SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
EMPYREAN BIOSCIENCE, INC.
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(Name of Small Business Issuer in its Charter)
WYOMING 83-0212682
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2238 WEST LONE CACTUS DRIVE, SUITE 200
PHOENIX, ARIZONA 85027-2613
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (623) 879-6935
SECURITIES TO BE REGISTERED UNDER SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which each
to be so registered class is to be registered
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None N/A
SECURITIES TO BE REGISTERED UNDER SECTION 12(G) OF THE ACT:
COMMON STOCK, WITHOUT PAR VALUE
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(Title of Class)
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PART I
BUSINESS
HISTORY
We were originally incorporated in the Province of British Columbia, Canada
in 1986 under the name "Mr. Build Industries Inc." Since that time, we changed
our name at various times, and on December 31, 1996, under the name Empyrean
Diagnostics, Ltd., we changed our governing jurisdiction from the Province of
British Columbia to the State of Wyoming through the filing of a certificate of
continuance with the Wyoming Secretary of State. We intend to seek a stockholder
vote on our planned reincorporation into Delaware and to elect new directors. A
registration statement relating to our reincorporation, which would be
accomplished by a merger of our existing Wyoming corporation into a newly formed
Delaware corporation, has been filed with the SEC but has not yet become
effective. No securities may be offered or exchanged in the reincorporation
merger prior to the time the registration statement becomes effective. This
disclosure is not an offer or solicitation to sell or exchange any securities in
connection with the planned reincorporation.
We have not undergone any bankruptcy, receivership, or similar proceedings
nor have we had any material consolidation, merger, or purchase or sale of a
significant amount of assets not in the ordinary course of business (except the
disposal of our diagnostic equipment assets upon discontinuance of that business
line, as described below).
Prior to April 1997, we distributed and marketed an HIV diagnostic product.
In April 1997, in connection with a change in our management team, we shifted
our focus from marketing and distributing the HIV diagnostic test kit to
marketing and distributing preventative products. In 1998, we discontinued
marketing and distributing our diagnostic kits. We wrote off our HIV diagnostic
kit inventory in 1997 and our diagnostic kit inventory in 1998, and stopped
marketing our diagnostic products. This shift in focus coincided with our
acquisition of rights to use a microbicide formulation utilized in a number of
our preventative products, including Preventx(R) hand sanitizer and antiseptic
skin protectant, Preventx(R) vaginal contraceptive gel, and Preventx(R)
antiseptic surface spray. Currently, we are only marketing our hand sanitizer
product in the United States and Canada. We do not have regulatory approval to
market our product in any other country, and we do not currently have regulatory
approval to market any of our products under development in any country. Under
the FDA's proposed regulations, we may be prevented from marketing our hand
sanitizer in the United States as a hand sanitizer product and with the claims
we currently make that it is long-lasting. If we are not permitted to market our
product with claims that generate market acceptance of it, we could experience a
loss of sales of that product and go out of business.
We have changed our Board of Directors and management from time to time in
connection with shifts in our business.
OVERVIEW
We develop innovative personal care products that are intended to prevent
the spread of infectious disease. Our current product, the hand sanitizer and
antiseptic skin protectant, as well as those under development, are intended to
be sold over-the-counter in the retail markets and also to various institutional
customers. Our current product is marketed as a hand sanitizer and antiseptic
skin protectant product sold under our Preventx(R) name. We are also utilizing
the formula used in our innovative hand sanitizer and antiseptic skin protectant
product to develop a variety of other products utilizing similar chemical
formulations as well as other formulations, including a contraceptive gel
designed to prevent pregnancy and sexually transmitted diseases, a disinfectant
surface spray to be marketed to the retail markets and also to the food service,
hotel and other industries, and a baby wipe product.
The contraceptive gel has been accepted by the National Institutes of
Health to undergo Phase III clinical trials to prove its safety and its
effectiveness against STDs and as a contraceptive. The purposes of our Phase I
and II clinical trials were to study the safety of the contraceptive gel when
used in women and its effectiveness against STDs in an in vitro environment. The
first two phases of the multi-million dollar, three phase clinical trials have
been completed with seemingly positive results from the standpoint of safety and
in vitro effectiveness. The results of the Phase I and II studies, which were
not conducted by the NIH, have been confirmed by the NIH. The Phase III study
and the confirmations of the Phase I and Phase II studies have and will continue
to be funded by the NIH.
We believe that our preventative technology will be shown to be both safer
and more effective as an antimicrobicide than existing competitive products in
the market and offers us a platform to leverage our expertise into other areas
of the infectious disease market such as treatment and curative products. Future
products could include deodorant, shaving cream, moist towelettes, toothpaste
and mouthwash products.
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We believe that the spread of infectious disease has become a major concern
in many industries, including the health care, food service and public
accommodation industries. We also believe that bacterial contamination has
become an issue of heightened public concern as well fueled by the prevalence or
reemergence of several deadly diseases in recent years, including HIV, the
causative agent of AIDS, Hepatitis, and other diseases.
A major source for transmission of infection is by the bacterial flora on
the skin, primarily the hands. Skin has two types of microbial flora, resident
or colonizing flora and transient or contaminating flora. Resident flora is
relatively stable and is not readily removed, although it can be inactivated by
antiseptics. Transient flora, on the other hand, can be acquired by contact,
does not colonize, and is easier to remove by physical or chemical means.
Infections can arise from either group. The primary means to avoid the spread of
contamination of microorganisms is through regular hand washing and the use of
barriers such as latex gloves. Poor compliance with normal hand washing
protocols and the porous nature of protective gloves limit their effectiveness.
In addition, many effective antiseptics cannot be used on skin or other surfaces
because they are too toxic for routine use or lead to undesirable side effects.
We believe that the formulation used in our existing hand sanitizer and
antiseptic skin protectant product and in our other disease preventative
products under development has the potential to offer several unique advantages
over other products currently available in the market, in that our formulation:
* may protect skin and surfaces from a broader range of harmful
microorganisms and infectious diseases;
* may be longer lasting and more effective,
* is alcohol and triclosan free, and as a result may be relatively
non-irritating and may avoid safety concerns such as flammability, and
* may be virtually non-toxic and safer for use around children and in
food preparation and medical applications.
Our basic product formulation utilizes benzalkonium chloride as its active
ingredient, which has been recognized to be effective at killing harmful
microorganisms and, we believe, is safe and offers greater versatility in
assisting the healing of minor cuts and abrasions.
A third party claims a prior worldwide licensing and marketing right to the
formula used in all of our products. Geda, the licensor, has sought a
declaratory judgment that the third party has no rights in our product line. If
Geda does not succeed in the litigation, we may not be able to market, sell or
manufacture our current hand sanitizer product or any other products in
development.
The FDA issues regulations called monographs that set forth the specific
active ingredients, dosages, indications and labeling statements for OTC drugs
that the FDA generally recognizes as safe, effective and branded properly and
therefore not subject to pre-market approval. OTC drugs not covered by proposed
or final regulation are subject to pre-market review and approval through the
New Drug Application or abbreviated New Drug Application process. We currently
market our hand sanitizer product under two separate proposed FDA regulations,
or monographs, a hand sanitizer monograph and a first-aid antiseptic monograph.
We believe that all of our product claims are permitted under the hand sanitizer
monograph, but our active ingredient is not included in that monograph. Unless
our active ingredient is included in the final hand sanitizer monograph, it will
not apply to our product. Our active ingredient is included in the first-aid
antiseptic monograph, however, that monograph does not permit a hand sanitizer
product name and does not provide for all of the claims that we currently make.
We are aware that the FDA has taken an adverse position with respect to a
lotion product of the Andrew Jergens Co. which contains the same active
ingredient as ours. We believe that our product marketing claims are different
than the Jergens product claims. The Jergens product claims to be a lotion,
which indicates it is permissible to use on all skin parts, although the FDA
hand sanitizer monograph allows for labeling for hands only. Our product is
labeled as a hand sanitizer and describes in the directions that it is for hands
only, which we believe will follow the hand sanitizer monograph if the final
monograph includes our active ingredient. We are not aware that the Jergens
product makes any first-aid antiseptic claims on the packaging. We make the
claim that our product heals minor cuts and abrasions, which we believe are
acceptable language in the first-aid monograph. Also, we believe the FDA's
position on the Jergens product is that it does not follow the allowable hand
sanitizer label instructions on claims and directions for use. We believe that
our labeling on claims and directions for use would be consistent with the final
FDA monograph for hand sanitizer requirements if the final monograph includes
our active ingredient. Our product is described as a hand sanitizer and makes
claims that it is long lasting; however, which is not a permitted product name
or claims provided in the monograph for first aid antiseptics. To make product
claims that are not included in the first aid monograph, we would need to
independently substantiate those claims to the FDA through a New Drug
Application. Although we believe that our claims are different than the Jergens
product, if the FDA takes a similar position against our product, and if our
active ingredient is not included in the final FDA hand sanitizer regulations,
we may be required to market it solely as a first aid product with the hand
sanitizer name and with our claims that is is long-lasting omitted. If we are
not successful in marketing our product in this fashion, we could experience a
loss of revenues from this product, which is our only product. This could cause
us to go out of business. If we were forced to obtain FDA pre-market approvals,
which we do not believe will be required, we do not currently have the resources
to do so.
We will attempt to capture a significant percentage of the infectious
disease preventative markets in which we compete by developing superior products
based on our formulation and manufacturing processes in large or rapidly growing
market segments, by developing brand awareness for our products, and by
leveraging our name and product recognition into compatible consumer product
applications and into other products intended to treat or cure infectious
disease. We believe that by offering unique products that may offer increased
protection against infectious disease, while at the same time eliminating many
of the discomforts and side effects caused by existing products on the market,
we can increase the demand for over-the-counter disease preventative products
and position ourselves to benefit from this expansion.
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Our hand sanitizer and antiseptic skin protectant product is intended to be
sold to retailers and to various institutional customers such as health care
personnel, hotels, airlines, food service companies and restaurants, cruise
lines, banks, casinos and other money handling entities, police departments,
emergency response, correctional facilities and other city services industries.
Our contraceptive gel will be marketed primarily to retailers and to
contraceptive product manufacturers. Our disinfectant spray product will be
marketed to consumers and to many of the same institutions and other customers
to whom our hand sanitizer and antiseptic skin protectant products are currently
being marketed. Our primary focus in developing and marketing our products is to
create brand awareness among consumers and to establish relationships with
wholesalers and volume buying organizations, such as health maintenance
organizations, hospital buying groups, hotel and restaurant chains, and
municipal service agencies.
We market and distribute our current product, and intend to market and
distribute our products currently under development, primarily through third
party distributors and marketing partners, and through our own internal sales
and sales support efforts. We currently have a distribution relationship with
Integrated Commercialization Solutions, a division of Bergen Brunswig
Corporation. Integrated Commercialization Solutions provides product marketing
and a variety of logistical services for us and also distributes our products in
the United States and abroad. We also have distribution relationships with third
party distributors in the United States and twelve foreign countries who
together employ approximately 700 sales people in the U.S. and 25 in foreign
countries.
INDUSTRY BACKGROUND
SANITIZER MARKET
Sales of all hand and body lotions (including those making sanitizing
claims) were estimated to be approximately $700 million in the United States in
1996. We believe that the growth in the sanitizer market, a subset of the hand
and body lotion market will be driven by the availability of effective products
that are also both safe and free of undesirable side effects.
The dominant products in the sanitizer market today are topically applied
hand sanitizing lotions or creams containing alcohol. These products are sold
primarily in the over-the-counter market, typically in plastic bottles ranging
from two to sixteen ounces each, and in larger volume or bulk forms in
industrial and institutional settings, such as large pump dispensers and wall
mounted dispensers.
Currently marketed hand sanitizer and antiseptic skin protectants or
antimicrobial lotions are designed to protect the skin against various disease
causing microorganisms, including E. Coli, Salmonella, Staph Aureas,
K-Pneumonia, and Pseudomonas Aeruginosa. These products typically are not
intended as a cleaner, like soap products, but are intended solely to kill germs
on contact. Sanitizer products can be used in a number of situations where the
spread of disease is a particular concern, such as in the food service, health
care and public accommodation industries, and in settings where water or
facilities are not available for conventional hand or body washing. The market
for personal sanitizing or antimicrobial products has increased rapidly in
recent years due in part to increasing concerns and public awareness and media
reports of dangerous and sometimes deadly bacterial or viral contaminations in
common or frequently populated areas.
Of the hand sanitizer and antiseptic skin protectant products currently on
the market today, most use as their active ingredient either alcohol or
triclosan. The typical alcohol concentration in these product is over 60%.
Institutional use hand sanitizer and antiseptic skin protectants may also
utilize chloroxylenol or nonoxynol-9 as active ingredients. Products based on
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these active ingredients can cause a number of undesirable side effects,
including dry skin conditions and other skin irritations such as burning,
itching and stinging. Many of these products, including all alcohol based
products, are flammable until dry, which can lead to limitations on use and to
risks of serious personal injury, and are also painful when applied to existing
cuts, burns, or abrasions. Products using alcohol and triclosan also have
limited effectiveness, as the range of infectious disease-causing germs with
which they react are more limited, and often do not include STDs. This can lead
to a false sense of continued disease protection in periods after application.
In fact, due primarily to their drying effect, products containing alcohol or
triclosan can actually increase vulnerability to infection after repeated use.
Triclosan based products also must be compounded with a form of alcohol or
organic solvent because they are not water soluble and the presence of water can
prevent the release of bactericidal potency in them. This can lead to the
development of environments where bacteria can mutate and the re-growth of
antiseptic tolerant bacteria can occur. In recent years, there have been at
least three product recalls of triclosan-based products, two of which were the
result of Pseudomonas found growing in the product.
Current products in the surface spray category include well known brand
names such as Lysol and Dial. It is a large market with no one product
dominating the segment. Our disinfectant surface spray, which is identical to
our hand sanitizer and antiseptic skin protectant except for the viscosity of
the product, is designed to be used in personal spray-size applications. It can
be used on surface areas typically containing large amounts of bacterial or
other contamination such as public telephones, toilet areas, and diaper changing
areas. It can also be used in institutional applications for surface areas such
as medical patient care areas, food service preparation areas such as sinks and
counter tops, and similar locations.
Existing sales of household cleaners (including all household cleaning
related products) were approximately $2.3 billion in the United States in 1998
according to MMR/IRI magazine. We believe that our surface spray product can
increase the market for disinfectant surface spray products due to its non-toxic
qualities, which make it available for more extensive use in the food service
and health care industries, among others.
CONTRACEPTIVE PRODUCTS
The contraceptive market consists of two general categories, oral
contraceptives which are available only through prescription and
over-the-counter contraceptive products such as gels, condoms and similar
products that do not require a prescription. Sales of over-the-counter
contraceptive products in 1998 were approximately $261 million in the United
States. We expect to compete and expand in the over-the-counter segment of the
contraceptive market with our vaginal contraceptive and disease preventative
gel, which has completed the first two of three-phases of clinical trials to
determine its safety and effectiveness as a contraceptive and against the
prevention of STDs in order to seek regulatory approval in the United States and
in various foreign countries.
To our knowledge, all over-the-counter and prescription contraceptive
products on the market today are effective only as a spermicide and are not
designed or claim to act as a barrier against STDs or other infectious diseases.
Some reports have suggested that the use of nonoxynol-9, the common active
ingredient in many contraceptive gel products, may actually increase the risk of
STD transmission.
It has been widely reported that the United States, like many other
countries, is experiencing an epidemic of STDs, including the HIV virus,
Gonorrhea, Syphilis, Chlamydia, Trichomonas vaginalis, and Herpes. According to
statistics compiled by the World Health Organization in 1997 and by the United
States Center for Disease Control in 1998, approximately 5.8 million new cases
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of HIV infection, 170 million new cases of Trichomonas, 89 million new cases of
Chlamydia, 62 million new cases of Gonorrhea, 12 million new cases of Syphilis
and 40 million new cases of genital Herpes are experienced worldwide each year,
and one in five adults in the United States now has genital Herpes. In the
September 10, 1998 edition of the New England Journal of Medicine, it was
reported that 9.2% of 13,204 female U.S. Army recruits tested were found to be
infected with Chlamydia, a disease that can lead to infertility. In the December
14, 1998 issue of U.S. News and World Report, it was reported that according to
a leading public health study, at least one in every three sexually active
people will contract an STD by the age of 24. The estimates of the number of
people contracting STDs are thought by many experts to be conservative, since it
is believed that many people either choose not to discuss these diseases with
their physicians or are unaware of them. The latter problem is particularly
acute with respect to the two STDs that together are thought to account for up
to two-thirds of all new STD infections each year, Trichomoniasis Vaginalis and
the human Papilloma virus. STDs can cause a variety of serious complications,
including cancers, infertility, ectopic pregnancy, spontaneous abortions, still
birth, low birth weight, and even death.
The most common front-line defense against STDs among over-the-counter
alternatives is the condom. Condoms do not kill STDs or other infectious
disease, but can act as a barrier against disease transmission and are often
purchased by consumers for that purpose. Condoms are relatively porous,
containing pore sizes ranging from 5 to 70 microns in size. In contrast, an HIV
particle is typically as small as .005 microns in size and can easily penetrate
condom surfaces, as can many other STDs.
Other over-the-counter gels and salves have recently been introduced which
are intended to kill bacteria and viruses that cause STDs, primarily the HIV
virus. Currently, most of these products utilize nonoxynol-9 as an active
ingredient. Recent studies have indicated that although products containing
nonoxynol-9 have been shown to kill HIV and other STDs In Vitro, nonoxynol-9 may
not have the same effect In Vivo and might actually increase the risk of
contracting HIV. At a high enough dosage, nonoxynol-9 also can cause
ulcerations, lesions, and other uncomfortable irritations. As a result of
current research findings, the New York State Health Department is reconsidering
its prior endorsement of nonoxynol-9, and the United States Center for Disease
Control and Prevention currently does not endorse the use of nonoxynol-9 without
a condom for protection from HIV.
MARKET OPPORTUNITIES
Infectious disease is the leading health problem in the world, leading to
more deaths and serious health conditions than any other high profile disease,
including heart disease and cancer. In 1997, there were over 2 million
infections and 90,000 deaths in the United States alone resulting from
nosocomial contamination which are infections contracted at a hospital or
doctor's office which are unrelated to the purpose of a patient's visit. There
were another 80 million cases of food poisoning in the United States, 10,000 of
which resulted in death. According to industry studies, in the United States the
average cost of treating nosocomial infections was $2,300 per incident, or $4.5
billion in annual direct costs. Developing inexpensive, effective and safe
solutions to these diseases will, we believe, satisfy a large unmet market need
that is being driven by the frequency and seriousness of public reports of
infectious disease contamination in common public venues, such as hotels, public
restrooms, and food service establishments. According to a December 1998 report
of the American Social Health Association, there are approximately 15 million
new cases of STDs in the U.S. annually. The direct medical cost of treating
these STDs and their complications is reported to be $8.4 billion annually.
OUR SOLUTION
Most of our preventative products utilize the same active ingredient,
benzalkonium chloride, and have the potential to provide exceptional safety and
efficacy qualities lacking in most competitive products, while at the same time
addressing limitations of competitive products. If the appropriate government
agencies approve the gel, we expect that our contraceptive gel will utilize
octoxynol-9 and benzalkonium chloride as its active ingredients. Octoxynol-9 is
a detergent-like chemical that attacks the outer membrane of microorganisms
allowing benzalkonium chloride to reduce harmful microorganisms.
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Most microorganisms are reduced after application or contact with the
product. Our product formulation does not utilize alcohol, triclosan or other
organic solvents, which are commonly used in competitive products. Our alcohol
and triclosan-free products do not appear to cause many of the skin conditions
and side effects of competitive products, such as dry skin and burning and
itching irritations. Our products may offer protection against the spread of
nearly all harmful microorganisms on the skin. In addition, our products are
non-flammable, allowing for use in many settings otherwise unsuitable for
competitive products. All of our products under development, and all of the
product innovations planned for development in the future, will be based on our
existing basic product and manufacturing formulations, thus creating an
opportunity for faster entry into compatible market opportunities.
BUSINESS STRATEGY
Our goal is to achieve a position in the retail and institutional markets
for over-the-counter disease preventative and contraceptive products, and to
leverage our position to enter other markets for infectious disease therapeutic
and curative products. We intend to pursue this goal by increasing the demand
for effective and safe disease preventative products and by increasing the
number of our products used to prevent infectious disease. Our business strategy
consists of the following key elements:
DEVELOP BRAND AWARENESS AND MARKET ACCEPTANCE FOR PREVENTX(R). We believe
that we can develop brand awareness and market acceptance of our unique
antimicrobial products among consumers and institutional customers. We
intend to develop brand awareness and acceptance by offering superior
products that are both more effective in protecting against infectious
disease and safer with more pleasing qualities than competitive products.
We also intend to develop brand awareness and market acceptance of our
products by expanding our network of United States and international
distributors and by entering into strategic relationships with other
parties who can increase significantly marketing, sales and distribution
resources.
APPLY CORE FORMULATIONS TO ADDITIONAL PRODUCT APPLICATIONS. Almost all of
our infectious disease preventative products are based on a common product
formulation, which is licensed to us by third parties. Our contraceptive
gel has octoxynol-9 and benzalkonium chloride as its active ingredients. We
intend to continue to leverage the brand awareness and market acceptance of
our hand sanitizer and antiseptic skin protectant product to create market
demand for our complementary baby wipes, surface spray product and our
contraceptive gel product, all of which will be developed using
manufacturing and packaging variations. We intend to leverage the future
success of these products through the introduction of a variety of
compatible personal care product formulations, such as deodorant, shaving
cream, moist towelettes, toothpaste and mouthwash products.
DEVELOP NEW TECHNOLOGIES. We intend to utilize our expertise in the
research and development of infectious disease to develop products and
technologies that address other aspects of infectious disease. We believe
that our expertise and the market acceptance of our infectious disease
preventative products will result in additional product and strategic
opportunities that will fill other unmet needs in the market.
LEVERAGE RESOURCES THROUGH STRATEGIC RELATIONSHIP AND ACQUISITIONS. We
intend to build our business in part through the acquisition of
complementary technologies, products and businesses and by entering into
strategic collaborations, including additional licensing and marketing
arrangements, with other biotechnology companies and research institutions.
We believe that these acquisitions and relationships will better enable us
to enter markets more quickly and extensively. We also believe that
significant acquisition and strategic partnering opportunities exist in the
infectious disease industry. We are not currently in active discussions
with possible acquisition or strategic partnering candidates.
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PRODUCTS AND TECHNOLOGIES
To date, we have introduced one product, the Preventx(R) hand sanitizer and
antiseptic skin protectant. We are developing three additional preventative
products, our surface spray disinfectant, baby wipes, and our contraceptive gel,
each of which will be undergoing clinical trials and for each of which we will
have to obtain regulatory approval prior to marketing. Each of these products is
described below.
CURRENT DISEASE PREVENTATIVE PRODUCTS
PREVENTX(R) HAND SANITIZER AND ANTISEPTIC SKIN PROTECTANT
Our hand sanitizer and antiseptic skin protectant product was launched in
the United States in March 1999 and we expect to launch it in consumer markets
in Far Eastern countries in late 1999 or early 2000. We recently entered into an
exclusive distribution agreement for Southeast Asia with Durstrand International
Limited. The agreement includes minimum product purchase requirements that must
be met in order to retain exclusivity, as well as sub-licensing payment
requirements. We expect that our product will be launched in Southeast Asian
countries upon receipt of required regulatory approvals.
Our hand sanitizer and antiseptic skin protectant is commonly applied in
small quantities and rubbed into the hands. We also recommend use of the product
in the medical and food service industries along with latex gloves as a
secondary barrier against infection. Our product decreases the risks associated
with glove degradation, tears or cuts, and large latex pore sizes. Because our
formula may be virtually non-toxic, it can be used safely in food preparation
areas and around medical patients. Our hand sanitizer and antiseptic skin
protectant will not damage latex gloves or other products.
Our hand sanitizer and antiseptic skin protectant product, unlike most
competitive products, does not include as its active ingredient alcohol,
triclosan, or other organic solvents. The benefits of utilizing an alcohol free
and triclosan free formulation are many, and include:
* Our hand sanitizer and antiseptic skin protectant provides a
protective skin barrier. In contrast, alcohol and triclosan based
products typically lose effectiveness after drying, which typically
lasts approximately fifteen seconds. Thus, our product requires less
frequent re-application.
* Our formulation does not dry out the skin and does not cause any
decreased germ resistance. Alcohol and triclosan based products have
been shown to actually increase the risk of infectious disease after
repeated use, as the drying nature of these ingredients can strip skin
of its natural barrier and cause microscopic cracks in the skin, which
act as an environment for disease-causing germs that colonize the
skin. In addition, triclosan based products have been found to cause
decreased resistance to bacteria and the mutation of some germs.
* Our product is non-flammable and thus reduces the personal injury
risks associated with alcohol-based products and increases the
institutional and consumer settings where a hand sanitizer and
antiseptic skin protectant product can safely and conveniently be
applied and stored. Alcohol-based products are highly flammable at
concentrations of 60% or greater which are the concentrations of some
competitive products.
* Our hand sanitizer and antiseptic skin protectant not only alleviates
dry skin conditions caused by alcohol or triclosan based products, it
actually helps nourish, moisturize, and heal damaged skin and does not
cause many of the skin irritations associated with competitive
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products, including itching, stinging and burning. We incorporate aloe
vera into our hand sanitizer and antiseptic skin protectant product to
further promote its soothing effects. In addition, our product helps
to heal minor cuts, burns, and abrasions, in contrast to alcohol based
products which can cause painful discomfort when in contact with minor
skin injuries. Our hand sanitizer and antiseptic skin protectant also
does not cause irritation to mucosal tissues in the nose and eyes,
unlike alcohol and triclosan based products.
Our hand sanitizer and antiseptic skin protectant is sold at retail in 2
and 8 ounce plastic bottles, and in the institutional markets in 2, 8, 16 and 32
ounce bottles. We will also provide a bulk refillable dispenser that dispenses
pre-measured lotion.
DISEASE PREVENTATIVE PRODUCTS UNDER DEVELOPMENT
BABY WIPES
Utilizing the same active ingredient as the hand sanitizer and antiseptic
skin protectant, we are developing a non-toxic, long lasting baby wipe for the
retail market. We believe that FDA regulatory approval of a benzalkonium
chloride-containing baby wipe product as a prevention for diaper rash, if sought
and obtained, would give the Preventx(R) baby wipe a significant advantage over
alcohol-based wipes on the market today.
The baby wipes have been developed and are currently being tested for
effectiveness in an independent laboratory.
SURFACE SPRAY DISINFECTANT
We have developed a surface spray disinfectant which utilizes the same key
active ingredient formulation as our hand sanitizer and antiseptic skin
protectant product. Our surface spray disinfectant does not contain the
thickening and aloe vera additives contained in our hand sanitizer and
antiseptic skin protectant, making it suitable for a pump spray application. The
pump spray will be packaged in smaller dispensers for personal use applications
around common dangerous germ concentrations such as public telephones, public
restrooms, and diaper changing areas, and for institutional applications such as
food service surfaces, hotel facilities, and surfaces where medical services are
performed. The spray will be marketed in 2 and 8 ounce sizes.
Our disinfectant surface spray has all of the same advantages as our hand
sanitizer and antiseptic skin protectant product, and is particularly suited for
uses in the food service, medical and hotel industries where safety and toxicity
are major concerns. Current competitive products include a variety of caustic
household or industrial surface cleaning products, all of which are toxic and
generally cannot be used in contact with food preparation or medical care areas
without caution. In addition, our disinfectant pump spray product is not harmful
to common surfaces such as sinks, counters, trays, furniture, or other objects.
We expect to launch our surface spray disinfectant product in the United
States after obtaining approval from the Environmental Protection Agency.
The disinfectant surface spray has been developed and is being reviewed by
an EPA consultant hired by us to determine what further testing is required
before we submit it to the EPA. It will require EPA approval because we want to
claim that the spray has the ability to eliminate viruses, bacteria and fungi on
surfaces. In accordance with EPA guidelines, the surface spray is classified as
a pesticide since it kills viruses, fungi and bacteria on surfaces. Therefore,
EPA approval will be applied for under the rules and regulations governing
pesticides.
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MICROBICIDAL CONTRACEPTIVE GEL
Our gel has been developed and we anticipate initiation of a Phase III
clinical trial with the National Institute of Allergy and Infectious Disease of
the National Institutes of Health. The clinical trial, if conducted, will
determine whether the gel effectively kills a host of STDs and other infectious
diseases, in addition to its contraceptive properties, and is safe. We are aware
of no other approved competitive products that make both claims, which would, if
successful, make the gel a unique product in the over-the-counter contraceptive
market. Upon initiation and successful completion of the Phase III clinical
trial and results showing safety and effectiveness, we will file a new drug
application with the FDA for its approval. We cannot assure you of any of the
following:
* the NIH study will either be initiated or successfully completed,
* the study's results will be positive,
* we will file a new drug application for the product, or
* any new drug application we do file will be approved by the FDA.
The gel would be marketed primarily in the retail, over-the-counter market
in 120 ml tubes, and in single use, pre-filled applicators. We would market the
product in bulk quantities to condom manufacturers to be used as a coating
inside the condom wrapper, thus enhancing the effectiveness of condoms as a
disease preventative and enabling condom manufacturers to make additional
product claims.
Existing contraceptive gel products utilize active ingredients such as
nonoxynol-9 that can cause lesions, ulcerations, and other skin irritations.
These irritations can in turn facilitate infections. Our gel's active
ingredients act synergistically as a microbicide and spermicide. In addition,
only small amounts are needed, limiting the possibility of skin irritations. In
pre-clinical safety studies, our gel was found to cause no damage to squamous or
columnar mucosa cells. The gel is compatible with latex condoms.
We believe that if the NIH studies are successfully completed and FDA
approval is obtained, we will be able to offer a product that can capture
significant market share and also increase the market for non-prescription
contraceptive products. We expect to launch our contraceptive gel product if we
receive FDA approval, although we may never obtain approval. The gel is
currently approved for sale in Canada as a contraceptive; however, no claims are
made by us regarding the microbicidal properties of the product at this time.
The contraceptive gel will not be sold in the United States until the NIH
completes its Phase III study which has yet to begin and a new drug application
is filed and approved by the FDA. The Phase III study will address the
effectiveness of the product in preventing the transmission of gonorrhea,
chlamydia, and trichomonas vaginalis. The second part of the Phase III testing
will address the effectiveness of the product in preventing the transmission of
syphilis, HIV, and herpes. This portion of the testing will be performed outside
of the United States due to the insufficient number of STDs in the United
States. It will then be submitted to the FDA for marketing approval.
ADDITIONAL PRODUCTS UNDER CONSIDERATION
We are investigating the use of our product formulation as a platform to
develop a variety of common personal care products. These products may include
deodorants, shaving creams, moist towelettes, toothpastes and mouthwashes.
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SALES AND MARKETING
We market our products in the United States and Canada to both the retail
over-the-counter market through third party distributors, and institutional
customers through the use of distributors and sales agents and through our
internal sales efforts. Our direct sales and executive management personnel lend
sales support to our distributors and third party sales agents by making direct
sales calls on large buying organizations such as municipal or other
governmental service providers, HMOs and hospital buying groups, physician and
school districts, airlines and cruise lines, and wholesale buyers and mass
merchandisers.
Within the United States our existing product is sold through Integrated
Commercialization Solutions and third-party distributors. We will attempt to
distribute our products under development, upon obtaining regulatory approval,
through multiple distributor networks. Internationally, we are represented by a
third party distributor in Southeast Asia who employs approximately 25 sales
representatives. Our foreign distributors are generally granted exclusive rights
in designated territories and are responsible for obtaining and maintaining
required foreign regulatory approvals for our products.
We typically sell inventories to third party distributors against
forecasted sales volumes at negotiated transfer prices, and the products are
then re-sold by the distributors to end users or other sub-distributors. Our
independent distributors are generally free to sell other products that do not
compete directly with our products.
Upon launch of our products, we undertake a high volume direct marketing
program, in cooperation with our dealers, consisting of direct mailings of
product announcements and introductory buying programs, pricing sheets, and
other product offers, followed by sales calls and other written and verbal
contacts that are targeted to specific types of buyers. We provide product
samples and seek to create product awareness through trade show presentations,
participation in public health studies, and through direct contact with various
media outlets. We also operate an Internet web site which provides useful
information about our current products and those under development, as well as
about us and our management.
STRATEGIC RELATIONSHIPS
GEDA LICENSE
We currently license our product and manufacturing formulations used in our
disease preventative products from Geda International Marketing Co., Ltd., a
Bahamian company. The license agreement allows us to make, use, and sell the
products formulated on this technology and to sub-license others to do so. The
license agreement requires us to pay licensor royalties and a portion of some of
our sub-licensing fees and other payments collected by us from joint venture
relationships. The license agreement covers the world except for Hong Kong,
Taiwan, Africa, and, as to the sale of the anti- microbial hand lotion, the
United States. We have subsequently acquired sub-licensing rights in the United
States. The term of the license extends to April 29, 2007, subject to renewal
options for additional 10 year terms if we meet the guaranteed minimum royalty
requirements. Under the license agreement, we are required to pay minimum
royalties in order to maintain exclusivity. These minimum royalties increase
each year of the contract as shown below:
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FUTURE MINIMUM
YEAR ENDING GUARANTEED
DECEMBER 31, PAYMENTS
------------ --------------
1999 $ 490,000
2000 735,000
2001 915,000
2002 1,215,000
2003 1,458,000
2004 1,758,000
2005 2,108,000
2006 2,508,000
2007 2,960,000
The agreement also grants us a right of first refusal to acquire the licensed
technology if the licensor decides to sell it.
We are involved in litigation concerning this license, the adverse outcome
of which could result in us losing rights to market, sell and manufacture our
hand sanitizer product and other products currently in development by us, which
would result in our inability to generate revenues.
PREVENT-X LICENSE
In July 1998, we entered into a sub-license agreement with Prevent-X, Inc.,
a Miami, Florida based marketing company. This agreement provides us with
exclusive rights to make, market, and sell our hand sanitizer and antiseptic
skin protectant product in the United States, which rights were previously
licensed to Prevent-X by Geda. This licensing agreement also licenses us to use
the Preventx(R) trade name, marks and logos. We acquired these rights in
exchange for up-front payments of 225,000 shares of our common stock, $50,000
cash, and continuing royalty payments of 5% of net sales. The initial term of
the agreement is ten years, based on Empyrean meeting the conditions of the
agreement.
ICS ALLIANCE
In October 1998, we entered into a letter of intent with Integrated
Commercialization Solutions, a division of Bergen Brunswig Corporation. The
letter of intent requires us to pay up to $75,000 for ICS services. ICS provided
us with a portfolio of outsourcing and marketing resources including finished
goods warehousing, customer service, order processing and distribution,
invoicing and accounts receivable management. ICS has also provided us with
product sampling and other marketing assistance. The arrangement covered all of
our disease preventive products. Currently, ICS is only providing distribution,
warehousing, order processing and some customer service functions.
DURSTRAND INTERNATIONAL LIMITED
On April 28, 1999, we entered into a distribution agreement with Durstrand
International Limited, a British Virgin Islands company with offices throughout
the world. The agreement provides Durstrand with exclusive rights for three
years and automatic renewal for two additional ten-year terms if the agreement's
provisions are met by both parties, to distribute the Preventx(R) Hand Sanitizer
and Antiseptic Skin Protectant and, when approved by the appropriate regulatory
bodies, our contraceptive gel in The Phillippines, Singapore, Thailand,
Indonesia, Malaysia, Cambodia, Myanmar and Vietnam. Durstrand paid $600,000 for
the exclusive rights to the Preventx(R) Hand Sanitizer and Antiseptic Skin
Protectant and will pay $600,000 for the contraceptive gel 120 days following
approval of claims related to our products by the FDA. Durstrand must purchase a
minimum of $4,400,000 of either product over the three-year term to maintain its
exclusive rights.
SUNBEAM(R) AND COLEMAN(R) LICENSES
On October 1, 1999, we entered into separate license agreements with
Sunbeam Corporation and The Coleman Company, Inc. The licenses are
non-exclusive. They allow us to use the Sunbeam(R) and Coleman(R) Trademarks in
connection with the sale and distribution, throughout the United States and
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Canada, of our hand sanitizers and first aid antiseptics, sanitizing wet wipes,
disinfectant surface sprays and sanitizing baby wipes under Sunbeam's and
Coleman's labels. The licenses expire on December 31, 2002. We can renew the
licenses until December 31, 2005 if we meet the renewal terms under the
agreements.
We are required to pay Sunbeam a royalty based on net sales of the Sunbeam
licensed products. Sunbeam has the right to terminate the agreement if we fail
to timely pay the higher of the applicable royalty percentage based on net sales
or minimum royalty amounts or if we fail to achieve minimum sales for the
Sunbeam licensed products.
We are required to pay Coleman a royalty based on net sales of the Coleman
licensed products. Coleman has the right to terminate the agreement if we fail
to timely pay the higher of the applicable royalty percentage based on net sales
or minimum royalty amounts or if we fail to achieve minimum sales for the
Coleman licensed products.
MANUFACTURING AND QUALITY CONTROL
PREVENTATIVE PRODUCTS
The manufacturing of our hand sanitizer and antiseptic skin protectant,
contraceptive gel, and disinfectant surface spray is performed to our
specifications by a contract manufacturer, Canadian Custom Packaging, a Canadian
entity located in Toronto, Ontario. CCP performs production and filling of
product into tubes and bottles, labeling and packaging. All of the raw materials
used in the formulation are acquired by CCP to our specifications. We believe
that the raw materials for our products are readily obtainable from a variety of
sources and we have experienced no difficulties or unexpected costs to date in
acquiring the raw materials. CCP's manufacturing facility is required to meet,
and currently meets, good manufacturing practices including regulations adopted
by the FDA and is subject to periodic inspection by the agency. It is also ISO
9001 certified. CCP may not continue to meet these requirements, and the failure
to meet current governmental regulations regarding manufacturing of our products
could cause significant disruptions and costs to be incurred by us, and could
cause a material loss of sales and customers. We do not have a long-term
contract with CCP and our current arrangement could be terminated at any time.
RESEARCH AND DEVELOPMENT
We currently focus all of our limited research and development resources
and efforts on our Preventx(R) antimicrobial and contraceptive products. In
addition to our internal research and development, we intend to pursue strategic
relationships with biotechnology companies and research institutions with
respect to further research and development of our product variations and future
products, and to seek funding from these partners. We have expended $31,425 and
$137,349 for research and development activities in 1998 and 1997, respectively.
PROPRIETARY RIGHTS
We license all of the product and manufacturing formulas used in our
disease preventative products from third parties. We believe the formulas are
proprietary although they are subject to current litigation by a third party
claiming a prior worldwide licensing and marketing right. To date, we hold no
patents on our products and formulas. These products utilize common compounds in
a formula that we believe are difficult to copy and manufacture. Our formulas
are primarily protected by trade secret protections and through contractual
confidentiality obligations, when obtainable, of our employees, contracting
parties, independent contractors and other collaborators. We rely on trade
secret protection, confidentiality obligations, know-how, and continuing
technological innovations and licensing opportunities to develop and maintain
our competitive position. We are reviewing the feasibility of obtaining future
patent protection with respect to some of our rights. Without adequate trade
secret or patent protection, competitors may be able to produce products
competing with our products without infringing on our rights. The lack of patent
protection poses risks to us.
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GOVERNMENT REGULATION
The products we market and intend to market are subject to regulatory
approval in both the United States and in foreign countries. The following
discussion outlines the various kinds of reviews to which our products may be
subjected to prior to receiving approval for marketing in the United States and
abroad. Some of our collaborative partners in foreign countries will be
responsible for preparing and processing regulatory submissions for countries
located in their respective territories.
REQUIREMENTS IN THE UNITED STATES
The production, distribution and marketing of our products and our research
and development activities are subject to regulation for safety, effectiveness
and quality by numerous governmental authorities in the United States and other
countries. In the United States, drugs are subject to extensive federal
regulation, ordinarily including the requirement of approval by the FDA before
marketing may begin, and, to a lesser extent, state regulation. The Federal
Food, Drug, and Cosmetic Act and the regulations promulgated thereunder, and
other federal and state statutes and regulations govern, among other things, the
testing, manufacture, safety, efficacy, labeling, distribution, storage, record
keeping, approval, advertising, marketing, and sale of our products. Product
development and approval within the regulatory scheme, if successful, will take
a number of years and involve the expenditure of substantial resources.
The standard process required by the FDA before a drug may be marketed in
the United States includes:
* preclinical laboratory and animal tests;
* submission to the FDA of an application for an investigational new
drug, which must become effective before testing of the drug in people
may begin;
* preliminary testing of the drug in people to evaluate the drug and its
manner of use; and
* adequate and well-controlled testing of the drug in people to
establish the safety and effectiveness of the drug for its intended
indication.
If the product is regulated as a prescription drug, or in some cases as an
over-the-counter drug, the Food and Drug Act ordinarily requires the submission
and approval of a New Drug Application or an abbreviated New Drug Application,
for duplicate versions of "pioneer" drug product, before commercial marketing
may begin. As part of the New Drug Application process, the manufacturer is
required to accumulate, and submit to the FDA for review and approval in the
form of a New Drug Application, a significant amount of safety and effectiveness
data from laboratory/animal testing and clinical studies; detailed information
concerning product composition, stability, and manufacturing; and other
information including proposed labeling. Abbreviated New Drug Applications do
not require their own clinical safety and effectiveness data. Each domestic and
foreign manufacturing establishment including contract manufacturers for us must
also be registered with the FDA and pass an inspection by the FDA prior to
approval for commercial distribution.
Domestic and foreign manufacturing establishments are subject to
inspections by the FDA and by other federal agencies and by state and local
agencies, and must comply with current good manufacturing practice requirements.
If violations of applicable requirements are noted by the FDA or other agencies
during an inspection, distribution of clinical materials for investigational use
or production lots for commercial use may be halted and, possibly, other
sanctions imposed. Commercial marketing of perhaps all of our products,
depending on ingredients, claims, and the outcome of the FDA's Over-the-Counter
Drug Review, may occur only after approval of New Drug Applications following
the submission of a complete application. The New Drug Application internal
review process frequently takes two to four years to complete, or longer and the
FDA may require us to perform additional studies to gain approval which may take
several years to complete. The FDA may not give its approval at the end of the
New Drug Application approval process, or ever, and stringent requirements,
violation of which may result in severe civil and criminal penalties, continue
to apply even after approval.
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Moreover, we are, or may become, subject to various federal, state and
local laws, regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices, the experimental use of animals and the
use, storage, handling and disposal of waste and hazardous substances used in
conjunction with our research work.
In 1972, the FDA instituted an ongoing review process to evaluate the
safety and effectiveness of over-the-counter (OTC) drugs. Through this process,
the FDA issues regulations called monographs, that set forth the specific active
ingredients, dosages, indications and labeling statements for OTC drugs that the
FDA generally recognizes as safe, effective and branded properly and therefore
not subject to premarket approval. OTC drugs not covered by proposed or final
regulations are subject to premarket review and approval through the New Drug
Application (NDA) or abbreviated NDA process. We currently market our hand
sanitizer product under two separate proposed monographs, a hand sanitizer
monograph and a first-aid antiseptic monograph.
The active ingredient in our hand sanitizer and antiseptic skin protectant
product, benzalkonium chloride, is included in an FDA proposed regulation for
first aid antiseptic drug products. However, the proposed regulation does not
permit naming the product a hand sanitizer and does not provide for the claims
that we make in marketing our product's hand sanitizing capabilities that it is
long-lasting. Claims that we wish to make that are not specifically allowed in
the first aid monograph would require us to independently substantiate the
claims to the FDA through a New Drug Application. We believe that all of our
current claims are allowable under the proposed hand sanitizer monograph.
However, our active ingredient, benzalkonium chloride, is not specifically
recognized as effective as an antiseptic handwash in the FDA's proposed hand
sanitizer regulation. Unless our active ingredient is included in the final
regulation, we would not be able to rely on that regulation to avoid pre-market
approval.
We are aware that the FDA issued a warning letter to Andrew Jergens Co.
dated April 22, 1999 for its antiseptic lotion containing benzalkonium chloride.
The letter maintains that as formulated and labeled the lotion may not be
legally marketed in the U.S. without a New Drug Application approved by the
agency and that the lotion is also misbranded because the adequacy of the
product's directions for use has not been determined. We understand that Jergens
continues to market its product despite the FDA warning letter.
We believe that the marketing and labeling of our product is different from
Jergens. The Jergens product claims to be a lotion, which indicates it is
permissible to use on all skin parts, although the FDA hand sanitizer monograph
allows for labeling for hands only. Our product is labeled as a hand sanitizer
and describes in the directions that it is for hands only, which we believe will
follow the hand sanitizer monograph if the final monograph includes our active
ingredient. We are not aware that the Jergens product makes any first-aid
antiseptic claims on the packaging. We make the claim that our product heals
minor cuts and abrasions, which we believe are acceptable language in the
first-aid monograph. Also, we believe the FDA's position on the Jergens product
is that it does not follow the allowable hand sanitizer label instructions on
claims and directions for use. We believe that our labeling on claims and
directions for use would be consistent with the FDA monograph for hand sanitizer
requirements if the final monograph includes our active ingredient. Our product
is described as a hand sanitizer and makes claims that it is long lasting;
however, which is not a permitted product name or claims provided for in the
monograph for first aid antiseptics. If we wanted to make product claims that
are not included in the first aid monograph, we would need to independently
substantiate those claims to the FDA in a New Drug Application. Despite the
differences in the claims and labeling, the FDA may assert the same or similar
positions respecting our hand sanitizer and antiseptic skin protectant product
that it has asserted against Jergens. If the FDA takes this position, we may
need to petition the FDA to include our active ingredient in the final
regulations for hand sanitizers. We may not have the resources or may not be
able to convince the FDA to do so. Alternatively, we could attempt to market our
product solely as a first aid antiseptic under the FDA's first aid product
regulations. This would result in our being forced to rename the product as a
first aid antiseptic rather than a hand sanitizer, and to omit some claims that
we make, unless we are able to independently substantiate claims made by us that
are not included in the regulation. This could result in a loss of revenue from
this product, which is our only current product, and eventually put us out of
business.
We are subject to federal, state and local environmental laws. We believe
that we are in material compliance with applicable environmental laws in
connection with our current operations.
REQUIREMENTS IN FOREIGN COUNTRIES
There is a wide variation in the approval or clearance requirements
necessary to market products in foreign countries. The requirements range from
virtually no requirements to a level comparable to those of the FDA. For
example, many countries in South America have minimal regulatory requirements,
while many developed countries, such as Japan, have conditions as stringent as
those of the FDA. Many lesser developed countries, including many countries in
Africa, allow products evaluated and accepted by the World Health Organization
to be sold. WHO acceptance must be requested by a country before the WHO will
evaluate the product. FDA acceptance is not a substitute for foreign
governmental approval or clearance. As in the United States, there is no
guarantee that the applicable governmental approval or clearance for any of our
products will be quickly obtained or that it will be obtained at all.
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We have obtained all necessary governmental approvals required to market
our current product in Canada. In Southeast Asia, we are currently seeking
applicable government approvals for our existing product.
COMPETITION
PREVENTATIVE PRODUCTS
PREVENTX(R) VAGINAL CONTRACEPTIVE GEL
There are a number of microbicidal devices that are in various stages of
development, and none of which to our knowledge are in Phase III clinical trials
at this time. Our gel has been accepted by the National Institutes of Health to
undergo a Phase III clinical trial to prove its safety and its effectiveness
against STDs and as a contraceptive. The purpose of the first two phases of the
multimillion dollar clinical trials were to study the safety of the
contraceptive gel when used in women and its effectiveness against STDs in an in
vitro environment. These first two phases have been completed with seemingly
positive results from the standpoint of safety and in vitro effectiveness. The
third phase of the clinical trials will be funded by the NIH. Most competitive
products recommend the use of a condom or diaphragm with their product. These
products do not include claims that they kill STDs or other infectious disease.
The contraceptive gel, if approved in the United States, will be sold as a
contraceptive gel and anti-infective barrier. The product will be sold at a
premium from contraceptive gels that cannot claim an anti-infective barrier. We
believe that our gel will compete against other contraceptive products on the
basis of product differentiation and, to a lesser extent, price. To the extent
we compete based on price, we will be at a competitive disadvantage.
PREVENTX(R) HAND SANITIZER AND ANTISEPTIC SKIN PROTECTANT
There are a number of competitors in the consumer hand sanitizer and
antiseptic skin protectant market, including Dial Corporation, GoJo Industries,
Colgate-Palmolive Company and Reckitt & Coleman, Inc. Most current products use
a 60% or higher concentration of either alcohol or triclosan as their active
ingredients. In the institutional market, our current competitors include
SyDerma, Woodward Laboratories and Bio-Safe. Some of the competitive products
have formulas similar to Preventx(R). Hand sanitizers in the United States are
sold based on price competition.
PREVENTX(R) DISINFECTANT SURFACE SPRAY
There are numerous competitors in the surface cleaning market, both in the
United States and worldwide, including Reckitt & Coleman, which markets the
Lysol brand, and Dial.
We plan to sell the disinfectant surface spray as an anti-bacterial surface
spray that is safe to be used near food and that does not give any after taste
or odor. We expect that it will be as strong and as effective as those sprays
not used near food because they are lethal to ingest. We intend to sell the
product at a premium price. Like our contraceptive gel, we believe that our
surface spray will compete against other surface cleaners based on product
differentiation and, to a lesser extent, price. Price competition would place us
at a competitive disadvantage.
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EMPLOYEES
As of November 10, 1999, we employed nine full-time personnel. These
employees are involved in executive, corporate administration, operations, and
sales and marketing functions.
RISKS RELATING TO OUR BUSINESS AND OUR SECURITIES
Our future prospects and the market value of our securities are subject to
several risks, some of which are described below.
RISKS RELATING TO OUR BUSINESS:
BASED UPON FDA PRONOUNCEMENTS REGARDING THE ACTIVE INGREDIENT IN OUR HAND
SANITIZER PRODUCT, WE BELIEVE THE FDA COULD SEEK TO ALTER THE WAY WE CURRENTLY
MARKET THIS PRODUCT, WHICH COULD RESULT IN A LOSS OF SALES OF THIS PRODUCT,
WHICH MAY RESULT IN US GOING OUT OF BUSINESS.
The FDA has issued pronouncements regarding the active ingredient in our hand
sanitizer product. The pronouncements have been in the form of both general
rulemaking, as well as a letter to a competitor which uses the same active
ingredient. These pronouncements call into question our ability to market and
sell our product as a hand sanitizer, which is key to our business strategy. If
the FDA were to prevent us, or even seek to prevent us, from continuing to
market our product as we currently do, we may be forced to market our product
solely as a first-aid antiseptic and not as a hand sanitizer, and to omit some
of our current claims. We may not be able to successfully market our product in
this fashion. If the FDA does not allow the marketing of our product in the
final regulations in the way that we believe is necessary to make the product a
commercial success, this could put us out of business. In this regard, we do not
have sufficient resources to combat an adverse FDA determination.
WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT CAPITAL TO FUND OUR OPERATIONS AND,
AS A RESULT, WE MAY CUT BACK OR DISCONTINUE OPERATIONS OR LIMIT OUR BUSINESS
STRATEGIES.
While we will need significant additional capital in the near future, we
may be unable to obtain funding for our operations on favorable terms, or at
all. If adequate funds are not available, we may be required to cut back or
discontinue one or more of our product development, marketing or distribution
programs or plans, reduce operating expenses, or attempt to obtain funds through
strategic alliances that may require us to relinquish rights to one or more of
our technologies or products.
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Our future capital requirements will depend on many factors, including:
* the progress of our product development, sales, marketing and
distribution efforts;
* the scope and results of clinical trials related to our products;
* the progress in filing for and obtaining regulatory approvals;
* the rate of technological advances;
* the market acceptance of our products;
* the levels of administrative and legal expenses; and
* competitive products.
In addition, future financing may be increasingly difficult to obtain due
to our limited operating history and results, the level of risk associated with
our business and business plans, increases in our vulnerability to general
economic conditions, and increased stockholder dilution. Additional debt
financing, if available, may have several negative effects on our future
operations including:
* a portion of our cash flow from operations will be dedicated to
payment of principal and interest and this would reduce the funds
available for operations and capital expenditures;
* increased debt burdens will substantially increase our vulnerability
to adverse changes in general economic and competitive conditions; and
* we may be subject to restrictive debt covenants and other conditions
in our debt instruments that may limit our capital expenditures, limit
our expansion or future acquisitions, and restrict our ability to
pursue our business strategies.
Additional equity financing will also lead to increased dilution to existing
stockholders.
CURRENT LITIGATION MAY ADVERSELY AFFECT ONE OF OUR PRIMARY LICENSES AND WE
COULD LOSE OUR RIGHTS TO MAKE OR SELL OUR PRODUCTS AND BE UNABLE TO GENERATE
REVENUES.
A third party claims a prior worldwide licensing and marketing right
without an expiration date which could materially adversely affect our rights to
license and market our current hand sanitizer product and future products
developed by us. These products include any products that we develop based on
the formulation licensed by us from Geda, which is currently all of our
products. Geda, our licensor, has sought a declaratory judgment that the third
party has no rights in the product line, but it may not succeed in the
litigation. If Geda does not succeed, we may not be able to market, sell or
manufacture our current hand sanitizer product or any other products in
development. If that were to occur, we would be unable to generate revenues.
WE EXPECT TO INCUR LOSSES FOR THE FORESEEABLE FUTURE AND CONTINUED LOSSES
COULD RESULT IN OUR INABILITY TO FUND BUSINESS OPERATIONS AND CAUSE OUR STOCK
PRICE TO DECLINE.
We expect to incur a net loss at least through the end of 1999. We have
incurred a net loss in each year of our existence. We incurred operating losses
of $2,007,172, $2,595,546, and $3,147,135 for the years 1996, 1997 and 1998,
respectively, and $2,802,281 in the nine months ending September 30, 1999. We
may never make a profit. These losses are due in part to expenses associated
with our sales and marketing, overhead, research and development, and regulatory
compliance. As a result, our accumulated deficit has increased from $12,628,792
at December 31, 1996 to $21,173,754 at September 30, 1999. In we continue to
incur losses, we would not be able to fund continuing business operations which
could lead to the limitation or closure of some or all of our operations.
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EXISTING OR POTENTIAL MARKETS MAY NOT ACCEPT OUR PRODUCTS AND WE MAY
EXPERIENCE AN INABILITY TO GENERATE REVENUE OR PROFITS.
Our success depends significantly on obtaining and increasing penetration
of existing and new markets and the acceptance of our products in these markets.
Our products may not achieve or maintain market acceptance. We also may not be
successful in increasing our market share with respect to any of our current
products. Market acceptance will depend, in large part, upon our ability to
educate health care providers and other institutional or consumer end users as
to the distinctive characteristics and benefits of our products. Failure of some
or all of our preventative products to achieve significant market acceptance
would limit our ability to generate revenue or result in a loss of revenue and
our ability to ever make a profit.
ADVERSE PRODUCT PUBLICITY AND PRODUCT RECALLS OF OTHER PRODUCTS MAY HAVE A
NEGATIVE EFFECT ON THE SALES OR ACCEPTANCE OF OUR PRODUCTS AND COULD RESULT IN A
LOSS OF REVENUES OR OUR INABILITY TO EVER BECOME PROFITABLE.
Anti-bacterial products containing triclosan as the active ingredient,
which is not used in our products, have been the focus of adverse publicity and
some product recalls due to its side effects and its ineffectiveness in killing
germs. Although our products do not use triclosan and, we believe, are superior
to other anti-bacterial sanitizing products, adverse publicity stemming from
broadcasts of problems with or recalls of other products may adversely affect
the sales of our products or our ability to ever become profitable, as our
customers or consumers may not distinguish our products from the products that
are the subject of negative publicity.
WE MAY INCUR SIGNIFICANT LIABILITIES AND EXPENSES IF OUR PRODUCTS CAUSE
PERSONAL INJURY OR PROPERTY DAMAGE.
Although we believe that our products are safe, there is a possibility that
personal injury, including death, or property damage could occur from the use or
misuse of our products. If so, significant product liability claims and
litigation could be brought against us. Currently, we maintain limited product
liability insurance. Any claims relating to our products, even if
nonmeritorious, may exceed our existing insurance coverages and assets. If this
occurs, we may experience significant losses and we may divert cash or assets
otherwise available for use in our operations to pay these losses and expenses.
WE HAVE LIMITED SALES, MARKETING AND DISTRIBUTION CAPABILITIES AND RELY
EXTENSIVELY ON THIRD PARTIES TO MARKET AND DISTRIBUTE OUR PRODUCTS, AND THE
FAILURE OR UNWILLINGNESS OF THESE PARTIES TO MARKET OUR PRODUCTS COULD LIMIT OUR
ABILITY TO GENERATE REVENUES OR PROFITS.
We rely extensively on third party marketing and distribution companies and
have little internal capabilities in these areas. Accordingly, our ability to
effectively market and distribute our products is largely dependent on the
strength and financial condition of others, the expertise and relationships of
our distributors and marketers with customers and the interest of these parties
in selling and marketing our products. Our marketing and distribution parties
also market and distribute the products of other companies. Our failure to
generate substantial sales through our distributors would result in our
inability to generate significant revenues and profits if we are not able to
generate sales with our internal salespeople. If our relationships with our
third party marketing and distribution partners were to terminate, we would need
to either develop alternative relationships or develop our own internal sales
and marketing forces to continue to sell our products. Even if we were able to
develop these capabilities internally, these efforts would require significant
cash and other resources that would be diverted from other uses, if available at
all, and could cause delays or interruptions in our product supply to customers,
which could result in the loss of significant sales or customers or our
inability to become profitable.
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WE HAVE NO INTERNAL MANUFACTURING CAPABILITY AND DEPEND HEAVILY UPON THIRD
PARTY SUPPLIERS, AND THE INABILITY OR UNWILLINGNESS OF THESE THIRD PARTIES TO
SUPPLY OUR PRODUCTS COULD RESULT IN INTERRUPTIONS OF OUR PRODUCT SUPPLY
CAPABILITY AND A LOSS OF CUSTOMERS AND REVENUES.
We have a single contract manufacturer for our current product who
purchases raw materials used in the manufacture of our product from various
suppliers. We do not have a written agreement with this manufacturer and our
arrangements could terminate at any time. Our contract manufacturer and our
suppliers may not be able to supply our product in a timely or cost-effective
manner or in accordance with applicable regulatory requirements or our
specifications. In 1999, we do not anticipate that we will be able to establish
additional or replacement suppliers and manufacturers for this product. A delay
or interruption in the supply of these materials or finished products would
significantly impair our ability to compete, would cause a loss of revenue and
could cause a loss of significant customers.
WE ARE SUBJECT TO INTENSE COMPETITION AND PRICING PRESSURES FROM
SUBSTANTIALLY LARGER COMPETITORS WHICH CAN LIMIT OUR ABILITY TO EVER MAKE A
PROFIT.
The consumer products industry in which we compete is intensely
competitive. Among our more significant competitors are large and
well-established companies, including the Dial Corporation, GoJo Industries,
Colgate-Palmolive Company, Reckitt & Coleman, Inc., and others. All of these
companies have significantly greater financial resources than us and are willing
to commit significant resources to protecting their market shares or to capture
market share. As a result, it will be difficult for us to successfully capture
market share from these competitors, promote and advertise our products
effectively against the products of these competitors, and develop product
innovations in response to market demands and opportunities. We may be unable to
successfully compete against these companies even if our products have
recognized superior qualities.
In addition, consumer products, particularly those that we offer or plan to
offer, are subject to significant price competition. From time to time, we may
need to engage in price cutting initiatives for some of our products to respond
to competitive and consumer pressures. Our inability to absorb price reductions
could cause a loss of sales volumes or prohibit us from generating profits from
our product sales.
WE DEPEND ON KEY EMPLOYEES FOR OUR SUCCESS AND THE LOSS OF OUR KEY
EMPLOYEES COULD LIMIT OUR SUCCESS.
Our future success will depend in large part on our ability to attract and
retain highly qualified managerial and technical personnel. The competition for
qualified personnel in our industry is intense and, accordingly, we may be
unable to hire or retain necessary personnel. We are presently highly dependent
upon the efforts of Mr. Stephen D. Hayter, a Director and the President and
Chief Executive Officer of our company, Mr. Richard C. Adamany, the Executive
Vice President and Chief Operating Officer of Empyrean and Mr. Bennett S. Rubin,
the Executive Vice President and Chief Marketing Officer of Empyrean. The loss
of the services of Mr. Hayter, Mr. Adamany or Mr. Rubin could limit our success
in the future. Messrs. Hayter, Adamany and Rubin are all subject to employment
agreements, and the Company plans to obtain "key man" life insurance policies on
their lives.
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GOVERNMENT REGULATION OF OUR PRODUCTS MAY PREVENT US FROM SELLING OUR
CURRENT PRODUCT OR MAY RESULT IN DELAYS IN LAUNCHING OR SELLING FUTURE PRODUCTS,
AND CAN SIGNIFICANTLY INCREASE OUR COSTS.
The testing, manufacture, labeling, distribution, advertising, marketing,
and sale of our products are subject to extensive international and domestic
regulation. To sell some or all of our drug products within the United States,
we will have to obtain premarket approval from the Food and Drug Administration.
The FDA approval process is very costly, time consuming, and uncertain, and our
products may not obtain FDA approval on a timely basis, if at all. We may not
have sufficient resources to complete the required testing and regulatory review
process for our products currently under development, and we do not have
sufficient resources to seek FDA approval of any of our products. In addition,
approvals are subject to continual review, and later discovery of previously
unknown problems may result in product labeling restrictions or withdrawal of
products from the market. Also, the FDA may restrict or prohibit us from making
pertinent product claims and this may limit the successful marketing of our
products or may reduce the prices for our products. Finally, failure to comply
with requirements for testing, manufacturing, labeling, distributing,
advertising, marketing, and selling drugs may subject us or our distributors or
manufacturers to administrative or court-imposed sanctions such as product
recalls or seizures, injunctions against production, distribution, sales and
marketing, delays in obtaining marketing approvals or the refusal of the
government to grant approvals, suspensions and withdrawals of previous
approvals, and criminal prosecution of us or our officers or employees.
THE PROTECTION OF OUR RIGHTS TO OUR PRODUCTS MAY NOT BE COMPLETE AND THIS
COULD IMPAIR OUR ABILITY TO SUCCESSFULLY COMPETE AGAINST OTHERS.
Our ability to effectively compete may be materially dependent upon the
proprietary nature of the products that we license from third parties.
Currently, there are no patents or patent applications pending with respect to
our products. We depend primarily on confidentiality provisions in our written
agreements with third parties and on trade secret laws, which vary from
jurisdiction to jurisdiction and are subject to interpretation. As a result, we
have no ability to prevent third parties from duplicating our products if they
can do so without either violating an agreement with us or improperly using our
trade secrets. We may never be able to obtain any key patents or other
protection and our licensors may never be able to obtain similar protection for
our products. Our existing rights may not be sufficient to protect our products,
may not be valid, and may not provide significant commercial benefits in any
event. Although we do not believe that our products infringe on the patent
rights or proprietary rights of others, they may infringe on other products.
WE HAVE A LIMITED PRODUCT LINE AND OUR INABILITY TO SUCCESSFULLY MARKET ANY
ONE OR A FEW OF OUR PRODUCTS COULD CAUSE A SIGNIFICANT DECLINE IN OUR REVENUES
OR FUTURE PROFITABILITY.
Nearly all of our revenues from product sales in 1998 and thus far in 1999
were derived from our hand sanitizer and antiseptic skin protectant product. We
anticipate that our contraceptive gel will not be available for sales and
marketing and distribution efforts in the United States unless and until an NIH
Phase III study is initiated and completed and successfully demonstrates its
safety and effectiveness as a contraceptive and a sexually transmitted disease
preventative and we obtain FDA approval. Neither successful completion of the
study nor FDA approval is guaranteed. We expect to derive most of our revenue in
the foreseeable future from sales of the hand sanitizer and antiseptic skin
protectant and possibly some of our preventative products currently under
development. As a result of our lack of product diversification, any failure to
successfully develop and market any one or a few of our existing or near-term
future products will have a significant impact on our ability to generate
revenues or profits and this impact would not be offset by the successful
marketing or sales of our other products.
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WE ARE INVOLVED IN A SECURITIES LITIGATION MATTER WHICH COULD RESULT IN
MATERIAL AMOUNTS OF DAMAGES.
We are named in a case involving several claims based on alleged securities
fraud violations and misrepresentations by a company called Pinnacle Diagnostics
and one of its former officers. The plaintiff claims that securities fraud
violations and misrepresentations led it to invest in Pinnacle Diagnostics. The
plaintiff claims damages of approximately $540,000 and interest on that amount,
plus punitive damages. We have been joined as a co-defendant. Although we do not
agree with plaintiff's claims, we could lose this lawsuit. A loss or a
settlement of this lawsuit may require us to pay the damages claimed and
punitive damages. Payment of these damages could cause us to incur significant
losses and deplete any cash or assets that we otherwise may have had available
for use in our business operations.
WE HAVE LIMITED RESEARCH AND DEVELOPMENT RESOURCES AND OUR SUCCESS DEPENDS
IN PART ON OUR RESEARCH AND DEVELOPMENT EFFORTS AND AS A RESULT OUR INABILITY TO
DEVELOP NEW PRODUCTS OR IMPROVEMENTS OF OUR PRODUCTS MAY HARM OUR FUTURE
PROFITABILITY AND ABILITY TO GENERATE REVENUES
Due to the early developmental stage of our business, we have expended only
limited amounts on research and development of disease preventative products in
1998 and 1999. Currently, we have very limited resources to devote to research
and development of our currently planned future products and technologies. Since
our only product on the market to date is our hand sanitizer and antiseptic skin
protectant product, our success depends heavily on our ability to develop
innovative additional products utilizing our core product formulation. Unless we
are able to obtain and devote resources to our research and development efforts,
we may only be able to develop limited product offerings in the future. As a
result, this may limit our ability to achieve market acceptance, to leverage
that acceptance through the introduction of follow-on products, or to better
diversify our risks through multiple product offerings. As a result, we may fail
to achieve significant growth in revenues or profitability in the future.
OUR INABILITY TO MANAGE GROWTH MAY STRAIN OUR RESOURCES AND SYSTEMS.
We anticipate additional growth in the number of people we employ and in
the scope and geographic areas of our operations as current and new products are
developed and commercialized. This growth, if achieved, will result in an
increase in responsibilities for both existing and new management personnel. Our
ability to manage growth effectively will require us to continue to implement
and improve our operating, financial and management information systems and to
train and motivate our current and new employees. Our failure to manage any
expansion effectively could strain our resources and systems and result in the
loss of revenues or customers or the incurrence of additional operating losses.
FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE MAY CAUSE A DISRUPTION IN OUR
SYSTEMS AND CAUSE US TO INCUR SIGNIFICANT LIABILITIES OR EXPENSES.
We recognize the need to ensure that Year 2000 hardware and software issues
do not adversely affect our operations. We believe that our critical internal
systems and software, which consists primarily of off-the-shelf, commercially
available software programs not customized for our business, are Year 2000
compliant. Our evaluation of the compliance of our operating and non-operating
systems with the Year 2000 conversion has not been exhaustive. We have not yet
completed a review of our suppliers or other third party business partners to
determine whether the systems employed by these parties are Year 2000 compliant.
In addition, we have not developed an internal contingency plan to deal with
Year 2000 issues that may affect our business. As a result, we may experience
disruptions in our ability to conduct business because of the Year 2000 problems
experienced by us, our distributors, or our vendors. To the extent that our
systems experience a Year 2000 failure, or if our key distributors or vendors
experience problems relating to achieving Year 2000 compliance, we could suffer
a disruption or loss of our systems and unanticipated additional costs and
possible revenue losses. We may also be subject to unanticipated and significant
litigation resulting from any lack of Year 2000 compliance by us or our vendors
or distributors.
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INTERNATIONAL SALES OF OUR PRODUCTS EXPOSE US TO CURRENCY FLUCTUATIONS AND
OTHER SPECIAL RISKS WHICH COULD LIMIT OUR ABILITY TO GENERATE PROFITS OR CAUSE
US TO INCUR OPERATING LOSSES.
We are attempting to expand the sale of our current products and to
introduce new products under development in several foreign countries. Our
international sales efforts are subject to several customary risks of doing
business abroad, including regulatory requirements, political and economic
instability, trade barriers, foreign taxes and tariff restrictions, restrictions
on the ability to transfer funds, and export licensing requirements. In
addition, although our limited foreign transactions to date have been U.S.
dollar denominated, foreign customers may later require us to receive payment in
foreign currency. Fluctuations in the value of foreign currencies relative to
the U.S. dollar could have an adverse impact on the price of our products in
foreign markets, which could limit or eliminate our ability to generate profits
from the sale of these products or cause us to incur significant losses.
RISKS RELATING TO OUR STOCK:
THE LACK OF A MATURE TRADING MARKET FOR OUR COMMON STOCK MAY CAUSE OUR
STOCK PRICE TO DECLINE SIGNIFICANTLY AND LIMIT THE LIQUIDITY OF OUR COMMON
STOCK.
We do not meet the listing requirements for the listing or quotation of our
common stock on any national or regional securities exchange or on Nasdaq.
Currently, our common stock is traded on the Over-The-Counter Bulletin Board. As
a result, accurate current quotations as to the value of our common stock are
not available and it is more difficult for investors to dispose of our common
stock. The lack of current quotations and liquidity can cause our stock price to
decline or to trade lower than the prices that may prevail if our securities
were listed or quoted on an exchange or on Nasdaq.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
Since our common stock is not listed or quoted on any exchange or on
Nasdaq, and no other exemptions currently apply, trading in our common stock on
the Over-The-Counter Bulletin Board is subject to the "penny stock" rules of the
SEC. These rules require, among other things, that any broker engaging in a
transaction in our securities provide its customers with a risk disclosure
document, disclosure of market quotations, if any, disclosure of the
compensation of the broker and its salespersons in the transaction, and monthly
account statements showing the market values of our securities held in the
customer's accounts. The brokers must provide bid and offer quotations and
compensation information prior to effecting the transaction and include the
information in the customer's confirmation. Generally, brokers may be less
willing to execute transactions in securities subject to the "penny stock"
rules. This may make it more difficult for investors to dispose of our common
stock and cause a decline in the market value of our stock.
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR WARRANTS AND OPTIONS THAT
MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY DEPRESS THE
MARKET PRICE OF OUR COMMON STOCK.
As of November 10, 1999, we have 29,346,659 shares of common stock
outstanding and available for sale in the public market, and we have outstanding
warrants and options to purchase 7,509,617 additional shares at various times.
Most of the shares, including some of the shares issuable upon exercise of our
warrants and options, may be sold without restriction, except for approximately
5,857,774 shares owned or currently issuable to our "affiliates." The future
sale of these shares may adversely affect the market price of our common stock.
The issuance of shares upon exercise of our outstanding warrants and options
will also cause immediate and substantial dilution to our existing stockholders.
In addition, as long as these warrants and options remain outstanding, we may
have difficulty obtaining additional capital.
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OUR STOCK PRICE MAY BE VOLATILE DUE TO FACTORS BEYOND OUR CONTROL WHICH
COULD SUBJECT THE VALUE OF OUR SHARES TO RAPID DECLINE.
In addition to the factors described above, the securities markets have
from time to time experienced significant price and volume fluctuations that can
be unrelated to the operating performance or financial condition of any
particular company, including us. This is especially true with respect to
emerging companies like us and companies in our industry. Announcements of
technology innovations or new products by other companies, release of reports by
securities analysts, regulatory developments, economic or other external
factors, as well as quarterly fluctuation in our or in our competitors'
operating results, can have a significant impact on our stock price. For
example, in the first quarter of 1999, the bid price of our common stock quoted
on the Over-The-Counter Bulletin Board ranged from a low of $0.35 per share to a
high of $1.03 per share, and from a high of $1.00 per share to a low of $0.30
per share in the fourth quarter of 1998. Similar fluctuations have been
experienced in other periods.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information regarding
Empyrean's financial position and its results of operations for the periods
shown. This discussion should be read in conjunction with Empyrean's
Consolidated Financial Statements and related Notes thereto included elsewhere
in this document.
INTRODUCTION
In 1998, we discontinued the distribution and marketing of our Trichomonas
diagnostic test kit. This shift in focus coincided with our acquisition of
certain rights to use a microbicide formulation utilized in a number of our
preventative products, including Preventx Hand Sanitizer and Antiseptic Skin
Protectant, Preventx Vaginal Contraceptive Gel, and Preventx Antiseptic Surface
Spray. Since that time, we are no longer actively marketing any of our
diagnostic products. The decision to discontinue active marketing of our prior
line of diagnostic products and the limited revenues and substantial start-up
costs associated with introducing our new line of preventative products have
significantly affected our current financial condition and operations. We are
actively seeking to obtain additional funds through private financing to meet
current operating expenses and intend to significantly increase sales of our
preventative products through increased marketing and sales efforts.
Empyrean has had limited revenues and has sustained substantial losses from
operations in recent years, has a negative stockholders equity, and at September
30, 1999, had current liabilities substantially in excess of current assets.
We expect to generate substantially all of our revenues in the future from
increased sales of our current line of preventative products. We are also
pursuing the development and introduction of additional preventative products.
In addition to costs of goods sold, which are anticipated to vary somewhat
proportionately with our level of sales, significant cost and expense items
include salaries and benefits, management fees and consulting, royalties and
distribution rights, office and administration, advertising, and legal and
accounting, each of which significantly exceeded Empyrean's total revenues for
the nine months ended September 30, 1999, primarily as a result of our limited
revenues. Accordingly, we do not believe comparing costs as a percentage of
revenues from year to year is meaningful.
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
Our total revenues in the nine months ended September 30, 1999 were
$649,963 compared to $9,430 in the nine months ended September 30, 1998.
Revenues in the first three quarters of 1999 consisted of sales from the
Preventx antiseptic and skin protectant product introduced in late February 1999
in the amount of $99,797 and from the sale of Southeast Asia distribution rights
in the amount of $550,166. Deferred revenue in the amount of $100,000 will be
recorded as revenue at the earlier of the first $100,000 of product shipped to
Durstrand, our Southeast Asia distributor, or May 2000. In the first three
quarters of 1998, revenues of $9,430 represented sales of products under
development for use as samples.
We incurred a net loss in the nine months ended September 30, 1999 of
$2,802,281 compared to a net loss of $2,389,267 in the nine months ended
September 30, 1998. The losses in 1999 and 1998 were due primarily to limited
revenues that were substantially exceeded by our costs of operation. Our net
loss per share for the quarter ended September 30, 1999 was $0.10 compared to a
net loss per share of $0.11 in the quarter ended September 30, 1998. The loss
per share decreased primarily as a result of issuing 2,946,835 shares of common
stock in 1999.
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Selling, general and administrative expenses increased to $3,252,141 in the
nine months ended September 30, 1999 from $2,318,831 in the nine months ended
September 30, 1998 primarily due to the following:
* Administrative fees relating to our relationship with Integrated
Commercialization Solutions (ICS), a division of Bergen Brunswig
Corporation, were $375,120 in the three months ended September 30, 1999 and
we did not incur these fees in the nine months ended September 30, 1998.
ICS provides infrastructure services including distribution, order entry,
warehousing, billing, customer service and marketing services.
* We incurred advertising expenses of $492,852 in the nine months ended
September 30, 1999 compared to $93,222 in the nine months ended September
30, 1998. The advertising expenses incurred in 1999 were primarily due to
our emphasis on marketing and selling our hand sanitizer.
* Legal and accounting expenses increased to $319,770 in the nine months
ended September 30, 1999 compared to $161,583 in the nine months ended
September 30, 1998. The increase in 1999 resulted primarily from legal and
accounting expenses related to our registration statement and filings with
the SEC.
* Consulting expense increased to $740,906 in the nine months ended September
30, 1999 compared to $701,497 in the nine months ended September 30, 1998.
The increase was primarily due to increased consulting expenses related to
our product launch in February 1999 of the hand sanitizer and antiseptic
skin protectant. The fair value of stock option grants to non-employees
were recorded in the amount of $419,890 in the nine months ended September
30, 1999 compared to $552,255 in the nine months ended September 30, 1998.
Interest expense increased to $156,590 in the nine months ended September
30, 1999 compared to $0 in the nine months ended September 30, 1998 due to
interest accrued on promissory notes and the amortization of the fair value of
warrants issued to promissory note holders in 1999.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
Our total revenues in the three months ended September 30, 1999 were
$63,372 compared to $430 in the three months ended September 30, 1998. Revenues
in the third quarter of 1999 consisted of sales from the Preventx antiseptic and
skin protectant product introduced in late February 1999 in the amount of
$29,872 and from the sale of Southeast Asia sub-license distribution rights in
the amount of $33,500.
We incurred a net loss in the three months ended September 30, 1999 of
$1,023,479 compared to a net loss of $900,735 in the three months ended
September 30, 1998. The losses in 1999 and 1998 were due primarily to limited
revenues that were substantially exceeded by our costs of operation. Our net
loss per share for the quarter ended September 30, 1999 and 1998 was $0.04.
Selling, general and administrative expenses increased to $1,030,114 in the
three months ended September 30, 1999 from $812,904 in the three months ended
September 30, 1998 primarily due to the following:
* Administrative fees relating to our relationship with Integrated
Commercialization Solutions (ICS), a division of Bergen Brunswig
Corporation, were $104,816 in the three months ended September 30, 1999 and
we did not incur these fees in the nine months ended September 30, 1998.
ICS provides infrastructure services including distribution, order entry,
warehousing, billing, customer service and marketing services.
* We incurred advertising expenses of $211,792 in the three months ended
September 30, 1999 compared to $53,814 in the three months ended September
30, 1998. The advertising expenses incurred in 1999 were primarily due to
our emphasis on marketing and selling our hand sanitizer.
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* Legal and accounting expenses increased to $156,198 in the three months
ended September 30, 1999 compared to $60,078 in the three months ended
September 30, 1998. The increase in 1999 resulted primarily from legal and
accounting expenses related to our registration statement and filings with
the SEC.
* Consulting expense increased to $101,750 in the three months ended
September 30, 1999 compared to $60,047 in the three months ended September
30, 1999. The increase was primarily due to increased consulting expenses
related to our product launch in February 1999 of the hand sanitizer and
antiseptic skin protectant.
* Royalties expense increased to $372,438 in the three months ended September
30, 1999 compared to $182,500 in the three months ended September 30, 1999.
The increase was due to the increase in minimum guaranteed royalties in
1999 from 1998 payable to the inventor of our current product formulation.
* License rights expense decreased to $0 in the three months ended September
30, 1999 compared to $273,250 in the three months ended September 30, 1998.
The decrease resulted from the purchase of Preventx distribution rights to
Canada and the purchase of the Preventx name in 1998.
Interest expense increased to $44,977 in the three months ended September
30, 1999 compared to $0 in the three months ended September 30, 1998 due to
interest accrued on promissory notes and the amortization of the fair value of
warrants issued to promissory note holders in 1999.
LIQUIDITY AND FINANCIAL POSITION
We have been unable to date to generate significant cash flows from our
business operations. As a result, we have funded our operations through investor
financing, including private placements of common stock, convertible debentures,
warrants and options. Until such time as we are able to generate significant
cash flow from operations through increased sales of our products, we will be
required to continue our reliance on investor financing to fund our operations.
At September 30, 1999, cash and cash equivalents totaled $141,744, an increase
of $78,591 from December 31, 1998. Also as of September 30, 1999, current
liabilities, consisting primarily of accounts payable and accrued liabilities,
exceeded current assets by $1,100,551.
During the nine months ended September 30, 1999, net cash used in operating
activities was $1,719,413 which primarily resulted from a net loss from
continuing operations of $2,802,281 less non-cash charges relating to warrant
and option grants in the amount of $536,466 and other net working capital
changes in the amount of $546,402.
In the nine months ended September 30, 1999, net cash flow from financing
activities increased by 16% due to funding from promissory notes in the amount
of $800,000 and an offsetting decrease in security issuances when compared to
1998 in the amount of $549,729. Net cash provided by financing activities for
the nine months ended September 30, 1999, was $1,807,773 resulting from issuance
of short-term promissory notes totaling $800,000 and $1,007,733 resulting from
the sale of common stock and the exercise of options and warrants. We have
pursued additional financing opportunities to fund the costs associated with
acquiring and marketing our new line of preventative products.
On August 15, 1999, promissory notes in the amount of $218,500 were settled
by offsetting the amounts payable against the proceeds receivable from the
exercise of 810,000 previously issued warrants. The due date of promissory notes
in the amount of $285,500 were extended for an additional six months. The
remaining promissory notes in the amount of $296,000 are currently due and
payable.
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We anticipate incurring a substantial increase in cash outlays associated
with increased marketing and sales of our Preventx preventative product line.
These cash outlays could include, but are not limited to, product registration
costs, advertising, inventory purchases and a sales and marketing campaign. To
maintain our current expenses of approximately $2 million per year and meet the
costs associated with our increased marketing and sales efforts, we will need to
raise substantial additional capital during 1999. If we are unsuccessful in
raising the required funds to meet these expenses, we are likely to be unable to
complete the steps necessary to significantly increase our sales. Also, unless
the FDA issues final regulations that are different than its current proposed
regulations with respect to our hand sanitizer product, we may experience an
adverse affect on liquidity. In these cases, our financial condition and results
of operations will deteriorate and our business may ultimately fail.
We do not have existing capital resources or credit lines available that
are sufficient to fund our operations and capital requirements as presently
planned over the next twelve months. We plan to raise funds through the issuance
of either debt or equity instruments. However, such funds may not be available
on favorable terms or at all.
COMPARISON OF YEARS ENDED 1998 AND 1997
Our total revenues in 1998 were $9,815 compared to total revenues in 1997
of $13,018. The 1998 amount was attributable primarily to sample sales of our
preventative products in development. As a result of the shift in focus in 1997
and 1998 to developing, marketing and distributing only disease preventative
products, we do not believe a comparison of our revenues for the fiscal years
ended December 31, 1998 and 1997 are meaningful or that a comparison is
indicative of any future trend in our financial performance.
We incurred a net loss in 1998 of $3,147,135 compared to a net loss of
$2,595,546 in 1997. These losses were due primarily to limited revenues that
were substantially less than our costs of operation. Our net loss per share was
$0.14 in 1998 and 1997, respectively.
Selling, general and administrative expenses increased to $2,912,791 in the
year ended December 31, 1998 from $1,875,020 in the year ended December 31, 1997
primarily due to the following:
* Management fees and consulting expenses increased to $849,178 in 1998 from
$118,744 in 1997. This increase resulted from a greater reliance on
independent contractors in 1998 compared to 1997 due to use of contract
sales representatives and product launch consultants.
* Expenses for royalties and distribution rights increased to $518,250 in
1998 from $275,492 in 1997, an increase of approximately 88% over the prior
year. This increase was due in large part to a $245,000 guaranteed minimum
payment in 1998 versus a guaranteed minimum payment of $0 in 1997. Our
agreement with Geda International Marketing Co., Ltd., under which we
acquired the rights to market and distribute our current line of
preventative products, provides for future minimum guaranteed payments that
increase significantly in each year of the contract. See Note 8 to our
Consolidated Financial Statements. As a result, we expect our expenses for
royalties and distribution rights to continue to increase significantly on
an annual basis. Unless we are successful in generating substantial
additional sales of our preventative products, we are also likely to
continue to generate substantial losses from operations.
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* As a result of consolidating operations into one leased facility in March
1998, total rent expense, net of sublease income received, declined to
$57,894 in 1998 from $91,912 in 1997.
* Office and administration expenses, which consist primarily of day-to-day
operational expenses, increased to $182,390 in 1998 from $164,096 in 1997.
This increase was due primarily to product launch related expenses.
* We incurred advertising expenses of $154,765 in 1998. No advertising
expenses were recorded in 1997. The advertising expenses incurred in 1998
were primarily due to our emphasis on marketing and selling our new line of
preventative products in order to generate increased sales. We anticipate
that advertising expenses will increase substantially in 1999 as a result
of our increased efforts to market and distribute our new line of
preventative products.
* Slightly offsetting the above increases, costs associated with salaries and
benefits declined to $710,137 in 1998 from $805,642 in the prior year. This
decline was primarily due to staff turnover associated with shifting the
organization from an R&D based organization to an emphasis on sales and
marketing.
Research and development expenses decreased to $31,425 in 1998 from
$137,349 in 1997, representing a decline of approximately 77%. This decline
represents our shift in focus from research and development of new diagnostic
test kit products to sales and marketing of our new line of preventative
products.
Prior to 1997 we made a $600,000 advance to Emerald Diagnostics, a company
controlled by a former director, for product development. In 1997 we wrote off
the remaining $105,000 advance because it had no future economic benefit.
We reported a $28,516 loss on inventory obsolescence in 1998 versus a
$458,800 loss in the prior year. The loss recorded in 1998 primarily reflects a
write-off of PEMVIEW Trichomonas test kits while the loss recorded in 1997
primarily reflects a write-off of HIV test kit components.
We incurred a $209,972 loss on fixed asset disposal in 1998. This loss was
due to a one-time noncash charge for a write-off of fixed assets used in
manufacturing and research associated with our discontinued line of diagnostic
products. We recorded a $30,693 loss on fixed asset disposal in 1997 due to
write-offs of abandoned leasehold improvements.
YEAR 2000 COMPLIANCE
The following Year 2000 discussion contains various forward-looking
statements that represent our beliefs or expectations regarding future events.
When used in the Year 2000 discussion, the words "believe," "expects,"
"estimates," and other similar expressions are intended to identify
forward-looking statements. Forward-looking statements include, without
limitation, our expectations as to when we and our significant distributors,
customers, and suppliers will complete the implementation and compliance phases
of the Year 2000 Plan, as well as any Year 2000 contingency plans; and our
belief that our internal systems and equipment are Year 2000 compliant. All
forward-looking statements involve a number of risks and uncertainties that
could cause actual results to differ materially from the projected results.
Factors that may cause these differences include, but are not limited to, the
availability of qualified personnel and other information technology resources
and the actions of independent third-parties with respect to Year 2000 problems.
The Year 2000 problem refers to the inability of software to process date
information later than December 31, 1999. Date codes in many software programs
are abbreviated to allow only two digits for the year. Software with
date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000. When that happens, some software
will not work at all and other software will suffer critical calculation and
other processing errors. Hardware and other products with embedded chips may
also experience problems.
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We believe that our critical internal systems, including versions of
Quickbooks, Microsoft Exchange and Microsoft Office products, are Year 2000
compliant. In addition, we track the versions and updates when available for
these products to ensure Year 2000 compliance.
We and our service provider, Integrated Commercialization Solutions, have
completed an evaluation of our internal systems and equipment that addresses
both information technology systems and non-IT systems. IT systems consist of
business systems and the software development environment. Non-IT systems
consist of all other systems such as building security and HVAC systems. In
addition, we have completed the upgrade of critical systems to meet Year 2000
requirements. We believe that any future internal Year 2000 costs will be
immaterial.
We have contacted our manufacturer, Canadian Custom Packaging, who has
confirmed that it is Year 2000 compliant. However, if there is interruption of
the manufacturing process due to Year 2000 computer malfunctions, we will have
no way to manufacture our product until the problem is corrected or another
manufacturer can be obtained.
Due to our Year 2000 analysis, we have determined that an internal
contingency plan is unnecessary. We also are in the process of conducting a
review of our suppliers to determine whether the suppliers' operations and the
products and services they provide are Year 2000 compliant.
We have no practical means to verify the information provided by these
third parties and will pursue those secondary distributors and vendors who have
not yet responded. Based upon these assessments and where practicable, we will
attempt to mitigate our risks with respect to any suppliers that may not meet
the requirements, including seeking alternative suppliers. However, we may
experience disruptions in our ability to conduct business because of Year 2000
problems experienced by our distributors or vendors. As a result, these problems
remain a possibility and could have an adverse impact on our results of
operations and financial condition. To the extent that our key distributors or
vendors experience problems relative to achieving Year 2000 compliance, we could
suffer unanticipated additional costs and possible revenue losses.
Some independent sales representatives that we use may have applications
that are not Year 2000 compliant. We do not believe this is a material concern
since product orders currently are either manually written and submitted
verbally or by fax.
Some commentators have predicted significant litigation regarding Year 2000
compliance issues. Because of the unprecedented nature of Year 2000 litigation,
it is uncertain whether, or to what extent, we may be affected.
SPECIAL NOTE CONCERNING FORWARD LOOKING STATEMENTS
This registration statement, including the notes to the consolidated
financial statements and this "Management's Discussion and Analysis of Financial
Condition and Results of Operations," contains forward looking statements. We
may make additional written and oral forward looking statements from time to
time in filings with the Securities and Exchange Commission, in our press
releases, or otherwise. The words "believe," "expect," "anticipate," "intends,"
"forecast," "project," and similar expressions identify forward looking
statements. These statements may include, but are not limited to, the
anticipated outcome of contingent events, including litigation, or regulatory
proceedings or rulemaking, projections of revenues, income or loss, or capital
expenditures, plans for future operations, growth and acquisitions, financing
needs or plans and the availability of financing, and plans relating to products
or product development as well as assumptions relating to the above subjects.
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<PAGE>
Forward looking statements reflect our current views concerning future
events and financial performance and speak only as of the date the statements
are made. These forward looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward looking statements. Statements in this
registration statement, including the notes to the consolidated financial
statements and this "Management's Discussion and Analysis of Financial Condition
and Results of Operations," describe factors, among others, that could
contribute to or cause such differences. Additional factors that could cause
actual results to differ materially from those expressed in such forward looking
statements are set forth in Item 1: Business. In addition, new factors emerge
from time to time and it is not possible for management to predict all of these
factors, nor can it assess the impact of each factor on the business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from forward looking statements. We undertake no obligation
to publicly update or review any forward looking statements, whether as a result
of new information, future events, or otherwise.
PROPERTIES
Our corporate facility is located in Phoenix, Arizona and consists of
approximately 4,300 square feet of executive office and warehouse space. We
lease this facility for a monthly base rent of $3,363. The lease expires in
March 2001. We believe that our facilities are adequate for our needs for the
foreseeable future.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of November 10, 1999 information about
the amount and nature of beneficial ownership of the common stock held by:
* Each person who we know is a beneficial owner of more than 5% of our
outstanding common stock;
* Each person who is a director or executive officer of Empyrean; and
* All of our directors and executive officers as a group.
The business address of each person listed is c/o Empyrean Bioscience,
Inc., 2238 West Lone Cactus Drive, Suite 200, Phoenix, Arizona 85027-2613.
Beneficial ownership is determined in accordance with the rules of the SEC
and includes generally voting powers and investment power with respect to
securities. We believe that each individual named has sole investment and voting
power with respect to shares of common stock indicated as beneficially owned by
him, subject to community property laws, where applicable and except where
otherwise noted.
Beneficial ownership is calculated based on 29,346,659 common shares issued
and outstanding as of November 10, 1999, under Rule 13d-3(d) of the Securities
Exchange Act of 1934. Shares subject to unexercised options, warrants, rights or
conversion privileges exercisable within 60 days of November 10, 1999, are
deemed outstanding for the purpose of calculating the number and percentage
owned by that person, but not deemed outstanding for the purpose of calculating
the percentage owned by each other person listed. The first column of the
following chart represents the total number of actual outstanding shares owned
by the named individual, including options and warrants exercisable within 60
days of November 10, 1999. The second column titled "Portion Represented by
Options and Warrants" shows the portion of the column one figure represented by
options and warrants exercisable within 60 days of November 10, 1999. The totals
for Mr. Bain include 890,000 shares owned beneficially by Uptic Investments
Corp., a company owned 100% by Mr. Bain.
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TOTAL AMOUNT PORTION REPRESENTED
NAME AND ADDRESS OF OF BENEFICIAL BY OPTIONS AND PERCENT
BENEFICIAL OWNER OWNERSHIP WARRANTS OF CLASS
- ------------------- ------------- ------------------- --------
Michael Cicak 1,385,000 580,000 4.7%
Stephen D. Hayter 1,557,305 1,400,570 5.3%
Raymond E. Dean 749,719 747,719 2.6%
Dr. Andrew J. Fishleder 163,000 140,000 *
Robert G.J. Burg II 130,000 100,000 *
Lawrence D. Bain 1,232,750 710,000 4.2%
Richard C. Adamany 320,000 320,000 1.1%
Bennett S. Rubin 320,000 320,000 1.1%
Directors and executive officers
as a group (eight persons) 5,857,774 4,318,289 19.9%
- ----------
* less than 1%
As of the date of this Registration Statement, to our knowledge, there are
no arrangements of which may at a subsequent date result in a change in control
of Empyrean.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the names of all of our current directors
and executive officers as of the date of this Registration Statement, with each
position and office held by them and their periods of service in the capacities
listed.
NAME AGE POSITION WITH THE COMPANY DATE FIRST ELECTED
- ---- --- ------------------------- ------------------
Stephen D. Hayter 60 Director, President and August 1996
Chief Executive Officer
Andrew J. Fishleder, M.D. 46 Director November 1998
Robert G.J. Burg II 42 Director November 1998
Michael Cicak 63 Director May 26, 1999
Lawrence D. Bain 49 Director August 6, 1999
Richard C. Adamany 46 Executive Vice President September 7, 1999
and Chief Operations Officer
Bennett S. Rubin 42 Executive Vice President September 7, 1999
and Chief Marketing
Officer
Mr. Hayter was appointed as our director, President and Chief Executive
Officer in August 1996. Mr. Hayter has over twenty years experience in the
health care industry, specifically in biotechnology, and has an extensive
network of contacts throughout North America, Europe and Japan. For the two
years prior to August 1996, Mr. Hayter served as President of Sedona
Biotechnology, a consulting practice with clients such as Fisher Scientific USA,
Colby Group International Japan and Durimport Marine Canada. Prior to 1996, Mr.
Hayter was the Executive Vice President of Centocor, Inc. responsible for the
Diagnostics Division. In 1987, Mr. Hayter founded ADI Diagnostics Inc., a fully
integrated diagnostics company specializing in infectious disease and oncology
testing, and was its President until 1993. In 1991, ADI Diagnostics, Inc. merged
with Cambridge Biotech. Mr. Hayter served in the Diagnostics Division of Abbott
Laboratories for thirteen years with his last position being the Executive
Vice-President and Representative Director of Abbott's joint venture, Dainabot
KK. Mr. Hayter currently resides in Phoenix, Arizona. Mr. Hayter will resign as
President and Chief Executive Officer by March 7, 2000.
Dr. Fishleder was appointed a director on November 20, 1998. Dr. Fishleder
has been the Chairman of the Division of Education of the Cleveland Clinic
Foundation since 1991 and currently serves on the institution's Board of
Governors and Medical Executive Committee. Dr. Fishleder is a pathologist and
has been a member of the staff of the Cleveland Clinic Department of Clinical
Pathology since 1982.
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<PAGE>
Mr. Burg was appointed a director on November 20, 1998. Mr. Burg has over
twenty-years experience in sales and marketing. Since January 1998 Mr. Burg has
been the President of Profile Sports. Between 1990 and 1998, Mr. Burg was
employed by Royal Grip, Inc./Roxxi Caps, which manufacturers and distributes
golf grips and sports headwear, and was its President between February 1995 and
January 1998. Mr. Burg has been a director of Royal Precision, Inc. since June,
1998.
Mr. Cicak was appointed a director on May 26, 1999. Mr. Cicak is currently
the president of Solar Cells, Inc., a privately held manufacturer and worldwide
distributor of solar panels, and was the president and CEO of GlassTech, Inc., a
privately held manufacturer and distributor of window manufacturing equipment,
from 1983 to 1993. He is currently a member of the Board of Directors of the
University of Findlay in Ohio and serves on several corporate boards including
First Solar, LLC and Autom.
Mr. Bain was appointed a director on August 6, 1999. Mr. Bain is a senior
vice president in the investment banking division of Stifel, Nicolaus & Company,
Incorporated. Previously, Mr. Bain was a managing director with Everen
Securities and a senior vice president with both Morgan Stanley Dean Witter and
E.F. Hutton Company. He currently serves as a trustee for Cleveland's Leprechaun
Society Charity and is a past board member of the Better Business Bureau.
Mr. Adamany was appointed Executive Vice President and Chief Operating
Officer on September 7, 1999. Prior to joining Empyrean, Mr. Adamany was a 50%
owner of Premier Enterprise Partners, LLC, a company formed to acquire, operate
and grow companies pursuing long-term capital gains. Mr. Adamany was Executive
Vice President and Chief Operating Officer of Advanced Lighting Technologies
from 1997 to 1998. From 1992 to 1996 Mr. Adamany was Senior Vice President,
Treasurer and Chief Financial Officer of Health O Meter Products Inc. which
acquired Mr. Coffee, Inc. where he held the same position. Mr. Adamany is
entitled under his employment agreement with us to become our President and
Chief Executive Officer and a director by March 7, 2000.
Mr. Rubin was appointed Executive Vice President and Chief Marketing
Officer on September 7, 1999. Prior to joining Empyrean, Mr. Rubin was a 50%
owner of Premier Enterprise Partners, LLC, a company formed to acquire, operate
and grow companies pursuing long-term capital gains. During 1998, Mr. Rubin was
Senior Vice President, Sales of Advance Lighting Technologies, Inc. From 1995 to
1998, Mr. Rubin held several senior management positions at Invacare
Corporation, including Vice President, Marketing and Marketing Services. From
1989 to 1995 Mr. Rubin was Vice President of Sales and Marketing of The Genie
Company. Mr. Rubin is entitled under his employment agreement with us to become
our Executive Vice President and Chief Operations Officer and a director by
March 7, 2000.
The directors have served in their respective capacities since their
election or appointment and will serve until the next annual shareholders
meeting or until a successor is duly elected, unless the office is vacated in
accordance with our Articles of Incorporation. The executive officers are
appointed by the Board of Directors to serve until the earlier of their
resignation or removal with or without cause by the directors.
There are no family relationships between any two or more directors or
executive officers. Under their employment agreements with us, we are required
to elect Mr. Adamany and Mr. Rubin as directors by March 7, 2000. Other than as
described for these individuals, there are no arrangements or understandings
regarding election between any two or more directors or executive officers.
BOARD COMMITTEES
The Board of Directors has an Audit Committee and a Compensation Committee.
No committee meetings occurred in 1998 or 1999. The Audit Committee is
responsible for evaluating the Company's accounting principles and its system of
accounting controls. The Compensation Committee acts on matters related to the
compensation of directors, senior management and key employees. Dr. Fishleder
and Mr. Burg each serve on our Audit Committee and Compensation Committee.
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<PAGE>
DIRECTOR COMPENSATION
Non-employee directors receive:
* a quarterly retainer of $2,500, plus $500 per committee meeting
attended;
* an annual grant of stock options to purchase 100,000 shares of our
common stock; and
* reimbursement for out-of-pocket expenses associated with attending
Board and committee meetings.
Employee directors receive no additional compensation for serving on the Board.
The stock options granted to non-employee directors are granted at an
exercise price equal to the fair market value of the common stock on the date of
grant, are fully vested at date of grant, and expire ten years from the date of
grant.
EXECUTIVE COMPENSATION
The following table is a summary of the compensation paid to our Chief
Executive Officer and each executive officer who earned over $100,000 in total
salary and bonus for each of our three most recently completed fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------- -------------
SECURITIES
OTHER ANNUAL UNDER OPTIONS ALL OTHER
NAME AND COMPENSATION GRANTED/SARS COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) GRANTED (#) ($)
- ------------------ ---- ---------- --------- ------------ ------------- ------------
<S> <C> <C> <C>
Stephen D. Hayter 1998 $186,923 -- -- 1,400,000 --
President and Chief 1997 $189,539 -- -- 300,000 --
Executive Officer 1996 $ 60,000 -- -- 600,000 --
Raymond E. Dean 1998 $135,000 -- -- 700,000 --
Former Secretary and 1997 $ 40,000 -- -- 300,000 --
Chief Operations
Officer(1)
</TABLE>
- ----------
(1) Mr. Dean joined Empyrean in August, 1997 and therefore no compensation
information for 1996 is provided. Mr. Dean resigned as chief operations
officer in September 1999. Currently he remains an employee of the Company.
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<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE
OPTIONS/SARS EMPLOYEES IN OR BASE PRICE
NAME GRANTED # FISCAL YEAR ($/SHARE) EXPIRATION DATE
---- ------------ ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Stephen D. Hayter 1,400,000 62.5% $ 0.95 April 28, 2001
Raymond E. Dean 700,000 31.3% $ 0.95 April 28, 2001
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS/SARS IN-THE-MONEY
ACQUIRED ON VALUE AT FISCAL YEAR-END OPTIONS/SARS FISCAL YEAR-END
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ------------------------------- ----------------------------
<S> <C> <C> <C> <C>
Stephen D. Hayter 25,000 $8,450 1,350,570/854,372 $3,500
Raymond E. Dean -- -- 747,719/427,186 --
</TABLE>
EMPLOYMENT AGREEMENTS
Steven D. Hayter, our President, Chief Executive Officer, and Chairman of
the Board, works under an employment agreement effective as of September 1,
1999. Under the employment agreement, six months from September 1, 1999, Mr.
Hayter will resign as President and Chief Executive Officer of the Company. Mr.
Hayter's agreement provides for a base salary of $180,000 per year which shall
continue through December 31, 2001 subject to review by our Compensation
Committee. Mr. Hayter would be entitled to participate in an incentive
compensation program in the future if so approved by our Board of Directors.
Under the employment agreement, we have agreed to register shares issuable upon
exercise of options granted to Mr. Hayter under our stock plan and have agreed
to register the resale of those shares under an effective Form S-3 Registration
Statement, if available. If Mr. Hayter is terminated without cause, we are
obligated to provide Mr. Hayter twelve months of severance pay, including one
year's salary and a pro rata portion of his annual bonus and accelerated vesting
of options. Mr. Hayter's agreement also contains confidentiality and non-compete
covenants. We have agreed to indemnify Mr. Hayter for actions taken by him as an
officer or director of us and this indemnification will survive his termination.
We have agreed to continue liability insurance until five years following Mr.
Hayter's termination with us.
Richard C. Adamany, our Executive Vice President and Chief Operating
Officer, works under an employment agreement effective as of September 7, 1999.
Mr. Adamany's agreement provides for a base salary of $150,000 for the first six
months of the agreement. Under the employment agreement, no later than six
months from September 7, 1999, Mr. Adamany will assume the position of President
and Chief Executive Officer of Empyrean and will become a director. His annual
base salary will increase to $180,000 at the end of the six month period. Mr.
Adamany will be reimbursed for weekly trips between Cleveland, Ohio and Phoenix,
Arizona. In addition, we will provide Mr. Adamany with a furnished two-bedroom
apartment in Phoenix, Arizona, access to a physical fitness center, and an
automobile. Mr. Adamany would be entitled to participate in an incentive
compensation program in the future if so approved by our Board of Directors.
Under the employment agreement, we have agreed to register shares issuable upon
exercise of options granted to Mr. Adamany under our stock plan and have agreed
to register the resale of those shares under an effective Form S-3 Registration
Statement, if available. If Mr. Adamany is terminated without cause, we are
obligated to provide Mr. Adamany twenty-four months of severance pay, including
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<PAGE>
two years of salary and a pro rata portion of his annual bonus and accelerated
vesting of options, unless Mr. Adamany is terminated less than twelve months
from the date of execution of the employment agreement, in which case his
severance pay would be limited to twelve months. Mr. Adamany has the option upon
termination of accepting a lump sum payment for severance pay, calculated by
discounting the stream of payments owed to him using a discount rate of 15%. Mr.
Adamany's bonus will be payable no later than ninety days following the close of
the fiscal year that he is terminated. Mr. Adamany's agreement also contains
confidentiality and non-compete covenants. We have agreed to indemnify Mr.
Adamany for actions taken by him as an officer or director of us and this
indemnification will survive his termination. We have agreed to continue
liability insurance until five years following Mr. Adamany's termination with
us.
In addition, under his employment agreement, Mr. Adamany is entitled to a
grant of options to purchase a minimum of 1.5 million shares of common stock at
the fair market value on the date of grant. The first option to purchase 50,000
shares of common stock vested upon execution of the employment agreement.
Options to purchase 90,000 shares will vest on the last day of each of the
second, third, fourth, fifth and sixth months following the execution of the
employment agreement. The remaining options will vest according to mutually
agreed upon performance criteria. The agreement provides that options granted to
other members of management will vest upon the same performance criteria as the
criteria for Mr. Adamany. Empyrean has not yet granted these options to Mr.
Adamany.
Bennett S. Rubin, our Executive Vice President and Chief Marketing Officer,
works under an employment agreement effective as of September 7, 1999. Mr.
Rubin's agreement provides for a base salary of $150,000 for the first six
months of the agreement. Under the employment agreement, no later than six
months from the effective date of September 7, 1999, Mr. Rubin will assume the
position of Executive Vice President and Chief Operating Officer of Empyrean,
and will become a director. His annual base salary will increase to $170,000 at
the end of the six month period. Mr. Rubin will be reimbursed for weekly trips
between Cleveland, Ohio and Phoenix, Arizona. In addition, we will provide Mr.
Rubin with a furnished two-bedroom apartment in Phoenix, Arizona, access to a
physical fitness center, and an automobile. Mr. Rubin would be entitled to
participate in an incentive compensation program in the future if so approved by
our Board of Directors. Under the employment agreement, we have agreed to
register shares issuable upon exercise of options granted to Mr. Rubin under our
stock plan and have agreed to register the resale of shares under an effective
Form S-3 Registration Statement, if available. If Mr. Rubin is terminated
without cause, we are obligated to provide Mr. Rubin twenty-four months of
severance pay, including two years of salary and a pro rata portion of his
annual bonus and accelerated vesting of options, unless Mr. Rubin is terminated
less than twelve months from the date of execution of the employment agreement,
in which case his severance pay would be limited to twelve months. Mr. Rubin has
the option upon termination of accepting a lump sum payment for severance pay,
calculated by discounting the stream of payments owed to him using a discount
rate of 15%. Mr. Rubin's bonus will be payable no later than ninety days
following the close of the fiscal year that he is terminated. Mr. Rubin's
agreement also contains confidentiality and non-compete covenants. We have
agreed to indemnify Mr. Rubin for actions taken by him as an officer or director
of us and this indemnification will survive his termination. We have agreed to
continue liability insurance until five years following Mr. Rubin's termination
with us.
In addition, under his employment agreement, Mr. Rubin is entitled to a
grant of options to purchase a minimum of 1.5 million shares of common stock at
the fair market value on the date of grant. The first option to purchase 50,000
shares of common stock vested upon execution of the employment agreement.
Options to purchase 90,000 shares will vest on the last day of each of the
second, third, fourth, fifth and sixth months following the execution of the
employment agreement. The remaining options will vest according to mutually
agreed upon performance criteria. The agreement provides that options granted to
other members of management will vest upon the same performance criteria as the
criteria for Mr. Rubin. Empyrean has not yet granted these options to Mr. Rubin.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the last two fiscal years we have entered into the following
transactions with our directors, officers, holders of 5% or more of our common
stock, or their affiliates:
STUART C. MCNEILL
Mr. McNeill was our Secretary and a director from November 9, 1995 to
November 20, 1998. We entered into an oral agreement with McNeill & Associates
Financial Consultants, Inc. which is a private British Columbia company
controlled by Mr. McNeill. McNeill & Associates, under the agreement, provided
us with accounting, office and administrative services. We paid McNeill &
Associates $120,534 in 1996 and $15,346 in 1997 for its services. The agreement
was terminated on February 1, 1997.
DAVID TEWS
Mr. Tews was a director between January 27, 1997 and November 20, 1998. We
entered into a Consulting Services Agreement with International Trade Group,
Inc. which is a private company controlled by Mr. Tews. ITG, under the
agreement, provided consulting services to us with respect to strategic planning
and business development for a monthly fee of $6,000 and 250,000 stock options
exercisable for three years at $0.83 per share. The 250,000 stock options were
granted on June 16, 1998. The agreement was for a term of three years starting
June 16, 1998. Effective October 15, 1999, we notified Mr. Tews that we were
terminating this agreement.
ANDREW POLLET
Mr. Pollet was one of our directors between March 24, 1997 and November 20,
1998. Pollet Law, a law firm which Mr. Pollet founded and is the principal
shareholder, has provided us with legal services. We paid Pollet Law $127,329,
$93,975 and $126,775 in 1998, 1997 and 1996, respectively for legal services.
Pollet Law continues to provide legal services.
LAWRENCE D. BAIN
Mr. Bain was appointed a director on August 6, 1999. In April 1998, we
entered into an engagement agreement with Uptic Investments Corp., which is
controlled by Mr. Bain. Uptic provided financial advisory services to us with
respect to obtaining strategic corporate or institutional investors and also
facilitated introductions to key customers and distributors. Uptic has been
issued warrants to purchase 1,000,000 shares of common stock, of which it has
purchased upon exercise of the warrant 250,000 shares that were granted and
fully exercisable in April 1998 at an exercise price of $0.01 per share, and
250,000 shares that were granted and fully exercisable in January 1999 at an
exercise price of $0.01 per share. The remaining 500,000 warrants were granted
and fully exercisable on May 5, 1999 and have an exercise price of $0.50 per
share. Consulting expenses in the amounts of $213,275 and $301,000 were recorded
in 1998 and 1999, respectively, in accordance with SFAS 123 for the fair value
of the warrants.
INDEBTEDNESS OF MANAGEMENT AND OTHERS TO THE COMPANY
In 1997 Mr. Stephen D. Hayter, our President, Chief Executive Officer, and
a Director, delivered to us a promissory note in the original principal amount
of $120,873 with interest at 8.5% per annum, as payment for the exercise of
200,000 stock options. The promissory note was paid in full during the first
quarter of 1998.
37
<PAGE>
DESCRIPTION OF SECURITIES
The following is a description of all of the material rights of our
securities. For a more complete description of the rights and other terms of our
capital stock, we direct you to our Articles of Incorporation and Bylaws.
COMMON STOCK
Our authorized common stock consists of 100,000,000 shares of common stock
without par value. The holders of common stock are entitled to dividends, pro
rata, as and when declared by the Board of Directors, to one vote per share at a
meeting of shareholders and, upon winding up or liquidation, to receive those of
our assets that are distributable to the holders of the common stock upon
winding up or liquidation. No common stock has been issued subject to call or
assessment. There are no preemptive or conversion rights and no provisions for
redemption, purchase for cancellation, surrender or sinking funds. Provisions as
to the modification or variation of such rights or such provisions are contained
in the Wyoming Business Corporation Act. As of October 22, 1999, there were
29,346,659 issued and outstanding shares of common stock.
PREFERRED STOCK
Our authorized shares of Class "A" Preferred Stock consists of 100,000,000
shares with a par value of $10 per share. Our authorized Class "B" Preferred
Stock consists of 100,000,000 shares with a par value of $50 per share. All
Class "A" and Class "B" Preferred Stock rank equally within their respective
classes as to dividends or return of capital on winding-up or otherwise. Neither
Class "A" nor Class "B" Preferred Stock are entitled to vote at any general
meeting of shareholders unless expressly provided as a special right. Our
directors are authorized by our Articles to issue Class "A" and Class "B"
Preferred Stock in one or more series each and to create and attach special
rights and restrictions to a series of shares. In the event of the liquidation,
dissolution or winding-up of Empyrean or any distribution of our assets for the
purpose of winding-up our affairs, the holders of Class "A" and Class "B"
Preferred Stock are entitled, unless otherwise provided in the special rights
and restrictions attached to such shares, after the payment of unpaid dividends,
to be paid equally between the two classes, the amount of capital paid up per
share (or as otherwise provided by the special rights and restrictions attached
thereto) from our assets in priority over the common stock. No shares of either
Class "A" Preferred Stock or Class "B" Preferred Stock have been issued.
Other than the Board's ability to issue preferred stock described above,
there are no provisions in our Articles which would have an effect of delaying,
deferring or preventing a change in control of Empyrean.
ESCROW SHARES
An additional 710,000 shares of our common stock were issued and are held
in escrow pursuant to the terms of an Escrow Agreement dated July 9, 1998 among
Empyrean, Kaplan Gottbertter & Levenson, LLP and the purchasers of our
convertible debentures.
38
<PAGE>
WARRANTS
Set forth below is a table showing the number of warrants currently
outstanding to purchase our common stock, the exercise prices payable upon an
election to exercise, and the term of each of these warrants:
CURRENTLY EXERCISE
ORIGINAL ISSUANCE DATE OUTSTANDING PRICE/SH EXPIRATION
- ---------------------- ----------- ---------- ----------
July 15, 1998 (1) 795,492 $0.9051(2) July 9, 2001
February 15, 1999(3) 40,000 $ 0.10 February 15, 2001
March 17, 1999 460,000 $ 0.60(4) March 17, 2001
May 5, 1999 500,000 $ 0.50 May 5, 2004
May 27, 1999 610,000 $ 0.60(5) May 26, 2001
---------
Total 2,405,492
=========
- ----------
(1) These warrants were issued to purchasers of debentures of Empyrean issued
in a private placement on the same date.
(2) The exercise price per share of the warrants is $0.90510 from July 10, 1999
until July 9, 2000, and increases to $1.05595 from July 10, 2000 to July 9,
2001.
(3) These warrants were issued to purchasers of our promissory notes issued in
a private placement on the same date.
(4) The exercise price per share of the warrants is $0.60 from the date of
issue (March 17, 1999) to March 17, 2000, and increases to $0.75 per share
from March 18, 2000 to March 17, 2001.
(5) The exercise price per share of the warrants is $0.60 from the date of
issue (May 27, 1999) to May 26, 2000, and increases to $0.75 per share from
May 27, 2000 to May 26, 2001.
1998 STOCK PLAN
Empyrean's Board of Directors adopted the Empyrean Diagnostics Inc. 1998
Stock Plan in May 1999. We believe the Plan is necessary to attract, compensate,
and motivate our employees, officers, directors, and consultants. Under the
Plan, we may grant incentive stock options and non-qualified stock options to
our employees, officers, directors, and consultants. The board administers the
Plan. The board determines eligibility, the types and sizes of options, the
price and timing of options, and any vesting, including acceleration of vesting,
of options.
An aggregate of 6,000,000 shares of our common stock are available for
grant under the Plan. The Board may terminate or amend the Plan to the extent
shareholder approval is not required by law. Termination or amendment will not
adversely affect options previously granted under the Plan.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent of our common stock is Jersey Transfer and
Trust Company, 201 Bloomfield Avenue, P.O. Box 36, Verona New Jersey 07044.
39
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
Our common stock is publicly traded on the over-the-counter bulletin board
under the ticker symbol "EMDG." We have approximately 4,100 holders of our
common stock. We have never paid dividends on our common stock and have no plans
to do so. The following table presents the high and low bid prices of the common
stock for the periods indicated. The quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not represent actual
transactions.
HIGH(2) LOW (2)
------- -------
1999
Third Quarter $1.00 $0.62
Second Quarter $1.01 $0.48
First Quarter $1.03 $0.35
1998
Fourth Quarter $1.00 $0.30
Third Quarter $1.00 $0.50
Second Quarter $1.50 $0.59
First Quarter $0.94 $0.44
1997
Fourth Quarter(1) $1.00 $0.55
- ----------
(1) We began trading on the Bulletin Board on December 16, 1997.
(2) The high and low bid prices were obtained from a web site located at
www.quotecentral.com.
ITEM 2. LEGAL PROCEEDINGS
An action was filed against us on February 28, 1997 in the Superior Court
of the State of California, Santa Clara County, alleging a number of securities
fraud violations and misrepresentations by Daniel Bland and Pinnacle
Diagnostics, formerly known as Empyrean Diagnostics USA, Inc. Plaintiff, Focus
Profile, LLC, claims economic damages in amount of $538,750, plus interest.
Plaintiff also requests punitive damages. We have been joined as defendants on
the theory that Pinnacle's investment in us declined as a result of
misrepresentations and omissions by former management and that we are
purportedly liable to Pinnacle's investors as an "alter-ego" of Pinnacle. We
were granted judgement in this case on September 22, 1999. Plaintiff has the
right to appeal through December 1999.
We are involved in an action filed by Optima Holding Co., Ltd. and Mercury
Technology Corp. on July 28, 1998 in the Circuit Court of the Eleventh Judicial
District, Dade County, Florida. This action alleges that we tortiously
interfered with Optima and Mercury's contractual relationship with Geda. Optima
and Mercury claim that they had prior rights to the Geda formulation and
products and that we induced Geda to breach that agreement. Optima and Mercury
have requested an unspecified amount of damages against us. In a seperate action
that has now been consolidated with the first action in the same court, Geda has
requested a declaratory judgment that Geda properly terminated its development
and distribution contract with Optima and Mercury. Plaintiffs also seek
injunctive relief to prevent Geda and its managers and directors from allowing
Geda to have further dealings with us. If we are not successful in this action,
we could lose the right to market, sell or manufacture worldwide our hand
sanitizer product and other products currently under development.
II-1
<PAGE>
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
PRIVATE PLACEMENTS OF COMMON STOCK AND WARRANTS FOR CASH
Empyrean sold common stock for cash at the prices and during the periods
provided as follows: during the first quarter of 1997, 1,773,773 shares at a
price of $0.50 per share were issued to 7 purchasers; during the second quarter
of 1997, 306,389 shares at a price of $0.52 per share were issued to 20
purchasers; during the third quarter of 1997, 544,250 shares at a price of $0.80
per share were issued to 10 purchasers; during the fourth quarter of 1998,
1,000,000 shares at a price of $0.50 per share and warrants to purchase
1,000,000 shares at an exercise price of $0.50 per share were issued to 9
purchasers; during the first quarter of 1999, 360,000 shares at price of $0.50
per share and warrants to purchase 360,000 shares at an exercise price of $0.50
per share were issued to 4 purchasers; and during the second quarter of 1999,
600,000 shares at a price of $0.50 per share and warrants to purchase 600,000
shares at an exercise price of $0.50 per share were issued to 3 purchasers. Of
the above purchasers, approximately five invested in more than one of the above
private placements. The offers and sales of the above securities were deemed to
be exempt from registration under the Securities Act in reliance on Section 4(2)
or Regulation D promulgated thereunder. No advertising or general solicitation
was employed in offering the securities. The securities were offered to a
limited number of persons all of whom were business associates of Empyrean or
its executive officers and directors, and transfers of the shares were
appropriately restricted by Empyrean. All persons were accredited or
sophisticated investors, were capable of analyzing the merits and risks of their
investment, acknowledged in writing that they were acquiring the securities for
investment and not with a view toward distribution or resale and understood the
speculative nature of their investment.
SALES OF DEBT AND WARRANTS FOR CASH
Convertible debentures were issued to 4 accredited purchasers during the
third quarter of 1998. The debentures were in the original principal amount of
$600,000. The debentures were convertible into common stock at a conversion
price of the lower of $0.8588 or 70% of the per share market value of the common
stock for the five trading days immediately preceding the conversion date. In
addition, these same purchasers received warrants to purchase common stock at an
adjustable exercise price of $0.8588. All of these convertible debentures were
converted into common stock and all of these warrants are currently outstanding.
The offering of convertible debentures and warrants were deemed to be exempt
from registration under Rule 504 of Regulation D and under Section 4(2) of the
Securities Act. No advertising or general solicitation was employed in offering
the securities. All persons were accredited investors, were capable of analyzing
the merits and risks of their investment, acknowledged in writing that they were
acquiring the securities for investment and not with a view toward distribution
or resale and understood the speculative nature of their investment.
During the last three years, convertible debentures and warrants have been
converted into or exercised for an aggregate of 1,680,372 shares of common
stock. Currently, we have no convertible debt securities outstanding and
warrants to purchase 2,405,492 shares of our common stock are outstanding.
OPTION GRANTS
During the preceding three years, Empyrean granted to directors, executive
officers, employees, advisors and consultants options to purchase an aggregate
of 6,514,125 shares of common stock at a weighted average exercise price of
$0.68 per share. The offer of these securities was deemed to be exempt from
registration under the Securities Act under Rule 701 of Section 3(b) of the
Securities Act and Section 4(2) of the Securities Act. The options were granted
under compensatory benefit plans and contracts relating to compensation. Options
issued in the above transactions, have been exercised for 1,427,639 shares.
Options to purchase 5,104,125 shares remain outstanding.
II-2
<PAGE>
SALES OF STOCK FOR SERVICES OR IN SATISFACTION OF OBLIGATIONS
In July 1998, as partial payment for the exclusive marketing and
manufacturing rights to Geda products, Empyrean issued 100,000 shares of common
stock to Geda International Marketing Co., Ltd.
In July 1997, in settlement for incurred and assumed debt in the amount of
$93,080, Empyrean issued 260,728 shares of common stock to five of Empyrean's
creditors.
In the third quarters of 1997 and 1998, as fees for services related to the
introduction of our current product, Empyrean issued 25,000 shares in each
quarter to Mr. Ed Rolquin. In the third quarter of 1998, as a fee for research
and development services, Empyrean issued 25,000 shares to Mr. Al Rubenstein.
In October 1997, in exchange for a license to a bacterial meningitis test,
Empyrean issued 95,000 shares of common stock to Global Tek, Inc.
In April 1998, as an inducement to enter into a contract to provide
financial advisory services, Empyrean issued to Uptic Investment Corp., a
company controlled by Lawrence D. Bain, now a board member, warrants to purchase
250,000 shares of common stock at an exercise price of $0.01 per share. The
warrants were exercised in June 1998.
In July 1998, in exchange for exclusive distribution rights for the
Preventx lotion, Empyrean issued 225,000 shares of common stock to Prevent-X,
Inc.
In November 1998, in settlement for incurred and assumed debt in the amount
of $89,236, Empyrean issued 114,405 shares of common stock to a creditor of
Empyrean.
In November 1998, in settlement for an obligation resulting from an
attempted business venture with another party, Empyrean issued 197,247 shares to
five owners of the other party. This venture related to our attempt to
distribute HIV and Trichomonas diagnostic test kits in Europe. We were not able
to complete the venture due to a lack of funding and we have since exited the
diagnostic test kit business.
In March 1999, in exchange for exclusive rights to licensed products in
Canada, Empyrean issued 100,000 shares of common stock to Farida Darbar.
In May 1999, in settlement for incurred and assumed debt in the amount of
$49,230, Empyrean issued 71,650 shares of common stock to one of Empyrean's
creditors.
In January and May 1999, Empyrean issued warrants to purchase 250,000
shares of common stock at $.01 per share and 500,000 shares of common stock at
$0.50 per share to Uptic Investments Corp. (an entity controlled by one of our
directors, Lawrence Bain) for financial advisory services and for Uptic's
introductions of Empyrean to distributors and customers.
The above offerings and sales were deemed to be exempt under Regulation D
and Section 4(2) of the Securities Act. No advertising or general solicitation
was employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were business associates of Empyrean or
its executive officers and directors, and the transfer thereof was appropriately
restricted by Empyrean. All persons were accredited or sophisticated investors,
were capable of analyzing the merits and risks of their investment, acknowledged
in writing that they were acquiring the securities for investment and not with a
view toward distribution or resale and understood the speculative nature of
their investment.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Each director or former director and their heirs and personal
representatives are entitled to be indemnified by Empyrean under our Articles of
Incorporation and Bylaws against all costs, charges and expenses, including an
amount paid to settle an action or satisfy a judgment, actually and reasonably
incurred by him or them in a civil, criminal or administrative action or
proceeding to which he is or they are made a party by reason of his being or
having been a director of Empyrean.
II-3
<PAGE>
PART F/S
FINANCIAL STATEMENTS AND INFORMATION
C O N T E N T S
Page
----
Report of Independent Certified Public Accountants .................. F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet ....................................... F-3
Consolidated Statements of Operations ........................... F-4
Consolidated Statement of Stockholders' Equity (Deficit) ......... F-5
Consolidated Statements of Cash Flows ........................... F-6
Notes to Consolidated Financial Statements ........................ F-7
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIOD ENDING SEPTEMBER 30, 1999
Condensed Consolidated Balance Sheet .............................. F-14
Condensed Consolidated Statements of Operations .................. F-15
Condensed Consolidated Statement of Stockholders' Equity (Deficit) F-16
Condensed Consolidated Statements of Cash Flows .................. F-17
Notes to Condensed Consolidated Financial Statements ............ F-18
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Empyrean Bioscience, Inc.
We have audited the accompanying consolidated balance sheet of Empyrean
Bioscience, Inc., and its wholly-owned subsidiary as of December 31, 1998, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the two years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Empyrean
Bioscience, Inc., and subsidiary as of December 31, 1998, and the consolidated
results of their operations and their cash flows for each of the two years then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Empyrean Bioscience, Inc., will continue as a going concern. As shown in the
financial statements, Empyrean Bioscience, Inc., incurred a net loss of
$3,147,135 during the year ended December 31, 1998, and, as of that date
Empyrean Bioscience, Inc. has a deficit in stockholders' equity of $124,908.
These factors, among others, as discussed in Note 2 to the financial statements,
raise substantial doubt about Empyrean Bioscience, Inc.'s ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
As discussed in Note 11, the accompanying consolidated financial statements
as of and for the year ended December 31, 1998 have been restated.
GRANT THORNTON LLP
San Francisco, California
February 11, 1999, except for notes 11 and 12 as to
which the date is October 25, 1999.
F-2
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(Restated)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................... $ 62,793
Prepaid expenses and deposits................................ 167,913
Inventory.................................................... 16,386
Due from an employee......................................... 9,305
Other........................................................ 306
-------------
Total current assets......................................... 256,703
EQUIPMENT AND IMPROVEMENTS...................................... 57,122
-------------
$ 313,825
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities..................... $ 438,733
COMMITMENTS AND CONTINGENCIES................................... --
STOCKHOLDERS' DEFICIT
Common stock, authorized 100,000,000 shares, without
par value; 26,399,824 shares issued and outstanding......... 18,246,565
Accumulated deficit.......................................... (18,371,473)
-------------
(124,908)
-------------
$ 313,825
=============
See accompanying notes to financial statements.
F-3
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
1997 1998
------------ ------------
(Restated)
Net sales ................................... $ 13,018 $ 9,815
Cost of sales ............................... 2,623 3,436
------------ ------------
Gross profit ............................. 10,395 6,379
Selling, general and administrative expenses 1,875,020 2,912,791
Research and development expense ............ 137,349 31,425
Write-down of inventory ..................... 458,800 28,516
Write-down of receivables ................... 105,000 --
------------ ------------
2,576,169 2,972,732
------------ ------------
Loss from operations ..................... (2,565,774) (2,966,353)
Other income (expense)
Loss on disposal of fixed assets ........... (30,693) (209,972)
Other, net ................................. 921 29,190
------------ ------------
(29,772) (180,782)
------------ ------------
NET LOSS ................................. $ (2,595,546) $ (3,147,135)
============ ============
BASIC AND DILUTED LOSS PER SHARE ............ $ (.14) $ (.14)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 18,213,790 22,883,937
============ ============
See accompanying notes to financial statements.
F-4
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997 AND 1998
(Restated)
<TABLE>
<CAPTION>
Common Stock
-------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- ------------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1997................... 15,712,580 $ 12,633,185 $ 368,004 $ (12,628,792) $ 372,397
Common stock issued for cash............. 1,542,889 549,329 -- -- 549,329
Common stock issued for subscription..... 1,008,773 368,004 (368,004) -- --
Stock option exercised by directors...... 584,155 205,162 -- -- 205,162
Stock option exercised by contractors 120,139 49,594 -- -- 49,594
Stock option exercised by the
Company's CEO for note receivable....... 215,845 120,873 -- -- 120,873
Warrants exercised by directors.......... 251,766 125,511 -- -- 125,511
Warrants exercised by investors.......... 1,410,081 1,011,255 -- -- 1,011,255
Common stock issued for debt............. 260,728 262,237 -- -- 262,237
Common stock issued for finder's fee 25,000 28,878 -- -- 28,878
Common stock issued for license rights... 95,000 75,492 -- -- 75,492
Net loss................................. -- -- -- (2,595,546) (2,595,546)
---------- ------------ ---------- ------------- ------------
Balances, December 31, 1997................. 21,226,956 15,429,520 -- (15,224,338) 205,182
Common stock issued for cash............. 2,680,322 1,078,000 -- -- 1,078,000
Stock options exercised by directors..... 125,000 57,766 -- -- 57,766
Stock options exercised by others........ 7,500 4,178 -- -- 4,178
Warrants exercised by directors.......... 186,370 84,955 -- -- 84,955
Warrants exercised by investors.......... 1,480,506 578,140 -- -- 578,140
Common stock issued for debt............. 197,247 124,265 -- -- 124,265
Common stock issued for expenses......... 170,923 114,236 -- -- 114,236
Common stock issued for license
rights.................................. 325,000 223,250 -- -- 223,250
Fair value of option and warrant
grants.................................. -- 552,255 -- -- 552,255
Net loss................................. -- -- -- (3,147,135) (3,147,135)
---------- ------------ ---------- ------------- ------------
Balances, December 31, 1998 ................ 26,399,824 $ 18,246,565 $ -- $ (18,371,473) $ (124,908)
========== ============ ========== ============= ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1998
----------- -----------
(Restated)
<S> <C> <C>
Cash flows from operating activities
Net loss .................................................. $(2,595,546) $(3,147,135)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation ............................................ 90,120 80,132
Options and warrants issued for services ................ -- 552,255
Loss on write-downs and adjustments ..................... 610,795 212,804
Issuance of common stock for expenses ................... 104,370 337,486
Changes in operating assets and liabilities
Prepaid expenses and deposits .......................... (14,899) (153,014)
Inventory .............................................. (56,511) --
Accounts payable and accrued liabilities ............... (71,971) 297,106
Deposits ............................................... 149,985 --
----------- -----------
Net cash used in operating activities .................. (1,783,657) (1,820,366)
Cash flows from investing activities
Payments on note receivable ............................... 70,112 50,761
Proceeds from sale of capital assets ...................... -- 3,320
Purchase of capital assets ................................ (66,244) (40,644)
Proceeds from (advances to) employee and other receivables (12,672) 19,386
----------- -----------
Net cash provided by (used in) investing activities ....... (8,804) 32,823
Cash flows from financing activities
Proceeds from issuance of common stock .................... 1,836,481 1,803,039
----------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS .......................................... 44,020 15,497
Cash and cash equivalents at beginning of year ............. 3,276 47,296
----------- -----------
Cash and cash equivalents at end of year ................... $ 47,296 $ 62,793
=========== ===========
Noncash financing and investing activities
Issuance of common shares for debt ........................ $ 262,237 $ 124,265
Issuance of common shares to CEO for note receivable ...... $ 120,873 $ --
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Empyrean Bioscience, Inc. (the "Company"), previously known as Empyrean
Diagnostics Ltd., was originally a Canadian entity, which in 1995 was a fully
operational organization. The Company became a Wyoming corporation during
1997. The Company through its subsidiary distributes and markets products
designed to prevent and diagnose diseases. The Company is identifying
strategic corporate partners to both fund and distribute the PrevenTx Hand
Sanitizer and Antiseptic Skin Protectant and Vaginal Contraceptive Gel in the
United States.
The Company's summary of significant accounting policies applied in the
preparation of these financial statements follows:
* PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All intercompany accounts and transactions are
eliminated in consolidation.
* CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at the date of acquisition to be cash equivalents.
* INVENTORY
Inventory is recorded at the lower of cost (average cost) or market.
Management performs periodic assessments to determine the existence of
obsolete, slow moving and non-salable inventories, and records necessary
provisions to reduce such inventories to net realizable value.
* EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are recorded at cost. Depreciation is provided
from the dates the assets are placed in service on a declining balance basis
at the following rates:
Lab and manufacturing equipment -- 25% declining balance
Office equipment and furniture -- 20% declining balance
Leasehold improvements -- lesser of 5 years or the
term of the lease
* REVENUE RECOGNITION
The Company recognizes revenue when no significant obligations remain and
collectability of the amount is probable.
* ADVERTISING
The Company recognizes advertising expenses as they are incurred.
* INCOME TAXES
The Company accounts for income taxes on the liability method, as provided
by Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes."
* EARNINGS (LOSS) PER SHARE
Loss per share has been calculated using the weighted average number of
shares outstanding. The effect of options, warrants and contingent share
issuances are excluded from the calculation when the effects are
anti-dilutive.
F-7
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 -- (Continued)
* STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees and members of the
board of directors using the intrinsic value method in accordance with APB
No. 25, "Accounting for Stock Issued to Employees." Awards to consultants and
others are accounted for using the fair value method of SFAS No. 123
"Stock-based Compensation." The Company presents the disclosure only
provisions of SFAS No. 123 for employee and director awards.
* USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions 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 revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
* FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the estimated fair value of an entity's financial
instrument assets and liabilities. These assets and liabilities consist of,
based on the short-term nature of such instruments, cash, cash equivalents
and payables. The balance sheet carrying amounts of these instruments
approximate the estimated fair values.
* SEGMENT REPORTING
The Company's business is currently conducted in a single operating segment,
preventative products. In the future, we expect to operate in several
segments based on the type of customer such as institutional, retail and
distributor. The Company's chief operating decision maker is the Chief
Executive Officer who reviews a single set of financial data that encompasses
our entire operations for purposes of making operating decisions and
assessing performance.
NOTE 2 -- GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company has sustained
substantial losses from operations in recent years and has a deficit in
stockholders' equity.
In view of the matter described in the preceding paragraph, recoverability of
a major portion of the recorded asset amounts shown in the accompanying
balance sheet is dependent upon continued operations of the Company, which in
turn is dependent upon the Company's ability to meet its financing
requirements on a continuing basis, to maintain present financing, and to
succeed in its future operations. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
The Company has assessed its position in the marketplace as a
manufacturer/distributor, and has redirected its efforts to promotion of and
finding distributors for its line of contraceptive gels and antiseptic
lotions. Management intends to seek additional capital investment through
either debt or equity placements and believes the proceeds of these
placements, along with the focus on new products, will generate sufficient
working capital for the Company to continue in operation for the next twelve
months.
F-8
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 -- (Continued)
NOTE 3 -- PREPAID EXPENSES AND DEPOSITS
During 1998 the Company placed an order with a manufacturer for approximately
$424,000. As of December 31, 1998, the Company had advanced the manufacturer
$150,000 on the order. The terms of the prepaid purchase was freight on board
shipping point. As of December 31, 1998, no goods had been shipped by the
manufacturer.
NOTE 4 -- EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are comprised of the following:
Furniture and office equipment .................... $ 107,376
Leasehold improvements ............................ 9,455
---------
116,831
Accumulated depreciation .......................... (59,709)
---------
$ 57,122
=========
NOTE 5 - STOCKHOLDERS' EQUITY
The Company's authorized preferred stock consists of 100,000,000 shares of
Class "A" with a par value of $10 and 100,000,000 shares of Class "B" with a
par value of $50. As of December 31, 1998, no preferred stock is issued or
outstanding.
The 1997 Stock Option Plan, which is accounted for under APB Opinion No. 25
and related interpretations, provides that up to 6,000,000 stock options may
be granted to employees, board members and persons providing services to the
Company. The stock options may be exercised at the rate of 25% semi-annually,
on a cumulative basis during a vesting period of two years and generally
expire three years after the grant date. The stock options are exercisable
during involvement with the Company and up to thirty days after involvement
has ceased, if the Board of Directors so approve. The options are exercisable
at not less than the market value of the Company's stock on the date of the
grant. Accordingly, no compensation cost has been recognized for grants from
the plan. Had compensation cost for the plan been determined based on the
fair value of the options at the grant dates consistent with SFAS No. 123,
the Company's net loss and loss per share would have been increased to the
pro forma amounts indicated below.
1997 1998
----------- -----------
Net loss
As reported ........... $(2,595,546) $(3,147,135)
Pro forma ............. (3,166,866) (3,931,960)
Loss per share
As reported ........... (.14) (.14)
Pro forma ............. (.17) (.17)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions: dividend yield of 0%; a risk-free interest rate of 6%, expected
lives of 2 years; and volatility of 96%.
F-9
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 -- (Continued)
A summary of the status of the Company's stock options as of December 31,
1997 and 1998, and changes during the years ending on those dates is
presented below.
1997 1998
--------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- -------- ---------- --------
Outstanding at beginning of year... 1,055,139 $ .41 2,390,000 $ .64
Granted ....................... 2,255,000 .68 2,925,000 .91
Exercised .................... (920,139) .41 (132,500) .47
Expired ....................... -- -- (212,500) .55
--------- ---------
Outstanding at end of year ........ 2,390,000 .64 4,970,000 .81
========= =========
Weighted-average fair value of
options granted during the year... $ .44 $ .56
The following table summarizes information concerning options outstanding
at December 31, 1998:
Options Outstanding Options Exercisable
- ------------------------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Stock Exercise
Price Outstanding Life Price Options Price
- ---------------- ----------- ----------- -------- ----------- --------
$.38 - 0.40 .... 635,000 1.9 $ .39 635,000 $ .39
.55 - 0.67 .... 1,010,000 1.8 .57 480,000 .57
.80 - .95 .... 3,325,000 2.0 .95 1,195,000 .95
--------- ---------
4,970,000 .81 2,310,000 .69
========= =========
The Company generally issues one warrant for the purchase of one share of
common stock with each share of common stock that it issues. The following table
summarizes the status of warrants at December 31, 1997 and 1998 and for the
years then ended.
<TABLE>
<CAPTION>
1997 1998
---------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Warrants Price Warrants Price
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year ...... 2,670,500 $ .72 2,636,645 $ .46
Issued .............................. 2,551,662 .48 1,045,492 .57
Exercised ........................... (1,661,847) .62 (1,666,876) .40
Expired ........................... (923,670) 1.02 -- --
---------- ----------
Outstanding at end of year ............ 2,636,645 .46 2,015,261 .57
========== ==========
</TABLE>
F-10
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 -- (Continued)
NOTE 6 -- INCOME TAXES
Deferred tax assets consist of the following at December 31, 1998:
Net operating loss carryover ................. $ 5,615,000
Other ........................................ 17,000
Intangible asset -- tax basis ................ 1,094,000
-----------
6,726,000
Less valuation allowance ..................... (6,726,000)
-----------
$ --
===========
The change in the valuation allowance was $1,092,000 in 1997 and $1,325,000
in 1998.
Cumulative net operating losses of approximately $14,589,000 in 1998 are
being carried forward for Federal tax return purposes. The earliest
carryforwards begin to expire in 2007.
The following is a reconciliation between the federal statutory rate and the
effective rate used for the Company's income tax benefit.
1997 1998
----------- -----------
Loss before income tax benefit ....... $ 2,595,546 $ 3,147,135
=========== ===========
Tax benefit at statutory federal
income tax rate (34%) ............... $ 882,000 $ 1,070,000
State franchise tax benefit .......... 210,000 255,000
Change in valuation allowance ........ (1,092,000) (1,325,000)
----------- -----------
$ -- $ --
=========== ===========
NOTE 7 -- LEASES
The Company conducts its business primarily in leased facilities. One of the
leases was a net lease which required the payment of such costs as property
taxes, additional rent, common area maintenance, and other operating costs.
This lease was terminated October 1, 1998. On March 26, 1998, the Company
entered into a commercial lease for 4,343 square feet in Phoenix, Arizona.
This lease ends on March 31, 2001.
The schedule of minimum future rental payments and future sublease income
follows:
Future
Minimum Future
Year ending Rental Sublease
December 31 Payments Income
----------- -------- --------
1999................ $ 65,606 $ 25,778
2000................ 65,606 25,778
2001................ 10,032 --
--------- --------
$ 141,244 $ 51,556
========= ========
F-11
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 -- (Continued)
Total rent expense, net of sublease income received, was $91,912 and $57,894
for the years ended December 31, 1997 and 1998, respectively.
NOTE 8 -- LICENSES AND ROYALTIES
The Company entered into an agreement on April 29, 1997, which was
subsequently amended in February 1998 with Geda International Marketing Co.
Ltd. ("Geda"), whereby the Company obtained the marketing and distribution
rights to Geda's products worldwide with the exception of the territories of
Hong Kong and Taiwan and the countries of Canada, Africa, Mexico, the
Dominican Republic and, as to the sale of the Geda Lotion only, the United
States. Geda manufactures a microbicide lotion for use with medical gloves,
as well as other uses, for stopping the transmission of all communicable
diseases through bodily contact. As consideration, the Company paid Geda
$200,000 in cash in 1997, and, in 1998, issued 100,000 shares of common stock
valued at $50,000 for these rights.
For the period of April 29, 1997 through April 29, 2007, the Company is
required to pay the greater of 2% of net sales or $1.35 per liter
manufactured of the Geda products. The Company is required to pay guaranteed
minimum amounts comprised of all license fees, royalties and joint venture
royalties, as follows.
Future
Minimum
Year ending Guaranteed
December 31, Payments
------------ ------------
1999 .......................... $ 490,000
2000 .......................... 735,000
2001 .......................... 915,000
2002 .......................... 1,215,000
2003 .......................... 1,458,000
Thereafter .................... 9,334,000
------------
$ 14,147,000
============
The lotion licensed from Geda is used in a number of products, including
Preventx(R) Vaginal Contraceptive Gel, Preventx(R) Hand Sanitizer and
Antiseptic Skin Protectant, and Preventx(R) Antiseptic Surface Spray. The
Company has been contacted by a third party claiming that Geda granted a
prior license in the lotion to the third party. The Company has been advised
by Geda that Geda has filed suit against the third party seeking a
declaratory judgement that the third party has no rights to the lotion. The
Company has not been named in this litigation. Although Geda has represented
that it has the exclusive right and authority to license the formula to the
Company, and has agreed to pay any legal fees incurred by the Company arising
out of the Company's investigation and any defense of this matter, there can
be no assurance as to the outcome of this matter or that it will not
materially or adversely impact the Company.
In 1998, the Company obtained a license from the third party to sell the
products. In consideration for this license, the Company paid $50,000 in cash
and issued 225,000 shares of common stock values at $173,250. The Company is
also required to pay a royalty equal to 5% of the net revenues of certain
products that contain the lotion.
In 1997, the Company acquired the license rights to manufacture and
distribute a diagnostic test kit for bacterial meningitis for a term of 40
years, renewable for a further term of 20 years. In consideration for this
license, the Company paid approximately $53,000, including legal and finder's
fees and issued 95,000 shares of Common Stock valued at $75,492. The Company
is also required to pay a royalty equal to 10% of net sales.
F-12
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 -- (Continued)
NOTE 9 -- CONTINGENCIES
The Company is a defendant in lawsuits where the plaintiffs are seeking
recovery of amounts invested in a company controlled by the Company's former
CEO. The suits seek approximately $800,000 plus punitive damages. In the
opinion of management, based upon advice of counsel, it is not currently
feasible to predict or determine the outcome of these proceedings.
NOTE 10 -- RELATED PARTY TRANSACTIONS
During 1997, the Company paid consulting fees of $15,346 to a company
controlled by a former director to provide accounting, office and
administrative services. The arrangement was terminated on February 1, 1997.
On June 16, 1998, the Company entered into a three year agreement with a
company controlled by a former director to provide strategic planning and
business development services for a monthly fee of $6,000 and 250,000
immediately exercisable stock options at $0.83 per share expiring three years
from the date of grant. The Company incurred total expenses on this contract
of $162,425 in 1998 of which $36,000 was payable in cash and the balance of
$126,425 represents the fair value of the stock options granted.
During 1998, the Company entered into an agreement with a company controlled
by a current director who was appointed in August 1999. The agreement
provided for financial advisory services to the Company with respect to
obtaining strategic corporate or institutional investors and also facilitated
introductions to key customers and distributors in exchange for the issuance
of warrants to purchase 1,000,000 shares of common stock, of which 250,000
warrants were fully exercisable in April 1998 at an exercise price of $0.01,
250,000 warrants were fully exercisable in January 1999 at an exercise price
of $0.01 and the remaining 500,000 warrants were fully exercisable in May
1999 at an exercise price of $0.50. Consulting expenses of $213,275,
representing the fair value of 250,000 warrants in accordance with SFAS 123,
was recorded in 1998.
The Company incurred legal expenses of $93,975 in 1997 and $127,329 in 1998
with a law firm founded by a former director. The firm continues to provide
legal services for the Company. Accrued and outstanding expenses were $14,752
at December 31, 1998.
In 1997, the Company made a loan in the principal amount of $120,873 to a
current officer and director for the exercise of 200,000 stock options. This
loan was evidenced by a promissory note with interest payable at 8.5% per
annum. The promissory note was paid in full during the first quarter of 1998.
NOTE 11 -- PRIOR PERIOD ADJUSTMENT
The 1998 consolidated financial statements have been restated to reflect the
correction of an error in the recording of $552,255 of expense related to
options and warrants granted to consultants. The grants were made in 1998 but
not approved by the Board of Directors until 1999. The expense was originally
recorded in 1999.
NOTE 12 -- SUBSEQUENT EVENT
In connection with the Company's reincorporation in Delaware it will be
changing its name to Preventx, Inc.
F-13
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
------------- -------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents .................... $ 141,744 $ 62,793
Accounts receivable .......................... 22,083 --
Prepaid expenses and deposits ................ 350,113 167,913
Inventory .................................... 342,449 16,386
Other assets ................................. 3,000 9,611
------------ ------------
Total current assets ...................... 859,389 256,703
Equipment and improvements ....................... 55,291 57,122
------------ ------------
Total assets .............................. $ 914,680 $ 313,825
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities ..... $ 1,278,440 $ 438,733
Deferred revenue ............................. 100,000 --
Short-term note payable ...................... 581,500 --
------------ ------------
Total current liabilities ................. 1,959,940 438,733
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, authorized 100,000,000 shares,
without par value; issued and outstanding
(1999: 29,346,659; 1998: 26,399,824) ...... 20,128,494 18,246,565
Accumulated deficit .......................... (21,173,754) (18,371,473)
------------ ------------
Total stockholders' deficit ............... (1,045,260) (124,908)
------------ ------------
Total liabilities and shareholders' deficit $ 914,680 $ 313,825
============ ============
See accompanying notes to financial statements
F-14
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
Sept 30, Sept 30, Sept 30, Sept 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues .................................... $ 63,372 $ 430 $ 649,963 $ 9,430
Cost of sales ................................... 11,633 -- 33,970 3,400
------------ ------------ ------------ ------------
Gross profit ................................ 51,739 430 615,993 6,030
Selling, general and administrative ............. 1,030,114 812,084 3,252,141 2,318,831
Research and development ........................ -- 22,464 10,519 24,475
------------ ------------ ------------ ------------
1,030,114 834,548 3,262,660 2,343,306
------------ ------------ ------------ ------------
Operating loss .............................. (978,375) (834,118) (2,646,667) (2,337,276)
Other income (expenses)
Other, net .................................... (745) (68,635) (1,914) (54,710)
Interest expense .............................. (44,977) -- (156,590) --
Interest income ............................... 618 2,018 2,890 2,719
------------ ------------ ------------ ------------
(45,104) (66,617) (155,614) (51,991)
------------ ------------ ------------ ------------
Net loss .................................... $ (1,023,479) $ (900,735) $ (2,802,281) $ (2,389,267)
============ ============ ============ ============
Basic and diluted loss per share ............ $ (0.04) $ (0.04) $ (0.10) $ (0.11)
============ ============ ============ ============
Weighted average number of shares outstanding
used in computing per share information ... 28,455,659 23,283,554 27,519,375 22,478,294
============ ============ ============ ============
</TABLE>
F-15
See accompanying notes to financial statements
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Accumulated
Shares Amount Deficit Total
---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Balances, December 31, 1998 ............... 26,399,824 $18,246,565 $(18,371,473) $ (124,908)
Warrants exercised by investors ........... 1,487,050 596,233 596,233
Stock options exercised ................... 375,000 150,000 150,000
Shares issued for license rights .......... 100,000 70,000 70,000
Common stock issued in satisfaction of debt 71,660 49,230 49,230
Common stock issued for cash .............. 960,000 480,000 480,000
Cancellation of escrow shares ............. (46,875) 0 0
Fair value of options and warrant grants .. 0 536,466 536,466
Net loss .................................. (2,802,281) (2,802,281)
---------- ----------- ------------ ----------
Balances, September 30, 1999 .............. 29,346,659 $20,128,494 $(21,173,754) $(1,045,260)
========== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements
F-16
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
---------------------------
Sept 30, Sept 30,
1999 1998
----------- -----------
Cash flows from operating activities:
Net cash used by operating activities ............ $(1,719,413) $(1,561,793)
Cash flows from investing activities:
Payments on note receivable ...................... -- 50,761
Purchase of capital assets ....................... (9,369) (37,325)
----------- -----------
Net cash provided (used) by investing activities (9,369) 13,436
Cash flows from financing activities:
Issuance of common stock ......................... 1,007,733 1,557,462
Short-term note payable proceeds ................. 800,000 --
----------- -----------
Net cash provided by financing activities ...... 1,807,733 1,557,462
----------- -----------
Net increase in cash and cash equivalents ...... 78,951 9,105
Cash and cash equivalents at beginning of period ... 62,793 47,296
----------- -----------
Cash and cash equivalents at end of period ......... $ 141,744 $ 56,401
=========== ===========
See accompanying notes to financial statements
F-17
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The financial information included herein for the three and nine month
periods ended September 30, 1999 and 1998, and the financial information as
of September 30, 1999, is unaudited; however, such information reflects all
adjustments, consisting of normal recurring adjustments, which are, in the
opinion of management, necessary for the fair presentation of the financial
position, results of operations and cash flows for the interim periods. The
interim financial statements and the notes thereto should be read in
conjunction with the annual audited financial statements as of December 31,
1998. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
The accompanying condensed consolidated financial statements include Empyrean
Bioscience, Inc., and its wholly-owned subsidiary, Empyrean Diagnostics, Inc.
All significant intercompany balances and transactions have been eliminated
in consolidation.
NOTE 2 - INVENTORIES
Inventories consist of the following:
September 30, December 31,
1999 1998
------------- ------------
Diagnostic Kits-Raw Materials ......... $ -- $16,386
Preventx-Finished Goods ............... 342,449 --
-------- -------
$342,449 $16,386
======== =======
NOTE 3 - SHORT-TERM NOTES PAYABLE
In February 1999, the Company entered into promissory note agreements in the
aggregate amount of $800,000 with various investors. The promissory notes
were due and payable six months from the loan date and have a fixed interest
rate of 10%, payable monthly. The Company also issued 320,000 warrants to the
promissory note holders, exercisable for two years expiring February 15,
2001, at an exercise price of $0.10. The fair value of the warrants was
estimated on the date of grant using the Black-Scholes option pricing model
to be $116,576 and was recorded as interest expense over the term of the
promissory notes. On August 15, 1999, promissory notes in the amount of
$218,500 were settled by offsetting the amounts payable against the proceeds
receivable from the exercise of 810,000 previously issued warrants. The due
date of promissory notes in the amount of $285,500 were extended for an
additional six months. The remaining promissory notes in the amount of
$296,000 are currently due and payable.
F-18
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
NOTE 4 - LEGAL PROCEEDINGS
An action was filed against us on February 28, 1997 in the Superior Court of
the State of California, Santa Clara County, alleging a number of securities
fraud violations and misrepresentations by Daniel Bland and Pinnacle
Diagnostics, formerly known as Empryean Diagnostics USA, Inc. The plaintiff,
Focus Profile, LLC, claims economic damages in the amount of $538,750, plus
interest and also requests punitive damages. We have been joined as
defendants on the theory that Pinnacle's investment in us declined as a
result of misrepresentations and omissions by former management and that we
are purportedly liable to Pinnacle's investors as an "alter-ego" of Pinnacle.
We were granted judgement in this case on September 22, 1999. The Plaintiff
has the right to appeal through December, 1999.
We are involved in an action filed by Optima Holding Co., Ltd. and Mercury
Technology Corp. on July 2, 1998 in the Circuit Court of the Eleventh
Judicial District, Dade County, Florida. This action alleges that we
tortiously interfered with Optima and Mercury's contractual relationship with
Geda International Marketing Co., Ltd., the licensor of our product
formulation. Optima and Mercury claim that they had prior rights to the Geda
formulation and products and that we induced Geda to breach that agreement by
licensing rights to us. Optima and Mercury have requested an unspecified
amount of damages in the same court, Geda has requested a declaratory
judgment that Geda properly terminated its development and distribution
contract with Optima and Mercury. Plaintiffs seek injuncture relief to
prevent Geda and its managers and directors from allowing Geda to have
further dealings with us. If we are not successful in this action, we could
lose the rights to market, sell or manufacture our current hand sanitizer
product and on other products under development.
NOTE 5 - REVENUES
Net revenues are comprised of the following:
Three months ended Nine months ended
-------------------- --------------------
Sept 30, Sept 30, Sept 30, Sept 30,
1999 1998 1999 1998
------- -------- -------- ------
Distribution rights .... $33,500 $ -- $550,166 $ --
Product sales .......... 29,872 -- 99,797 9,000
------- -------- -------- ------
Net revenues ..... 63,372 -- 649,963 9,000
======= ======== ======== ======
F-19
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY
The Company has granted options to employees, directors and others as well as
warrants to debtholders and investors. For option grants to non-employees,
the Company recognizes compensation expense equal to the fair value of the
grant. Warrants are issued to investors in the Company's common stock at a
rate of one warrant for each share of common stock purchased. At September
30, 1999, 5,966,966 options and warants were exerciseable at a weighted
average price of $0.61.
A summary of the status of stock options and warrants as of September 30,
1999, and changes during the nine months ending on that date is presented
below.
Options Warrants
------------------ ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Number Price Number Price
------ ----- ------ -----
Outstanding at beginning of year 4,970,000 $.81 2,015,261 $.57
Granted ........................ 1,334,125 .48 3,030,000 .48
Exercised ...................... (375,000) .40 (1,487,500) .40
Expired ........................ (825,000) .88 (1,152,269) .75
--------- ---------- ----
Outstanding at September 30, 1999.. 5,104,125 .71 2,405,492 .48
========= ==========
Stock options and warrants were not included in the computation of diluted
loss per share for the periods presented because to do so would have been
antidilutive.
NOTE 7 - DISTRIBUTION AGREEMENT
In the nine monthe ended September 30, 1999, the Company executed a
distribution agreement with Durstrand International Limited granting
Durstrand the exclusive right to distribute the Company's products in
certain Southeast Asian markets. Durstrand made a non-refundable payment of
$600,000 for these rights. The Company recognized $500,000 of the fee paid
as revenue in the nine months ended September 30, 1999 as the Company had
performed all of its obligations under the agreement. The remaining
$100,000 was deferred pending shipment of product to Durstrand. Durstrand
will make an additional $600,000 payment once approval for additional
products is received from the US Food and Drug Administration. No royalties
are payable to Geda as a result of this agreement.
F-20
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
2.1 Articles of Incorporation and Bylaws of Empyrean Wyoming.*
2.2 Convertible Debenture and Warrant Purchase Agreement by and among
Empyrean and purchasers thereof and related Warrant.*
2.3 Form of Warrant between Empyrean and the Purchasers thereof dated
February 15, 1999.*
2.4 Form of Promissory Note between Empyrean and the Purchasers
thereof.*
2.5 Form of "Series K" Warrant Certificate dated March 17, 1999 between
Empyrean and the Purchasers thereof.*
2.6 Form of "Series L" Warrant Certificate between Empyrean and the
Purchasers thereof.*
6.1 License Agreement dated as of February 21, 1998 between Empyrean and
Geda International Marketing, Co., Ltd.*
6.2 Sub-license Agreement dated as of July 20, 1998 between Empyrean and
Prevent-X, Inc.*
6.3 Agreement and Assignment of Distribution Rights, between GEDA
International Marketing Co., Ltd., Farida Darbar, Empyrean Diagnostics
Inc., and Empyrean Diagnostics, Ltd., dated August 31, 1998.*
6.4 1998 Stock Option Plan and Form of Stock Option Agreement.*
6.5 Real Property Lease dated February 20, 1998 between Empyrean and
Remcon II, LLC.*
6.6 Employment Agreement for Stephen D. Hayter.*
6.7 Employment Agreement for Richard C. Adamany.*
6.8 Employment Agreement for Bennett S. Rubin.*
6.9 Distribution Agreement between Empyrean and Durstrand International.*
6.10 License Agreement between The Coleman Company, Inc. and Empyrean dated
October 1, 1999.*
6.11 License Agreement between Sunbeam Corporation and Empyrean dated
October 1, 1999.*
23.1 Consent of Grant Thornton LLP*
- ----------
* Previously filed
III-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Phoenix,
State of Arizona, on November 16, 1999.
Empyrean Bioscience, Inc..
By /s/ Stephen D. Hayter
-------------------------------------
Stephen D. Hayter
Chairman of the Board of Directors,
President and Chief Executive Officer
