 shares of common stock under these plans. Of
these, options to purchase 585,316 shares are outstanding. The weighted average
exercise price of options outstanding under the plans is $6.46. As of April 13,
2000, we have granted Mr. Stoughton, Dr. Grove, Mr. Koch, Dr. Asarch, and Dr.
Valentekovich options to purchase 187,790, 94,856, 51,586, 26,875 and 13,269
shares of common stock, respectively, at a weighted average exercise price of
$5.69. We have also granted options to purchase an aggregate of 30,282 shares of
-49-
<PAGE>
common stock to non-employee directors for their service as directors. We may
grant options to purchase 597,738 shares of common stock in the future under the
Plans.
The purpose of our stock option plans is to promote our long-term
growth and profitability by providing key personnel with incentives to improve
stockholder value and to contribute to our growth and financial success. The
1996 Key Executive and Incentive and Non-Qualified Stock Option Plans have been
exhausted. All future grants will be under the 1998 Incentive and Non-Qualified
Stock Option Plan and 1998 Director Plan. Options may be awarded under the 1998
Incentive and Non-Qualified Stock Opton Plan to our executive officers,
employees and consultants. Only non-employee directors are eligible for awards
under the 1998 Director Stock Option Plan.
Our option plans are administered by our Board of Directors or a
committee of the Board. They decide the types of options to be granted, the
number of shares to be covered, the exercise price of each stock option, the
expiration date of each stock option, the vesting schedule and any other
material provisions.
Non-employee directors have received automatic, fully-vested option
grants under the 1996 Incentive and Non-Qualified Stock Option Plan. Each year,
we automatically grant each non-employee director an option to purchase 2,000
shares of common stock under the 1998 Director Stock Option Plan. Director
options always have a fair market value exercise price. Such options vest at the
end of the year of service as a director to which the option relates. All
director options under the 1998 Director Stock Option Plan generally will be
exercisable for a period of five years.
Option grants to our employees may take the form of either incentive
stock options, which are intended to qualify for preferential tax treatment
under Section 422 of the Internal Revenue Code, or non-qualified stock options,
which do not qualify for such treatment. Directors may receive only
non-qualified stock options. The exercise price of an incentive stock option
generally must not be less than the fair market value of the common stock on the
date the option is granted. The exercise price of a non-qualified stock option
will be stated in the option agreement governing the non-qualified stock option
and is not required by the option plans to be the fair market value of the
common stock on the date the option is granted.
In the event of any stock dividend, stock split, reverse stock split,
recapitalization or reclassification, involving us, appropriate proportional
adjustments will be made in the number of shares reserved for issuance under the
option plans, and the number, kind and price of shares covered by outstanding
grants. The option plans also provide for the ability of the Board of Directors
or a committee to accelerate the exercise date of any options granted
thereunder. Options may not be exercised more than 10 years after the date of
grant. In some cases, shorter periods apply. Shares underlying options that
lapse or expire are returned to the pool of shares available under the plans.
Grants under any option plan may only be made during the 10 year period after
the plan's adoption.
Our stock option plans may be amended by the Board of Directors so long
as such amendment does not change the terms of any outstanding option without
the affected optionee's consent or increase the number of shares that are the
subject of the plans.
Employee Stock Purchase Plan
Our Board of Directors adopted an Employee Stock Purchase Plan in
November 1998. This plan qualifies as an employee stock purchase plan under
Internal Revenue Code Section 423 and became effective upon completion of our
initial public offering. It allows employees to purchase, in the aggregate, up
to 150,000 shares of our common stock at a discount through payroll deductions.
To date, 6,341 of such shares have been purchased. The purchase price per share
offered under the Employee Stock Purchase Plan became 85% of the lesser of the
fair market value per share of common stock on the first or last trading day of
the quarter. Stock purchased will not be subject to taxes until sold. The plan
is designed to encourage and facilitate the purchase of common stock by our
employees and thereby to provide our employees with both a personal stake in our
business and a long range inducement to remain our employee. Each of our
full-time employees is eligible to participate in the Employee Stock Purchase
Plan.
The number and price of shares of common stock available for purchase
under the plan is subject to adjustment in the event the outstanding shares of
common stock are increased or decreased through stock dividends,
recapitalizations, reorganizations or similar changes. The plan is to be
administered by our Board of Directors or a committee of the Board of Directors.
-50-
<PAGE>
All funds we hold or receive under the Employee Stock Purchase Plan may
be used for any corporate purpose until applied to the purchase of shares of
common stock or refunded to employees and will not be segregated from our
general assets. We will pay all fees and expenses incurred (excluding individual
federal, state, local or other taxes) in connection with the Employee Stock
Purchase Plan.
Unless stockholder approval is required by law, the Board of Directors
or a committee of the Board of Directors has the right to amend, modify or
terminate the Employee Stock Purchase Plan at any time without notice, provided
that no employee's then existing rights are adversely affected without his or
her consent.
401(k) Plan
We have a 401(k) Salary Reduction Plan and Trust for eligible
employees. Eligible employees may contribute up to 15% of their current
compensation, up to a statutorily prescribed annual limit, to the 401(k) plan.
Each participant is fully-vested in his or her deferred salary contributions. A
participant's contributions are held in trust and invested pursuant to his or
her directions from among 20 or more investment funds made available under the
401(k) plan. We may make matching contributions of 50% of each participant's
deferred salary contributions, up to a maximum of 4% of such participant's
compensation. Our matching contributions vest after a participant has completed
three years of service with us, or earlier upon attainment of age 55, death
while in service, retirement for disability or termination of the 401(k) plan.
Payment of 401(k) plan benefits are made in a single lump-sum payment.
Distribution of a participant's vested interest in his or her account generally
occurs after a participant's termination of employment for any reason, including
retirement, death or disability.
-51-
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of common stock as of April 13, 2000, by (1) each person or
group of affiliated persons known by us to be the beneficial owner of more than
5% of our outstanding common stock, (2) each of our directors, (3) each of our
executive officers and (4) all of our executive officers and directors as a
group.
The number of shares of common stock actually owned by each principal
stockholder is listed in Column A, entitled "Shares of common stock." In
addition, each principal stockholder is deemed to be the beneficial owner of
common stock that such stockholder can acquire upon the exercise of warrants or
options on or within 60 days after April 13, 2000. These option and warrant
shares are listed separately in Column B, entitled "Shares Underlying
Options/Warrants." The total of these two columns is then set forth in Column C.
Each principal stockholder's maximum potential percentage ownership is in Column
D. Unless otherwise noted, we believe that all persons named in the table have
sole voting and investment power with respect to all shares beneficially owned
by them.
<TABLE>
<CAPTION>
(C)
(A) (B) Total (D)
Shares of Shares Beneficial Ownership Total
Common Underlying (Column A plus Percentage
Name of Beneficial Owner Stock Options/Warrants Column B) Owned
------------------------- ------ ----------------- --------- -----
<S> <C> <C> <C> <C>
Kevin Kimberlin.................................. 765,891(1) 336,349(2) 1,102,240 12.1%
c/o Spencer Trask Securities Incorporated
535 Madison Avenue, 18th Floor
New York, New York 10022
SmithKline Beecham Corporation................... 229,808 561,122(3) 790,930 8.5%
One Franklin Plaza
Philadelphia, Pennsylvania 19101
W. Vickery Stoughton............................. 285,005 161,405 446,410 5.0%
c/o Careside, Inc.
6100 Bristol Parkway
Culver City, California 90230
Dr. Thomas H. Grove.............................. 205,294 81,087 286,381 3.2%
c/o Careside, Inc.
6100 Bristol Parkway
Culver City, California 90230
Philip B. Smith.................................. 94,314(4) 115,260(5) 209,574 2.4%
James R. Koch.................................... 338 38,506 38,844 *
William F. Flatley............................... 15,470 6,490 21,962 *
Anthony P. Brenner............................... 10,769 6,490 17,260 *
Kenneth Kermes................................... 2,959 4,326 7,285 *
Diana Mackie..................................... 4,438 -- 4,438 *
C. Alan MacDonald................................ -- 6,490 6,490 *
All executive officers and directors as a group 617,434 421,204 1,038,638 11.3%
(9 persons)......................................
</TABLE>
________________
* Represents less than 1% of our outstanding shares of common stock.
(1) Includes 371,090 shares of common stock held by Oshkim Limited Partners,
L.P., and 339,041 shares of common stock held by Kevin Kimberlin
Partners, L.P., both of which are limited partnerships of which Mr.
Kimberlin is the general partner, and 55,760 shares of common stock held
by Spencer Trask Securities Incorporated of which Mr. Kimberlin is
Chairman and exercises voting control.
(2) Includes 20,517 shares of common stock issuable upon the exercise of
warrants held by Oshkim Limited Partners, L.P., and 38,095 shares of
common stock issuable upon the exercise of warrants held by Kevin
Kimberlin Partners, L.P. Also includes 277,737 shares of common stock
issuable upon the exercise of warrants owned by Spencer Trask Securities
Incorporated of which Mr. Kimberlin is Chairman and exercises voting
control. See "Certain Transactions--Financing Activities."
(3) Includes 325,828 shares of common stock underlying shares of Series A
Convertible Preferred Stock, and underlying warrants which will be
received if the Series A Convertible Preferred Stock is converted, owned
by S.R. One, Limited, an affiliate of SmithKline Beecham Corporation.
Also includes 235,294 shares of common stock issuable upon exercise of
bridge loan warrants owned by S.R. One, Limited.
(4) Includes 50,952 shares of common stock owned by Private Equity
Partnership, of which Mr. Smith is the general partner.
(5) Includes 108,771 shares of common stock issuable upon exercise of
warrants held by Private Equity Partnership.
-52-
<PAGE>
CERTAIN TRANSACTIONS
SmithKline Beecham
In July 1996, we entered into a letter of intent with SmithKline
Beecham Corporation and SmithKline Beecham Diagnostics Systems Co., an affiliate
of SmithKline Beecham Corporation, with respect to their point-of-care
development program. Pursuant to that letter of intent, SmithKline Beecham
Corporation supported the point-of-care development program by funding $1.8
million of the program's operating expenses for the transition period from July
1, 1996 through October 31, 1996. This funding has been reflected in the
Statement of Operations of the predecessor business for the ten months ended
October 31, 1996. Pursuant to an asset purchase agreement, SmithKline Beecham
Diagnostics Systems Co. and SmithKline Beecham Clinical Laboratories, Inc., sold
us certain fixed and intangible assets used in connection with the point-of-care
development program. As consideration for the purchase of the assets, we issued
to SmithKline Beecham Diagnostics Systems Co. 5% of our total common stock
outstanding at that time. This stock was later transferred to SmithKline Beecham
Corporation. Ms. Mackie, currently co-leader of the merger integration process
for Glaxo SmithKline, has served as one of our directors since February 1997 as
a representative of SmithKline Beecham Corporation. SmithKline Beecham
Corporation is one of our significant stockholders.
In addition to the operating funding provided during the transition
period, SmithKline Beecham Corporation made available to us a $1.0 million
credit facility at an interest rate of 8% per annum. We used the $1.0 million to
fund research and development and to establish our production facility by
funding capital purchases, rental payments for our facilities in Culver City,
California and operating expenses. In January 1997, the SmithKline Beecham
Corporation credit facility was converted into an additional 2% of our
outstanding common stock simultaneously with the initial closing of our 1997
private placement of common stock.
Simultaneously with the closing of the asset purchase, we entered into
a distribution and supply agreement with SmithKline Beecham Clinical
Laboratories, Inc. which gave SBCL, an exclusive right, as a commercial
laboratory, to use and domestically distribute the Careside system within the
commercial laboratory industry and the non-exclusive rights to sell the Careside
system to hospitals and healthcare systems, other health care providers, managed
care organizations and insurers. The agreement also obligated SBCL, upon FDA
clearance or exemption of 25 specified tests, to purchase a minimum number of
Careside Analyzers and test cartridges from us for the first five years
following such FDA action. This contract went through an amendment in early 1999
and we were in discussions about contract initiation at the time SBCL was sold
to Quest Diagnostics. During the summer of 1999, discussions with Quest
Diagnostics were deferred as the Quest/SBCL merger and consolidation planning
took precedence over our contract negotiations. Furthermore, Quest Diagnostics
had not put into place the organization and authority to deal with our contract
until late December 1999. In January 2000, we reopened contract discussions with
Quest Diagnostics management. Those discussions are continuing. It is too early
to determine whether Quest Diagnostics will see the same opportunity that SBCL
envisioned, and we expect these discussions to continue for a number of months
before a final decision is made.
Under the distribution and supply agreement, SBCL, until December 31,
2000 or any earlier termination of the agreement, is to supply us with clinical
samples to enable us to validate tests for our research and development of
point-of-care products. We are to bear the cost of retrieving and transporting
the samples and conducting our comparative validation tests.
Under our distribution and supply agreement with SBCL, all intellectual
property rights to patents, trademarks or otherwise which are associated with
the marketing and development of point-of-care products remain with us although
we are to share rights and responsibilities with SBCL in the protection of these
rights.
Financing Activities
On December 2, 1996, in connection with the establishment of a $1
million working capital facility, we issued 557,601 shares of common stock to
Exigent Partners, L.P. for an aggregate purchase price of $98,995. The working
capital facility was arranged by Exigent Partners, L.P. to be provided to us in
the form of a $1.0 million irrevocable letter of credit from Citibank, N.A.,
secured by pledges of cash or cash equivalents by Exigent Partners, L.P. The
general partner of Exigent Partners, L.P. was Kevin Kimberlin, an affiliate of
Spencer Trask Securities Incorporated and one of our principal stockholders, and
the limited partners were Mr. Stoughton and Dr. Grove, two of our executive
officers and directors, and Mr. Smith, one of our directors. Of the 557,601
shares of common stock issued to Exigent Partners, L.P., Mr. Kimberlin took
-53-
<PAGE>
beneficial ownership of 426,850 shares of common stock, and Mr. Stoughton and
Dr. Grove took beneficial ownership of 36,802 and 18,958 shares of common stock,
respectively. We repaid all funds drawn under the facility and the letter of
credit, both of which have since terminated. Exigent Partners, L.P. was
dissolved and each of its partners received a pro rata distribution of shares of
common stock. See "Principal Stockholders."
In 1997 and 1998, we undertook two private placements of our common
stock, both of which were completed through Spencer Trask Securities
Incorporated. Spencer Trask received approximately $2.5 million in commissions
and expenses from the private placements, which generated aggregate net proceeds
to us of $19.0 million. Affiliates of Spencer Trask, including its employees,
received warrants to purchase 384,615 shares of common stock at $5.20 per share
in the 1997 private placement and warrants to purchase 340,237 shares of common
stock at $6.76 per share in the 1998 private placement. Warrants issued in
connection with both private placements will expire in June of 2002.
As partial consideration for its services in the 1997 private
placement, Spencer Trask was granted a right of first refusal to act as
underwriter or agent for any proposed public offering or any private placement
of our securities. Spencer Trask was also granted the right to purchase
securities in any such offering in which purchasers in the 1997 private
placement are entitled to preemptive rights under the stockholders' agreement or
in any sale of common stock by the former partners of Exigent Partners.
At the first closing of the 1997 private placement, we entered into an
investment banking agreement with Spencer Trask pursuant to which Spencer Trask
will receive a percentage, ranging from seven percent to two and one-half
percent, depending upon the size of the transaction involved, of the
consideration involved in any transaction we undertake with a person introduced
to us by Spencer Trask in the five years ending March 2002. The agreement also
provides for Spencer Trask, subject to certain terms and conditions, to act as
our exclusive representative in advising us with respect to executive
compensation benefits, insurance and retirement planning, providing us with
certain investment banking services and addressing our cash management needs.
Spencer Trask has waived all such rights relating to investment banking
services.
In connection with the 1997 and 1998 private placements, we entered
into a stockholders' agreement with each of our stockholders and warrantholders.
The stockholders' agreement included preemptive rights and provided for the
nomination and election of each of our current directors including Ms. Diana
Mackie. The stockholders' agreement terminated by its terms upon completion of
our initial public offering. See "Management-Agreement Relating to Election of
Directors."
In December 1997, Cedar Capital Investors, an entity owned and
controlled by Anthony P. Brenner, one of our directors, provided certain
financial consulting services to us in connection with the 1998 private
placement. In consideration for providing such services, Cedar Capital Investors
was reimbursed $6,651 for out-of-pocket expenses and received options to
purchase 1,154 shares of common stock at an exercise price of $.052 per share.
These options were exercised in the first quarter of 2000.
In July 1998, in connection with the relocation of James R. Koch, our
Chief Financial Officer, Treasurer and Executive Vice President, as well as one
of our directors, from Texas to the Los Angeles area in August 1998, we provided
a bridge loan to Mr. Koch, pursuant to a promissory note executed in our favor
by Mr. Koch, in the aggregate principal amount of $125,000. The bridge loan,
which was subject to an interest rate of 7.5% per annum, was paid in full by Mr.
Koch on September 21, 1998. As of that date, an aggregate of $125,911 in
principal and interest was owing under the promissory note.
In December 1998, we entered into a bridge financing with S.R. One,
Limited, a business trust controlled by SmithKline Beecham Corporation. For
consideration of $3.0 million cash, we issued S.R. One a $3.0 million note
payable bearing interest at 8%. In April 1999, S.R. One agreed to convert $1
million of the $3 million loan, together with accrued interest on the $1
million, upon consummation of our initial public offering, into shares of Series
A Convertible Preferred Stock. 162,914 shares of Series A Convertible Preferred
Stock were issued to S.R. One upon the conversion of the loan on June 16, 1999.
The conversion price was $6.375, which is 85% of the initial public offering
price per unit. Each share of Series A Convertible Preferred Stock is in turn
immediately convertible, at the option of the holder, into one share of our
common stock and one warrant to purchase an additional share of our common
stock. All accrued and unpaid dividends with respect to shares of Series A
Convertible Preferred Stock that are converted by S.R. One will be converted
into shares of common stock and warrants at $7.50 per share. The exercise price
and other terms of the warrant received on the conversion of the the Series A
Convertible Preferred Stock will be the same as the warrants sold in our initial
public offering. The remaining $2 million of the loan will mature in April 2000.
The annual interest rate on the remaining $2 million increased to
-54-
<PAGE>
10% on July 1, 1999. Since the remainder of the bridge loan was not repaid by
December 1, 1999, S.R. One has the option to convert all or any portion of the
remaining loan, plus accrued interest thereon, into shares of Series A
Convertible Preferred Stock. This Series A Convertible Preferred Stock will be
issued to S.R. One on the same basis as the Series A Convertible Preferred Stock
that was issued to S.R. One as part of the $1 million conversion. As of March
31, 2000, principal and interest owed to S.R. One, Limited was $2,226,520.
Conversion of that amount would result in additional Series A Preferred shares
representing 349,258 shares of common stock, assuming exercise of all warrants
issuable on conversion of such Series A Preferred Stock.
In connection with the bridge financing, we issued a warrant to S.R.,
One. The bridge warrant is exercisable for 235,294 shares of common stock. The
warrant has an exercise price of $6.375. The warrant is currently exercisable
and will expire June 16, 2003.
In June 1999, we completed our initial public offering of 2,000,000
units, comprised of one share of our common stock and one warrant to purchase an
additional share of our common stock. Our publicly traded common stock is listed
on the American Stock Exchange under the tiSker symbol "CSA", and our publicly
traded warrants under the symbol "CSA. WS".
In December 1999, we acquired Texas International Laboratories, Inc.
(TIL). TIL owned and marketed a proprietary hematology - testing device that we
have renamed the Careside H-2000. In connection with this acquisition, we issued
521,739 shares of our common stock. For additional information on the TIL
acqusition, see "Business - General."
In March 2000, we completed a private placement of 1,184,091 shares of
our common stock at $8.77 per share, raising a gross amount of $10.4 million.
Expenses of this transaction were approximately $840,000. Purchasers of those
privately placed shares also received contingent warrants to purchase 142,091
shares of our common stock if the closing price of our common stock on the
American Stock Exchange falls below $7.50 per share for 15 consecutive days
during the period from August 15, 2000 to November 15, 2000. Such warrants will
expire on December 15, 2000. The Company intends to use the proceeds of the
private placement to further support its sales and marketing programs, to build
inventory and provide working capital, and to support further product
development. The Company may also use a portion of the proceeds to repay the
remaining $2 million balance on the convertible loan from S.R. One, Limited, if
the loan is not converted to equity.
We consider the terms of all of the above-referenced transactions to be
at arm's length and reasonably equivalent to terms we could have obtained
through negotiations with unaffiliated third parties under similar economic
conditions. Any transactions undertaken in the future, including loans, we enter
into with any of our officers, directors and principal stockholders or their
affiliates, will be approved by a majority of the entire Board of Directors, and
will be on terms no less favorable to us than could be obtained from
unaffiliated third parties. See "Description of Capital Stock--Takeover
Protection and Certain Charter and By-Law Provisions."
-55-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of (1) 50,000,000 shares of common
stock, $.01 par value per share, and (2) 5,000,000 shares of preferred stock,
$.01 par value per share, of which there are 8,797,665 shares of common stock
and 162,914 shares of Series A Convertible Preferred Stock outstanding. The
following description of our capital stock is a summary and is qualified in its
entirety by the provisions of our Amended and Restated Certificate of
Incorporation and Amended (including the Certificate of Designations for our
Series A Convertible Preferred Stock) and Restated By-Laws, copies of which have
been filed as exhibits to the registration statement of which this prospectus
forms a part.
Units
Each unit sold in our initial public offering consisted of one share of
common stock and one warrant to purchase an additional share of common stock.
The units automatically separated on July 16, 1999, 30 days from the date of our
initial public offering. After that date, the common stock and warrants in the
units began trading separately.
Common Stock
The issued and outstanding shares of common stock are validly issued, fully
paid and non-assessable. Each holder of shares of common stock is entitled to
one vote for each share held of record and may not cumulate votes for election
of directors. The shares are not entitled to preemptive rights under applicable
law and will not be subject to redemption or assessment. Subject to the rights
and preferences of the holders of any preferred stock outstanding in the future,
upon our liquidation, dissolution or winding-up, the holders of shares of common
stock will be entitled to receive, pro rata, our assets which are legally
available for distribution to stockholders. In addition, subject to the rights
and preferences of the holders of any preferred stock outstanding in the future,
the holders of shares of common stock will be entitled to share ratably in
dividends as, if and when declared by our Board of Directors. We do not
anticipate that any dividends will be paid in the foreseeable future.
Series A Convertible Preferred Stock
The Series A Convertible Preferred Stock has a stated value equal to $7.50
per share. There are 162,914 shares of Series A Convertible Preferred Stock
outstanding. The Series A Convertible Preferred Stock will be preferred over
common stock in dividends and has a liquidation preference over common stock
equal to the stated value of the Series A Convertible Preferred Stock, plus all
accrued and unpaid dividends on the Series A Convertible Preferred Stock. Each
share of Series A Convertible Preferred Stock has one vote on all matters to be
voted on by the holders of the common stock and will vote with the holders of
the common stock as one voting group. The Series A Convertible Preferred Stock
has the right to vote as a separate class pursuant to applicable law and on any
action limiting the preferences or rights of the Series A Convertible Preferred
Stock, reclassifying the common stock or any other capital stock ranking junior
to the Series A Convertible Preferred Stock into any class of security ranking
senior to or the same as the Series A Convertible Preferred Stock, or increasing
the authorized number of shares of Series A Convertible Preferred Stock. The
Series A Convertible Preferred Stock bears a cumulative dividend, which shall
accrue if not declared by the Board of Directors, at an annual rate of 10% of
stated value.
Each share of Series A Convertible Preferred Stock is convertible at the
option of the holder into one share of common stock and a warrant to purchase
one additional share of common stock. All accrued and unpaid dividends with
respect to shares of Series A Convertible Preferred Stock that are converted
will be converted into units at $7.50 per share. The terms and conditions of the
warrants received on conversion of Series A Convertible Preferred Stock,
including its exercise price, are identical to the terms and conditions of the
warrants sold in the offering.
We have the right to redeem the Series A Convertible Preferred Stock at
any time for a per share amount equal to the sum of (a) $7.50, (b) any accrued
and unpaid dividends and (c) the greater of (i) $0.05 or (ii) the excess of the
average five day closing price of a share of common stock over $9.00.
Undesignated Preferred Stock
In addition to the common stock and the Series A Convertible Preferred
Stock, we are, without further action by stockholders, also authorized to issue
up to 4,837,086 shares of preferred stock. Our Board of Directors may determine
the
-56-
<PAGE>
timing, series, designation, and number of shares of preferred stock to be
issued, as well as the rights, preferences, and limitations of such shares,
including those relating to voting power, redemption, conversion, dividend
rights, and liquidation. The issuance of preferred stock could adversely affect
the voting power of the holders of common stock or have the effect of deterring,
delaying or preventing any attempt by a person, entity or group to obtain
control of us. We have no current plans to issue any shares of preferred stock.
Publicly Traded Warrants
Each warrant comprising part of the units sold in our initial public
offering entitles the holder to purchase one share of common stock at an
exercise price of $9.00. We may reduce the exercise price of the warrants for a
period of at least 20 days. We must give holders of warrants at least 15 days'
notice of such decrease, which notice may be in the form of a press release. The
warrants will generally be exercisable at any time until June 16, 2004, unless
earlier redeemed. The warrants are redeemable by us, in whole or in part pro
rata from all warrant holders, at a price of $0.05 per warrant, upon 30 days'
prior written notice, if the closing price defined in the warrant agreement,
which we describe below, per share of common stock for the ten consecutive
trading days immediately preceding the date of notice of redemption equals or
exceeds $14.00. We may give more than one notice of redemption. If given,
notices of redemption are required to be mailed by registered or certified mail
to record holders of warrants. If we give notice of our intention to redeem, a
holder will have the choice either to sell or exercise his or her warrants
before the date specified in the redemption notice or to accept the redemption
price. After the redemption date, there can be no exercise of the warrants that
were the subject of the redemption.
The public warrants were issued in registered form under a warrant
agreement between us and American Stock Transfer & Trust Company, as warrant
agent. The shares of common stock underlying the warrants, when issued upon
exercise of a warrant, will be fully paid and nonassessable. We 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. These adjustments will occur in the event
of a merger, consolidation, sale or conveyance of all of the capital stock or
substantially all of the assets of Careside, stock split or reverse stock split,
stock dividend, capital reorganization or reclassification of our common stock.
We have the option to issue fractional shares or cash for fractional shares upon
the exercise of a warrant. The holder of a warrant will not, by reason of owning
a warrant, possess any rights as our shareholder until he or she exercises the
warrant.
A warrant may be exercised upon surrender of the warrant certificate on or
before the expiration or redemption date of the warrant at the offices of the
warrant agent, with the form of "Election to Purchase" on the reverse side of
the warrant certificate completed and executed as indicated, accompanied by
payment of the exercise price (by certified or bank check payable to the order
of Careside, Inc.) for the number of shares with respect to which the warrant is
being exercised.
For a holder to exercise the warrants, there must be a current registration
statement in effect with the Securities and Exchange Commission and
qualification in effect under applicable state securities laws (or applicable
exemptions from state qualification requirements) with respect to the issuance
of common stock or other securities underlying the warrants. We have agreed to
use all commercially reasonable efforts to cause the registration statement, of
which this prospectus forms a part, to remain effective in anticipation of and
before the exercise of the warrants and take such other actions under the laws
of various states as may be required to cause the sale of common stock or other
securities upon exercise of warrants to be lawful. We will not be required to
honor the exercise of warrants if, in the opinion of our Board of Directors,
with the advice of counsel, the sale of securities upon exercise would be
unlawful. If the common stock underlying the warrants are not registered under a
current effective registration statement or qualified under applicable state
securities laws and securities of the same class are listed on a securities
exchange or there are at least two independent market makers for the securities
of the same class, we may elect to redeem warrants submitted for exercise
instead of obtaining registration and qualification. If we elect to redeem the
warrants instead of obtaining registration, the redemption price of the warrants
would be equal to the difference between the aggregate low asked price or
closing price of the common stock underlying the warrants and the exercise price
of the warrants.
The foregoing discussion of material 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 for our initial public offering.
-57-
<PAGE>
For the life of the warrants, the holders have the opportunity to profit
from a rise in the market price of the common stock without assuming the risk of
ownership of the shares of common stock underlying the warrants. The warrant
holders may be expected to exercise their warrants at a time when we would, in
all likelihood, be able to obtain any needed capital by an offering of common
stock on terms more favorable than those provided for by the warrants.
Furthermore, the terms on which we could obtain additional capital during the
life of the warrants may be adversely affected by the existence of the warrants.
Representatives' Warrants
Upon the completion of our initial public offering, 200,000 warrants were
issued to the representatives of our underwriters entitling them to receive,
upon due exercise on a cashless basis or for the payment of $9.00 per warrant as
the exercise price, 200,000 shares of common stock and warrants to purchase an
additional 200,000 shares of common stock for $9.00 per share. The underlying
warrants have the same terms as the warrants sold as part of our initial public
offering. The representatives' warrants will expire June 16, 2004 and will be
exercisable commencing June 16, 2000. All numbers in this prospectus related to
proceeds from the exercise of representatives' warrants assume the exercise
price for these warrants is paid in cash.
Prior Warrants
As of April 13, 2000, we had outstanding exercisable warrants to purchase
384,615 shares of common stock at $5.20 per share. These warrants were issued in
connection with the 1997 private placement and will expire June 16, 2002. In
addition, as of April 13, 2000, we had outstanding exercisable warrants to
purchase 340,237 shares of common stock at $6.76 per share. These warrants were
issued in connection with the 1998 private placement and will also expire June
16, 2002. Further, we issued a warrant to S.R. One, Limited in connection with
the bridge financing. The bridge warrant is exercisable for 235,294 shares of
common stock, which is equal to $1,500,000 divided by 85% of the initial public
offering price per unit. The bridge warrant has an exercise price of $6.375,
which is 85% of the initial public offering price per unit of $7.50. The bridge
warrant will expire June 16, 2003.
March 2000 Private Placement
In March 2000, we completed a private placement of 1,184,091 shares of our
common stock at $8.77 per share, raising a gross amount of $10.4 million.
Expenses of this transaction were approximately $840,000. Purchasers of those
privately placed shares received contingent warrants to purchase 142,091 shares
of our common stock at an exercise price of $.01 per share if the closing price
of our common stock on the American Stock Exchange falls below $7.50 per share
for 15 consecutive days during the period from August 15, 2000 to November 15,
2000. Such warrants will expire on December 15, 2000. In addition, our placement
agent in this transaction, received warrants to purchase 101,305 shares of our
common stock. These warrants expire in March 2005 and the exercise price is
$8.77 per share. Upon exercise of its warrants, the placement agent also is
entitled to exercise a contingent warrant for 12,156 shares. These contingent
warrants have the same terms and conditions as the contingent warrants issued to
the purchasers in the private placement.
Registration Rights
Granted in Private Placements
We granted investors in the 1997 and 1998 private placements of common
stock demand and incidental registration rights. These include the right of the
holders of a majority of the registrable shares to demand registration of their
shares and the right of these investors to include their shares in other
registrations of our equity securities, other than in connection with issuances
under our benefit and other employee plans. We granted similar rights with
respect to the shares underlying the warrants issued to Spencer Trask Securities
Incorporated in connection with the 1997 and 1998 private placements. In
addition, we agreed to effect a registration under the Securities Act for the
resale of the common stock purchased by investors in the 1997 private placement
automatically by December 16, 2000. We also agreed to effect a registration for
the resale of the common stock purchased by investors in the 1998 private
placement automatically by June 16,2000. This automatic registration may be
delayed by Spencer Trask together with the underwriters of our initial public
offering. If we fail to register the common stock underlying the shares in
accordance with the terms of the agreements with the investors in the 1997 and
1998 private placements, we must either repurchase the shares at the fair market
value or give investors the ability to elect a majority of our Board of
Directors in order to provide liquidity. Pursuant to powers of attorney granted
by many investors, and amendments and waivers to the registration agreements,
our obligation to effect such registrations has been deferred until June 16,
2000.
In connection with our acquisition of Texas International Laboratories,
Inc. ("TIL") in December 1999, we
-58-
<PAGE>
granted to Yves LeBihan and Jean-Yves LeBihan demand and incidental registration
rights for the registration under the Securities Act of the resale of any or all
of the common stock received by them in the acquisition. The TIL shareholders
have exercised their demand registration right, requiring the Company to use
best efforts to register their 521,739 shares by June 16, 2000.
We have also agreed to file a resale registration statement registering for
resale under the Securities Act our common stock issued or issuable in
connection with our March 2000 private placement.
Granted to SmithKline
We have also granted demand and incidental registration rights to
SmithKline Beecham Corporation for the registration under the Securities Act of
the resale of any or all of the common stock held by it. SmithKline has agreed
not to make a demand until at least June 16, 2000. If we register an issuance of
our equity securities, other than shares issuable under employee or other
benefit plans, SmithKline may request that its shares be included in the
registration.
Granted to Management and Exigent Partners, L.P.
Additionally, Messrs. Stoughton and Smith, Drs. Grove and Asarch and three
of our employees and the former partners of Exigent Partners, L.P. have also
been granted demand and incidental registration rights with respect to their
common stock. The holders of a majority of all registrable securities owned by
these stockholders may demand on two occasions registration for the resale of
any or all of their shares. If we register an issuance of our equity securities,
other than shares issuable under our employee or other benefit plans, these
holders may request to include their shares in the registration.
Granted to S.R. One
In December 1998 in connection with the bridge financing and in April 1999
in connection with the conversion of a portion of the bridge loan into Series A
Convertible Preferred Stock, we granted demand and incidental registration
rights to S.R. One, Limited. S.R. One may demand that its shares of common stock
purchased upon exercise of the bridge warrant, or the common stock and warrants
issued on conversion of the Series A Convertible Preferred Stock, be registered
under the Securities Act. S.R. One may make such demand anytime until June 16,
2002. S.R. One has the same incidental registration rights as SmithKline,
described above.
Granted to Representative
Pursuant to a warrant agreement that we entered into with Paulson
Investment Company, Inc., on behalf of each of the representatives of the
underwriters in our initial public offering, we agreed to maintain an effective
registration statement with respect to the issuance of the common stock and
warrants issued to our underwriters' representatives, if necessary, to allow
their public resale without restriction, at all times during the period in which
the representatives' warrants are exercisable, beginning June 16, 2000. The
representatives' warrants, as well as the shares of common stock and warrants
issuable upon exercise of the representatives' warrants, are being registered on
the registration statement of which this prospectus is a part. We will cause the
registration statement to remain effective until the earlier of the time that
all of the representatives' warrants have been exercised and June 16, 2004. All
expenses incurred in connection with the registration of the shares of common
stock and warrants included in the units issuable upon the exercise of the
representatives' warrants will be borne by us. Under the warrant agreement, the
parties will also be bound by standard indemnification and contribution
provisions with respect to the registration of the warrant shares issuable upon
the exercise of the representatives' warrants.
General
As of April 13, 2000, there were 6,791,324 shares of common stock
outstanding, and 1,541,526 shares of common stock underlying warrants and Series
A Convertible Preferred Stock, subject to registration rights. In connection
with our initial public offering, certain of the holders of securities with
registration rights signed either a Lock-Up Agreement or a letter agreement and
waiver, whereby each such signatory agreed, among other things, not to exercise
any demand or piggyback registration rights prior to June 16, 2000. We will pay
for all expenses incurred in connection with these registrations, other than
underwriting discounts and commissions. The registration agreements also provide
for customary indemnification and contribution provisions involving the
participants in any registration effected pursuant thereto. The foregoing is
only a summary of certain of the terms and conditions of the registration rights
agreements involving such parties. Copies of the actual agreements have been
filed with the Securities and Exchange Commission as exhibits to the
registration statement of which this prospectus is a part.
-59-
<PAGE>
Certain Federal Income Tax Considerations
The following discussion sets forth the material federal income tax
consequences, under current law, relating to the exercise of our warrants and
the sale of our common stock and warrants. The discussion is a summary and does
not purport to deal with all aspects of federal taxation that may be applicable
to an investor, nor does it consider specific facts and circumstances that may
be relevant to a particular investor's tax position. Some holders, such as
dealers in securities, insurance companies, tax exempt organizations, foreign
persons and those holding common stock or warrants as part of a straddle or
hedge transaction, may be subject to special rules that are not addressed in
this discussion. This discussion is based only on current provisions of the
Internal Revenue Code of 1986, as amended, and on administrative and judicial
interpretations as of the date hereof, all of which are subject to change. You
should consult your own tax advisor as to the specific tax consequences to you
of this offering, including the applicability of federal, state, local and
foreign tax laws.
Exercise or Sale of Warrants
No gain or loss will be recognized by a holder of a warrant on the
purchase of shares of common stock for cash on an exercise of a warrant, except
that gain will be recognized to the extent cash is received in lieu of
fractional shares. The tax basis of common stock received upon exercise of a
warrant will equal the sum of the holder's tax basis for the exercised warrant
and the exercise price. The holding period of the common stock acquired will
begin on the date the warrant is exercised and the common stock is purchased. It
does not include the period during which the warrant was held.
Gain or loss from the sale or other disposition of a warrant will be
capital gain or loss to its holder if the common stock to which the warrant
relates would have been a capital asset in the hands of such holder. This
capital gain or loss will be long-term capital gain or loss if the holder has
held the warrant for more than one year at the time of the sale, disposition or
lapse. On the redemption of a warrant by us, the holder generally will realize
capital gain or loss. Individuals generally have a maximum federal income tax of
20% on long term capital gains. The deduction of capital losses is subject to
limitations.
Sale of Common Stock
A holder's sale of common stock which is not in connection with a tax
free reorganization of Careside will result in the recognition of gain or loss
to the holder in an amount equal to the difference between the amount realized
and such holder's tax basis in the common stock. If the common stock constitutes
a capital asset in the hands of the holder, gain or loss upon the sale of the
common stock will be characterized as long-term or short-term capital gain or
loss, depending on whether the common stock has been held for more than one
year. Individuals generally have a maximum federal income tax of 20% on long
term capital gains. The deduction of capital losses is subject to limitations.
Expiration of Warrants Without Exercise
If a holder of a warrant allows it to expire without exercise, the
expiration will be treated as a sale or exchange of the warrant on the
expiration date. The holder will have a loss equal to the amount of such
holder's tax basis in the lapsed warrant. If the warrant constitutes a capital
asset in the hands of the holder, the loss will be characterized as long-term or
short-term capital loss, depending on whether the warrant was held for more than
one year. The deduction of capital losses is subject to limitations.
Takeover Protection and Certain Charter and By-Law Provisions
Certain provisions of the Delaware General Corporation Law (the "DGCL"),
our Amended and Restated Certificate of Incorporation (the "Charter") our
Amended and Restated By-Laws (the "By-Laws") and our stock option plans may have
an anti-takeover effect and may delay, deter or prevent a tender offer, proxy
contest or other takeover attempt. This may be true even in circumstances where
a takeover attempt might result in payment of a premium over market price for
shares held by stockholders.
We are subject to Section 203 of the DGCL. Section 203 prohibits, subject
to certain exceptions, a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder. A
business combination includes mergers, asset sales and other transactions that
may result in a financial benefit to stockholders. A person will be deemed an
interested stockholder triggering this protection if the person together with
any affiliates or associates of such person, beneficially owns, directly or
-60-
<PAGE>
indirectly, 15% or more of our outstanding voting stock. There are three
exceptions to these provisions. First, if our Board of Directors gives prior
approval to either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder then the restrictions do not
apply. Second, the restrictions will not apply if, upon the consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of our outstanding
voting stock. Finally, the restrictions will not apply if, at the time of or
following the consummation of the transaction in which the stockholder became an
interested stockholder, our Board of Directors approves the business combination
and stockholders holding at least 66-2/3% of our outstanding voting stock not
owned by the interested stockholder authorize the business combination.
Our Board of Directors is divided into three classes of directors each
containing three directors. Directors within each class serve three-year terms.
Approximately one-third of the directors will sit for election at each annual
meeting of our stockholders. All directors elected to our classified Board of
Directors serve until the election and qualification of their successors or
their earlier resignation or removal. The Board of Directors may create new
directorships and fill such positions so created. In addition, the Board of
Directors or its remaining members, even though less than a quorum may fill
vacancies on the Board of Directors occurring for any reason until the next
annual election of directors. Members of the Board of Directors may only be
removed for cause. These provisions may have the effect of deterring or delaying
any attempt by any group to obtain control of us by a proxy contest. For
example, a third party would be required to have its nominees elected at two
separate annual meetings in order to elect a majority of the members of the
Board of Directors.
We may issue 4,837,086 shares of undesignated preferred stock. Under
certain circumstances, the issuance of preferred stock could be utilized as a
method of discouraging, delaying or preventing a change in control of our stock.
Our Charter provides that any action required or permitted to be taken
by our stockholders may be effected only at an annual or special meeting of
stockholders. Such action will not be permitted to be taken by written consent
in lieu of a meeting. Our Charter and the By-Laws also provide that special
meetings of stockholders may only be called by a majority of our Board of
Directors, our Chairman or our Chief Executive Officer. Stockholders will not be
permitted to call a special meeting or to require that our Board of Directors
call a special meeting of stockholders.
Our Charter provides that any director or the entire Board of Directors
may be removed only for cause and only upon the affirmative vote of holders of
80% or more of the outstanding shares of our capital stock. Further, our Charter
provides that the amendment of this provision for removing directors for cause
may only be amended by the affirmative vote of at least 75% of the voting power
of all the then outstanding shares of our capital stock voting together as a
single class.
Our By-Laws establish an advance notice procedure for nomination, other
than by or at the direction of our Board of Directors, of candidates for
election as directors. Advance notice procedures also exist for other
stockholder proposals to be considered at annual or special meetings of
stockholders. In general, we must receive notice of intent to nominate a
director or raise business at an annual meeting not less than 60 nor more than
90 days prior to the scheduled annual meeting. In the case of a special meeting
called for the purpose of electing directors, such notice of intent must be
received not later than the close of business on the fifth day following the day
on which notice of the date of the meeting was mailed. Such notice of intent
must contain certain specified information concerning the person to be nominated
or the matter to be brought before the meeting.
In addition, our By-Laws allow our Board of Directors to increase the
number of directors from time to time although a decrease in the number of
directors may not have the effect of shortening the term of any incumbent
director. Our By-Laws also grant the Board of Directors the authority to fill
any vacancies on the Board of Directors, including vacancies resulting from an
increase in the number of directors. Our Charter states that our By-Laws may be
amended by the stockholders only by the vote of not less than 80% of the
outstanding shares of stock entitled to vote upon the election of directors.
The provisions of the Charter and the By-Laws summarized in the
preceding paragraphs may have the effect of delaying, deferring or preventing a
non-negotiated merger or other business combination involving us. These
provisions are intended to encourage any person interested in acquiring us to
negotiate with and obtain the approval of our Board of Directors in connection
with the transaction. Certain of these provisions may, however, discourage our
future acquisition in a transaction not approved by our Board of Directors in
which stockholders might receive an attractive value for their shares or that a
substantial number or even a majority of our stockholders might believe to be in
their best interest. As a result, stockholders who desire to participate in such
a transaction may not have the opportunity to do so. Such provisions could also
-61-
<PAGE>
discourage bids for our common stock at a premium, as well as create a
depressive effect on the market price of our common stock. See "Risk
Factors--Statute, Charter and By-laws May Delay or Prevent Acquisition of
Careside."
Our stock option plans, in certain circumstances, allow our Board of
Directors or a committee thereof to accelerate the vesting or exercise date of
any options granted thereunder. The ability to accelerate the vesting or
exercise date of options could be utilized as a method of discouraging, delaying
or preventing a change in control of our stock. See "Management--Stock Option
Plans."
Transfer Agent and Registrar
The transfer agent and registrar and warrant agent for our common stock
and warrants is American Stock Transfer & Trust Company, New York, New York.
-62-
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of April 13, 2000, we had 8,797,665 shares of common stock outstanding.
Of these shares, 2,006,341 shares of common stock have been registered and are
freely tradable without restrictions or further registration under the
Securities Act. 1,706,984 shares of common stock are being registered on this
registration statement and will be freely tradable without restrictions or
further registration. The remaining 5,084,340 outstanding shares of common stock
are restricted securities within the meaning of Rule 144 and may not be sold in
the absence of registration under the Securities Act unless an exemption from
registration is available, including the exemption from registration offered by
Rule 144. As discussed in greater detail below, 4,942,727 of the 5,084,340
shares mentioned above are subject to various lock-up agreements that expire on
June 16, 2000 and 141,613 shares of common stock are currently Rule 144
eligible.
Holders of approximately 56% of our shares of common stock have agreed
not to sell or otherwise dispose of any of their shares of common stock until
after June 16, 2000, without the prior written consent of the representatives of
the underwriters in our initial public offering subject to certain limited
exceptions (the "Lock-Up Agreements"). After the expiration of these lock-up
periods, or earlier with the requisite consent, 4,942,727 shares of the common
stock may be sold in the public market pursuant to Rule 144.
In general, under Rule 144, as currently in effect, a person who has
beneficially owned restricted shares for at least one year, including a person
who may be deemed to be our affiliate, may sell within any three-month period a
number of shares of common stock that does not exceed 1% of then outstanding
shares of our common stock or 1% of the average weekly trading volume in our
common stock during the four calendar weeks immediately preceding the sale.
Sales under Rule 144 are also subject to restrictions relating to manner of
sale, notice and availability of current public information about us. In
addition, under Rule 144(k) of the Securities Act, a person who is not our
affiliate, has not been an affiliate of ours within three months prior to the
sale and has beneficially owned shares for at least two years, would be entitled
to sell such shares immediately without regard to volume limitations, manner of
sale provisions, notice or other requirements of Rule 144.
Certain shares issued (or issuable upon the exercise of options granted) by
us under our stock option plans, or our employee stock purchase plan will also
be eligible for resale in the public market, subject to vesting restrictions and
Lock-Up Agreements, and Rule 144 requirements, pursuant to a registration
statement on Form S-8 which we filed in December 1999 under the Securities Act.
As of April 13, 2000, we have options outstanding under our stock option plans
to purchase 585,316 shares of common stock which have not been exercised and
which become vested and exercisable at various times in the future. Any shares
issued upon the exercise of these options will be eligible for resale in the
public market pursuant to our Form S-8 registration statement. We have issued
6,341 under our employee stock purchase plan. Our Form S-8 registration
statement under the Securities Act also registered up to an aggregate of 741,397
shares of common stock which may be issued in the future under our stock option
plans and our employee stock purchase plan.
We issued a combination of 2,000,000 shares of common stock and 2,000,000
warrants to purchase common stock in our initial public offering. Each of the
2,000,000 warrants represents, upon exercise, a share of our common stock that
will be freely tradable without restrictions or further registration under the
Securities Act. The exercise price of these warrants is $9.00. Both the common
stock and the warrants issued in our initial public offering are publicly
tradable now.
We also issued 200,000 warrants, which represent 400,000 shares of common
stock, to the representatives of the underwriters in our initial public
offering. Each of these 200,000 warrants entitles the holder to acquire both a
share of common stock and a warrant to acquire an additional share of common
stock at any time after June 16, 2000 and until June 16, 2004. The exercise
price of these 200,000 warrants is $9.00 and the exercise price of the
underlying warrants is $9.00 per share.
We issued warrants prior to our initial public offering to purchase an
aggregate of 724,852 shares of common stock at exercise prices ranging $5.20 to
$6.76 per share to Spencer Trask Securities Incorporated. These warrants are
exercisable until June 16, 2002. A warrant issued to S.R. One, Limited is
exercisable to purchase 235,294 shares of common stock. The S.R. One, Limited
warrant has an exercise price of $6.375 per share and will expire June 16, 2003.
Both Spencer Trask Securities Incorporated and S.R. One, Limited are entitled to
certain registration rights with respect to the shares issuable upon exercise of
their warrants. Approximately one-half of the shares of common stock underlying
these warrants are subject to Lock-up Agreements that expire on June 16, 2000.
-63-
<PAGE>
We will be required to issue up to 325,828 shares of our common stock
upon conversion of our outstanding shares of Series A Preferred Stock and the
exercise of warrants issued upon that conversion. These shares will be eligible
for resale into the public market on June 21, 2000, subject to the volume
limitations, manner of sale provisions, notice and other requirements of Rule
144.
We may be required to issue additional shares of common stock if the loan
owed to S.R. One, Limited is converted to shares of Series A Preferred Stock.
S.R. One, Limited has the right to convert the loan, currently $2,000,000 plus
accrued interest, into shares of Series A Preferred Stock at $6.375 per share.
Each share of Series A Preferred Stock is itself convertible into one share of
common stock and a warrant to purchase an additional share of common stock for
$9.00 per share.
In March 2000, we privately placed a total of 1,184,091 shares of our
common stock at $8.77 per share, raising a gross amount of $10.4 million.
Expenses of the transaction were approximately 840,000. Purchasers of those
privately placed shares also received a contingent warrant to purchase 142,091
shares of our common stock at an exercise price of $.01 per share if the closing
price of our common stock on the American Stock Exchange falls below $7.50 per
share for 15 consecutive days during the period from August 15, 2000 to November
15, 2000. Such warrants will expire on December 15, 2000. In addition, our
placement agent in this transaction received warrants to purchase 101,305 shares
of our common stock. These warrants expire in March 2005 and the exercise price
is $8.77. Upon exercise of its warrants, the placement agent is entitled to
exercise a contingent warrant for 12,156 share of common stock. These contingent
warrants have the same terms and conditions as the contingent warrants issued to
the purchasers in the private placement.
-64-
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the common stock by each of the selling stockholders.
Unless otherwise indicated below, to the knowledge of the Company, all persons
listed below have sole voting and investment power with respect to the shares of
common stock, except to the extent authority is shared by spouses under
applicable law.
The information included below is based upon information provided by
the selling stockholders. Because the selling stockholders may offer all, some
or none of their common stock, no definitive estimate as to the number of shares
thereof that will be held by the selling stockholders after such offering can be
provided and the following table has been prepared on the assumption that all
shares of common stock offered under this Prospectus will be sold. See "Plan of
Distribution."
<TABLE>
<CAPTION>
Common Stock Common Stock To Be Beneficially
Beneficially Owned Prior Owned If All Shares Offered
to the Offering Hereunder Are Sold
---------------------------------------- -----------------------------
Shares That May be
Name Shares Percent(A) Offered Hereunder Shares Percent(A)
---- ------ ---------- ----------------- ------ ----------
<S> <C> <C> <C> <C> <C>
S.R. One, Limited(1)................ 790,930 6.0% 561,122 229,808 1.7%
Yves LeBihan........................ 347,826 (2) 2.6 347,826 0 *
Jean-Yves LeBihan................... 173,913 (3) 1.3 173,913 0 *
Archille Guest...................... 1,803 (4) * 1,803 0 *
Adam Stern.......................... 20,260 (4) * 20,260 0 *
Amaud deVienne...................... 5,386 (4) * 5,386 0 *
Bobette Leidner..................... 2,644 (4) * 2,644 0 *
Brian Fenlin........................ 74 (4) * 74 0 *
Brian Rockowitz..................... 3,397 (4) * 3,397 0 *
Brookehill Equities, Inc............ 433 (4) * 433 0 *
Bruce Baumann....................... 740 (4) * 740 0 *
Carol Zervoulei..................... 962 (4) * 962 0 *
Christopher Nasca................... 529 (4) * 529 0 *
Daniel Zettler...................... 2,600 (4) * 2,600 0 *
David Anderson...................... 1,800 (4) * 1,800 0 *
David Hochman....................... 962 (4) * 962 0 *
Donald Slowinski.................... 1,109 (4) * 1,109 0 *
Donald Spongberg.................... 15,210 (4) * 15,210 0 *
Donna Baselice...................... 2,500 (4) * 2,500 0 *
Edward Taylor....................... 2,476 (4) * 2,476 0 *
A. Emerson Martin II................ 9,615 (4) * 9,615 0 *
Evelyn Flores....................... 29 (4) * 29 0 *
Felix Hernadez...................... 8,370 (4) * 8,370 0 *
First Albany Corp................... 1,497 (4) * 1,497 0 *
First Equity Corp................... 821 (4) * 821 0 *
First National Fund................. 962 (4) * 962 0 *
James Glickstein.................... 1,514 (4) * 1,514 0 *
James H. Kogut...................... 3,302 (4) * 3,302 0 *
Jamie Hellman....................... 1,572 (4) * 1,572 0 *
Jason Adelman....................... 1,827 (4) * 1,827 0 *
Jeffrey Cohen....................... 185 (4) * 185 0 *
Jennifer Hahn....................... 62 (4) * 62 0 *
Jerrie Colish....................... 721 (4) * 721 0 *
John Nelson......................... 1,232 (4) * 1,232 0 *
Joseph A. Genzardi.................. 1,010 (4) * 1,010 0 *
Joseph Franzese..................... 740 (4) * 740 0 *
</TABLE>
-65-
<PAGE>
<TABLE>
<CAPTION>
Common Stock Common Stock To Be Beneficially
Beneficially Owned Prior Owned If All Shares Offered
to the Offering Hereunder Are Sold
---------------------------------------- -----------------------------
Shares That May be
Name Shares Percent(A) Offered Hereunder Shares Percent(A)
---- ------ ---------- ----------------- ------ ----------
<S> <C> <C> <C> <C> <C>
Joseph Gianella..................... 481 (4) * 481 0 *
Joseph Nehme........................ 601 (4) * 601 0 *
Joseph Richman...................... 2,209 (4) * 2,209 0 *
Joseph Smith........................ 1,922 (4) * 1,922 0 *
Josephthal, Lyon & Ross............. 1,538 (4) * 1,538 0 *
Karl F. Birkenfeld.................. 1,442 (4) * 1,442 0 *
Kevin Kimberlin (5)................. 1,102,240 (4) 8.4% 336,349 765,891 5.8%
Laura McNamara...................... 10,694 (4) * 10,694 0 *
Lillian Gonzalez.................... 69 (4) * 69 0 *
Maroni Burchell..................... 841 (4) * 841 0 *
Matthew Schwartz.................... 192 (4) * 192 0 *
Buckman, Buckman & Reid, Inc 192 (4) * 192 0 *
Michael Podnis...................... 925 (4) * 925 0 *
Michael Siek........................ 3,654 (4) * 3,654 0 *
Michael Sullivan.................... 925 (4) * 925 0 *
Nick Zacharis....................... 240 (4) * 240 0 *
Paul & Daryl Webber................. 1,731 (4) * 1,731 0 *
Peter Friedli (6)................... 416,495 3.2% 42,974 373,521 2.8%
Phoenix Samson Associates, L.P...... 602 (4) * 602 0 *
Philip B. Smith (7)................. 209,574 (4) 1.6% 108,771 100,803 *
Quinn McKean........................ 192 (4) * 192 0 *
Richard Mish........................ 1,849 (4) * 1,849 0 *
Rick Elkin.......................... 1,294 (4) * 1,294 0 *
Robert Giannini..................... 93 (4) * 93 0 *
Robert R. Salyard................... 721 (4) * 721 0 *
Ronald Luken....................... 2,308 (4) * 2,308 0 *
Rosemarie Melnichuk................. 144 (4) * 144 0 *
Rosemarie Sheahan................... 11,902 (4) * 11,902 0 *
Scott Schulte....................... 2,606 (4) * 2,606 0 *
Stephen Lichaw...................... 925 (4) * 925 0 *
Steve Lazarus....................... 185 (4) * 185 0 *
Stuart Brown........................ 120 (4) * 120 0 *
The Richard A. Oshins 1995 2,019 (4) * 2,019 0 *
Irrevocable Trust, TTEES Richard
Oshins & Jerry Engel 9/15/95
Thomas Candee....................... 962 (4) * 962 0 *
Thomas J. Hutzel.................... 3,077 (4) * 3,077 0 *
Thomas Muldowney.................... 1,530 (4) * 1,530 0 *
Timothy Collins..................... 240 (4) * 240 0 *
Todd Harrigan....................... 277 (4) * 277 0 *
Wes Hampp........................... 1,109 (4) * 1,109 0 *
William Buchanan.................... 962 (4) * 962 0 *
William P. Dioguardi................ 96,616 (4) * 77,385 19,231 *
William Stein....................... 2,259 (4) * 2,259 0 *
DFS Integrity Partners LP........... 112,000 (8) * 112,000 0 *
Dolphin Offshore Partners, L.P...... 63,855 (8) * 63,855 0 *
William T. Frantz................... 63,855 (8) * 63,855 0 *
</TABLE>
-66-
<PAGE>
<TABLE>
<CAPTION>
Common Stock Common Stock To Be Beneficially
Beneficially Owned Prior Owned If All Shares Offered
to the Offering Hereunder Are Sold
---------------------------------------- -----------------------------
Shares That May be
Name Shares Percent(A) Offered Hereunder Shares Percent(A)
---- ------ ---------- ----------------- ------ ----------
<S> <C> <C> <C> <C> <C>
Pacific Asset Partners.............. 63,855 (8) * 63,855 0 *
Alza Corporation Retirement Plan.... 25,760 (8)(9) * 25,760 0 *
City of Milford Pension &
Retirement Fund..................... 51,520 (8)(9) * 51,520 0 *
National Federation of Independent
Business Employee Pension Trust..... 32,480 (8)(9) * 32,480 0 *
National Federation of Independent
BusinessCorporate Account........... 25,760 (8)(9) * 25,760 0 *
Norwalk Employees' Pension Plan..... 43,680 (8)(9) * 43,680 0 *
Public Employee Retirement System of
Idaho............................... 160,160 (8)(9) * 160,160 0 *
City of Stamford Firemen's
Pension Fund........................ 38,080 (8)(9) * 38,080 0 *
The Jennifer Altman Foundation...... 19,040 (8)(9) * 19,040 0 *
Asphalt Green, Inc.................. 6,720 (8)(9) * 6,720 0 *
Dean Witter Foundation.............. 25,760 (8)(9) * 25,760 0 *
Lazar Foundation.................... 6,720 (8)(9) * 6,720 0 *
Roanoke College..................... 25,760 (8)(9) * 25,760 0 *
A. Carey Zesiger.................... 6,720 (8)(9) * 6,720 0 *
Alexa L. Zesiger.................... 6,720 (8)(9) * 6,720 0 *
Butler Family LLC................... 12,320 (8)(9) * 12,320 0 *
David Zesiger....................... 6,720 (8)(9) * 6,720 0 *
Salvador O. Gutierrez............... 6,720 (8)(9) * 6,720 0 *
The Ferris Hamilton Family Trust.... 11,200 (8)(9) * 11,200 0 *
Mary Ann S. Hamilton Trust for Self. 11,200 (8)(9) * 11,200 0 *
HBL Charitable Unitrust............. 6,720 (8)(9) * 6,720 0 *
Andrew Heiskell..................... 19,040 (8)(9) * 19,040 0 *
Helen Hunt.......................... 6,720 (8)(9) * 6,720 0 *
Jeanne L. Morency................... 6,720 (8)(9) * 6,720 0 *
Psychology Associates............... 6,720 (8)(9) * 6,720 0 *
Leonard Kingsley.................... 11,200 (8)(9) * 11,200 0 *
Peter Looram........................ 6,720 (8)(9) * 6,720 0 *
Mary C. Anderson.................... 6,720 (8)(9) * 6,720 0 *
Murray Capital, LLC................. 6,720 (8)(9) * 6,720 0 *
Domenic J. Mizio.................... 25,760 (8)(9) * 25,760 0 *
Morgan Trust Co. of the Bahamas
Ltd. as Trustee U/A/D 11/30/93...... 25,760 (8)(9) * 25,760 0 *
Nicola Z. Mullen.................... 6,720 (8)(9) * 6,720 0 *
Susan Uris Halpern.................. 12,320 (8)(9) * 12,320 0 *
William B. Lazar.................... 6,720 (8)(9) * 6,720 0 *
Wells Family LLC.................... 25,760 (8)(9) * 25,760 0 *
Harold & Grace Willens JTWROS....... 6,720 (8)(9) * 6,720 0 *
Albert L. Zesiger................... 25,760 (8)(9) * 25,760 0 *
Barrie Ramsay Zesiger............... 19,040 (8)(9) * 19,040 0 *
Wolfson Investment Partners LP...... 12,320 (8)(9) * 12,320 0 *
Paulson Family LLC.................. 107,255 (8)(10) * 63,855 0 *
</TABLE>
-67-
<PAGE>
<TABLE>
<CAPTION>
Common Stock Common Stock To Be Beneficially
Beneficially Owned Prior Owned If All Shares Offered
to the Offering Hereunder Are Sold
---------------------------------------- -----------------------------
Shares That May be
Name Shares Percent(A) Offered Hereunder Shares Percent(A)
---- ------ ---------- ----------------- ------ ----------
<S> <C> <C> <C> <C> <C>
Paulson Investment Co............... 368,149 (8)(10) * 127,709 0 *
Narrangansett I, LP................. 44,060 (8) * 44,060 0 *
Narrangansett Off Shore Ltd......... 19,794 (8) * 19,794 0 *
H.C. Wainwright & Co.., Inc......... 113,461 (11) * 113,461 0 *
Anthony P. Brenner.................. 17,260 * 1,154 (12) 16,106 *
----------
Total............................... 3,248,510
</TABLE>
* Represents less than 1% of our outstanding shares of common stock
(A) The percentage of ownership of outstanding common stock before and
after the Offering is based on the fully diluted number of shares of
common stock outstanding (assuming exercise of all warrants and
options and conversion of our outstanding Series A Preferred Stock)
except that it does not take into account the 154,247 shares of
common stock underlying the Contingent Warrants for 12% of the
shares of common stock purchased in our private placement that
closed in March, 2000.
(1) The total number of shares owned prior to the offering includes
235,294 shares of common stock issuable upon the exercise of a
bridge loan warrant, 325,828 shares of common stock underlying
shares of Series A Convertible Preferred Stock and underlying
warrants which will be received if the Series A Preferred Stock is
converted. Also includes 229,808 shares of common stock owned by
SmithKline Beecham Corporation, an affiliate of S.R. One, Limited.
The shares being offered under this prospectus include those shares
of common stock underlying the securities held by S.R. One, Limited.
(2) Mr. Yves LeBihan acquired his shares in connection with the
acquisition of Texas International Laboratories, Inc. by Careside
Hematology, Inc., a wholly-owned subsidiary of the Company. Mr. Yves
LeBihan remains a consultant and a director of Careside Hematology,
Inc.
(3) Mr. Jean-Yves LeBihan acquired his shares in connection with the
acquisition of Texas International Laboratories, Inc. by Careside
Hematology, Inc. Mr. Jean-Yves LeBihan is the Vice President of
Veterinary Product Sales of Careside Hematology, Inc.
(4) Includes shares of common stock issuable upon exercise of warrants
issued in connection with our 1997 private placement and/or our 1998
private placement. Spencer Trask was the Placement Agent for both
private placements and it and its affiliates, including Spencer
Trask employees, received the warrants as compensation.
(5) The total number of shares owned prior to the offering includes
371,090 shares of common stock held by Oshkim Limited Partners,
L.P., and 339,041 shares of common stock held by Kevin Kimberlin
Partners, L.P., both of which are limited partnerships of which Mr.
Kimberlin is the general partner, and 55,760 shares of common stock
held by Spencer Trask Securities Incorporated of which Mr. Kimberlin
is Chairman and exercises voting control. Also includes 20,517
shares of common stock issuable upon the exercise of warrants held
by Oshkim Limited Partners, L.P., and 38,095 shares of common stock
issuable upon the exercise of warrants held by Kevin Kimberlin
Partners, L.P. Also includes 277,737 shares of common stock issuable
upon the exercise of warrants owned by Spencer Trask Securities
Incorporated of which Mr. Kimberlin is Chairman and exercises voting
control. The shares being offered under this prospectus include the
shares of common stock issuable upon the exercise of warrants held
by Oshkim Limited Partners, L.P., Kevin Kimberlin Partners and
Spencer Trask Securities Incorporated.
(6) The total number of shares owned prior to the offering includes
373,521 shares of common stock held by Venturetec, Inc. of which Mr.
Friedli is the controlling stockholder, 9,320 shares of common stock
issuable upon exercise of warrants owned by Pine Incorporated, a
corporation owned and controlled by Mr. Friedli and 33,654 shares of
common stock issuable upon exercise of warrants held by Mr. Friedli.
The shares being offered under this prospectus include the shares of
common stock issuable upon exercise of the warrants held by Pine
Incorporated and Mr. Frieldi.
-68-
<PAGE>
(7) The total number of shares owned prior to the offering includes
43,362 shares of common stock and 6,489 shares of common stock
underlying options held by Mr. Smith, 50,952 shares of common stock
held by Private Equity Partnership of which Mr. Smith is the general
partner and 108,771 shares of common stock issuable upon exercise of
warrants held by Private Equity Partnership and certain of the
common stock that Mr. Smith can acquire per exercise of options on a
within 60 days after April 5, 2000. Mr. Smith has served as one of
our directors since November 1996. The shares being offered under
this prospectus include the shares of common stock issuable upon
exercise of the warrants held by Private Equity Partnership.
(8) Represents shares of common stock purchased by the selling
stockholder in our recent private placement and shares of common
stock upon exercise of certain contingent warrants (for 12% of the
shares of common stock purchased in the private placement by the
selling shareholder) granted to the selling shareholder in
connection with the private placement. These contingent warrants are
exercisable at $.01 per share, after August 15, 2000 and prior to
December 15, 2000 if, during the period of August 15, 2000 and
November 15, 2000, the average closing price of the common stock for
any 15 consecutive trading days is equal to or less than $7.50.
(9) Zesiger Capital Group LLC has sole investment and voting power over
such shares and expects to release the voting power after
effectiveness of this registration statement except with respect to
certain investors, representing approximately 429,000 shares.
(10) Paulson Family, LLC is controlled by the chairman of Paulson
Investment Company, Inc. Paulson Investment Company, Inc. was the
underwriters in our initial public offering on June 16, 1999. Number
of shares includes shares of common stock issuable upon exercise of
warrants to purchase units, each unit comprises one share of common
stock and one warrant to purchase one share of common stock.
(11) Represents 101,305 shares of common stock underlying warrants
granted to H.C. Wainwright at an exercise price of $8.77 per share
and 12,156 shares of common stock issuable upon exercise of
contingent warrants owned by H.C. Wainwright. Wainwright's
contingent warrants have the same terms and conditions as those
issued to purchasers in the private placement except that
Wainwright's exercise of the contingent warrant is conditioned upon
exercise of Wainwright's other warrant. The warrants were granted to
H.C. Wainwright as compensation for acting as the placement agent in
our recent private placement.
(12) Represents shares of common stock issued to Mr. Brenner upon
exercise of options granted pursuant to a consulting agreement with
an affiliate of Mr. Brenner. See "Certain Transactions - Financing
Activities." Mr. Brenner is a director of the Company.
-69-
<PAGE>
PLAN OF DISTRIBUTION
We are registering the common stock covered by this prospectus for selling
stockholders. As used in this prospectus, "selling stockholders" includes the
donees, pledgees, transferees or others who may later hold the selling
stockholders' interest. We will pay the costs, expenses and fees in connection
with registering the common stock, but the selling stockholders will pay any
brokerage commissions, discounts or other expenses attributable to the sale of
common stock.
The selling stockholders may sell the common stock from time to time in
one or more types of transactions (which may include block transactions), on the
American Stock Exchange, in negotiated transactions, through put or call options
transactions relating to the shares, through short sales of shares, or a
combination of such methods of sale, at market prices prevailing at the time of
sale, or at negotiated prices. Such transactions may or may not involve brokers
or dealers.
The selling stockholders may effect such transactions by selling shares
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions).
The selling stockholders and any broker-dealers that act in connection
with the sale of shares might be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act, and any commissions received by such
broker-dealers and any profit on the resale of the shares sold by them while
acting as principals might be deemed to be underwriting discounts or commissions
under the Securities Act. The selling stockholders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the shares against certain liabilities, including liabilities arising under
the Securities Act.
Because selling stockholders may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, the selling stockholders will be
subject to the prospectus delivery requirements of the Securities Act. We have
informed the selling stockholders that the anti-manipulative provisions of
Regulation M promulgated under the Exchange Act may apply to their sales in the
market.
Selling stockholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act, provided
they meet the criteria and conform to the requirements of such Rule.
Upon notification to us by a selling stockholder that any material
arrangement has been entered into with a broker or dealer for the sale of shares
of common stock through a block trade, special offering, exchange distribution
or secondary distribution or a purchase by a broker or dealer, a supplement to
this prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing (i) the name of each such selling stockholder and of
the participating brokers or dealers, (ii) the number of shares of common stock
involved, (iii) the price at which such shares were sold, (iv) the commissions
paid or discounts or concessions allowed to such brokers or dealers, where
applicable, (v) that such brokers or dealers did not conduct any investigation
to verify the information set out or incorporated by reference in this
prospectus and (vi) other facts material to the transaction. In addition, upon
notification to us by a selling stockholder that a donee or pledgee intends to
sell more than 500 shares of common stock, a supplement to this prospectus will
be filed.
-70-
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Pepper Hamilton LLP.
EXPERTS
The audited financial statements included in this prospectus and elsewhere
in the registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of that firm as
experts in giving their reports. Reference is made to said report, which
includes an explanatory paragraph with respect to the uncertainty regarding the
Company's ability to continue as a going concern as discussed in Note 1 to the
financial statements.
-71-
<PAGE>
WHERE YOU CAN GET MORE INFORMATION
Our fiscal year ends on December 31. We file annual, quarterly and current
reports, proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any reports, statements or other information
on file at the SEC's public reference room in Washington, D.C. You can request
copies of those documents, upon payment of a duplicating fee, by writing to the
SEC.
We have filed a registration statement on Form S-1 with the SEC. This
prospectus, which forms a part of the registration statement, does not contain
all of the information included in the registration statement. Certain
information is omitted. You should refer to the registration statement and its
exhibits. With respect to references made in this prospectus to any contract or
other document relating to us, such references are not necessarily complete. You
should refer to the exhibits attached to the registration statement for copies
of the actual contract or document. You may review a copy of the registration
statement at the SEC's public reference room in Washington, D.C., and at the
SEC's regional offices in Chicago, Illinois and New York, New York. Please call
the SEC at 1-800-SEC-0330 for further information on the operation of the public
reference rooms. Our SEC filings, including the registration statement, can also
be reviewed by accessing the SEC's Internet site at http://www.sec.gov.
-72-
<PAGE>
CARESIDE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
CARESIDE, INC.: ----
<S> <C>
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit).................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Careside, Inc.:
We have audited the accompanying consolidated balance sheets of Careside,
Inc. (a Delaware corporation) as of December 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Careside,
Inc. as of December 31, 1998 and 1999, and the results of its operations and
its cash flows for the each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States.
The accompanying consolidated financial statements have been prepared
assuming that Careside, Inc. will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has suffered
recurring losses from operations and has accumulated a deficit during the
development stage that raises substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Arthur Andersen LLP
Los Angeles, California
March 13, 2000
F-2
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents........................ $ 3,926,603 $ 4,905,440
Accounts receivable, net of allowance of $0...... -- 78,046
Inventory........................................ -- 548,623
Prepaid expenses and other....................... 82,173 102,615
------------ ------------
Total current assets........................... 4,008,776 5,634,724
------------ ------------
Property and Equipment, net........................ 3,386,484 5,939,186
Deferred Offering Costs............................ 498,443 2,318
Deposits and Other................................. 17,700 15,000
Goodwill, net...................................... -- 2,798,170
------------ ------------
$ 7,911,403 $ 14,389,398
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current portion of long-term debt................ $ 186,998 $ 2,316,192
Current portion of obligation under capital
lease........................................... -- 11,006
Accounts payable................................. 1,369,889 844,904
Accrued expenses................................. 160,439 886,260
Accrued interest................................. -- 156,493
------------ ------------
Total current liabilities...................... 1,717,326 4,214,855
------------ ------------
Long-Term Debt, net of current portion............. 2,044,932 1,059,876
------------ ------------
Obligation Under Capital Lease, net of current
portion........................................... -- 35,835
------------ ------------
Commitments
Stockholders' Equity:
Preferred stock, $.01 par value: 5,000,000 shares
authorized--none and 162,914 shares issued and
outstanding at December 31, 1998 and 1999,
respectively.................................... -- 1,629
Common stock, $.01 par value: 50,000,000 shares
authorized--5,084,340 and 7,609,581 shares
issued and outstanding at December 31, 1998 and
1999, respectively.............................. 50,843 76,095
Additional paid-in capital....................... 21,003,545 37,496,984
Deficit accumulated during development stage..... (16,905,243) (28,495,876)
------------ ------------
Total stockholders' equity..................... 4,149,145 9,078,832
------------ ------------
$ 7,911,403 $ 14,389,398
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
from Inception
(July 10, 1996)
For the Year Ended December 31, through
-------------------------------------- December 31,
1997 1998 1999 1999
----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
Sales, net.............. $ -- $ -- $ 60,956 $ 60,956
Cost of Sales........... -- -- 30,566 30,566
----------- ----------- ------------ ------------
Gross Profit............ -- -- 30,390 30,390
Operating Expenses:
Research and
development.......... 5,895,465 8,297,974 8,252,081 24,007,367
Selling and
marketing............ 85,402 249,000 1,204,548 1,538,950
General and
administrative....... 555,172 601,129 1,448,300 2,660,116
----------- ----------- ------------ ------------
Operating Loss...... (6,536,039) (9,148,103) (10,874,539) (28,176,043)
Interest Income......... 213,585 234,089 291,008 738,682
Interest Expense........ (8,329) (22,275) (970,525) (1,021,938)
Goodwill amortization... -- -- (36,577) (36,577)
----------- ----------- ------------ ------------
Net Loss................ (6,330,783) (8,936,289) (11,590,633) (28,495,876)
Preferred stock
dividends.............. -- -- (55,201) (55,201)
----------- ----------- ------------ ------------
Net loss available to
common stockholders.... (6,330,783) (8,936,289) (11,645,834) (28,551,077)
----------- ----------- ------------ ------------
Basic and Diluted Net
Loss per Common Share.. $ (2.04) $ (1.93) $ (1.88)
----------- ----------- ------------
Shares used in Computing
Basic and Diluted Net
Loss per Common Share.. 3,098,980 4,629,916 6,210,496
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Series A Deficit
Preferred Accumulated Total
Stock Common Stock Additional Stock During Stockholders'
-------------- ----------------- Paid-In Subscription Development Equity
Shares Amount Shares Amount Capital Receivable Stage (Deficit)
------- ------ --------- ------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 10, 1996
(inception)............. -- $ -- -- $ -- -- $ -- $ -- $ --
Shares issued to
founders and
management.............. -- -- 659,344 6,593 (6,593) -- -- --
Shares issued to
SmithKline Beecham
Corporation in
connection with asset
purchase................ -- -- 34,702 347 571,006 -- -- 571,353
Sales of shares to
Exigent Partners, L.P... -- -- 557,601 5,576 93,419 (98,995) -- --
Shares issued to
investment banker in
connection with equity
financing............... -- -- 30,173 302 (302) -- -- --
Shares issued to
SmithKline Beecham
Corporation pursuant to
antidilution agreement.. -- -- 30,935 310 (310) -- -- --
Net loss................ -- -- -- -- -- -- (1,638,171) (1,638,171)
------- ------ --------- ------- ----------- -------- ------------ ------------
Balance, December 31,
1996.................... -- -- 1,312,755 13,128 657,220 (98,995) (1,638,171) (1,066,818)
Shares issued in
connection with private
placement, net of
offering costs of
$1,291,772.............. -- -- 1,923,090 19,231 8,688,998 -- -- 8,708,229
Shares issued to
SmithKline Beecham
Corporation upon
conversion of note
payable................. -- -- 129,555 1,295 1,026,689 -- -- 1,027,984
Payment of stock
subscription............ -- -- -- -- -- 98,995 -- 98,995
Net loss................ -- -- -- -- -- -- (6,330,783) (6,330,783)
------- ------ --------- ------- ----------- -------- ------------ ------------
Balance, December 31,
1997.................... -- -- 3,365,400 33,654 10,372,907 -- (7,968,954) 2,437,607
Shares issued in
connection with private
placement, net of
offering costs of
$1,302,029.............. -- -- 1,701,225 17,012 10,180,959 -- -- 10,197,971
Shares issued in
connection with exercise
of stock options........ -- -- 17,715 177 119,565 -- -- 119,742
Value of warrants issued
in connection with
bridge financing........ -- -- -- -- 330,114 -- -- 330,114
Net loss................ -- -- -- -- -- -- (8,936,289) (8,936,289)
------- ------ --------- ------- ----------- -------- ------------ ------------
Balance, December 31,
1998.................... -- -- 5,084,340 50,843 21,003,545 -- (16,905,243) 4,149,145
Shares issued in
connection with initial
public offering, net of
offering costs
$2,639,212 ............. -- -- 2,000,000 20,000 12,340,788 -- -- 12,360,788
Issuance of Series A
Preferred Stock in
exchange for bridge
financing............... 162,914 1,629 -- -- 1,036,946 -- -- 1,038,575
Issuance of warrant in
connection with exchange
of bridge financing for
Series A Preferred
Stock................... -- -- -- -- 289,801 -- -- 289,801
Accrued dividend on
Series A Preferred
Stock................... -- -- -- -- (55,201) -- -- (55,201)
Shares issued in
connection with the
acquisition of Texas
International
Laboratories, Inc....... -- -- 521,739 5,217 2,864,348 -- -- 2,869,565
Shares issued in
connection with employee
stock purchase plan..... -- -- 3,502 35 16,757 -- -- 16,792
Net loss................ -- -- -- -- -- -- (11,590,633) (11,590,633)
------- ------ --------- ------- ----------- -------- ------------ ------------
Balance, December 31,
1999.................... 162,914 $1,629 7,609,581 $76,095 $37,496,984 $ -- $(28,495,876) $ 9,078,832
======= ====== ========= ======= =========== ======== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
Period from
Inception
(July 10,
1996)
For the Year Ended December 31, through
-------------------------------------- December 31,
1997 1998 1999 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Operating Activities:
Net loss.............. $(6,330,783) $(8,936,289) $(11,590,633) $(28,495,876)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization....... 145,858 367,231 1,357,488 1,882,852
Imputed interest on
note payable....... 8,329 -- -- 8,329
Amortization of debt
discount........... -- 20,960 309,154 330,114
Noncash interest
expense............ -- -- 289,801 289,801
Changes in operating
assets and
liabilties, net of
acquisition:
Accounts
receivable......... -- -- (73,446) (73,446)
Inventory........... -- -- (472,123) (472,123)
Prepaid expenses and
other.............. (210,740) (25,118) (20,442) (102,618)
Deposits and other.. 19,933 80,067 2,700 --
Accounts payable.... 208,906 876,904 (72,942) 1,296,950
Accrued expenses.... (346,014) (49,192) 670,621 850,716
Accrued interest.... -- -- 195,068 195,068
----------- ----------- ------------ ------------
Net cash used in
operating
activities....... (6,504,511) (7,665,437) (9,404,754) (24,290,233)
----------- ----------- ------------ ------------
Investing Activities:
Purchases of property
and equipment........ (888,510) (2,005,463) (3,820,634) (7,228,865)
Cash acquired in
purchase of Texas
International
Laboratories, Inc. .. -- -- 118 118
----------- ----------- ------------ ------------
Net cash used in
investing
activities....... (888,510) (2,005,463) (3,820,516) (7,228,747)
----------- ----------- ------------ ------------
Financing Activities:
Net borrowings
(repayments) on line
of credit............ (400,000) -- --
Proceeds from
borrowings under
long-term debt....... -- 2,541,084 2,058,831 5,599,915
Payments on long-term
debt................. -- -- (223,847) (223,847)
Payments on capital
lease obligation..... -- -- (6,139) (6,139)
Deferred offering
costs................ -- (498,443) (2,318) (692,667)
Proceeds from the
issuance of common
stock................ 8,900,134 10,317,713 12,377,580 31,595,427
Payment of stock
subscription......... 98,995 -- -- 98,995
Cash received from
SmithKline Beecham
Corporation in
connection with asset
purchase............. -- -- -- 52,736
----------- ----------- ------------ ------------
Net cash provided
by financing
activities....... 8,599,129 12,360,354 14,204,107 36,424,420
Net Increase in Cash and
Cash Equivalents....... 1,206,108 2,689,454 978,837 4,905,440
Cash and Cash
Equivalents, beginning
of period.............. 31,041 1,237,149 3,926,603 --
----------- ----------- ------------ ------------
Cash and Cash
Equivalents, end of
period................. $ 1,237,149 $ 3,926,603 $ 4,905,440 $ 4,905,440
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Careside
Background
Careside, Inc. ("Careside") is focused on designing products intended to
perform routine diagnostic blood tests in doctors' offices, hospital rooms,
patient homes or anywhere a patient is receiving medical attention. Careside's
first product in development is a compact portable device with related
disposables that performs chemistry, electrochemistry, immunochemistry and
coagulation testing.
In December 1999, Careside completed its acquisition of Texas Instrument
Laboratories, Inc. ("TIL") and merged TIL into a newly formed, wholly-owned
subsidiary, Careside Hematology. TIL manufactures hematology products used
primarily in veterinary applications. Careside and Careside Hematology are
collectively referred to as the Company.
Development Stage Risks and Liquidity
Careside was incorporated in July 1996 to acquire an ongoing, point-of-care
("POC") testing, development-stage product from SmithKline Beecham Corporation
and its affiliates ("SmithKline") and to complete the development of and to
manufacture, market and distribute POC diagnostic products. Since its
inception, Careside has generated minimal revenues and incurred significant
losses. Careside anticipates incurring additional losses over at least the
next year, and such losses are expected to increase as Careside expands its
marketing activities. Substantial financing will be needed by Careside to fund
its operations and to commercially develop its products. The ability of
Careside to commercialize its products will depend on, among other things, the
relative cost to the customer of Careside's products compared to alternative
products, its ability to obtain necessary regulatory approvals and to
manufacture the products in accordance with Good Manufacturing Practices, and
its ability to market and distribute its products. There can be no assurance
that Careside's future product enhancements will receive regulatory clearance
or be profitable in the marketplace.
The accompanying consolidated financial statements have been prepared in
conformity with principles of accounting applicable to a going concern. These
principles contemplate the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements for the year ended December 31, 1999, the
Company incurred a net loss of $11,590,633, has used cash for operating
activities of $9,404,754 and has accumulated a deficit of $28,495,876 since
inception. Management believes that the Company's existing sources of
liquidity, which contemplates that $2 million of bridge financing (see Note 9)
will be converted to equity, together with the proceeds received in March 2000
from its private placement of common stock (see Note 15) will be sufficient to
fund its planned operations into 2001. However, until the $2 million of bridge
financing has been converted and the Company has successfully entered its
targeted markets, there are uncertainties that may impact the Company's ability
to fund its planned operations and meet its operational objectives.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Careside and
Careside Hematology. Intercompany accounts and transactions are eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
F-7
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
All highly liquid investments with an original maturity of three months or
less are presented as cash equivalents in the accompanying consolidated
financial statements. At December 31, 1999, a $453,255 bank overdraft was
included in accrued expenses.
Inventory
Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out basis, and are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
-------- --------
<S> <C> <C>
Raw materials............................................ $ -- $369,937
Work in process.......................................... -- 48,620
Finished goods........................................... -- 130,066
-------- --------
$ -- $548,623
======== ========
</TABLE>
Property and Equipment
Property and equipment are stated at cost. Property and equipment
capitalized under capital leases are recorded at the present value of the
minimum lease payments due over the lease term. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the related assets or the lease term, whichever is shorter. The Company uses
lives of two to five years for research and manufacturing equipment and three
to seven years for office equipment. Leasehold improvements generally are
amortized over the life of the lease.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset or a
group of assets may not be recoverable. If an asset is determined to be
impaired, the loss is measured as the amount by which the carrying amount of
the asset exceeds fair value. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset would be compared to
the asset's carrying amount to determine if a write-down to market value or
discounted cash flow value is required. The Company is still in the
development stage and has not recorded an impairment loss in any period
presented.
Fair Value of Financial Instruments
Cash equivalents are reflected in the accompanying consolidated financial
statements at fair value due to the short-term nature of those instruments.
The carrying amount of long-term debt approximates fair value on the balance
sheet dates based on borrowing rates currently available to the Company for
loans with similar terms and maturities.
Revenue Recognition
The Company recognizes revenue upon shipment, except that revenue from
analyzers is not recognized until customer acceptance.
F-8
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Research and Development
Research and development costs are charged to expense as incurred.
Income Taxes
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes." Under SFAS No. 109, the liability method
is used in accounting for income taxes. Under this method, deferred tax assets
and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using
enacted tax rates that are expected to be in effect when the differences
reverse.
Accounting for Stock-Based Compensation
The Company applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its stock
options. The Company follows the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits pro forma disclosure
of the net loss using a fair value-based method of accounting for employee
stock option plans (see Note 10).
Net Loss Per Common Share
The Company has presented net loss per common share pursuant to SFAS No.
128, "Earnings per Share." Basic loss per common share was computed by
dividing net loss applicable to common shareholders by the weighted average
number of shares of common stock outstanding during the period. Dilutive loss
per common share has not been presented since the impact on loss per share
using the treasury stock method is anti-dilutive due to the Company's losses.
Recapitalization
In February 1999, Careside's stockholders approved a 1-for-5.2 reverse stock
split of Careside's common stock to be effective upon consummation of the
initial public offering which took place in June 1999. All references in the
accompanying consolidated financial statements to the number of shares and per
share amounts have been retroactively restated to reflect the reverse stock
split.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Recently Issued Pronouncements
In June 1999, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133, as amended by SFAS No. 137, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company is currently
evaluating the potential impact of SFAS No. 133 and SFAS No. 137.
F-9
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
---------- -----------
<S> <C> <C>
Laboratory equipment.... $3,433,811 $ 7,098,808
Computer and office
equipment.............. 106,798 315,414
Leasehold improvements.. 371,239 371,239
---------- -----------
3,911,848 7,785,461
Less--Accumulated
depreciation and
amortization........... (525,364) (1,846,275)
---------- -----------
$3,386,484 $ 5,939,186
========== ===========
</TABLE>
At December 31, 1999, there was approximately $1,600,000 of production
equipment that was in the process of being assembled. Depreciation and
amortization expense for the years ended December 31, 1997, 1998 and 1999, and
the period from inception (July 10, 1996) through December 31, 1999 was,
$145,858, $367,231, $1,320,911 and $1,846,275, respectively.
4. Income Taxes
Deferred income tax assets or liabilities are computed based on the
temporary differences between the financial statement and income tax bases of
assets and liabilities using the enacted marginal income tax rate in effect
for the year in which the differences are expected to reverse. Realization of
the net deferred tax assets is dependent on generating sufficient taxable
income during the periods in which temporary differences will reverse. The
amount of the net deferred tax assets considered realizable, however, could be
adjusted in the near term if estimates of future taxable income during the
reversal periods are revised. Deferred income tax expenses or credits are
based on the changes in the deferred income tax assets or liabilities from
period to period.
At December 31, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $17,769,156. In addition, the
Company has federal research and development credit carryforwards of
approximately $759,464. The net operating loss and credit carryforwards begin
to expire in 2011 and are subject to review and possible adjustment by the
Internal Revenue Service. The Tax Reform Act of 1986 contains provisions that
may limit the net operating loss carryforwards available to be used in any
given year in the event of significant changes in ownership interests.
The components of the deferred income tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1999
----------- ------------
<S> <C> <C> <C>
Net operating loss carryforwards.......... $ 730,438 $ 7,612,306
Research and development credit
carryforwards............................ 224,775 1,115,120
Capitalized research and development...... 1,955,893 2,152,254
Start-up costs............................ 419,936 1,570,460
Accruals.................................. 6,663 18,569
Depreciation and amortization............. 178,623 783,964
Deferred rent............................. -- 31,365
State tax benefit......................... -- (319,686)
Valuation allowance....................... (3,516,328) (12,964,352)
----------- ------------
$ -- $ --
=========== ============
</TABLE>
F-10
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Due to the uncertainty surrounding the realization of the deferred tax
asset, the Company has provided a valuation allowance against the entire
asset.
5. Common Stock Placements
In March 1997, Careside completed a private placement (the "1997 Private
Placement") of 1,923,090 shares of its common stock at $5.20 per share. The
1997 Private Placement raised approximately $8.7 million, net of the placement
agent's commission and offering costs. In connection with the 1997 Private
Placement, the placement agent and its affiliates received warrants to
purchase 384,615 shares of Careside's Common stock at $5.20 per share. These
warrants are currently exercisable and expire seven years from the date of
issuance.
In June 1998, Careside completed a private placement (the "1998 Private
Placement") of 1,701,225 shares of its common stock at $6.76 per share, which
generated net proceeds of approximately $10.2 million. In connection with the
1998 Private Placement, the placement agent and its affiliates received
warrants to purchase 340,237 shares of Careside's common stock at $6.76 per
share. These warrants are currently exercisable and expire seven years from
the date of issuance. In connection with providing financial consulting
services for the 1998 Private Placement, Careside granted an option to
purchase 1,154 shares of common stock at $.05 per share to an entity owned by
a director of Careside.
In June 1999, Careside completed an initial public offering of its common
stock. The offering totaled 2,000,000 shares of common stock and 2,000,000
tradable warrants exercisable into one share of common stock each. The
combined share and warrant were sold at a price of $7.50 per unit. The
warrants are currently exercisable at a price of $9.00 per share and expire on
the earlier of five years from the date of issuance or if they are called.
They are callable at $0.05 per warrant upon 30 days written notice if the
common stock trades for ten consecutive days at a price equal to or exceeding
$14.00 per share.
6. Preferred Stock
In June 1999, the Company exchanged $1,038,575 of bridge financing and
unpaid interest (see Note 9) for 162,914 shares of Series A Convertible
Preferred Stock.
The Series A Convertible Preferred Stock has a stated value equal to $7.50
per share. The Series A Convertible Preferred Stock has preference over common
stock in dividends and has a liquidation preference over common stock of
$7.50, plus all accrued and unpaid dividends. Each share of Series A
Convertible Preferred Stock has one vote on all matters to be voted on by the
holders of the common stock and votes with the holders of the common stock as
one voting group. The Series A Convertible Preferred Stock has the right to
vote as a separate class pursuant to applicable law and on any action limiting
the preferences or rights of the Series A Convertible Preferred Stock,
reclassifying the common stock or any other capital stock ranking junior to
the Series A Convertible Preferred Stock into any class of security ranking
senior to or the same as the Series A Convertible Preferred Stock, or
increasing the authorized number of shares of Series A Convertible Preferred
Stock. The Series A Convertible Preferred Stock bears a cumulative dividend,
which accrues if not declared by the Board of Directors, at an annual rate of
10% of stated value. In 1999, the Company accrued dividends payable in the
amount of $55,201.
Each share of Series A Convertible Preferred Stock is convertible at the
option of the holder into one unit comprised of one share of common stock and
a warrant to purchase one additional share of common stock. All accrued and
unpaid dividends with respect to shares of Series A Convertible Preferred
Stock that are converted will be converted into units at the initial offering
price per unit. The terms and conditions of the warrants received on
conversion of Series A Convertible Preferred Stock, including its exercise
price, will be identical to the terms and conditions of the warrants included
in the units sold in the initial public offering.
F-11
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has the right to redeem the Series A Convertible Preferred Stock
at any time for a per share amount equal to the sum of $7.50, plus any accrued
and unpaid dividends and the greater of $0.05 or the excess of the average
five day closing price of a share of common stock over the exercise price of
the warrant issuable upon conversion of the Series A Convertible Preferred
Stock.
7. Purchase of Texas Instrument Laboratories, Inc.
In December 1999, the Careside acquired all of the outstanding common stock
of TIL in exchange for 521,739 shares of Careside's common stock. TIL was then
merged into Careside's newly formed, wholly-owned subsidiary, Careside
Hematology. The transaction was accounted for using the purchase method of
accounting. Careside acquired substantially all assets of TIL for $2,869,565,
which represented the market value of the 521,739 shares of common stock on
the date of acquisition. The excess of the purchase price over the book value
of TIL was recorded as goodwill in the amount of $2,834,747. Goodwill will be
amortized over a five-year period. Amortization expense was $36,577 in 1999.
The following unaudited proforma results of operations for the years ended
December 31, 1998 and 1999 have been prepared as if the acquisition of TIL
occurred on January 1, 1998:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1998 1999
----------- ------------
(unaudited)
<S> <C> <C>
Revenue......................................... $ 285,856 $ 321,823
Net loss........................................ (9,532,870) (12,103,215)
Net loss available to common stockholders....... (9,532,870) (12,158,416)
Basic and diluted loss per common share......... (1.85) (1.81)
</TABLE>
8. Related Party Transactions
During 1997, SmithKline loaned Careside $1,000,000, which along with accrued
expenses of $27,985 was converted into an additional 2% equity interest
(129,555 common shares) in Careside upon the closing of the 1997 Private
Placement. SmithKline currently owns 229,808 shares, representing 3.0% of the
current outstanding common stock.
In December 1998, Careside entered into an agreement with an affiliate of
SmithKline for up to $3,000,000 of bridge financing. In 1999, $1,000,000 of
this debt, plus $38,575 of accrued interest of unpaid interest was converted
to Series A Preferred Stock (see Note 9).
F-12
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
---------- -----------
<S> <C> <C>
Note payable, interest at 8%, due on January 31,
2000, net of unamortized discount of $309,154.... $1,190,846 $ --
Note payable, interest at 10%, due on April 30,
2000............................................. -- 2,000,000
Equipment loan due to finance company, interest at
14%, due in monthly installments of principal and
interest of $26,837, with a final payment of
$133,490 in December 2002........................ 1,041,084 854,286
Equipment loan due to finance company, interest at
15%, due in monthly installments of principal and
interest of $14,347, with a final payment of
$69,854 in September 2003........................ -- 521,782
---------- -----------
2,231,930 3,376,068
Less--Current Portion............................. (186,998) (2,316,192)
---------- -----------
$2,044,932 $ 1,059,876
========== ===========
</TABLE>
In December 1998, Careside entered into a $2,500,000 facility with an
equipment financing company. Borrowings under the facility are evidenced as
separate loans and are secured by specific equipment assets. Each equipment
loan has a 48-month term and bears interest at approximately 14% and 15% per
year, adjusted for an index rate based on 48-month U.S. Treasury Notes at the
time of borrowing (6.44% at December 31, 1999). Careside borrowed $1,041,084
in 1998 and $558,831 in 1999 under this facility to finance equipment
purchases. Careside recorded interest expense of $0 and $155,369 in 1998 and
1999, respectively related to these borrowings.
In December 1998, Careside entered into an agreement with an affiliate of
SmithKline for up to $3,000,000 of bridge financing, of which $1,500,000 was
drawn on December 28, 1998 and the remaining $1,500,000 was drawn on January
31, 1999. The outstanding principal under the bridge financing originally
matured upon the earliest of the completion of Careside's initial public
offering (the "Offering"), a private equity financing of at least $8,000,000
or January 31, 2000. The maturity date has been extended to April 30, 2000.
Careside issued a warrant (the "Bridge Warrant") in connection with the bridge
financing. The Bridge Warrant was originally exercisable into that number of
shares of common stock which is equal to $750,000 divided by 85% of the
Offering price per share. The Bridge Warrant has an exercise price equal to
85% of the Offering price. The Bridge Warrant became exercisable in December
1999 and expires on June 16, 2003. Using the Black-Scholes pricing model, the
estimated fair value of the Bridge Warrant was calculated at $330,114 and was
recorded as a reduction in the carrying amount of the bridge note, with a
corresponding increase in stockholders' equity. The discount on the bridge
note was amortized over the estimated term of the note as additional interest
expense. In June 1999, $1,000,000 of the bridge financing plus $38,575 of
unpaid interest was converted to Series A Convertible Preferred Stock (see
Note 6). In connection with the conversion, the Bridge Warrant was modified
such that it will be exercisable into that number of shares of common stock
which is equal to $1,500,000 divided by 85% of the Offering price per share.
Using the Black-Scholes pricing model, the estimated fair value of the
increase in shares under the Bridge Warrant modification was calculated at
$289,801 and was recorded as interest expense in 1999, with a corresponding
increase in stockholders' equity.
F-13
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future maturities of debt at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000.......................................................... $2,316,192
2001.......................................................... 363,598
2002.......................................................... 525,366
2003 ......................................................... 170,912
----------
$3,376,068
==========
</TABLE>
10. Stock Options and Warrants
Stock Options
Careside has adopted the 1996 Incentive and Non-Qualified Stock Option Plan,
1996 Key Executive Stock Option Plan, 1998 Incentive and Non-Qualified Stock
Option Plan and the 1998 Director Stock Option Plan (together, the "Plans"),
which provide for the granting of options to purchase up to 1,201,923 shares
of common stock to directors, officers, consultants and employees of the
Company. At December 31, 1999, 684,238 shares were available for future grant
under the Plans. The number of options to be granted and the option prices are
determined by the Board of Directors in accordance with the terms of the
Plans. Generally, options are not granted at prices below the fair market
value at the date of grant. Each option expires on such date as the Board of
Directors may determine. Generally options vest from 3 to 5 years.
The table below summarizes the option activity for 1997, 1998, and 1999:
<TABLE>
<CAPTION>
Weighted Exercisable
Weighted Average Fair Weighted
Average Value of Average
Number of Exercise Options Granted Number Exercise
Shares Price During the Year Exercisable Price
--------- -------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at December
31, 1996............... --
Granted............... 317,163 $5.49 $2.14
------- ----- =====
Outstanding at December
31, 1997............... 317,163 5.49 23,051 $5.28
======= =====
Granted............... 111,950 6.76 $1.83
=====
Exercised............. (17,715) 6.76
Cancelled............. (673) 5.20
------- -----
Outstanding at December
31, 1998............... 410,725 5.78 198,343 $5.08
======= =====
Granted............... 95,017 6.17 $2.82
=====
Exercised............. -- --
Cancelled............. (5,772) 6.07
------- -----
Outstanding at December
31, 1999............... 499,970 $5.85 390,278 $5.76
======= ===== ======= =====
</TABLE>
F-14
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below summarizes information about options outstanding at December
31, 1999:
<TABLE>
<CAPTION>
Weighted Average
Range of Number Weighted Average Exercise Price Number
Exercise Outstanding at Remaining of Options Exercisable at
Prices December 31, 1999 Contractual Life Outstanding December 31, 1999
-------- ----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
$0.05-
0.05.. 1,154 7.4 years $0.05 1,154
$5.00-
7.50.. 497,614 7.9 years $5.86 388,884
$8.01.. 1,202 9.0 years $8.01 240
------- --------- ----- -------
$0.05-
8.01.. 499,970 7.9 years $5.85 390,278
======= ========= ===== =======
</TABLE>
As permitted by SFAS No. 123 "Accounting for Stock-Based Compensation," the
Company continues to apply the accounting rules of APB No. 25 governing the
recognition of compensation expense for employee stock options. Such
accounting rules measure compensation expense on the first date at which both
the exercise price and the number of shares are known. Expense is only
recognized in circumstances where the exercise price is less than the fair
market value at the measurement date. No such expense has been recorded in the
accompanying consolidated statements of operations. In 1998 Careside issued
1,154 options to a consultant. Compensation expense recorded for these options
was immaterial.
Under the requirements of SFAS No. 123 pro forma disclosure of compensation
expense using the fair value method is required to be disclosed if the Company
applies APB No. 25. Pro forma compensation has been computed by estimating the
fair value of options at the date of grant using the Black-Scholes option
pricing model.
The following assumptions were used in estimating the fair value of options:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ----------
<S> <C> <C> <C>
Weighted average risk-
free interest rate..... 6.41% 5.56% 5.92%
Weighted average
expected life.......... 6.7 years 7.0 years 4.17 years
Weighted average
volatility............. 0% 0% 60%
Dividend yield.......... 0% 0% 0%
</TABLE>
Had the compensation cost of these options been recorded for the years ended
December 31, 1997, 1998 and 1999, the Company's net loss would have increased
by approximately $28,000, $316,000 and $442,256, respectively.
Stock Warrants
The following table summarizes outstanding warrants at December 31, 1999
issued in connection with private placements of Careside's common stock prior
to the Offering:
<TABLE>
<CAPTION>
Outstanding Exercise Expiration
Type of Warrants Warrants Price Issuance Date Date
---------------- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Common stock.............. 384,615 $5.20 February 1997 February 2004
Common stock.............. 340,237 $6.76 April 1998 April 2005
-------
724,852
=======
</TABLE>
In addition to the above warrants, the Company issued a Bridge Warrant in
connection with the issuance of debt (see Note 9). The Bridge Warrant became
exercisable in December 1999 and expires in June 2003. Warrants to purchase
200,000 units were granted to the underwriters of the initial public offering.
Each warrant carries an exercise price
F-15
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of $9.00 and allows the purchase of one share of common stock and a tradable
warrant identical to those sold in the Offering. The warrants are exercisable
for a four year period beginning on the first anniversary of the initial public
offering.
11. Statements of Cash Flows
The Company prepares its statements of cash flows using the indirect method
as defined under SFAS No. 95. The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Supplemental cash flows disclosures are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- --------
<S> <C> <C> <C>
Cash paid for interest................................. $ -- $ -- $157,653
Cash paid for income taxes............................. -- -- --
</TABLE>
Non-cash Investing and Financing Activities:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----------
<S> <C> <C> <C>
Conversion of bridge financing to Series A
Preferred Stock................................... $ -- $ -- $1,038,575
Acquisition of equipment under capital lease....... -- -- 52,980
Accrued dividends on Series A Preferred stock...... -- -- 55,201
</TABLE>
In connection with the Company's initial public offering, $498,433 of
previously unpaid deferred offering costs were offset against accounts
payable.
In connection with the acquisition of TIL in December 1999, the Company
recorded the following non-cash amounts which have been excluded from the
consolidated statement of cash flows:
<TABLE>
<S> <C>
Additional paid-in capital..................................... $2,869,565
Goodwill....................................................... 2,834,747
Net assets acquired............................................ 34,818
</TABLE>
12. Commitments
Leases
The Company leases office and laboratory facilities under noncancelable
operating leases expiring from August 2000 to July 2006. Rent expense for the
years ended 1997, 1998 and 1999 and the period from inception (July 10, 1996)
through December 31, 1999 was $156,756, $156,756, $174,497 and $514,135,
respectively.
Included in property and equipment is approximately $52,980 of equipment, at
acquisition cost, which is leased under a noncancellable lease accounted for
as a capital lease expiring in June 2003.
F-16
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999, the future minimum annual rental payments under lease
agreements are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases Total
-------- ---------- ----------
<S> <C> <C> <C>
December 31:
2000................................... $ 16,875 $ 189,065 $ 205,940
2001................................... 16,875 219,515 236,390
2002................................... 16,875 238,746 255,621
2003................................... 9,019 253,965 262,984
2004................................... -- 263,577 263,577
Thereafter............................. -- 435,820 435,820
-------- ---------- ----------
59,644 $1,600,688 $1,660,332
========== ==========
Less--Amount representing interest at
approximately 14 percent................ (12,803)
--------
Present value of minimum lease payments.. 46,841
--------
Less--Current portion.................... (11,006)
--------
$ 35,835
========
</TABLE>
Collaborative Arrangements
Careside has utilized strategic partners with specific design and technology
expertise in order to develop the Careside system rapidly and on a cost-
effective basis. Careside has agreements with (i) Fuji Photo Film Co., Ltd.
for the supply of its dry film based chemistry reagents, (ii) International
Technidyne Corporation for the joint development of coagulation reagents,
(iii) UMM Electronics, Inc. to design and manufacture the CareSide Analyzer
and (iv) Advanced Medical Information Technologies, Inc. to develop software
to link the Careside system and other medical devices, including the
hematology device. In addition, Careside contracted with Hauser, Inc. for the
design of the Careside system and with Battelle Memorial Institute for the
design of the system's disposable test cartridges and their automated assembly
manufacturing system. TIL has agreements with Ysebaert, Inc., the manufacturer
of the Hematology Analyzer. The Company's agreements with its strategic
partners do not obligate it to any minimum purchase commitments.
The Company purchases its dry film based chemistry reagents solely from Fuji
Photo Film Co., Ltd. In addition, UMM Electronics, Inc. is the sole designer
and manufacturer of the Careside Analyzer. The loss of these suppliers could
impact the Company's ability to obtain and produce these items in the short-
term. However, the Company believes that acceptable alternative suppliers are
available.
Employment Agreements
The Company has entered into three-year renewable employment agreements with
three of its executive officers that provide for aggregate annual compensation
of approximately $543,325.
13. Retirement Plan
The Company maintains a 401(k) profit sharing plan on behalf of its
employees. Participation in the plan is voluntary and eligible employees, as
defined, may contribute up to 15% of their compensation to the plan. The
Company matches 50% of the employee's contribution up to 4% of an employee's
compensation. Contributions
F-17
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
under the Plan were, $32,315, $34,657, 47,195 and $114,167 for the years ended
1997, 1998 and 1999 and the period from inception (July 10, 1996) through
December 31, 1999, respectively.
14. Employee Stock Purchase Plan
In 1999, the Company's shareholders approved the Employee Stock Purchase
Plan ("ESPP"), under which 150,000 shares of the Company's common stock could
be sold to employees. Each quarter, an eligible U.S. employee may elect to
withhold up to 15 percent of his or her salary to purchase shares of the
Company's stock at a price equal to 85 percent of the fair value of the stock
as of the first day of the quarter, or the last day of the quarter. The ESPP
will terminate at the earlier of the date that all 150,000 shares have been
sold or the date as of which the Board of Directors chooses to terminate the
plan as provided in the plan provision. In 1999, 3,502 shares of the Company's
stock were sold under the ESPP for $16,792, and at December 31, 1999,
146,498 shares remained available for sale.
15. Subsequent Events
In January 2000, the Company financed the purchase price of certain
equipment totaling $795,465 and pledged the equipment as collateral. The loan
is paid in monthly installments and is due over 48 months.
In January 2000, the Company granted 86,500 options under the 1996 and 1998
stock option Plans with a weighted average exercise price of $10.00.
16. Events Subsequent to the Auditors' Report (Unaudited)
In March 2000, the Company sold 1,184,091 shares of common stock in a private
placement for $8.77 per common share. Proceeds, net of approximately $840,000
offering cost, amounted to $9.5 million. The Company has agreed to file a
registration statement with the Securities and Exchange Commission to register
these shares within 30 days after the closing. In connection with the sale, the
Company issued warrants exercisable into 142,091 shares of the Company's common
stock at an exercise price of $0.01 per share. The warrants are exercisable upon
certain conditions and expire on December 15, 2000. In addition, the Company
issued warrants to purchase 101,305 shares of common stock to the placement
agent with an exercise price of $8.77 each. Upon exercise of its warrants, the
placement agent is entitled to exercise a contingent warrant for 12,156 shares
of common stock. These contingent warrants have the same terms and conditions as
the contingent warrants issued to the purchasers in the private placement.
F-18
<PAGE>
================================================================================
LOGO
3,248,510 Shares of Common Stock
__________________
PROSPECTUS
__________________
April __, 2000
================================================================================
We have not authorized any dealer, salesperson or other person to give any
information or represent anything not contained in this prospectus. You must not
rely on any unauthorized information. This prospectus does not offer to sell or
buy any securities in any jurisdiction where it is unlawful. The information in
this prospectus is current as of its date.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth an itemization of all estimated expenses,
in connection with sale of the securities being registered payable by Careside:
<TABLE>
<CAPTION>
Nature of Expense Amount
----------------- ----------
<S> <C>
SEC Registration Fee............................................ $ 8,254.46
Printing and engraving fees..................................... $ 4,500
Registrant's counsel fees and expenses.......................... $25,000
Accounting fees and expenses.................................... $32,000
Miscellaneous................................................... $ 5,245.54
----------
TOTAL.......................................................... $75,000.00
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Our Amended and Restated Certificate of Incorporation (the "Charter")
provides that we shall indemnify and advance expenses to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law ("DGCL"), as
amended from time to time, to each person who is or was one of our directors or
officers and the heirs, executors and administrators of such a person. Any
expenses, including attorneys' fees, incurred by a person who is or was one of
our directors or officers, and the heirs, executors and administrators of such
a person in connection with defending any such proceeding in advance of its
final disposition shall be paid by us; provided, however, that if the DGCL
requires, an advancement of expenses incurred by an indemnitee in his capacity
as a director or officer, and not in any other capacity in which service was or
is rendered by such indemnitee, including, without limitation, service to an
employee benefit plan, shall be made only upon delivery to us of an undertaking
by or on behalf of such indemnitee, to repay all amounts so advanced, if it
shall ultimately be determined that such indemnitee is not entitled to be
indemnified for such expenses. Notwithstanding the aforementioned
indemnification provisions, we may, at the discretion of our Chief Executive
Officer, enter into indemnification agreements with directors or officers.
Section 145 of the DGCL provides that a corporation has the power to
indemnify any director or officer, or former director or officer, who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, other than an action by or in the right of the corporation,
by reason of the fact that such director or officer or former director or
officer is or was a director, officer, employee or agent of the corporation,
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by them in connection with such
action, suit or proceeding, if such person shall have acted in good faith and
in a manner reasonably believed to be in or not opposed to the best interests
of the corporation, and, with respect to any criminal action or proceeding,
provided that such person had no reasonable cause to believe his or her conduct
was unlawful, except that, if such action shall be in the right of the
corporation, no such indemnification shall be provided as to any claim, issue
or matter as to which such person shall have been judged to have been liable to
the corporation unless and to the extent that the Court of Chancery of the
State of Delaware, or any court in which such suit or action was brought, shall
determine upon application that, in view of all of the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses as such court shall deem proper.
II-1
<PAGE>
The Charter contains a provision to limit the personal liability of our
directors to the fullest extent permitted by Section 102(b)(7) of the DGCL, as
amended. In addition, the Amended and Restated By-Laws provide that we shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, other than an action by us or
in our right, by reason of the fact that he is or was one of our directors,
officers, employees or agents, or is or was serving at our request as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to our best
interests, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
As permitted by the DGCL, the Charter provides that, subject to certain
limited exceptions, none of our directors shall be liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (1) for any breach of the director's duty of loyalty to us
or our stockholders, (2) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (3) for the
unlawful payment of dividends on or redemption or repurchase of our capital
stock or (4) for any transaction from which the director derived an improper
personal benefit. The effect of this provision is to limit our ability and our
stockholders' ability through stockholder derivative suits on our behalf, to
recover monetary damages against a director for the breach of certain fiduciary
duties as a director, including breaches resulting from grossly negligent
conduct. In addition, the Charter and Amended and Restated By-Laws provide that
we shall, to the fullest extent permitted by the DGCL, indemnify all of our
directors and officers and that we may, to the extent permitted by the DGCL,
indemnify our employees and agents.
Item 15. Recent Sales of Unregistered Securities.
Since our formation in July 1996, we have issued the following securities,
having given retroactive effect to a 1-for-5.2 reverse stock split effected in
connection with our initial public offering, without registration under the
Securities Act:
1. In July 1996 and October 1996, we issued an aggregate of 659,344 shares
of common stock to our founder group for no consideration.
2. In November 1996, pursuant to an asset purchase agreement, SmithKline
Beecham Diagnostics Systems Co. and SmithKline Beecham Clinical
Laboratories, Inc. sold us certain fixed and intangible assets used in
connection with our point-of-care development program. As consideration
for the purchase of the assets, we issued to SBDS 34,702 shares of
common stock, representing 5% of our total common stock outstanding at
that time.
3. In December 1996, in connection with the establishment of a $1.0 million
working capital facility, we issued Exigent Partners, L.P. 557,601
shares of common stock for an aggregate purchase price of $98,995. In
the same month, we issued (1) 30,935 shares of common stock to
SmithKline Beecham Corporation pursuant to certain anti-dilution
protections granted to SmithKline Beecham Corporation in connection with
a credit facility and asset transfer and (2) 30,173 shares of common
stock to Philip B. Smith for the investment banking services he provided
in connection with our equity financing.
4. In January 1997, our credit facility from SmithKline Beecham
Corporation, pursuant to its terms, was converted into 129,555 shares of
common stock, representing 2% of our total common stock outstanding at
that time.
II-2
<PAGE>
5. In March 1997, we completed a private placement of securities through
Spencer Trask Securities Incorporated which resulted in our issuance
of 1,923,090 shares of common stock at $5.20 per share to 203
investors who were deemed to be accredited investors under Rule 501(a)
of Regulation D of the Securities Act of 1933 based upon
representations made to us by such investors. In connection with the
private placement in February 1997, we issued warrants to Spencer
Trask Securities Incorporated to purchase 384,615 shares of common
stock at an exercise price of $5.20 per share as partial consideration
for its services in the private placement. These warrants expire three
(3) years after closing of the offering. Of the proceeds of this
private placement, which totalled in the aggregate approximately $10
million, we received approximately $9 million with the remainder paid
as a commission to Spencer Trask for its services in the private
placement.
6. In February 1997, we granted stock options to purchase an aggregate of
256,368 shares of common stock under our 1996 Incentive and Non-
Qualified Stock Option Plan and 1996 Key Executive Stock Option Plan
(collectively, the "1996 Stock Option Plans") to ten employees and
directors. The weighted average per share exercise price of these
stock options is $5.29.
7. In May 1997, we granted stock options to purchase 192 shares of common
stock under our 1996 Incentive and Non-Qualified Stock Option Plan to
one employee. The per share exercise price of these stock options is
$5.20.
8. In June 1997, we granted stock options to purchase an aggregate of
31,731 shares of common stock under our 1996 Stock Option Plans to an
individual who was both one of our employees. The per share exercise
price of these stock options is $6.76.
9. In August 1997, we granted Cedar Capital Investors, options to
purchase 1,154 shares of common stock at an exercise price of $.052
per share. These options remain exercisable until August 8, 2007.
These options were granted to Cedar Capital Investors in consideration
for providing certain financial consulting services to us in
connection with a private placement of securities in 1998.
10. In December 1997, we granted stock options to purchase an aggregate of
27,718 shares of common stock under our 1996 Incentive and Non-
Qualified Stock Option Plan to 20 employees. The weighted average per
share exercise price of these stock options is $6.09.
11. In January 1998, we granted stock options to purchase an aggregate of
1,923 shares of common stock under our 1996 Incentive and Non-
Qualified Stock Option Plan to one employee. The per share exercise
price of these stock options is $6.76.
12. In February 1998, we granted stock options to purchase an aggregate of
13,700 shares of common stock under our 1996 Incentive and Non-
Qualified Stock Option Plan to one employee and five non-employee
directors. The per share exercise price of these stock options is
$6.76.
13. In May 1998, we granted stock options to purchase an aggregate of
17,715 shares of common stock under our 1996 Incentive and Non-
Qualified Stock Option Plan to 18 employees which were immediately
exercised. The per share exercise price of these stock options was
$6.76 per share.
14. In June 1998, we completed a second private placement of securities
through Spencer Trask Securities Incorporated which resulted in our
issuance of 1,701,225 shares of common stock at $6.76 per share to 311
investors, of whom 101 invested in the 1997 private placement of
securities, who were deemed to be accredited investors under Rule
501(a) of Regulation D of the Securities Act of 1933 based upon
certain representations made to us by such investors. In connection
with the private placement in 1998, we issued warrants to Spencer
Trask Securities Incorporated to purchase 340,237 shares of common
stock at an exercise price of $6.76 per share as partial consideration
for our services in these private placements. These warrants expire
three years from the date of closing of the offering. Of the proceeds
of this private placement, which totalled in the aggregate
approximately $11.5 million, we received approximately $10 million
with the remainder paid as a commission to Spencer Trask Securities
Incorporated for its services in the private placement.
15. In July 1998, we granted stock options to purchase an aggregate of
67,074 shares of common stock under our 1996 Stock Option Plans to 29
employees two of whom are directors. The per share exercise price of
these stock options is $6.76.
II-3
<PAGE>
16. In November 1998, we granted stock options to purchase an aggregate of
11,538 shares of common stock under our 1996 Incentive and Non-
Qualified Stock Option Plan to six employees two of whom are
directors. The per share exercise price of these stock options is
$7.28.
17. In December 1998, we entered into a bridge loan agreement with S.R.
One, Limited for a $3.0 million loan at 8% per annum interest. Draw
down of $1.5 million on this loan occurred on December 28, 1998 with
the remaining $1.5 million drawn down in January 1999. Prior to the
modification described in item 19 below, the bridge loan matured on
the date of completion of the offering or January 31, 2000, whichever
occurred sooner. We issued a warrant to S.R. One, Limited which, prior
to the modification described in Item 19 below, had an exercise price
based upon the initial public offering price of our common stock, less
a 15% discount, as partial consideration for providing the bridge
loan. The warrant is not exercisable until at least six months after
completion of the offering.
18. In January 1999, we granted stock options to purchase an aggregate of
1,202 shares of common stock under our 1996 Incentive and Non-
Qualified Stock Option Plan to one employee. The per share exercise
price of these stock options is $8.00.
19. In April 1999, we entered into a commitment letter with S.R. One,
Limited pursuant to which S.R. One agreed to convert $1 million of our
$3 million bridge loan, together with accrued interest at the rate of
8% on $1 million, upon consummation of the offering, into 162,914
shares of Series A Convertible Preferred Stock. The remaining $2
million of the bridge loan matured in December 1999. The annual
interest rate on the remaining $2 million increased to 10% on July 1,
1999. Since the remainder of the bridge loan was not repaid by
December 1, 1999, S.R. One has the option to convert all or any
portion of the remaining loan, plus accrued interest thereon, into
shares of Series A Convertible Preferred Stock on the same basis as
the Series A Convertible Preferred Stock that is issued to S.R. One as
part of the $1 million conversion at the completion of our initial
public offering. As part of the conversion, the bridge warrant issued
to S.R. One in the bridge financing was modified such that it will
entitle S.R. One to purchase that number of shares of common stock
which is equal to $1,500,000 divided by $6.38
20. In June 1999, we granted stock options to purchase an aggregate of
10,815 shares of common stock under our 1996 Incentive and Non-
Qualified Stock Option Plan to five non-employee directors. The per
share exercise price of these stock options is $7.50.
21. In June 1999, we completed our initial public offering of 2,000,000
units, comprised of one share of common stock and one warrant to
purchase an additional share of our common stock. The net proceeds
from our initial public offering were $12.4 million, after deducting
the underwriting fees and estimated expenses of that offering. Of the
net proceeds received, (i) 4.4 million was used to complete product
development, (ii) 1.0 million was used to prepare for the marketing,
sale and launch of our product and (iii) the balance has and will
continue to be used for working capital and other general corporate
purposes.
22. On December 7, 1999, we acquired all of the outstanding stock of Texas
International Laboratories, Inc. (TIL). The acquisition was effected
by the merger of TIL with and into Careside Hematology, Inc., our
wholly-owned subsidiary. The stockholders of TIL received 521,739
unregistered shares of our Common Stock.
23. On December 31, 1999, we issued 3,502 shares of common stock to one
employee who purchased them pursuant to our Employee Stock Purchase
Plan.
24. In January 2000, we granted stock options to purchase 86,500 shares of
common stock under our 1996 and 1998 Incentive and Non-Qualified Stock
Option Plans to 30 employees. The per share exercise price is $10.00.
25. In March 2000, we issued 1,154 shares to Mr. Anthony Brenner upon
exercise of options at $.052 per share originally granted to Cedar
Capital Investors.
26. In March 2000, we completed a private placement of 1,184,091 shares of
our common stock at $8.77 per share, raising a gross amount of $10.4
million. Our expenses in that transaction were approximately $840,000.
Purchasers of those privately placed shares also received contingent
warrants to purchase 142,091 shares of our common stock at an exercise
price of $.01 per share if the closing price of our common stock on
the American Stock Exchange falls below $7.50 per share for 15
consecutive days during the period from August 15, 2000 to November
15, 2000. Such warrants will expire on December 15, 2000. In addition,
our placement agent in this transaction received warrants to purchase
101,305 shares of our common stock. The agent's warrants expire in
March 2005 and the exercise price is $8.77 per share. Upon exercise of
its warrants, the placement agent is entitled to exercise a contingent
warrant for an additional 12,156 shares of our common stock at $.01
per share. The agent's contingent warrant has the same terms and
conditions as the contingent warrant issued to the purchasers in the
transaction.
27. On March 31, 2000 we issued 2,839 shares of common stock to one
employee who purchased them pursuant to our Employee Stock Purchase
Plan.
We believe that the transactions described in paragraphs 1 through 27 above
were exempt from registration under Section 3(b), 4(2) or 3(a)(9) of the
Securities Act because the subject securities were either (1) issued pursuant
to a compensatory benefit plan pursuant to Rule 701 under the Securities Act,
(2) issued to a limited group of persons, each of whom was believed to have
been a sophisticated investor or to have had a preexisting business or personal
relationship with us or our management and to have been purchasing for
investment without a view to further distribution or (3) exchanged by us with
our existing security holders exclusively where no commission or other
remuneration was paid or given directly or indirectly for soliciting such
exchange. In addition, unless the shares were registered, the recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with us, to information about us.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
Exhibit No. Description
- ----------- -----------
2.1* Agreement and Plan of Merger dated as of December 7, 1999 by and
among Careside, Inc., Careside Hematology, Inc., Texas
International Laboratories, Inc., Yves LeBihan and Jean-Yves
LeBihan.
3.1** Amended and Restated Certificate of Incorporation of Careside,
Inc.
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.2** Certificate of Designations of Series A Convertible Preferred
Stock
3.3** Amended and Restated Bylaws of Careside, Inc.
4.1*** Specimen Stock Certificate
4.1a** Specimen Warrant Certificate
4.1b** Specimen Unit Certificate
4.2*** Placement Agent Warrant Agreement dated as of January 31, 1997 by
and between Careside, Inc. and Spencer Trask Securities
Incorporated (including Form of Warrant)
4.3*** Placement Agent Warrant Agreement dated as of March 6, 1998 by
and between Careside, Inc. and Spencer Trask Securities
Incorporated (including Form of Warrant)
4.4*** Securities Purchase Agreement dated as of December 17, 1998 by
and between S.R. One, Limited and Careside, Inc. (including Form
of Note) (as amended)
4.5*** Warrant Issued to S.R. One, Limited on December 17, 1998
4.6** Warrant Agreement dated June 21, 2000, by and between Careside,
Inc. and Paulson Investment Company, Inc.
4.7** Form of Warrant Agreement dated June 21, 2000, by and between
Careside, Inc. and American Stock Transfer & Trust Company, as
Warrant Agent
4.8** Warrant issued to S.R. One, Limited dated June 21, 1999.
4.9** New Note issued to S.R. One, Limited dated as of June 21, 1999.
4.10**** Registration Rights Agreement dated as of December 7, 1999 by and
between Careside, Inc. and Yves LeBihan and Jean-Yves LeBihan.
4.11*** Securities Purchase and Subscription Agreement dated as
of March 8, 2000 by and between Careside, Inc. and Purchasers
4.12*** Warrant Agreement dated as of March 8, 2000 by and between
Careside, Inc. and H. C. Wainwright & Co., Inc. (including Form
of Warrant)
4.13*** Contingent Warrant Agreement dated as of March 8, 2000 by and
between Careside, Inc. and Purchasers (including Form of Warrant)
5.1 Opinion of Pepper Hamilton LLP (including consent)
10.1*** Registration Rights Agreement dated as of November 7, 1996 by and
among SmithKline Beecham Diagnostic Systems Co., SmithKline
Beecham Corporation and Careside, Inc.
10.2*** Registration Rights Agreement dated as of December 4, 1996 by and
among Careside, Inc., Exigent Partners, L.P., W. Vickery
Stoughton, Thomas H. Grove, Kenneth B. Asarch, William S. Knight,
Donald S. Wong, Ashok K. Sawhney and Philip B. Smith
10.3*** Amendment No. 1 to Registration Rights Agreement dated as of
January 31, 1997 by and among Careside, Inc. Exigent Partners,
L.P., W. Vickery Stoughton, Thomas H. Grove, Kenneth B. Asarch,
William S. Knight, Donald S. Wong, Ashok K. Sawhney and Philip B.
Smith
10.4*** Registration Rights Agreement dated as of December 4, 1996 by and
between Careside, Inc. and Spencer Trask Securities Incorporated
10.5*** Registration Rights Agreement dated as of January 31, 1997 by and
among Careside, Inc. and the Investors signatory thereto
10.6*** Stockholders Agreement dated as of December 4, 1996 by and among
the Careside, Inc., SmithKline Beecham Corporation, SmithKline
Beecham Diagnostic Systems Co., Spencer Trask Securities
Incorporated, Exigent Partners, L.P., W. Vickery Stoughton,
Thomas H. Grove, Kenneth B. Asarch, William S. Knight, Donald S.
Wong, Ashok K. Sawhney, Philip B. Smith and each Investor
signatory thereto
10.7*** Consulting Agreement by and between Careside, Inc. and Cedar
Capital Investors dated August 8, 1997
10.8*** Employment Agreement dated as of March 3, 1997 between Careside,
Inc. and W. Vickery Stoughton
10.9*** Employment Agreement dated as of March 3, 1997 between Careside,
Inc. and Thomas H. Grove
10.10*** Employment Agreement dated as of July 30, 1998 between Careside,
Inc. and James R. Koch
10.11*** 1996 Incentive and Non-Qualified Stock Option Plan, as amended
and restated
10.12*** 1996 Key Executive Stock Option Plan, as amended and restated
10.13*** 1998 Incentive and Non-Qualified Stock Option Plan
10.14*** 1998 Director Stock Option Plan
10.15*** Standard Industrial/Commercial Single-Tenant Lease-NET dated as
of October 14, 1996, by and between Fox Hills Business Park, a
California Limited Partnership and Careside, Inc.
10.16*** Agreement dated as of August 23, 1996, by and between Fuji Photo
Film Co., Ltd. and Careside, Inc.
10.17*** Agreement dated as of December 12, 1995, by and between United
Medical Manufacturing Company and SmithKline Beecham Corporation
and assignment
</TABLE>
II-5
<PAGE>
Exhibit No. Description
- ----------- -----------
10.18*** Product Development and Supply Agreement dated as of July 18,
1997, by and between Careside, Inc. and UMM Electronics, Inc.
10.19*** Agreement executed December 7, 1995 and February 28, 1996, by and
between SmithKline Beecham Corporation and Hauser, Inc. and
assignment
10.20*** Agreement Number CP032284 Cost Type executed December 5 and 17,
1996 by and between Battelle Memorial Institute and Careside,
Inc.
10.21*** Joint Research and Development Agreement dated as of October 28,
1996 by and between Careside, Inc. and International Technidyne
Corporation
10.22*** Commitment Letter between S.R. One, Limited and Careside, Inc.
dated April 29, 1999.
10.23*** Distribution and Supply Agreement dated as of November 7, 1996,
by and between SmithKline Beecham Clinical Laboratories, Inc. and
Careside, Inc, as amended on February 12, 1999.
10.24*** Asset Purchase Agreement dated as of November 7, 1996, by and
among SmithKline Beecham Clinical Laboratories, Inc., SmithKline
Beecham Diagnostic Systems Co. and Careside, Inc.
10.25*** Loan and Security Agreement dated as of October 1, 1996, by and
between Careside, Inc. and SmithKline Beecham Corporation
10.26*** Placement Agency Agreement dated as of December 10, 1996, by and
between Careside, Inc. and Spencer Trask Securities Incorporated
10.27*** Placement Agency Agreement dated as of January 29, 1998, by and
between Spencer Trask Securities Incorporated and Careside, Inc.
10.28*** Investment Banking Agreement dated as of January 31, 1997, by and
between Careside, Inc. and Spencer Trask Securities Incorporated
10.29*** Agreement of Limited Partnership of Exigent Partners, L.P. dated
as of October 1996, by and between Kevin Kimberlin and those
persons listed on Schedule A attached thereto
10.30*** The Lincoln National Life Insurance Company Standardized 401(k)
Salary Reduction Plan and Trust Prototype Plan Adoption Agreement
Plan #008, effective January 1, 1997, by and between Careside,
Inc. W. Vickery Stoughton and Thomas Grove
10.31*** Employee Stock Purchase Plan
10.32*** Registration Rights Agreement dated as of March 6, 1998 by and
among Careside, Inc. and the Investors signatory thereto
10.33*** Registration Rights Agreement dated as of March 6, 1998 by and
between Careside, Inc. and Spencer Trask Securities Incorporated
10.34*** Registration Rights Agreement dated as of December 17, 1998 by
and between Careside, Inc. and S.R. One, Limited
10.35*** Waiver Letter Agreement dated as of May 25, 1999 by and between
Careside, Inc. and Spencer Trask Securities Incorporated
10.36*** Letter Agreements between Advanced Medical Information
Technologies, Inc. and Careside, Inc. dated January 11, 1999,
January 25, 1999 and February 19, 1999.
10.37** Securities Conversion Agreement dated as of June 14, 1999
between S.R. One, Limited and Careside, Inc.
10.38** Form of Amended and Restated Registration Rights Agreement dated
as of June 21, 1999 between S.R. One, Limited and Careside, Inc.
10.39*** Agreement dated as of April 13, 1999 by and between Fuji Photo
Film Co., Ltd. and Careside, Inc.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Pepper Hamilton LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature the signature page
hereof)
* Incorporated herein by reference to Careside's current report on Form 8-K
filed on December 22, 1999.
** Incorporated herein by reference to Careside's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999 filed on August 13, 1999.
*** Incorporated herein by reference to the Registration Statement on Form S-1
of Careside, Inc., as amended. Registration No. 333-69207.
**** Incorporated herein by reference to Careside's Annual Report on Form 10-K/A
filed on March 31, 2000.
(b) Financial Statement Schedules:
Financial Statement Schedules are omitted because the information is
included in the Financial Statements or notes thereto.
II-6
<PAGE>
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange 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
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant 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 registrant 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.
The undersigned registrant hereby undertakes that:
(1) To file during any period in which offers or sales are being made, 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 "Securities Act");
(ii) Reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the dollar value of the securities offered would not
exceed that which was registered) and any deviation from the low
or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration
statement, and
(iii) Include additional or changed material information on the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) For purposes of determining liability under the Securities 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) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(5) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
In addition, the undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Culver City,
California, on this 17th Day of April, 2000.
CARESIDE, INC.
By: /s/ W. Vickery Stoughton
-------------------------
W. Vickery Stoughton
Chairman of the Board of Directors
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints W. Vickery Stoughton, Thomas H. Grove,
and James R. Koch and each of them, his true and lawful attorney-in-fact and
agents, with full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to sign any
registration statement for the same offering covered by this Registration
Statement that is to be effective upon filing pursuant to Rule 462(b)
promulgated under the Securities Act of 1933, and all post-effective amendments
thereto, and to file the same, with all exhibits thereto and all documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or his or their substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ W. Vickery Stoughton Chairman of the Board of April 17, 2000
- ---------------------------------- Directors, Chief
W. Vickery Stoughton Executive Officer and
Director (principal
executive officer)
/s/ Thomas H. Grove Executive Vice President April 17, 2000
- ---------------------------------- Research and Development
Thomas H. Grove and Director
/s/ James R. Koch Chief Financial Officer April 17, 2000
- ---------------------------------- Treasurer, Executive Vice
James R. Koch President and Director
(principal financial and
accounting officer)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Anthony P. Brenner Director April 17, 2000
- ----------------------------------
Anthony P. Brenner
/s/ William F. Flatley Director April 17, 2000
- ----------------------------------
William F. Flatley
/s/ Kenneth N. Kermes Director April 17, 2000
- ----------------------------------
Kenneth N. Kermes
/s/ C. Alan MacDonald Director April 17, 2000
- ----------------------------------
C. Alan MacDonald
/s/ Diana Mackie Director April 17, 2000
- ----------------------------------
Diana Mackie
/s/ Philip B. Smith Director April 17, 2000
- ----------------------------------
Philip B. Smith
</TABLE>
<PAGE>
Exhibit 5.1
April 17, 2000
Careside, Inc.
6100 Bristol Parkway
Culver City, CA 90250
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We have acted as counsel to Careside, Inc., a Delaware corporation (the
"Company"), in connection with its registration statement on Form S-1 (the
"Registration Statement") relating to the registration under the Securities Act
of 1933, as amended (the "Act"), of 3,248,510 shares of the Company's common
stock, par value $.01 per share (the "Common Stock").
We have examined the Registration Statement, including the exhibits
thereto, the Company's Amended and Restated Certificate of Incorporation, the
Company's Amended and Restated By-laws, and such other documents as we have
deemed appropriate. In the foregoing examination, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals and the authenticity of all documents submitted to us as copies of
originals.
Based upon the foregoing, we are of the opinion that the shares of Common
Stock and the shares of Common Stock issuable upon the exercise of the warrants,
the contingent warrants, and conversion of the Series A Preferred Stock (as
described in the Registration Statement) which are being registered under the
Registration Statement, have been or will be validly issued and outstanding as
fully paid and non-assessable shares.
Our opinion expressed above is limited to the federal laws of the United
States and the law of the State of Delaware.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement. In giving this consent, we do not hereby admit that we
come within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules and regulations thereunder.
Very truly yours,
PEPPER HAMILTON LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated March 13, 2000 (and to all references to our Firm) included in this Form
S-1 Registration Statement.
Arthur Andersen LLP
Los Angeles, California
April 12, 2000
