As Filed With the Securities and Exchange Commission on September 5, 2000
File No. 333-84147
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3 TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
EMPYREAN BIOSCIENCE, INC.
(Exact name of Registrant as specified in its charter)
Delaware 5122 86-0973095
(State of (Primary Standard Industrial (I.R.S. Employer
Incorporation) Classification Code Number) Identification Number)
23800 Commerce Park Road, Suite A, Cleveland, Ohio, 44122 (216) 360-7900
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
Richard C. Adamany
President and Chief Executive Officer
23800 Commerce Park Road, Suite A
Cleveland, Ohio 44122
(216) 360-7900
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
Copies of All Communications, Including All Communications
Sent to the Agent for Service, Should be Sent To:
James M. Hill
Benesch, Friedlander, Coplan & Aronoff LLP
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114
(216) 363-4500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after the effective date of this Registration Statement and the effective
time of the merger of Empyrean Bioscience, Inc. (Wyoming) and Empyrean
Bioscience, Inc. (Delaware) pursuant to the Agreement and Plan of Merger dated
September __, 2000 attached as Annex A to the proxy statement/prospectus forming
a part of this registration statement.
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the securities act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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<PAGE>
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Amount to be Maximum Aggregate Amount of
Securities to be Registered Registered Offering Price Registration Fee
--------------------------------------------------------------------------------
Common Stock,
$.0001, par value $47,787,495(1) $47,280,947.55(2) $12,482.17(3)
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(1) Empyrean Bioscience, Inc. (Delaware) is registering: (i) the number of
shares of its common stock issuable to holders of common stock of Empyrean
Bioscience, Inc. (Wyoming) in the merger; (ii) 3,488,254 shares of common
stock issuable upon the exercise of outstanding warrants to purchase
Empyrean Bioscience, Inc. (Wyoming) common stock which will be converted to
warrants to purchase Empyrean Bioscience, Inc. (Delaware) common stock
after the merger; and (iii) 2,973,500 shares of common stock issuable upon
the exercise of outstanding options to purchase Empyrean Bioscience, Inc.
(Wyoming) common stock which will be converted to options to purchase
Empyrean Bioscience, Inc. (Delaware) common stock after the merger. The
shares held by certain stockholders of Empyrean Bioscience, Inc. (Delaware)
and the shares issuable upon exercise of outstanding warrants and options
held by such stockholders being registered for reoffer hereunder are
included within the shares being registered hereunder.
(2) Estimated under the Rule 457(f)(1) solely for the purpose of calculating
the amount of the registration fee.
(3) $5,123.46 of this amount was previously paid. The balance of $7,358.71 is
being paid with the filing of this Amendment No. 3.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
EMPYREAN BIOSCIENCE, INC.
23800 COMMERCE PARK ROAD, SUITE A
CLEVELAND, OHIO 44122
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON____________, 2000
Dear Stockholder:
We will hold an annual meeting of stockholders on ____________, 2000, at
10:00 a.m. Local time, at ___________________________________________________.
We are holding the meeting for the following purposes:
(a) To approve reincorporation to Delaware by approving a merger agreement
between our Delaware and Wyoming companies. Our Delaware company has
three classes of directors, each with a different term of office.
Approval of the merger agreement will also represent approval of the
election of the six directors named in the merger agreement;
(b) To approve an amendment to our 1998 Stock Plan to reserve an
additional number of shares for issuance under the 1998 Stock Plan;
and
(c) To transact other business that may properly come before the annual
meeting.
These items are more fully described in the enclosed joint proxy
statement/prospectus.
You may vote at the meeting if you are a stockholder of record at the close
of business on __________, 2000.
If you are entitled to vote, you may dissent from the adoption of the
merger agreement. We have attached a copy of the merger agreement as Annex A and
a copy of the dissenters' rights statute as Annex B.
We have enclosed a proxy card to assist you in the voting process. We look
forward to seeing you on _____________, 2000.
YOUR VOTE IS IMPORTANT.
By Order of the Board of Directors:
Bennett S. Rubin
Secretary
Cleveland, Ohio
_______________, 2000
TO VOTE YOUR SHARES, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND
MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
<PAGE>
THIS PROSPECTUS CONTAINS INFORMATION WHICH IS NOT COMPLETE AND WHICH MAY BE
CHANGED. NO ONE MAY SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED _____________, 2000
EMPYREAN BIOSCIENCE, INC.
47,787,495 Shares of Common Stock
Joint Proxy Statement/Prospectus
We are changing our state of incorporation to Delaware.
We cannot complete the reincorporation unless stockholders holding a
majority of our outstanding common stock approve the merger of our Wyoming and
Delaware companies. Our Delaware company has three classes of directors, each
with a different term of office. Approval of the merger agreement will also
represent approval of the election of the six directors named in the merger
agreement.
We are amending our 1998 Stock Plan to increase the number of shares
reserved for issuance under our 1998 Stock Plan. Stockholders holding a majority
of our outstanding common stock must approve the amendment to our 1998 Stock
Plan.
At our annual meeting our stockholders will vote on the merger. The date,
time and place of the meeting are as follows:
DATE: ______________, 2000
TIME: 10:00 a.m., Local Time
PLACE: __________________________________________________
Whether or not you plan to attend our meeting, please take the time to vote
by completing and mailing the enclosed proxy card to us. If you sign, date and
mail your proxy card without indicating how you want to vote, we will count your
proxy as a vote in favor of the merger proposal submitted at the meeting and for
each of the director nominees identified in this document. Failure to return
your proxy card or vote in person at the meeting will effectively result in a
vote against the merger.
Additionally, we may permit, from time to time, certain stockholders to
sell their shares of common stock using this prospectus. We will pay all
expenses of the offering. We will not pay any underwriting discounts or
commissions in connection with the sale of any shares.
Our common stock is traded on the Over-The-Counter Bulletin Board and is
not listed on any exchange or on Nasdaq.
You should carefully consider the risks described in "Risk Factors"
beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
_______________, 2000
<PAGE>
SUMMARY
THIS SUMMARY CONTAINS BASIC INFORMATION ABOUT US AND OUR REINCORPORATION.
BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT IS
IMPORTANT TO YOU. YOU SHOULD CAREFULLY READ THIS ENTIRE DOCUMENT AND THE
DOCUMENTS TO WHICH WE HAVE REFERRED YOU.
OUR BUSINESS
We market, sell and distribute innovative personal care products that are
intended to prevent the spread of infectious disease. We currently market and
sell only a hand sanitizer and first-aid antiseptic product. We sell hand
sanitizer over the counter in retail markets and to commercial, industrial and
institutional customers in the United States. We also have licensing rights in
the United States to a microbicidal contraceptive gel as well as a line of
related products such as towelettes, baby wipes and a disinfectant surface
spray. We intend to market and sell these additional preventative products based
on a formula licensed to us by International Bioscience Corporation.
REINCORPORATING IN DELAWARE
We are reincorporating in Delaware. We are currently a Wyoming company. We
will reincorporate in Delaware by merging our Wyoming company into our Delaware
company. The management of our new Delaware company will be identical to the
current management of our Wyoming company. The reincorporation will not affect
our ongoing business. We are reincorporating because we believe that Delaware
has more stable, modern, and flexible corporate law than Wyoming.
Reincorporation in Delaware may restrict stockholder's rights, discourage a
change in ownership or management, and could negatively impact our stock price.
We discuss this possibility in our "Risk Factors" and "Reincorporation Proposal"
discussions in this Proxy Statement/Prospectus. You will receive one share of
our Delaware company for every share of the current Wyoming company and a
warrant or option for every warrant or option you currently own. We are not
registering any warrants or options through this Registration Statement, but we
are registering the shares of the Delaware company that you will receive if you
exercise any warrants or options.
ELECTION OF DIRECTORS
Approval of the reincorporation proposal will also represent approval of
the election of six directors. We are electing: Robert G.J. Burg II and Michael
Cicak for a one-year term. We are electing Andrew J. Fishleder, M.D. and
Lawrence D. Bain for two-year terms. We are electing Richard C. Adamany and
Bennett S. Rubin for three-year terms.
AMENDMENT TO OUR 1998 STOCK PLAN
We are amending our 1998 Stock Plan to increase the number of shares
subject to issuance under our 1998 Stock Plan.
VOTES REQUIRED
A vote of a majority of the outstanding shares of our common stock in favor
of the reincorporation proposal will approve the merger. Approval of the merger
will also represent approval of the six directors named above for the terms
described above. A vote of a majority of the outstanding shares of our common
stock in favor of the amendment proposal will approve the increase in the number
of shares for issuance under our 1998 Stock Plan. As of August 18, 2000, our
directors, executive officers, and their affiliates owned or had an irrevocable
proxy for approximately 20% of our outstanding common stock entitled to vote
excluding shares issuable upon exercise of warrants or options held by them.
1
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DISSENTERS' RIGHTS
Stockholders may dissent from the merger and receive the "fair value" of
their common stock. Wyoming law requires each dissenting stockholder to meet
strict requirements to dissent properly. You should consult your legal advisor
for a full understanding of your right to dissent. We have attached a copy of
the Wyoming statute that provides for your appraisal rights as Annex B, which
includes the procedures that you must follow to properly exercise these rights.
REGISTRATION OF SHARES OF AFFILIATES FOR REOFFER
Shares of common stock owned by affiliates of Empyrean Delaware and shares
issuable upon exercise of warrants and certain options held by such affiliates
after the merger, will be registered for resale pursuant to this Proxy
Statement/Prospectus. In the event that any such shares of common stock are sold
by the affiliates, Empyrean will not receive any of the proceeds from such
sales.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Forward-looking statements made in this document are subject to risks and
uncertainties. Forward-looking statements include the information concerning our
possible or assumed future results of operations and market opportunities for
our current and planned products. Also, when we use words such as "believes,"
"expects," "anticipates" or similar expressions, we are making forward-looking
statements. You should understand that factors identified in the section of this
document titled "Risk Factors" could affect our future financial results and
stock price, in addition to those factors discussed elsewhere in this joint
proxy statement/prospectus, and could cause results to differ materially from
those expressed in our forward-looking statements.
2
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SUMMARY HISTORICAL FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended Six Months
December 31 Ended June 30
-------------------- --------------------
1998 1999 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
SELECTED CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net revenues ............................... $ 10 $ 662 $ 587 $ 458
Cost of sales .............................. 3 109 22 252
Gross profit ............................... 7 553 565 206
Research and development ................... 31 15 -- --
Selling, general and administrative expenses 2,913 4,814 2,563 1,662
Write-down of inventory .................... 29 -- -- --
Restructuring charge ....................... -- 345 -- --
Loss from operations ....................... (2,966) (4,621) (1,998) (1,456)
Other expense, net ......................... (181) (164) (111) (8)
Net loss ................................... (3,147) (4,785) (2,109) (1,464)
Net loss per share ......................... (0.14) (0.17) (0.08) (0.04)
Weighted average shares outstanding ........ 22,884 28,108 26,838 34,849
</TABLE>
At December 31, 1999 At June 30, 2000
-------------------- ----------------
SELECTED CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash equivalents $ 286 $ 1,015
Working capital (1,714) (649)
Total assets 681 1,337
Long-term obligations -- --
Stockholders' equity (deficit) (1,662) (609)
3
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RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS TOGETHER WITH ALL OF
THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE YOU DECIDE TO VOTE ON
OUR MERGER AND REINCORPORATION.
RISKS RELATING TO THE MERGER:
REINCORPORATION IN DELAWARE MAY RESTRICT STOCKHOLDERS' RIGHTS AND NEGATIVELY
IMPACT OUR STOCK PRICE.
If we complete the merger, we will become a Delaware corporation subject to
the corporation laws of that state. These laws are different from the corporate
laws of Wyoming where we are currently incorporated. As a result, our
shareholders may lose some rights they would have been entitled to under Wyoming
law. For example, our shareholders can call special meetings under Wyoming law
but will be unable to if we reincorporate in Delaware. Wyoming law also provides
for dissenters' or appraisal rights for a broader range of mergers and other
transactions than does Delaware, where these rights are more limited. Delaware
allows for less restrictive dividend rights than we have as a Wyoming
corporation. In addition, under Delaware law and our new Articles of
Incorporation and Bylaws, it may be more difficult or less advantageous for
another person or entity to attempt or complete a hostile acquisition of us. All
of these factors may have a negative impact on our stock price.
WE MAY ISSUE PREFERRED STOCK WITH RIGHTS AND PREFERENCES SENIOR TO THOSE OF
COMMON STOCK IF THE MERGER IS SUCCESSFUL, WHICH COULD CAUSE A DECLINE IN THE
VALUE OF THE COMMON STOCK OR MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE
US.
If we complete the merger, we will be governed by Articles of Incorporation
in the form attached as Exhibit 3.1(b). These new Articles of Incorporation,
unlike our existing articles, contain a provision providing for serial or "blank
check" preferred stock. This provision will enable our Board of Directors,
without a vote of common stockholders, to issue separate classes or series of
preferred stock with rights and preferences that may be senior to those of our
common stock. These rights include voting, dividends, rights upon liquidation,
dissolution or acquisition, and redemption. If the Board of Directors issues
preferred stock and such rights are affected, it may cause a decline in the
value of the common stock. The Board of Directors could also provide the
preferred stockholders with separate rights to approve an acquisition of us by a
third party and may make an acquisition of us more difficult. At this time, we
have no intentions or plans to issue preferred stock.
THE ELECTION OF A CLASSIFIED OR STAGGERED BOARD OF DIRECTORS MAY HAVE THE EFFECT
OF DISCOURAGING A CHANGE IN OWNERSHIP OR MANAGEMENT AND MAY INHIBIT A THIRD
PARTY FROM MAKING AN ACQUISITION PROPOSAL.
The Delaware Certificate of Incorporation provides for a classified or
"staggered" Board of Directors. This means that all of the directors' terms of
office do not expire at the same time. The Board will be divided into three
classes of directors, with each class constituting approximately one- third of
the total number of directors, and with the classes serving staggered three-year
terms. A "staggered" or classified Board will make it more difficult for
stockholders to change the composition of the Board, and therefore, the control
of the Company because only a minority of the directors are up for election at
any one time, and may be replaced by a vote of the stockholders.
Having a "staggered" Board provision in the Certificate of Incorporation
could discourage a third party from accumulating a larger block of the capital
stock or attempting to obtain control, even though such an attempt might be
beneficial to some, or a majority, of stockholders. Accordingly, under some
circumstances stockholders could be deprived of opportunities to sell their
common stock at a higher price than might otherwise be available.
RISKS RELATING TO OUR BUSINESS:
FDA DECISIONS MAY ADVERSELY AFFECT MARKETING OUR HAND SANITIZER, RESULTING IN
LOSS OF SALES.
The Food and Drug Administration regulates the manufacture and sale of hand
sanitizers. The FDA has recently taken an adverse position regarding the
marketing of a lotion, made and sold by the Andrew Jergens Co., that contains
benzalkonium chloride, the same active ingredient included in our hand
sanitizer. If the FDA decides similarly regarding our hand sanitizer, we would
be forced to market our hand sanitizer as merely a first aid product. As a
result, sales of our hand sanitizer, our only product, would suffer and we could
go out of business.
4
<PAGE>
FDA hand sanitizer regulations require that hand sanitizers be marketed for
hand use only. We believe that our marketing claims comply with FDA
requirements. Our hand sanitizer is labeled as a hand sanitizer and its
directions state that it is for hand use only. The Jergens product claimed to be
a lotion, implying it may be used on all skin parts. Our hand sanitizer also
claims that it heals minor cuts and abrasions. We are unaware that the Jergens
product made the same or similar claims. We understand that the Jergens product
has been discontinued. We believe that our healing claims comply with FDA
hand sanitizer requirements. Our label claims that our hand sanitizer is long
lasting. We believe that claim also complies with FDA hand sanitizer
requirements, but not with FDA first-aid antiseptic requirements. We do not make
prophylactic claims with respect to our hand sanitizer.
If the FDA prohibited the use of benzalkonium chloride in our hand
sanitizer, we would be forced to market this product only as a first-aid
antiseptic product. Further, any claims we make about a first-aid antiseptic
product which are not within the FDA's first-aid antiseptic rules would have to
be substantiated to the FDA or omitted. We do not have sufficient resources to
obtain FDA approvals.
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 introductions, sales, marketing or
distribution programs or plans; or 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.
Our future capital requirements will depend on many factors, including:
- the progress of our product introductions, 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 such factors as 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. 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.
5
<PAGE>
A THIRD PARTY CLAIM MAY ADVERSELY AFFECT OUR RIGHTS TO MAKE OR SELL OUR PRODUCTS
AND WE WOULD BE UNABLE TO GENERATE REVENUES.
Our hand sanitizer and first-aid antiseptic product is based on a formula
licensed to us by IBC. A third party claims a prior worldwide licensing and
marketing right without an expiration date to use the IBC formula. If the claim
is successful, it could materially adversely affect our rights to license and
market our hand sanitizer and future potential products that may be developed
based on the IBC formula. IBC is seeking a declaratory judgment that the third
party has no rights in the product line, but the litigation may not succeed. If
IBC does not succeed, we may be unable to market, sell or distribute our hand
sanitizer or any other products under development. If that were to occur, IBC
has agreed to assign us their rights. However, we may be unable to generate
revenues, which would likely require the termination of our business.
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 2000. We have
incurred a net loss in each year of our existence. We incurred losses of
$2,596,000 in 1997, $3,147,000 in 1998 and $4,785,000 in 1999. We incurred a
loss of $1,464,000 for the six months ending June 30, 2000. We may never make a
profit. These losses are due in part to expenses associated with sales and
marketing, overhead, research and development, and regulatory compliance. As a
result, our accumulated deficit has increased from $12,629,000 at December 31,
1996 to $24,620,000 at June 30, 2000. If 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.
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 consumers, health care providers and other institutional end users as to
the distinctive characteristics and benefits of our products. If we fail to
achieve significant market acceptance of our preventative products, we would not
generate sufficient revenues, lose revenues or make a profit in the future.
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 AFFECT OUR ABILITY TO EVER BECOME PROFITABLE.
Anti-bacterial products containing triclosan as the active ingredient have
been the focus of adverse publicity. Some products have been recalled due to
triclosan's 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 problems
with, or recalls of, other products may adversely affect the sales of our
products and our ability to ever become profitable. Such confusion about our
product identity may cause our customers to confuse our products with those
subject to adverse 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, injured parties could initiate significant
product liability claims and litigation against us. Any claims relating to our
products, even if without merit, may exceed our existing insurance coverages and
assets, and we may be required to pay these losses and expenses from funds for
operations, causing significant losses.
6
<PAGE>
WE HAVE LIMITED SALES, MARKETING AND DISTRIBUTION CAPABILITIES AND RELY
EXTENSIVELY ON THIRD PARTIES TO MARKET AND DISTRIBUTE OUR PRODUCTS. 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 manufacturer representatives and on
marketing and distribution companies to market and distribute our products.
Accordingly, sales of our products depends largely on the strength and financial
condition of others, the expertise and relationships of our manufacturer
representatives, marketers and distributors with customers, and the interest of
these parties in selling and marketing our products. Our manufacturer
representatives and marketing and distribution parties also sell, market and
distribute the products of other companies. If we do not generate substantial
sales through our manufacturer representatives and distributors, we may not
generate sufficient revenues and profits. If our relationships with our third
party manufacturer representatives and our marketing and distribution partners
were to terminate, we would need to develop relationships with other third
parties or substantially increase our own sales and marketing forces. To develop
sales and marketing forces internally would require significant cash and other
resources and could cause delays or interruptions in our product supply to
customers. This could result in the loss of significant sales or customers and
limit our ability to become profitable.
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 third party manufacturer for our current product who
purchases raw materials used in the manufacture of our product from various
suppliers. Since we do not have a written agreement, this manufacturer could
terminate our arrangement at any time. Our 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 the
year 2000 we hope 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 or capturing 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 with
these companies even if our products have recognized superior qualities.
In addition, our consumer products and those products we plan to offer are
subject to significant price competition. To respond to these competitive and
consumer pressures, we may need to cut prices from time to time. We may be
unable to absorb price reductions that could cause a loss of sales volume or
limit our profits from 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. Richard C. Adamany, our President and Chief Executive
Officer, and Mr. Bennett S. Rubin, our Executive Vice President and Chief
Operating Officer. The loss of the services of Mr. Adamany or Mr. Rubin could
limit our success in the future. Messrs. Adamany and Rubin are subject to
employment agreements.
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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 must comply with FDA guidelines or obtain premarket approval from the FDA.
The FDA approval process is very costly, time consuming, and uncertain. It is
possible that the FDA will not approve our products or approve them in a timely
manner. We may not have sufficient resources to complete the required testing
and regulatory review process for our products currently under development.
Further, we do not have sufficient resources to seek FDA approval of any of our
products.
Approval by the FDA is 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 price for our products. Finally, if
we failed to comply with requirements for testing, manufacturing, labeling,
distributing, advertising, marketing, and selling drugs, we may be subject to
administrative or court-imposed sanctions. These sanctions could include 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 possible criminal prosecution. Our distributors and manufacturers
are subject to the same sanctions.
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 1999 and thus far in 2000
were derived from our hand sanitizer and first-aid antiseptic product. The
contraceptive gel will not be available for sales, marketing and distribution in
the United States unless and until a Phase III study is initiated and completed.
This study must successfully demonstrate that the contraceptive gel is safe and
effective both as a contraceptive and as a preventative of sexually transmitted
diseases. Next, we must obtain FDA approval. Neither successful completion of
the study nor FDA approval can be assured. In the foreseeable future, we expect
most of our revenue will derive from sales of the hand sanitizer and first-aid
antiseptic product. Since we lack product diversification, our ability to
generate revenues or profits depends on our successful introduction of new
products and marketing of existing products.
WE HAVE LIMITED RESEARCH AND DEVELOPMENT RESOURCES AND OUR SUCCESS DEPENDS IN
PART ON THE RESEARCH AND DEVELOPMENT EFFORT OF OUR JOINT VENTURE WITH IBC. OUR
INABILITY TO DEVELOP NEW PRODUCTS OR IMPROVEMENTS OF EXISTING 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
1999 and 2000. 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 first-aid
antiseptic product, our success depends heavily on the ability of our joint
venture with IBC to develop additional products using the IBC formulation.
Unless the joint venture is able to obtain and devote resources to research and
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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 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
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 employees. Our failure to
manage any expansion effectively could strain our resources and systems and
result in further operating losses, or the loss of customers and revenues.
INTERNATIONAL SALES OF OUR PRODUCTS EXPOSE US TO CURRENCY FLUCTUATIONS AND OTHER
SPECIAL RISKS WHICH COULD REDUCE OR ELIMINATE PROFITS OR CAUSE 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 reduce or eliminate our ability to generate profits
from the sale of these products or cause significant operating 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
unavailable making it 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 might 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 before making any purchase or sale of a penny stock and
also provide this 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.
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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 August 18, 2000, we have 41,325,741 shares of common stock issued and
outstanding, and we have outstanding warrants and options to purchase 12,661,293
shares of common stock. All of the shares, including all of the shares issuable
upon exercise of our warrants and options, may be sold without restriction. The
sale of these shares may adversely affect the market price of our common stock.
The issuance of shares upon exercise of outstanding warrants and options will
also cause immediate and substantial dilution to our existing stockholders and
may make it difficult to obtain additional capital.
OUR STOCK PRICE MAY BE VOLATILE DUE TO FACTORS BEYOND OUR CONTROL WHICH COULD
SUBJECT THE VALUE OF OUR SHARES TO RAPID DECLINE.
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. This is especially true for
emerging companies like ours and for other companies in our industry. For
instance, stock prices can be significantly impacted by announcements of
technology innovations or new products by other companies, release of reports by
securities analysts or regulatory developments. Economic or other external
factors, as well as quarterly fluctuations in our or in our competitors'
operating results, also can have a significant impact on our stock price. For
example, in the first six months of 2000, the closing bid price of our common
stock quoted on the Over-The-Counter Bulletin Board ranged from a low of $0.50
per share to a high of $3.56 per share. We have experienced similar fluctuations
in other periods.
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OUR ANNUAL MEETING
GENERAL
We are furnishing this joint proxy statement/prospectus to our stockholders
as part of the solicitation of proxies by our Board for use at our annual
meeting of stockholders to be held on ___________, 2000 at 10:00 a.m. local
time, at__________________________________________________.
We are first mailing this joint proxy statement/prospectus on the enclosed
form of proxy to our stockholders on or about ____________, 2000.
The purpose of our meeting is:
(a) To consider and vote upon a proposal to approve the reincorporation of
our company from Wyoming to Delaware by way of a merger between
Empyrean Bioscience, Inc., a Wyoming corporation, and Empyrean
Bioscience, Inc., a Delaware corporation and a wholly-owned subsidiary
of Empyrean Wyoming. Empyrean Wyoming will merge with and into
Empyrean Delaware. Empyrean Delaware will continue as the surviving
corporation. Each outstanding share of Empyrean Wyoming common stock
will be converted into one share of Empyrean Delaware common stock. On
the effective date of the merger, each outstanding warrant or option
to purchase Empyrean Wyoming common stock will be converted into a
warrant or option to purchase a like number of shares of Empyrean
Bioscience (Delaware) common stock on the same terms and conditions.
Approval of the merger will also represent approval of the election of
six directors of Empyrean Delaware, two of whom will be elected for a
one-year term, one of whom will be elected for a two-year term, and
three of whom will be elected for three-year terms;
(b) To approve an amendment to our 1998 Stock Plan to increase the number
of shares reserved for issuance under the 1998 Stock Plan; and
(c) To transact other business that may properly come before the annual
meeting.
A form of proxy for use at the annual meeting accompanies this joint proxy
statement/prospectus mailed to our stockholders.
The Board unanimously recommends that stockholders vote FOR the approval of
the merger proposal and the election of six directors. The Board unanimously
recommends that stockholders vote FOR the amendment to the 1998 Stock Plan.
RECORD DATE AND VOTING
We have fixed the close of business on ____________, 2000 as the record
date for establishing which stockholders are entitled to vote at the annual
meeting. Accordingly, only holders of record of common stock on the record date
will be entitled to vote at the annual meeting. As of the record date, there
were 41,325,741 shares of our common stock issued and outstanding and entitled
to vote. These shares were held by approximately 4,100 holders of record. Each
holder of record of our common stock on the record date is entitled to one vote
per share. This vote may be cast either in person, or by properly executed
proxy, at our annual meeting. A quorum for the annual meeting consists of a
majority of the outstanding shares of our common stock. Approval of the merger
requires the affirmative vote of holders of at least a majority of the shares of
our common stock outstanding and entitled to vote on the record date.
We will count shares of our common stock represented in person or by proxy
for purposes of establishing a quorum at our annual meeting. Shares which
abstain from voting as to a particular matter will be treated as shares that are
present and entitled to vote at the annual meeting for purposes of determining
whether a quorum exists, but abstentions will have the same effect as votes
against that matter. Brokers or nominees holding shares of record for customers
will not be entitled to vote on the reincorporation proposal unless they receive
voting instructions from their customers. Shares held by brokerage nominees for
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which no instructions are given by the beneficial owners will not count toward
determining whether a quorum exists or be voted in any manner on the proposals
and will have the same effect as votes against the reincorporation proposal.
As of the record date for the annual meeting, our directors and executive
officers and their affiliates may be deemed to be beneficial owners of or
possess an irrevocable proxy for approximately 20% of the outstanding shares of
our common stock, excluding shares issuable upon exercise of outstanding options
and warrants, and have expressed their intent to vote their shares in favor of
the reincorporation proposal (and the election of the six directors included
within the reincorporation proposal).
VOTING AND REVOCATION OF PROXIES
All shares of our common stock that are entitled to vote and are
represented at our annual meeting by properly executed proxies received prior to
or at the meeting and not revoked, will be voted at the meeting in accordance
with the instructions indicated on the proxies. If no instructions are
indicated, proxies will be voted for approval of the reincorporation proposal.
The only business that may be conducted at the annual meeting is business
that is brought before the meeting under our notice of the annual meeting. If
any other matters are properly presented at the annual meeting for
consideration, such as consideration of a motion to adjourn the meeting, the
persons named in the enclosed forms of proxy generally will have discretion to
vote on those matters in accordance with their best judgment. Proxies voting
against a specific proposal may not be used by the persons named in the proxies
to vote for adjournment of the meeting to give management additional time to
solicit votes for approval of the proposal.
Any proxy given under this solicitation may be revoked by the person giving
it at any time before it is voted. Proxies may be revoked by:
- Filing with our secretary at or before the taking of the vote at the
annual meeting a written notice of revocation bearing a date later
than the proxy;
- Duly executing a later dated proxy relating to the same shares and
delivering it to our secretary before the taking of the vote at our
meeting; or
- Attending our annual meeting and voting in person although attendance
alone will not constitute revocation.
Any written notice of revocation or subsequent proxy should be sent to
23800 Commerce Park Road, Suite A, Cleveland, Ohio 44122, Attention: Secretary,
or hand delivered to the Secretary of Empyrean at or before the taking of the
vote at the annual meeting. Stockholders that have instructed a broker to vote
their shares must follow directions received from the broker to change their
vote or to vote at the annual meeting.
We will bear all expenses of our solicitation of proxies for the annual
meeting. In addition to solicitation by use of mail, proxies may be solicited
from our stockholders by directors, officers, and employees in person or by
telephone, facsimile, or other means of communication. Our directors, officers
and employees will not be additionally compensated, but may be reimbursed for
reasonable out-of-pocket expenses in connection with the solicitation. We will
make arrangements with brokerage houses, custodians, nominees, and fiduciaries
for forwarding of proxy solicitation materials to beneficial owners of shares
held of record by these brokerage houses, custodians, nominees, and fiduciaries.
We will reimburse these institutions for their reasonable expenses incurred in
connection with the solicitation.
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THE REINCORPORATION PROPOSAL
INTRODUCTION
The purpose of the merger of Empyrean Wyoming into Empyrean Delaware is to
change the state of our incorporation from Wyoming to Delaware. The Board of
Directors believes that changing the state of our incorporation or
"reincorporating" from Wyoming to Delaware will be in the best interests of our
company and its shareholders. You are urged to carefully read the following
sections of this joint proxy statement/prospectus before voting on the proposed
reincorporation.
With your approval, we will complete the reincorporation through a merger.
Empyrean Wyoming will merge with Empyrean Delaware, and Empyrean Delaware will
continue as the surviving corporation. Each outstanding share of Empyrean
Wyoming common stock will automatically convert into one share of Empyrean
Delaware common stock on the effective date of the merger. On the effective date
of the merger, each outstanding warrant and option to purchase shares of
Empyrean Wyoming common stock will be converted into a warrant or option to
purchase a like number of shares of Empyrean Delaware common stock, on the same
terms and conditions. There will be no effect on our financial statements or our
financial condition due to this transaction.
Any stockholder may, as an alternative to voting to approve the proposed
reincorporation, dissent from the right to vote and obtain the fair value of his
or her shares. We provide a more detailed discussion of dissenters' rights and
the concept of fair value in the section below entitled "Dissenters' Rights".
We do not believe that any state or federal regulatory filings, consents or
approvals are required for the merger except for certain filings with the
Secretary of State for each of Delaware and Wyoming. We will make all required
filings in Delaware and Wyoming upon the approval of the reincorporation
proposal by our shareholders.
PREDICTABILITY OF DELAWARE LAW
For many years Delaware has followed a policy of encouraging incorporation
in that state. As part of this policy, Delaware has adopted comprehensive
corporate laws responsive to the needs of Delaware corporations. We believe that
the Delaware legislature is particularly sensitive to issues regarding corporate
law and is especially responsive to developments in modern corporate law. We
also believe that the Delaware courts have developed considerable expertise in
dealing with corporate issues as well as a substantial body of case law
construing Delaware's corporate law. As a result of these factors, we anticipate
that Delaware law will provide greater predictability in our legal affairs than
is presently available under Wyoming law.
ABILITY TO ATTRACT AND RETAIN DIRECTORS
In 1986, Delaware amended its corporate law to allow a corporation to limit
the personal monetary liability of its directors for their conduct as directors
under some circumstances. Our Board of Directors has elected to adopt such a
provision in the Certificate of Incorporation that would govern us after the
reincorporation. Delaware law does not permit a Delaware corporation to limit or
eliminate the liability of its directors for breaches of their fiduciary duty of
loyalty, intentional misconduct, bad faith conduct, unlawful distributions or
any transaction from which the director derives an improper personal benefit.
While Wyoming law was more recently amended to permit similar limitations on the
liability of directors, Wyoming does not have the depth of case law interpreting
its statutory provisions. The Board of Directors believes that Delaware
incorporation, and the provisions of the Delaware Certificate of Incorporation,
will enhance our ability to recruit and retain directors in the future. However,
the shareholders should be aware that such a provision inures to the benefit of
the directors, and, therefore, the interest of the Board of Directors in
recommending the reincorporation may be in conflict with the interests of the
shareholders.
ANTI TAKEOVER IMPLICATIONS
Delaware law, more so than Wyoming law, permits us to take protective
measures to deter hostile takeover attempts. A hostile takeover attempt may have
a positive or a negative effect on us and our shareholders, depending on the
circumstances surrounding a particular takeover attempt. Takeover attempts that
have not been negotiated or approved by the Board of Directors of a corporation
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can seriously disrupt the business and management of a corporation and generally
present to the shareholders the risk of terms that may be less than favorable to
all of the shareholders than would be available in a Board approved transaction.
Board approved transactions may be carefully planned and undertaken at an
opportune time to obtain maximum value for the corporation and all of its
shareholders with due consideration to matters such as the recognition or
postponement of gain or loss for tax purposes, the management and business of
the acquiring corporation and maximum strategic deployment of corporate assets.
The Board of Directors recognizes that hostile takeover attempts do not
always have the unfavorable consequences or effects described above and may
frequently be beneficial to the shareholders, providing all of the shareholders
with considerable value for their shares. However, the Board of Directors
believes that the potential disadvantages of unapproved takeover attempts are
sufficiently great that prudent steps may in the future be required to reduce
the likelihood of takeover attempts, in the best interests of our shareholders
and us.
You should recognize that one of the effects of reincorporating may be to
discourage a future attempt to acquire control of us which is not presented to
and approved by the Board of Directors, but which a substantial number and
perhaps even a majority of our shareholders might believe to be in their best
interests or in which shareholders might receive a substantial premium for their
shares over the current market prices. As a result, shareholders that might
desire to participate in such a transaction may not have an opportunity to do
so.
In addition, we will have the ability to issue shares of our preferred
stock that will enable the Board of Directors, without a vote of our common
stockholders, to issue separate classes or series of preferred stock with rights
and preferences that may be senior to those of our common stock with respect to
voting, dividends, rights upon liquidation, dissolution or acquisition, and
redemption. This could discourage a change in control.
NO CHANGE IN THE BUSINESS, OR LOCATION OF PRINCIPAL FACILITIES OF EMPYREAN
We will change our legal domicile and make other changes of a legal nature
through the proposed reincorporation. The proposed reincorporation will not,
however, result in any change in the business, management, fiscal year, assets,
liabilities, or location of our principal facilities. The directors you elect at
the annual meeting will continue as directors of Empyrean Delaware. All of the
employee benefit and stock option plans of Empyrean Wyoming, including the 1998
Empyrean Diagnostics, Ltd. Stock Plan, will be continued by Empyrean Delaware
and each outstanding option to purchase shares of Empyrean stock will
automatically be converted into an option to purchase an equivalent number of
shares of Empyrean Delaware stock on the same terms and subject to the same
conditions.
OUR CHARTER AND BYLAWS
The provisions of our Delaware Certificate of Incorporation are similar to
those of our Wyoming Articles of Incorporation in many respects. We initially
created the Wyoming Articles of Incorporation to meet British Columbia, Canada
legal requirements. We did not amend the Articles of Incorporation when we
changed our governing jurisdiction from Canada to Wyoming. Those Articles of
Incorporation have acted as our Bylaws as well. We have modified these Articles
of Incorporation to meet the requirements of Delaware law. In particular,
Empyrean Delaware will have a separate Certificate of Incorporation and Bylaws.
We describe below the material changes between the Wyoming Articles of
Incorporation and Bylaws and the Delaware Certificate of Incorporation and
Bylaws.
AUTHORIZED STOCK
Our Wyoming Articles of Incorporation authorize the Board of Directors to
issue shares of capital stock with terms and for consideration that the Board
considers proper. The Board of Directors has authorized 300,000,000 shares of
capital stock, of which 100,000,000 shares are designated Common Stock, no par
value, and 200,000,000 shares are designated Preferred Stock, with par values
ranging from $10 to $50 per share. The Certificate of Incorporation of Empyrean
Delaware authorizes 100,000,000 shares of capital stock, $.0001 par value, of
which 90,000,000 shares are designated Common Stock and 10,000,000 shares are
designated Preferred Stock.
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ELECTION OF DIRECTORS
Approval of the reincorporation proposal also represents approval of the
election of six directors to one, two and three-year terms. We are electing
Robert G.J. Burg II and Michael Cicak for a one year term. We are electing
Andrew J. Fishleder, M.D. and Lawrence D. Bain for two-year terms. We are
electing Richard C. Adamany, Lawrence D. Bain and Bennett S. Rubin for
three-year terms. Since the number of directors on the Board was set at six, one
current director, Stephen D. Hayter, was chosen not to stand for reelection. If
any nominee should be unable to serve, the proxy will be voted for a substitute
nominee selected by our Board of Directors.
The name, principal occupation, business experience since at least 1995,
tenure, and age of each nominee for election as a director are set forth below.
LAWRENCE D. BAIN, Director and Chairman of the Board
Mr. Bain, 50, was appointed a director on August 6, 1999 and became
Chairman of the Board on January 1, 2000. Mr. Bain is a Senior Vice President in
the investment banking division of Stifel, Nicolaus & Company, Incorporated.
From 1995 to 1999, Mr. Bain was a Managing Director with Everen Securities. Mr.
Bain also wholly owns Uptic Investment Corp., which provides financial advisory
services. He currently serves as a trustee for Cleveland's Leprechaun Society
charity.
RICHARD C. ADAMANY, President and Chief Executive Officer
Mr. Adamany, 47, was appointed Executive Vice President, Chief Operating
Officer and Chief Financial Officer on September 7, 1999 and was promoted to
President, Chief Executive Officer and Chief Financial Officer on January 1,
2000. On August 1, 2000, Mr. Adamany relinquished the title of Chief Financial
Officer upon the appointment of Brenda K. Brown to that position. 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. Pursuant to an employment agreement effective as of September 7,
1999, the Board has nominated Mr. Adamany for election as a director by the
shareholders. Approval of the reincorporation will also represent approval of
the election of six directors, including the election of Mr. Adamany. Failure to
elect Mr. Adamany to the Company's Board of Directors will constitute a breach
of his Employment Agreement. A breach of the Employment Agreement by the Company
is considered a breach "without cause" entitling Mr. Adamany to twenty-four (24)
months of severance.
BENNETT S. RUBIN, Executive Vice President and Chief Operating Officer
Mr. Rubin, 42, was appointed Executive Vice President and Chief Marketing
Officer on September 7, 1999 and was promoted to Executive Vice President and
Chief Operating Officer on January 1, 2000. 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 Advanced 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. Pursuant to an employment agreement effective as
of September 7, 1999, the Board has nominated Mr. Rubin for election as a
director by the shareholders. Approval of the reincorporation will also
represent approval of the election of six directors, including the election of
Mr. Rubin. Failure to elect Mr. Rubin to the Company's Board of Directors will
constitute a breach of his Employment Agreement. A breach of the Employment
Agreement by the Company is considered a breach "without cause" entitling Mr.
Rubin to twenty-four (24) months of severance.
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ROBERT G.J. BURG III, Director
Mr. Burg, 43, was appointed a director on November 20, 1998. Mr. Burg has
over twenty-years experience in sales and marketing. Mr. Burg is currently the
President and Chief Executive Officer of SwimEX, a manufacturer of hydrotherapy
pools designed for rehabilitation and sports specific training. Between January
1998 and 1999, Mr. Burg was the President of Profile Sports, a golf networking
company. 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. Between June 1998 and
1999, Mr. Burg was a director of Royal Precision, Inc. which manufactures and
distributes golf grips.
MICHAEL CICAK, Director
Mr. Cicak, 63, was appointed a director on May 26, 1999. Mr. Cicak is
currently the President of Solar Cells, Inc., a private holding company and
President and director of McMaster Motor Inc., a newly formed private company
and was the President and Chief Executive Officer 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.
ANDREW J. FISHLEDER, M.D., Director
Dr. Fishleder, 47, 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 its 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.
The Directors have served in their respective capacities since their
election or appointment and will serve until their respective terms expire 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, we are required to elect
Mr. Adamany and Mr. Rubin as directors. 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 Compensation Committee meetings occurred in 1999 or thus far in 2000. The
Audit Committee has met twice. The Audit Committee is responsible for, among
other things, evaluating the Company's accounting principles and its systems of
internal accounting controls. The Compensation Committee acts on matters related
to the compensation of directors, senior management and key employees. On
February 9, 2000, the Board of Directors appointed Lawrence D. Bain as Chairman
of the Compensation Committee and Dr. Andrew J. Fishleder as Chairman of the
Audit Committee.
MEETING ATTENDANCE.
The Board of Directors has had five meetings in 2000. All of the directors
attended the February 9, 2000, June 27, 2000 and August 3, 2000 meetings. Mr.
Burg was unable to attend the April 5, 2000 meeting. Mr. Cicak was unable to
attend the April 9, 2000 meeting.
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DIRECTOR COMPENSATION.
Non-employee directors receive:
- a quarterly retainer of $2,500, plus $500 per committee meeting
attended to be issued quarterly, in the form of common stock at the
prevailing market rate on the date of the meeting;
- a one-time grant of stock options to purchase 100,000 shares of our
common stock subject to Board approval; 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.
SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF WYOMING AND DELAWARE
The corporation laws of Wyoming and Delaware differ in many respects. It is
not practical to summarize all differences in this joint merger/proxy statement,
but the principal differences that could materially affect the rights of
stockholders are discussed below.
DISSENTERS' RIGHTS.
Wyoming law and Delaware law each grant a stockholder of a corporation
dissenters' rights in certain circumstances. Dissenters' rights allow a
stockholder to receive the fair value of his or her shares instead of the amount
he or she would otherwise receive in the transaction. Fair value may not
necessarily be the market price of the common stock prior to reincorporation.
Both Wyoming and Delaware law limit the availability of dissenters' rights where
the state law does not require a stockholder vote to approve the corporate
transaction.
Under Delaware law, dissenters' rights are generally not available in a
merger or share exchange if the stockholders' shares were either listed on a
national securities exchange or held by at least 2,000 stockholders of record.
However, the Certificate of Incorporation of the corporation may provide for
appraisal rights. We do not intend to provide for appraisal rights in our
Certificate of Incorporation. Also, Delaware law makes appraisal rights
available if the plan of merger or share exchange provides that stockholders
receive anything other than cash, shares of the surviving corporation, shares of
a publicly traded or widely held corporation, or a combination of these. Under
Wyoming law, appraisal rights may be available for transactions other than
mergers, including sales of significant amounts of assets and changes in the
capital structure or the terms of stock in the Articles of Incorporation. In
Delaware, appraisal rights are only available for some mergers as described
above. We provide a specific description of your dissenters' rights regarding
the reincorporation proposal in the section below entitled "Dissenters' Rights".
LIMITATIONS ON DIRECTOR LIABILITY.
Both Wyoming and Delaware law permit a corporation to limit the personal
liability of a director to the corporation or its shareholders for money damages
for breach of the director's duties. Wyoming does not allow a corporation to
limit director liability when the director:
- receives benefits to which he or she is not entitled;
- intentionally inflicts harm on the corporation or its stockholders;
- votes for an unlawful distribution; or
- intentionally violates criminal law.
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Our Delaware Certificate of Incorporation eliminates the liability of
directors to the fullest extent permissible under Delaware law, as the law
exists currently or as it may be amended in the future. Under Delaware law, a
corporation may not eliminate or limit director monetary liability for:
- breaches of the director's duty of loyalty to the corporation or its
shareholders;
- acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law;
- the payment of unlawful dividends or unlawful stock repurchases or
redemptions; or
- transactions in which the director received an improper personal
benefit.
A limitation of liability provision may not limit directors' liability for
violation of, or otherwise relieve the Delaware corporation or its directors
from the necessity of complying with, federal or state securities laws or affect
the availability of non-monetary remedies such as injunctive relief or
rescission.
Our Wyoming Articles of Incorporation limit director, officer, or employee
liability for any loss, damage or expense related to execution of their duties
unless the loss, damage or expense arises through the person's willful act or
default, through negligence, through a breach of trust or through a breach of
duty. Our Delaware Certificate of Incorporation eliminates director and officer
liability to the fullest extent permissible under Delaware law as it exists or
may be amended in the future.
INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Wyoming and Delaware have similar laws respecting indemnification by a
corporation of its officers and directors. There are nonetheless differences
between the laws of the two states, as well as the Wyoming and Delaware Bylaws.
Both Delaware and Wyoming law permit indemnification when a director or
officer:
- conducted himself or herself in good faith;
- reasonably believed his or her conduct was not opposed to the
corporation's best interest; or
- in a criminal proceeding, had no reasonable cause to believe his or
her conduct was unlawful.
Unlike Wyoming law, Delaware law limits indemnification against expenses
where the director is adjudged liable for negligence or misconduct in the
performance of his or her duty to the corporation to court approved expenses.
Under Wyoming law and the Wyoming Articles of Incorporation, Empyrean may
provide indemnification or advance expenses to officers and directors only as
permitted by the Wyoming statute relating to indemnification or advances. On the
other hand, a provision of Delaware law states that the indemnification provided
by statute will not be deemed exclusive of any other rights under any bylaw,
agreement, vote of shareholders or disinterested directors or otherwise. As a
result, under Delaware law, the Delaware corporation is permitted to indemnify
its directors and officers within the limits established by law and public
policy, pursuant to an express contract, bylaw provision, shareholder vote, vote
of disinterested directors or otherwise, any or all of which could provide
indemnification rights broader than those currently available under the Wyoming
Bylaws or the Wyoming indemnification statutes.
The Wyoming Bylaws require that Empyrean indemnify each of our directors
and officers against any liability incurred by reason of that person's status as
a director or officer, except for liabilities arising out of his or her own
negligence or willful misconduct. The Delaware Bylaws require that the Delaware
corporation indemnify its directors or officers, to the fullest extent permitted
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by Delaware law, provided that the Delaware corporation will not be required to
indemnify any director or officer in connection with a proceeding initiated by
that person unless the proceeding was authorized by the Board of Directors.
The indemnification and limitation of liability provisions of Wyoming law,
and not Delaware law, will apply to actions of the directors and officers of
Empyrean made prior to the proposed reincorporation. Nevertheless, the Board of
Directors has recognized in considering this reincorporation proposal that the
individual directors have a personal interest in obtaining the application of
Delaware law to indemnity and limitation of liability issues affecting them and
Empyrean in the event these issues arise from a potential future case. The Board
of Directors also recognizes that the application of Delaware law, to the extent
that any director or officer is actually indemnified in circumstances where
indemnification would not be available under Wyoming law and the Wyoming
Articles, would result in expense to Empyrean which Empyrean would not incur if
Empyrean were not reincorporated. The Board of Directors believes, however, that
the overall effect of reincorporation is to provide a corporate legal
environment that enhances our ability to attract and retain high quality outside
directors and thus benefits the interests of us and our shareholders.
SHAREHOLDER POWER TO CALL SPECIAL SHAREHOLDER MEETING.
Under Wyoming law, a special meeting of stockholders may be called by the
Board of Directors; the Chairman of the Board; the President; the holders of
Shares entitled to cast not less than ten percent of the votes at the meeting;
or any additional persons authorized by the Articles of Incorporation or the
Bylaws.
Under the Delaware Certificate of Incorporation and the Delaware Bylaws, a
special meeting of shareholders may be called by the Board of Directors, the
Chairman or Vice Chairman, or a majority, of the Board of Directors or the
President, Vice President or Secretary, and may be called by any of the
foregoing at the request in writing of stockholders holding a majority of the
then outstanding shares entitled to vote.
ACTION BY WRITTEN CONSENT OF STOCKHOLDERS.
Under Wyoming law, the shareholders may execute a shareholder action by
written consent in lieu of a meeting of shareholders only if the written consent
is signed by all shareholders. Under Delaware law, action by written consent may
be taken by the number of shares that would have been necessary to authorize the
action at a meeting of shareholders, provided that prompt notice of the taking
of the action is given to those shareholders who did not consent and who would
have been entitled to vote on the action at a meeting. However, our Delaware
Bylaws provide that shareholders may not take action by written consent.
BUSINESS COMBINATIONS.
The Wyoming Management Stability Act restricts the ability of "qualified
corporation" to engage in certain "business combinations" with an "interested
shareholder" for three years following the date on which the shareholder
acquired 15% or more of the outstanding voting stock of the company. A
"qualified corporation" means certain publicly traded corporations incorporated
in Wyoming generally having at least $10,000,000 of assets and in excess of
1,000 record stockholders and with substantial operations in the state.
Under Delaware law, we will be required to comply with the provisions of
Section 203 of the Delaware General Corporation Law. Section 203 restricts
business combinations with a category of stockholders called "interested
stockholders," defined as persons who beneficially own or acquire 15% or more of
a Delaware corporation's voting stock, with the exception of any person who
owned and has continued to own shares in excess of the 15% limitation since
December 23, 1987. Section 203 defines "business combination" broadly to include
mergers, consolidations, sales or other disposition of assets having a total
value in excess of 10% of the consolidated assets of the corporation, and other
transactions that would increase an interested stockholder's proportionate share
ownership in the corporation. Section 203 prohibits business combinations
between a publicly held Delaware corporation and any interested stockholder for
a period of three years after the date on which the interested stockholder
became an interested stockholder, unless (a) prior to that date, the
corporation's board approved either the proposed business combination or the
transaction that resulted in the interested stockholder becoming an interested
stockholder; (b) when the transaction that resulted in the interested
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stockholder becoming an interested stockholder was completed, the interested
stockholder already owned at least 85% of the voting stock of the corporation
outstanding at the time; or (c) on the date on which the business combination is
approved by the corporation's board of directors and authorized at an annual or
special meeting of stockholders, the transaction was approved by at least
two-thirds of the outstanding voting stock that is not owned by the interested
stockholder.
LOANS TO OFFICERS AND DIRECTORS.
Wyoming law limits loans or guarantees to a director except shareholder
approved or Board of Directors approved loans or guarantees. Under Delaware law,
a corporation may make loans or guarantees for the benefit of directors,
officers or other employees when, in the judgment of the Board of Directors, the
loan or guaranty may reasonably be expected to benefit the corporation.
DIVIDENDS.
Under Wyoming law, dividends or other distributions to shareholders may not
be made if, after giving effect to the distribution, the corporation would not
be able to pay its debts in the usual course of business or the corporation's
total assets would be less than the sum of its total liabilities plus the amount
that would be needed to satisfy superior preferential rights if the corporation
immediately dissolved. Delaware law allows the payment of dividends and
redemption of stock out of surplus or out of net profits for the current and
immediately preceding fiscal years. Empyrean has never paid cash dividends and
has no present plans to do so.
PREFERRED SHARES.
The Delaware Certificate of Incorporation authorizes the Board to establish
one or more series of preferred shares, and to determine preferences, rights and
other terms of those series. The purpose of allowing the Board to issue one or
more series of preferred shares is to provide increased flexibility in
structuring possible future financings and acquisitions, and in meeting other
corporate needs. The authorized preferred shares are available for issuance
without further action by our stockholders, unless the action is required by
applicable law or the rules of any stock exchange or automated quotation system
on which our securities may be listed or traded. A new series of preferred
stock, due to its terms, could impede a merger, tender offer or other
transaction that some, or a majority, of its stockholders might believe to be in
their best interests or in which stockholders might receive a premium over then
prevailing market prices for our common stock. We have no present intention to,
although we could in the future, issue a series of preferred shares.
CLASSIFIED BOARD OF DIRECTORS.
Our Delaware Certificate of Incorporation provides for a classified or
"staggered" Board of Directors. A "staggered" Board means that all of the
directors' terms of office do not expire at the same time. Our Delaware Board
will be divided into three classes of directors, with each class constituting
approximately one-third of the total number of directors, and with these classes
serving staggered three-year terms. The Wyoming corporation laws also permit a
corporation to adopt a "staggered" Board; however, we did not adopt a
"staggered" Board provision when initially incorporating.
Providing for a "staggered" Board may make it more difficult to change
control or management of our company and may inhibit a third party from making
an acquisition proposal. Under some circumstances, stockholders could be
deprived of opportunities to sell their stock at a higher price than might
otherwise be available.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES.
After giving preference to any rights of holders of preferred shares to
elect additional directors under specified circumstances, the Delaware
Certificate of Incorporation and the Delaware Bylaws provide that the number of
directors must not be less than one nor more than fifteen. In addition, the new
Delaware Certificate of Incorporation provides that, after giving preference to
rights of holders of preferred shares, any vacancies will be filled by majority
of the remaining directors, even though less than a quorum, or by a sole
director and any vacancies created by an increase in the total number of
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directors may be filled only by the Board. Accordingly, the Board could
temporarily prevent any stockholder from enlarging the Board and then filling
the new positions with the stockholder's own nominees.
The Delaware Certificate of Incorporation and the new Delaware Bylaws
provide that, after giving preference to any rights of holders of preferred
shares, directors may be removed only for cause upon the affirmative vote of
holders of a majority of the entire voting power of all the then- outstanding
shares entitled to vote in the election of directors, voting together as a
single class.
ADVANCE NOTICE PROVISIONS FOR DIRECTOR NOMINATIONS AND STOCKHOLDER
PROPOSALS.
The Delaware Certificate of Incorporation provides for an advance notice
procedure for stockholders to make nominations of candidates for director or to
bring other business before the annual meeting of stockholders. According to
this procedure (1) only persons who are nominated by, or at the direction of,
our Board, or by a stockholder who has given timely written notice containing
specified information to the Secretary prior to the meeting at which directors
are to be elected, will be eligible to nominate candidates for director and (2)
at an annual meeting, only such business may be conducted as has been brought
before the meeting by, or at the direction of the Board or by a stockholder who
has given timely written notice to the Secretary of his or her intention to
bring the business before the meeting. In general, for notice of stockholder
nominations or proposed business to be conducted at an annual meeting to be
timely, the notice must be received by the Board not less than 60 days nor more
than 90 days prior to the scheduled date of the meeting.
The purpose of requiring stockholders to give advance notice of nominations
and other business is to afford the Board a meaningful opportunity to consider
the qualifications of the proposed nominees or the advisability of the other
proposed business. To the extent necessary or considered desirable by the Board,
the advance notice provision will allow the Board to inform stockholders and
make recommendations about the nominees or business, as well as to ensure an
orderly procedure for conducting meetings of stockholders. Although the Delaware
Certificate of Incorporation does not give the Board power to block stockholder
nominations for the election of directors or proposals for action, the advance
notice procedure may have the effect of discouraging a stockholder from
proposing nominees or business, precluding a contest for the election of
directors or the consideration of stockholder proposals if procedural
requirements are not met. This might also deter third parties from soliciting
proxies for a non-management proposal or slate of directors, without regard to
the merits of the proposal or slate.
Any action required or permitted by the stockholders must be taken at a
properly called annual or special meeting of the stockholders and may not be
taken by written consent. Special meetings of the stockholders may be called at
any time but only by the Chairman or Vice Chairman of the Board or the
President, Vice President, the Secretary or by the Board of Directors, and shall
be called by any of the foregoing at the request of Stockholders holding a
majority of the outstanding shares entitled to vote by a majority of the
directors then in office.
FEDERAL INCOME TAX CONSEQUENCES
In this section, we discuss the material federal income tax consequences to
the Empyrean Wyoming capital stockholders who receive solely Empyrean Delaware
capital stock in exchange for their Empyrean Wyoming capital stock as a result
of the proposed reincorporation. We do not address state, local, or foreign tax
consequences in this section.
This discussion does not address all the tax consequences (including all of
the federal income tax consequences) of the proposed reincorporation that may be
relevant to particular Empyrean Wyoming stockholders. We urge you to consult
with your own tax advisor as to the specific tax consequences to you of the
proposed reincorporation, including the applicability of federal, state, local,
or foreign tax laws.
We have not requested a ruling from the Internal Revenue Service ("IRS") on
the federal income tax consequences of the proposed reincorporation under the
Internal Revenue Code of 1986, as amended (the "Code"). We have obtained an
opinion of counsel substantially to the effect that the federal income tax
consequences of the proposed reincorporation will be as follows:
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- the proposed reincorporation will constitute a tax-free reorganization
under Section 368(a) of the Code;
- no gain or loss will be recognized by Empyrean Wyoming capital
stockholders when they receive Empyrean Delaware capital stock solely
in exchange for their Empyrean Wyoming capital stock under the
proposed reincorporation;
- the aggregate tax basis of the Empyrean Delaware capital stock
received by an Empyrean Wyoming stockholder in exchange for such
stockholder of Empyrean Wyoming capital stock will be the same as the
aggregate tax basis such shareholder had in the Empyrean Wyoming
capital stock surrendered in exchange therefor;
- the holding period of the Empyrean Delaware capital stock received by
each Empyrean Wyoming stockholder will include the period the
stockholder held the Empyrean Wyoming capital stock exchanged
therefor, provided that the Empyrean Wyoming capital stock was held by
such shareholder as a capital asset at the time of the proposed
reincorporation; and
- Empyrean Wyoming should not recognize gain or loss for federal income
tax purposes as a result of the proposed reincorporation, and Empyrean
Delaware should succeed to the federal income tax attributes of
Empyrean Wyoming enumerated in Section 381(c) of the Code.
If the IRS were to successfully challenge the tax-free status of the
proposed reincorporation, stockholders would be required to recognize gain or
loss on each share of Empyrean Wyoming capital stock surrendered in exchange for
a share of Empyrean Delaware capital stock. State, local, or foreign income tax
consequences to stockholders may vary from the federal income tax consequences
described above.
The above tax opinion is based upon certain representations and assumptions
referred to in such tax opinion and assumes that the proposed reincorporation
will be completed in the manner described in this Registration Statement. Any
change in the facts, representations or assumptions could affect the anticipated
tax consequences of the proposed reincorporation. Moreover, it should be pointed
out that an opinion of counsel is not binding on the IRS or the courts.
THE FOREGOING DISCUSSION OF THE ANTICIPATED MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE PROPOSED REINCORPORATION IS BASED ON THE LAW IN EFFECT AS OF
THE DATE HEREOF, INCLUDING THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, THE
TREASURY REGULATIONS PROMULGATED THEREUNDER, AND ADMINISTRATIVE AND JUDICIAL
INTERPRETATIONS THEREOF, ALL OF WHICH ARE SUBJECT TO CHANGE (POSSIBLY ON A
RETROACTIVE BASIS). NEITHER THIS DISCUSSION NOR THE TAX OPINION ADDRESSES ANY
ASPECT OF STATE, LOCAL OR FOREIGN TAXATION. NEITHER THIS DISCUSSION NOR THE TAX
OPINION ADDRESSES ALL ISSUES THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF
EMPYREAN WYOMING CAPITAL STOCK IN LIGHT OF SUCH HOLDER'S PERSONAL CIRCUMSTANCES,
NOR DO THEY APPLY TO HOLDERS SUBJECT TO SPECIAL TREATMENT UNDER THE FEDERAL
INCOME TAX LAWS. FURTHER, NEITHER THIS DISCUSSION NOR THE TAX OPINION MAY APPLY
TO A HOLDER OF EMPYREAN WYOMING CAPITAL STOCK WHO ACQUIRED SUCH STOCK PURSUANT
TO THE EXERCISE OF AN EMPLOYEE STOCK OPTION OR OTHERWISE AS COMPENSATION OR WHO
EXERCISES THEIR DISSENTERS' RIGHTS PURSUANT TO THE PROPOSED REINCORPORATION.
ACCORDINGLY, EACH HOLDER OF EMPYREAN WYOMING CAPITAL STOCK SHOULD CONSULT SUCH
HOLDER'S OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF
THE PROPOSED REINCORPORATION, INCLUDING THE EFFECT OF STATE, LOCAL, FOREIGN AND
OTHER TAX LAWS.
VOTE REQUIRED FOR THE REINCORPORATION PROPOSAL
Approval of the reincorporation proposal, which includes approval of the
election of six (6) directors for staggered terms, requires the affirmative vote
of the holders of a majority of the outstanding shares of Empyrean Wyoming
common stock.
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The Board of Directors recommends that stockholders vote "FOR" the
reincorporation proposal. An abstention or a failure to vote will have the same
effect as a vote "AGAINST" the reincorporation proposal.
DISSENTERS' RIGHTS
You have dissenters' rights with respect to the reincorporation proposal.
Wyoming law requires that you follow its statutory procedures to exercise your
rights. We have attached to this joint merger/proxy statement as Annex B the
pertinent sections of the Wyoming law. We urge you to consult with your legal
advisor and follow the procedural steps under Wyoming law to exercise your
dissenters' rights. The following description of the appraisal rights procedure
is a summary of Wyoming law.
If you wish to dissent from the reincorporation proposal you must send to
Empyrean a written notice of your intent to demand payment for your shares prior
to the time the vote is taken on the merger. If you vote your shares in favor of
the reincorporation proposal, this will waive your appraisal rights. Your notice
must be sent separately to us, as a vote against the reincorporation proposal
alone will not be sufficient notice of your intent to seek appraisal. If you
deliver your notice and do not vote in favor of the reincorporation proposal, we
will deliver a notice to you of when the reincorporation proposal is approved by
the shareholders, no later than ten days after the shareholders' approval. Our
notice to you will include the following:
- an address where a payment demand can be sent and where and when
certificates can be deposited;
- information on the extent of restrictions on the transfer of shares
after the payment demand is received;
- a form for demanding payment, including the date of the first
announcement to the news media or shareholders of the terms of the
reincorporation proposal and requiring that the dissenter certify
whether or not he or she acquired beneficial ownership of the shares
before that date;
- a date between thirty and sixty days after delivery of our notice by
which we need to receive payment demand;
- a copy of the dissenter's rights statute.
After receiving our notice you then need to follow the instructions in our
notice if you want to demand payment. Your demand for payment must be delivered
within the time period described in our notice to you (a date between thirty and
sixty days after delivery to you of our notice, as described above). Upon
receipt of a payment demand that complies with the above procedure, we will do
the following:
- estimate the fair value of your shares;
- pay you the fair value;
- provide you with a balance sheet or an estimate of the fair value of
the shares;
- provide you with a statement describing your right to demand further
payment; and
- provide you with a copy of the dissenter's rights statute.
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If you believe that the fair value of your shares is greater than our offer
to pay fair value, you may send an additional demand for payment of the
difference or reject our offer of payment and demand your estimate of fair value
if any of the following are true:
- you believe that the fair value of your shares was incorrectly
calculated or the amount paid was less than the fair value;
- you believe Empyrean made payment after sixty days of the date set for
demanding payment; or
- if the reincorporation does not take place and we do not return your
stock certificates or release transfer restrictions within sixty days
after demand payment.
If a demand remains unsettled after the above procedure, we will institute
a proceeding in court to determine the fair value of the shares. If we do not
institute a proceeding within sixty days of receiving your payment demand, you
will be entitled to receive the amount you have demanded. All dissenters who
have unsettled payments will be joined as parties in the action. Court costs
will be paid by us unless the court determines that the dissenters acted
arbitrarily, vexatiously or not in good faith.
THE AMENDMENT PROPOSAL
The Board of Directors has adopted, subject to stockholder approval, an
amendment solely to increase the number of shares of common stock available for
grant under the Empyrean Diagnostics Inc. 1998 Stock Plan (the "1998 Stock
Plan") to an aggregate of 8,000,000 shares. The current number of shares of
common stock which may be granted under our 1998 Stock Plan is 6,000,000 shares,
of which 1,725,461 shares remained available for grant as of August 31, 2000.
The amendment increasing the number of shares of common stock available for
grant has been proposed by the Board of Directors in the belief that our 1998
Stock Plan is accomplishing its goal of providing additional incentive to
persons who can contribute significantly to the success of our business and that
we should be in a position to continue to make grants under our 1998 Stock Plan.
We anticipate making additional grants of stock options or other awards in the
future, thus making it necessary to amend our 1998 Stock Plan by increasing the
number of shares available for grant under our 1998 Stock Plan.
DESCRIPTION OF OUR 1998 STOCK PLAN
Our Board of Directors adopted our 1998 Stock Plan in May 1999. We believe
our 1998 Stock Plan is necessary to attract, compensate, and motivate our
employees, officers, directors, and consultants. Under our 1998 Stock Plan, we
may grant incentive stock options and non-qualified stock options to our
employees, officers, directors, and consultants. The Board administers to our
1998 Stock 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.
The Board may terminate or amend our 1998 Stock Plan to the extent
shareholder approval is not required by law. Termination or amendment will not
adversely affect options previously granted under our 1998 Stock Plan.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE CONCERNING FORWARD LOOKING STATEMENTS
THIS FORM S-4, 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, REGULATORY PROCEEDINGS OR RULEMAKING,
PROJECTIONS OF REVENUES, INCOME, 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.
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 SUBJECT TO RISKS AND
UNCERTAINTIES, SOME OF WHICH CANNOT BE PREDICTED OR QUANTIFIED, THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN, CONTEMPLATED BY, OR
UNDERLYING THE FORWARD LOOKING STATEMENTS. STATEMENTS IN THIS FORM S-4,
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. SUCH FACTORS INCLUDE, AMONG OTHER FACTORS, THE ACCEPTABILITY
OF EXISTING AND POTENTIAL PRODUCTS IN THE MARKETPLACE, THE ABILITY TO OBTAIN
SUFFICIENT CAPITAL TO FUND OPERATIONS AND THE OUTCOME OF POTENTIAL LITIGATION.
The following discussion and analysis provides information regarding our
financial position and results of operations for the periods shown. This
discussion should be read in conjunction with our Consolidated Financial
Statements and related Notes thereto included elsewhere in this document.
INTRODUCTION
In 1998, we discontinued the distribution and marketing of our diagnostic
test kits. This shift in focus coincided with our acquisition of certain rights
to use a microbicide formulation from IBC utilized in our hand sanitizer and
proposed products. Since that time, we no longer actively market any of our
diagnostic products. Our current financial condition and operations have been
significantly affected by 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.
We have had limited revenues and have sustained substantial losses from
operations in recent years and have an accumulated deficit.
We incurred net losses in 1998 and 1999 and expect to incur net losses at
least through 2000. We expect operations to generate negative cash flow through
at least through 2000 and we currently have no credit line available to us.
These factors raise doubts about our ability to continue as a going concern and
our audit report contained elsewhere in this proxy statement/prospectus contains
an explanatory paragraph with respect to this matter.
We expect to generate substantially all of our revenues in the future from
increased sales of our current line of preventative products. With the
settlement of our suit against IBC on August 9, 2000, we will rely on the joint
venture formed with IBC to develop additional preventative products for our
Company utilizing the formulation used in our hand sanitizer.
In addition to cost of goods sold, which we expect to vary somewhat
proportionately with sales over time, significant cost and expense items include
salaries and benefits, consulting fees, royalties, distribution rights, office
and administration, advertising, and legal and accounting, all of which, in
total, significantly exceeded our total revenues for 1999 and the first half of
2000. Accordingly, we do not believe comparing costs as a percentage of revenues
from year to year is meaningful.
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RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Our total revenues in the six months ended June 30, 2000 were $458,000
compared with $587,000 in the six months ended June 30, 1999. Product sales
increased in the six months ending June 30, 2000 to $458,000 from $70,000 in the
six months ending June 30, 1999 due to initial and reorder shipments to Wal-Mart
Stores, Inc. in 2000, which represented approximately 92% of total revenues for
the six months ended June 30, 2000. However, total revenues decreased due to the
sale of Southeast Asia distribution rights for $517,000 in the first half of
1999 as compared to $0 in the first half of 2000.
Our gross margin from product sales decreased to 45.0% in the six months
ended June 30, 2000 from 68.6% in the six months ended June 30, 1999 primarily
due to lower selling prices of the hand sanitizer in a higher volume retail
environment during 2000.
We incurred a net loss in the six months ended June 30, 2000 of $1,464,000
compared to a net loss of $2,109,000 in the six months ended June 30, 1999. The
losses in the first half of 2000 and 1999 were due primarily to limited revenues
that were substantially exceeded by our costs of operation. Our net loss per
share for the six months ended June 30, 2000 was $0.04 compared to a net loss
per share of $0.08 in the six months ended June 30, 1999. The loss per share
decreased primarily as a result of the decrease in selling, general and
administrative expenses and an increase in the weighted average number of shares
outstanding to 34,849,000 in the six months ended June 30, 2000 from 26,838,000
in the six months ended June 30, 1999.
Selling, general and administrative expenses decreased to $1,662,000 in the
six months ended June 30, 2000 from $2,563,000 in the six months ended June 30,
1999 primarily due to the following:
* Consulting expenses decreased to $138,000 in the six months ended June
30, 2000 from $969,000 in the six months ended June 30, 1999 primarily
due to less expense recorded for stock option grants to consultants
and less reliance on paid consultants in the six months ended June 30,
2000. Additionally, in connection with our Southeast Asia distribution
agreement, we incurred consulting services in the amount of $330,000
in the six months ended June 30, 1999 as compared to $0 in the six
months ended June 30, 2000.
* Fees relating to third party distribution of our hand sanitizer
decreased to $69,000 in the six months ended June 30, 2000 compared
with $270,000 in the six months ended June 30, 1999. We reduced
distribution costs by changing to an Ohio-based third party
distributor in March 2000, which also provides infrastructure services
including distribution, order entry, warehousing, customer service and
billing services.
* Expenses for royalties increased to $408,000 in the six months ended
June 30, 2000 from $248,000 in the six months ended June 30, 1999
primarily due to a guaranteed minimum royalty accrual of $367,000 in
the six months ended June 30, 2000 compared with $245,000 in 1999 and
an increase from sub-license royalty expenses associated with
increased sales of our hand sanitizer in the six months ended June 30,
2000 versus the six months ended June 30, 1999. Our new license
agreement with IBC dated August 9, 2000 eliminates the guaranteed
minimum royalty beginning January 1, 2000. Under the new agreement, we
must pay IBC a royalty equal to 5% of net sales of licensed products
in the United States.
* Expenses for distribution rights decreased to $0 in the six months
ended June 30, 2000 from $70,000 in the six months ended June 30, 1999
because a 1999 payment for the Canadian distribution rights to the IBC
formulation was not required in 2000.
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Interest expense decreased to $6,000 in the six months ended June 30, 2000
from $112,000 in the six months ended June 30, 1999, due to greater amortization
of the fair market value of warrants issued to promissory note holders and
interest on loans in 1999.
COMPARISON OF YEARS ENDED 1999 AND 1998
Our total revenues in 1999 were $662,000 compared with $10,000 in 1998.
Revenues in 1999 consisted of sales of the hand sanitizer introduced in late
February 1999 in the amount of $112,000 and the sale of Southeast Asia
distribution rights for $550,000. Deferred revenue in the amount of $100,000
will be recorded as revenue when the first $100,000 of product is shipped to our
Southeast Asia distributor. In 1998, revenues of $10,000 represented sales of
products under development for use as samples.
Cost of sales for 1999 includes a write-down of inventory of $71,000 which
pertains to certain products in inventory which were deemed to be unsaleable.
Selling, general and administrative expenses increased to $4,814,000 in
1999 from $2,913,000 in 1998 primarily due to the following:
* Administrative fees relating to our former relationship with
Integrated Commercialization Solutions, a division of Bergen Brunswig
Corporation, were $453,000 in 1999 compared to $40,000 in 1998. ICS
provided infrastructure services including distribution, order entry,
warehousing, billing, customer service and marketing services. We
terminated this relationship on March 2, 2000.
* We incurred advertising expenses of $581,000 in 1999 compared to
$155,000 in 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 $534,000 in 1999 compared
to $198,000 in 1998. The increase in 1999 resulted primarily from
legal and accounting expenses related to our filings with the SEC and
costs associated with defending various lawsuits.
* Expenses for royalties increased to $505,000 in 1999 from $245,000 in
1998 primarily due to a guaranteed minimum royalty payment of $490,000
in 1999 compared with $245,000 in 1998. Our new agreement with IBC
eliminates the future minimum guaranteed payments effective January 1,
2000. Under this agreement we will pay IBC a royalty equal to 5% of
net sales of licensed products in the United States.
* Expenses for distribution rights decreased to $70,000 in 1999 from
$273,000 in 1998 due to the 1998 payment for exclusive worldwide
distribution rights to the IBC formula except in Hong Kong, Taiwan and
Africa and the 1999 payment for Canadian IBC formula distribution
rights.
* Consulting expenses increased to $1,199,000 in 1999 from $849,000 in
1998. This increase resulted primarily from consulting services in the
amount of $330,000 provided on behalf of the Company in conjunction
with the Southeast Asia distribution agreement.
We recorded a restructuring charge of $345,000 in 1999 consisting of
involuntary termination benefits of $263,000 and other related reorganization
costs of $82,000. This charge resulted from a business reorganization approved
by the Board of Directors in December 1999 that included a facility closure,
relocation of the corporate headquarters to a more cost effective location,
severance costs for two Arizona based personnel and the write down of abandoned
fixed assets to estimated fair value less cost to sell. As of June 30, 2000,
both employees have been terminated and we have paid involuntary termination
benefits in the amount of $95,000 and other related reorganization costs in the
amount of $44,000. All reorganization costs including severance payments are
expected to be paid prior to December 31, 2000.
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Interest expense increased to $174,000 in 1999 compared to $0 in 1998 due
to interest accrued on promissory notes and the amortization of the fair value
of warrants issued to promissory note holders in 1999.
We incurred a net loss in 1999 of $4,785,000 compared to a net loss of
$3,147,000 in 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 1999 was $0.17 compared to a net loss per share of $0.14 in
1998. The loss per share increased primarily as a result of the increase in 1999
net loss.
LIQUIDITY AND FINANCIAL POSITION
To date, we have been unable to generate significant cash flows from our
business operations. As a result, we have funded our operations through investor
financing, including sales of common stock, convertible debentures, and the
exercise of 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 June 30, 2000, cash and cash equivalents totaled $1,015,000, an
increase of $825,000 from June 30, 1999. Current liabilities at June 30, 2000,
consisting primarily of accounts payable and accrued liabilities, exceeded
current assets by $649,000.
During the six months ended June 30, 2000, net cash used in operating
activities was $1,220,000 primarily due to the net loss of $1,464,000.
In the six months ended June 30, 2000, net cash flow from financing
activities was $1,957,000 resulting from the sale of common stock and the
exercise of options and warrants in the amount of $1,857,000 and from the
issuance of short-term promissory notes totaling $250,000, with offsetting
payments of the notes in the amount of $150,000.
On February 23, 2000, we completed a private placement of 6,151,050 shares
of common stock that generated gross proceeds of $3,076,000. Of this amount,
cash proceeds of $750,000 and $1,452,000 were received in the fourth quarter of
1999 and the first quarter of 2000, respectively, and $874,000 resulted from the
conversion of promissory notes and royalties payable to common stock. As of June
30, 2000, we have paid all of our debt with cash or by converting promissory
notes into the Company's common stock and have reduced past due accounts
payable.
Our future royalty requirements will affect liquidity. We are required to
pay royalties to various licensors including IBC, depending on the product and
country of sale, of up to 17% of net sales.
As of August 18, 2000, our cash balance was $494,000 and we have no debt
service or capital expenditure obligations.
We anticipate a substantial increase in cash outlays associated with
increased marketing and sales of our Preventx(R) preventative product line.
Further, we will incur additional expenditures associated with the development
of additional preventative products that we can market utilizing the formulation
used in our hand sanitizer. These cash outlays could include, but are not
limited to, product testing, product registration costs, advertising, inventory
purchases and a sales and marketing campaign. To maintain our current expenses
of approximately $3 million to $4 million per year and meet the costs associated
with our increased marketing, sales and development efforts, we will need to
raise additional capital during 2000 or secure a line of credit. Also, unless
the FDA issues final regulations that are different than its current proposed
regulations with respect to our hand sanitizer, we may experience an adverse
effect on liquidity. In those 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 pursue a working capital line of
credit to be secured by our accounts receivable and inventory. We may also raise
funds through the issuance of either debt or equity instruments. However, such
funds may not be available on favorable terms or at all.
During 2000, in excess of $400,000 has been raised from the exercise of
outstanding stock options and warrants. However, this will not negate the need
to raise additional funds through issuance of debt and equity instruments or
with credit lines.
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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. We are seeking a stockholder vote on
our planned reincorporation into Delaware by way of a merger of our existing
Wyoming corporation into a newly formed Delaware corporation. This proxy
statement/prospectus relates to our reincorporation proposal.
Prior to April 1997, we distributed and marketed an HIV diagnostic product.
In April 1997, 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 Trichomonas diagnostic kit
inventory in 1998, and stopped marketing our diagnostic products. This shift in
focus coincided with our acquisition of rights from IBC to use their microbicide
formulation in our current and proposed preventative products.
We market, sell and distribute innovative personal care products that are
intended to prevent the spread of infectious disease. To date, we have
introduced one product, which is marketed as both the Preventx(R) hand sanitizer
and the Coleman(R) hand sanitizer and first-aid antiseptic with the Advanced
Preventx(R) Formula. In accordance with the settlement of our suit with IBC, new
product development is vested in the joint venture formed with IBC. Our
marketing personnel and IBC's scientific personnel share new product development
responsibilities. Additional preventative products will be developed that we can
market utilizing the formulation used in our hand sanitizer including
towelettes, baby wipes, a disinfectant surface spray and a microbicidal
contraceptive gel. We hope to begin testing for FDA approved of the baby wipes
in 2000. Our disinfectant surface spray must obtain regulatory approval from the
EPA, which we estimate will take at least 12 months. The microbicidal
contraceptive gel must undergo clinical trials and obtain regulatory approval
prior to marketing, which will take at least 18 months.
We incurred net losses in 1998, 1999 and in the six months ended June 30,
2000 and expect to incur net losses at least through 2000, which will cause our
company to have a negative net worth. We expect operations to generate negative
cash flow through at least 2000 and we currently have no credit line available
to us. These factors raise doubts about our ability to continue as a going
concern and our audit report, included elsewhere in this proxy
statement/prospectus, contains an explanatory paragraph with respect to our
ability to continue as a going concern.
OVERVIEW
We market, sell and distribute innovative personal care products that are
intended to prevent the spread of infectious disease. Our current product, the
hand sanitizer, developed and licensed to us by IBC, is sold over-the-counter in
the retail markets and also to commercial, industrial and institutional
customers. Our current product is marketed as a hand sanitizer product sold
under our Preventx(R) brand name and as a hand sanitizer and first-aid
antiseptic sold under the Coleman(R) brand name. The formula used in our hand
sanitizer is also being utilized to develop a variety of other products with
similar chemical formulations including a moist towelette, a baby wipe product,
a disinfectant surface spray to be marketed to the retail markets and also to
the food service, hotel and other industries and a microbicidal contraceptive
gel designed to prevent pregnancy and sexually transmitted diseases ("STDs").
We believe that the preventative formula licensed from IBC will be shown to
be both safer and more effective as an anti-microbicide than existing
competitive products in the market and offers us a platform to leverage our
expertise into other areas of the infectious disease market.
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, and will continue to be, an issue of heightened public concern fueled by
the prevalence or reemergence of several deadly diseases in recent years,
including HIV (the causative agent of AIDS), hepatitis, and other diseases.
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A major source for transmission of infection is 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 by 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 IBC formulation used in our existing hand sanitizer and
in our other infectious disease preventative products that are being developed
has the potential to offer several unique advantages over other products
currently available in the market, in that the IBC 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,
- is virtually odor free, and
- may be virtually non-toxic and safer for use around children and in
food preparation and medical applications.
The basic IBC 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 by
assisting the healing of minor cuts and abrasions.
We will attempt to capture a significant percentage of the infectious
disease preventative markets in which we compete by marketing, selling and
distributing superior products based on the IBC formulation 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 prevent 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.
Our hand sanitizer is, and our moist towelettes and disinfectant surface
spray products will be, marketed to consumers through retail channels of
distribution and to commercial, industrial and 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 baby wipe product will be marketed primarily to consumers
through retail channels of distribution. We expect our microbicidal
contraceptive gel will be marketed primarily to consumers through retail
channels of distribution, and to contraceptive product manufacturers. Our
primary focus in marketing our products is to generate sales and create brand
awareness and effectively communicate our unique features and benefits to
consumers, and to establish relationships with retailers, distributors,
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 hand sanitizer and intend to market and
distribute the products currently under development, primarily through our own
internal sales and sales support efforts and through independent manufacturers'
sales representatives, third party distributors and marketing partners. We
currently have engaged Handl-It Inc. to provide customer service, warehousing
and distribution services for us, including order taking via telephone, fax and
electronic data interchange, warehousing, distribution and customer invoicing
and accounting. We also have distribution relationships with third party
distributors covering the United States and twelve foreign countries. In
accordance with the settlement of our suit with IBC, rights to manufacture, sell
and grant distribution rights for the licensed products outside the United
States and Brazil will now be vested in the joint venture formed with IBC.
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The microbicidal contraceptive gel has been accepted by the National
Institutes of Health ("NIH") to undergo Phase III clinical trials to prove its
safety and its effectiveness against STDs and as a contraceptive. The purposes
of the 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 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.
Future products could include deodorant, shaving cream, toothpaste and
mouthwash products.
We will attempt to capture a significant percentage of the infectious
disease preventative markets in which we compete by the development of superior
products based on the IBC 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.
Litigation and regulatory matters may affect our business.
We are a defendant in an action that was 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 state court action
alleges that we tortiously interfered with Optima and Mercury's contractual
relationship with IBC. Optima and Mercury claim that they had prior rights to
the IBC formulation and products and that we induced IBC to breach that
agreement. Optima and Mercury have requested an unspecified amount of damages
against us. In a separate action that has now been consolidated with the first
action in the same court, IBC has requested a declaratory judgment that IBC
properly terminated its development and distribution contract with Optima and
Mercury. Optima and Mercury also seek injunctive relief to prevent IBC and its
managers and directors from allowing IBC to have further dealings with us. The
state court action was informally abated while the parties pursued their
remedies in the federal action. If the federal action is dismissed, it is likely
that the state court action will resume. If we are not successful in the state
court action, or in the federal action, we could lose the right to market, sell
or manufacture our hand sanitizer product and other products currently under
development. If that were to occur, IBC has agreed to assign to us their rights.
The FDA has taken an adverse position with respect to a lotion product of
the Andrew Jergens Co. that contains benzalkonium chloride, 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 follows the hand sanitizer monograph. 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 is 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 claims and directions for use are consistent with the FDA
monographs for hand sanitizer and first-aid antiseptic requirements. Our product
is described as a hand sanitizer and first-aid antiseptic and makes claims that
it is long lasting. However, this is not a permitted product name or claim
provided in the monograph for hand sanitizers or first-aid antiseptics. To make
product claims that are not included in the monographs, we may be required to
independently substantiate those claims to the FDA.
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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 some of our claims omitted. If we are not successful in marketing our
product in this fashion, we could experience a loss of revenues. Since the hand
sanitizer is our only product, such adverse action by the FDA 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.
INDUSTRY BACKGROUND
HAND SANITIZER PRODUCTS
Sales of all hand and body lotions (including those making sanitizing
claims) were estimated to be approximately $850 million in the United States in
1999 (according to the Mass Market Retailers/Information Resources Inc. Health
and Beauty Aids Report, 1999/1998). 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 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. Many sanitizers are also sold in towelette form where the
sanitizing solution has been applied to a sheet of absorbent paper that is
typically packaged individually or in a perforated roll packed in a plastic
dispenser.
Currently marketed hand sanitizers or antimicrobial lotions are designed to
sanitize the skin against various disease causing microorganisms, including E.
coli, Salmonella, Staphylococcus 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 public awareness and media reports of dangerous and
sometimes deadly bacterial or viral contamination in common or frequently
populated areas.
Of the hand sanitizer products currently on the market today, most use
either alcohol or triclosan as their active ingredient. The typical alcohol
concentration in these products is over 60%. Institutional use hand sanitizers
may also utilize chloroxylenol or nonoxynol-9 as active ingredients. Products
based on these active ingredients may 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 may be painful when applied
to existing cuts, burns, or abrasions. Products using alcohol and triclosan may
have limited effectiveness, as the range of infectious disease germs with which
they react are more limited, and often do not include STDs. 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.
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BABY WIPE PRODUCTS
Sales of baby wipes by drug stores, discount stores and supermarkets in the
United States totaled $596 million in 1998. Well-known brand names dominate this
category and include Huggies, Luvs and Pampers. Products are classified as
super-premium, premium, private label, average and low end. Only two
manufacturers offer an anti-bacterial feature and neither of them are
long-lasting nor are they alcohol-free.
We intend to sell our baby wipes as a super premium product due to the
benefits that they will offer to the consumer. Utilizing a formulation very
similar to that found in the hand sanitizer, we believe our baby wipes will be
alcohol-free, non-irritating, non-toxic, anti-bacterial and long lasting.
Through additional testing, we also believe we will be able to present the
product as aiding in the prevention of diaper rash. As a result, we believe that
our product will have significant advantages over products on the market today.
DISINFECTANT SURFACE SPRAY PRODUCTS
Current products in the disinfectant surface spray category include well
known brand names such as Clorox, Lysol and Dial. It is a large market with no
one product dominating the segment. Our disinfectant surface spray, which is
similar to our hand sanitizer, 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 Reports (1999/1998). We believe that our disinfectant
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 in and expand the over-the-counter segment of the
contraceptive market with our microbicidal contraceptive gel, which has
completed the first two of three phases of clinical trials to determine its
safety and effectiveness as a contraceptive and as a means of preventing STDs.
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.
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
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.
One in five adults in the United States now has genital herpes. 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 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 some other STDs.
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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. In fact, a Phase III study of a nonoxynol-9 product completed
in June 2000 resulted in a lower incidence of HIV infection for the placebo
rather than for the nonoxynol-9 product. 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. Other organizations are
calling for a total ban of nonoxynol-9 products based on the premise that
nonoxynol-9 actually promotes the transmission of 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, defined as infections contracted at a hospital or
doctor's office that 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, the average cost of
treating nosocomial infections in the United States 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
Our current and proposed preventative products use the same active
ingredient, benzalkonium chloride, and have the potential to provide safety and
efficacy qualities lacking in most competitive products, while at the same time
addressing limitations of competitive products. Our microbicidal contraceptive
gel will also use Octoxynol-9, a detergent-like chemical that attacks the outer
membrane of microorganisms allowing benzalkonium chloride to reduce harmful
microorganisms.
Most microorganisms are reduced after application or contact with the
product. The IBC 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 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 the products currently under
development, and all of the product innovations planned for development in the
future, will be based upon IBC's existing basic product formulations, thus
creating an opportunity for faster entry into compatible market opportunities.
BUSINESS STRATEGY
Our goal is to achieve a position in the retail, commercial and
institutional markets for over-the-counter infectious disease preventative and
contraceptive products, and to leverage our position to enter other markets. 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 as well as commercial and
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institutional customers. We intend to develop brand awareness and
acceptance by offering superior products that are 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 through advertising and by
expanding our network of United States and international distributors and
by entering into strategic relationships with other parties who can
significantly increase our marketing, sales and distribution resources.
APPLY CORE IBC FORMULATIONS TO ADDITIONAL PRODUCT APPLICATIONS. All of our
infectious disease preventative products are based on a common product
formulation, which is licensed to us by IBC and contains octoxynol-9 with
benzalkonium chloride as its active ingredient. We intend to continue to
leverage the brand awareness and market acceptance of our hand sanitizer
product to create market demand for our moist towelettes, baby wipes,
disinfectant surface spray and our microbicidal contraceptive gel. We may
leverage the future success of these products through the introduction of a
variety of compatible personal care product formulations, such as
deodorant, shaving cream, toothpaste and mouthwash products.
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.
PRODUCTS AND TECHNOLOGIES
To date, we have introduced one product that is marketed as both the
Preventx(R) hand sanitizer and the Coleman(R) hand sanitizer and first-aid
antiseptic with the Advanced Preventx(R) Formula. Several additional
preventative products are currently being developed, our moist towelettes, baby
wipes, disinfectant surface spray and microbicidal contraceptive gel, each of
which must comply with applicable regulatory requirements or obtain regulatory
approval (which may include clinical trials) prior to marketing. Each of these
products is described below.
CURRENT DISEASE PREVENTATIVE PRODUCT
PREVENTX(R) HAND SANITIZER
Our hand sanitizer 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 we believe the IBC formula is virtually
non-toxic, it can be used safely in food preparation areas and around medical
patients. Our hand sanitizer will not damage latex gloves or other products.
Our hand sanitizer product, unlike most competitive products, does not
include alcohol, triclosan, or other organic solvents as its active ingredient.
The benefits of using an alcohol free and triclosan free formulation include:
- The protection provided by our hand sanitizer is long lasting (up to
four hours). In contrast, alcohol and triclosan based products
typically lose effectiveness after drying (approximately fifteen
seconds).
- The IBC 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
provides a conducive environment for disease-causing germs that
colonize on the skin. In addition, triclosan based products have been
found to cause decreased resistance to bacteria and the mutation of
some germs.
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- Our product is non-flammable and thus reduces the risk of personal
injury associated with alcohol products and increases the
institutional and consumer settings where a hand sanitizer product can
safely and conveniently be applied and stored. At concentrations of
60% or greater, alcohol-based hand sanitizer products are highly
flammable.
- Our hand sanitizer 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 products, including itching,
stinging and burning. We incorporate aloe vera into our hand sanitizer
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 that can cause painful discomfort when in
contact with minor skin injuries. Our hand sanitizer also does not
cause irritation to mucosal tissues in the nose, unlike alcohol and
triclosan based products.
Presently, our hand sanitizer is sold at retail stores in 2 and 8 ounce
plastic bottles, and in the commercial, industrial and institutional markets in
2, 8 and 16 ounce plastic bottles. We also intend to offer a bulk refillable
dispenser that dispenses a pre-measured amount of the product as well as a moist
towelette.
Our hand sanitizer product was launched in the United States in March 1999.
In April 1999, we 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-distribution fee requirements. Durstrand has not satisfied the
minimum purchase requirement of $400,000 that was due by April 2000. As a
result, under the terms of the exclusive distribution agreement, we could revoke
Durstrand's exclusivity in the defined territory. We have not made a decision
whether to revoke. In accordance with the settlement of our suit with IBC,
rights to manufacture, sell, and grant distribution rights for the licensed
products outside the United Sand Brazil will now be vested in the joint venture
formed with IBC.
INFECTIOUS DISEASE PREVENTATIVE PRODUCTS UNDER DEVELOPMENT
MOIST TOWELETTES
As an extension of our existing hand sanitizer product line, we plan to
offer the hand sanitizer on a moist towelette. The towelette will offer all the
advantages of our hand sanitizer product for use in situations where items such
as dirt or food must be removed from the hands and facilities for normal hand
washing are unavailable.
The towelette will be packaged in three configurations: easy-to-use plastic
"Canister Pak" dispensers, personal-sized "Peel and Reseal" boxes and boxes of
individually wrapped towelettes. The proposed packaging is conveniently sized
for household and travel use and is resealable to keep the product moist. The
towelette will be sold under both the Preventx(R) and Coleman(R) brands.
BABY WIPES
Utilizing the same active ingredient as our hand sanitizer, 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 which aids in the prevention of diaper rash, if obtained, would give the
Preventx(R) baby wipe a significant advantage over alcohol-based wipes on the
market today.
In accordance with the settlement of our suit with IBC, new product
development is vested in the joint venture formed with IBC. Our marketing
personnel and IBC's scientific personnel share new product development
responsibilities. To make the aforementioned product claims, the joint venture
will have to file an IND with the FDA and conduct clinical trials to support the
claims. We are hopeful that this process can be started prior to the close of
2000.
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DISINFECTANT SURFACE SPRAY
A disinfectant surface spray is being developed that uses the same key
active ingredient formulation as our hand sanitizer product. Our disinfectant
surface spray does not contain the thickening and aloe vera additives contained
in our hand sanitizer, 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 larger dispensers for institutional
applications such as food service surfaces, hotel facilities, and surfaces where
medical services are performed.
Our disinfectant surface spray will have all of the same advantages as our
hand sanitizer 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 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 surface spray product is not harmful to common
surfaces such as sinks, counters, trays, furniture, or other objects.
We expect to launch our disinfectant surface spray product in the United
States after the joint venture has obtained approval from the Environmental
Protection Agency. We estimate that this approval process will take at least
twelve months from the submission of the application, which has not yet been
submitted.
The disinfectant surface spray will require EPA approval because we want to
claim that the spray has the ability to eliminate viruses, bacteria and fungi on
surfaces. Under EPA guidelines, the disinfectant surface spray is classified as
a pesticide since it kills viruses, fungi and bacteria on surfaces. Therefore,
EPA approval must be obtained under the rules and regulations governing
pesticides.
MICROBICIDAL CONTRACEPTIVE GEL
Our microbicidal contraceptive gel has been developed by IBC 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 will determine whether the gel effectively kills a host of STDs
and other infectious diseases, in addition to its contraceptive properties, and
is safe. Upon initiation and successful completion of the Phase III clinical
trial and results showing safety and effectiveness, a new drug application will
be filed with the FDA for its approval. We anticipate approval will take at
least 18 months from the time that Phase III trials commence.
Once approved, we anticipate marketing the gel primarily in the retail,
over-the-counter market in single use pre-filled applicators as well as larger
tubes. We also intend to 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 means of contraception and as a disease
preventative and enabling condom manufacturers to make additional product
claims.
Existing contraceptive gel products uses 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 are aware of
no other approved competitive products that make these claims. As a result, if
successful, the gel would be a unique product in the over-the-counter
contraceptive market.
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 microbicidal contraceptive gel will not be sold in the United States
until a Phase III study is completed and approved by the FDA. The Phase III
study has yet to begin and will address the effectiveness of the product in
preventing the transmission of gonorrhea, chlamydia, and trichomonas vaginalis.
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The second part of the Phase III testing will address the effectiveness of the
product in preventing the transmission of HIV. It will then be submitted to the
FDA for approval.
SALES AND MARKETING
We currently market our products in the United States to both the retail
over-the-counter market using internal sales personnel and third party
manufacturers representatives, and to commercial, industrial and institutional
customers through distributors and sales agents. Effective in the first quarter
of 2000, we began selling our product to Wal-Mart Stores, Inc. In the third
quarter of 2000, we began selling our product to Do-It-Best Corp. Before that
time we sold our product to smaller commercial and institutional customers.
Within the United States our existing product is distributed directly to
retailers and institutionally through third party distributors. Upon obtaining
regulatory approval, we plan to distribute the products currently under
development through the same channels. Our Southeast Asia distributor was
granted exclusive rights (subject to minimum purchase requirements) in
designated territories and is responsible for obtaining and maintaining required
foreign regulatory approvals for our products. Through the joint venture formed
with IBC, we anticipate granting distributorships in other territories that will
have the same requirements.
We typically sell inventories to third party distributors at negotiated
prices. The products are then re-sold by the distributors to a variety of
customers.
Our hand sanitizer product has been launched at Wal-Mart Stores, Inc.,
Do-It-Best Corp. and regional food and drug chains in the United States. We plan
to rely heavily on point-of-purchase merchandising programs in our marketing and
advertising efforts. We feel this strategy will be very effective for the hand
sanitizer product as consumers are already drawn to the health and beauty aids
area within the retail store. Therefore, our point-of-purchase merchandising
programs will tell the consumer about the many advantages of our hand sanitizer
over alcohol-based competitors. This strategy will be supplemented with print
and other forms of advertising as funds permit. We also operate an Internet web
site that provides useful information about our current products and those under
development.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
Wal-Mart Stores, Inc. comprised 13% of our product sales in 1999 and a
one-time sale to a large pharmaceutical company comprised 38%. Nearly all of our
current sales are to Wal-Mart Stores, Inc. We recently began sales to Do-It-Best
Corp. and we believe by the end of 2000 we will have developed relationships
with other large regional and national retail drug, grocery, hardware, sporting
goods and discount chains. Having these additional customers will lessen our
dependence on Wal-Mart.
STRATEGIC RELATIONSHIPS
INTERNATIONAL BIOSCIENCE CORPORATION LICENSE
We currently license our product and manufacturing formulations used in our
disease preventative products from International Bioscience Corporation
(formerly known as Geda International Marketing Co., Ltd.). In August 2000 we
announced a complete settlement of our litigation with IBC relating to our
license agreement with IBC. As part of the settlement, we executed a new license
agreement with IBC that grants us the exclusive right to purchase, use, have
used, sell and have sold the licensed products in the United States. The new
license agreement requires us to pay a 5% royalty to IBC on net sales of
licensed products in the United States. The initial term of the agreement is ten
years with automatic renewal for additional ten year terms. IBC has the right to
terminate the agreement if we do not sell any licensed products in the United
States for a period of two years.
As part of the agreement, IBC agreed to fund clinical trials for a
microbicidal contraceptive gel, with a commitment to invest, if necessary, up to
$10 million. The trials will be designed to fulfill all requirements for FDA
approval of the product. The trials will test the efficacy and safety of the
microbicidal contraceptive gel against various sexually transmitted diseases
including HIV. We have agreed to expend up to $10,000,000, if necessary, to
market the licensed products in the United States over the first five years of
the agreement. Additionally, we have executed a trademark license with IBC that
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permits and requires us to use IBC's GEDA(R) logo, to the extent available, on
all licensed products sold in the United States. The term of the trademark
license runs concurrently with the term of the license agreement from IBC to us.
IBC has the right to terminate the trademark license if we do not sell any
licensed products in the United States for a period of two years.
Also as part of the settlement, we have agreed that IBC shall have the full
and exclusive rights to sell its IBC formulated products in Brazil. In addition,
we have executed a trademark license with IBC that permits them to use, to the
extent available, our Preventx(R) trademark and associated trade dress in Brazil
in exchange for paying us a 5% royalty on net sales of licensed products in
Brazil. The initial term of the trademark license is ten years with automatic
renewals for additional terms of ten years. We have the right to terminate the
trademark license upon termination of the operating agreement for the joint
venture, which we formed with IBC as part of the settlement.
In exchange for the issuance of 5,000,000 shares of our common stock, IBC
will forego the payment by our company of any further minimum guaranteed
royalties, which totaled $13,657,000 for the seven years remaining in the
initial term of the original license agreement and $46,311,000 in the first
ten-year renewal term of the original license agreement. In addition, we granted
IBC an option to purchase another 2,226,000 shares of our common stock, having
an exercise price of $0.83 per share and vesting based upon IBC's completion of
critical strategic initiatives. The 5,000,000 shares of common stock as well as
any shares acquired upon exercise of the 2,226,000 options are subject to a
voting agreement, wherein an irrevocable proxy to vote these shares is given to
Lawrence D. Bain, Chairman of the Board of Directors of Empyrean Bioscience,
Inc.
We also previously acquired sub-licensing rights for the hand sanitizer in
the United States from Prevent-x Inc. The term of the license extends to July
20, 2008, subject to renewal options for additional 10-year terms.
IBC JOINT VENTURE
As part of our August 2000 settlement of all legal disputes between IBC and
us, we also announced that we had formed a joint venture with IBC to make, have
made, use, have used, sell and have sold licensed products throughout the world
with the exception of the United States and Brazil. The joint venture is a
limited liability corporation owned fifty-percent by us and fifty-percent by
IBC. A put agreement between IBC and us provides that upon a change of control
(as defined in the agreement) of either IBC or us, the other party has the
right, but not the obligation, to sell its interest in the joint venture at the
fair market value, to the acquirer of the controlling interest, IBC or us, as
the case may be.
An operating agreement has been executed between the parties that provides
for the joint venture to be managed by a board of managers consisting of six
managers, three managers to be appointed by IBC and three managers to be
appointed by us. Our marketing personnel and IBC's scientific personnel will
coordinate new product development.
Coincident with the formation of the joint venture, we executed a trademark
license with the joint venture and IBC also executed a trademark license as well
as a license agreement with the joint venture. Our trademark license with the
joint venture permits the joint venture to use, to the extent available, the
Preventx(R) trademark and associated trade dress on all of the licensed products
sold by the joint venture, with a term that runs until the expiration or
termination of the joint venture operating agreement unless terminated by us if
the joint venture does not sell any licensed products for a period of two years.
Similarly, the trademark license from IBC to the joint venture permits and
requires the joint venture to use, to the extent available, the GEDA(R) logo on
all of the licensed products sold by the joint venture, with a term that runs
until the expiration or termination of the joint venture operating agreement
unless terminated by IBC if the joint venture does not sell any licensed
products for a period of two years. The license agreement from IBC to the joint
venture grants the joint venture an exclusive, royalty-free right and license to
make, have made, use, have used, sell and have sold the licensed products
worldwide with the exception of the United States and Brazil, with a term that
runs until the expiration or termination of the joint venture operating
agreement, unless terminated by IBC if the joint venture does not sell any
licensed gel product for a period of two years after the gel product has been
approved for sale by the USFDA.
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PREVENT-X SUB-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 manufacture, market, and sell our hand sanitizer product in
the United States. These rights were previously licensed to Prevent-X by IBC.
This sub- licensing agreement also provided for the acquisition of 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 of the hand sanitizer sold in the
United States. The initial term of the agreement is ten years, based on Empyrean
meeting the conditions of the agreement.
HANDL-IT INC. ALLIANCE
Effective March 2, 2000, we engaged Handl-It Inc. of Cleveland, Ohio to
provide us with a portfolio of outsourcing services including finished goods
warehousing, distribution, customer service, order processing, invoicing and
accounts receivable management. The arrangement covers all of our infectious
disease preventative products. Handl-It is able to provide these services more
efficiently and at a more competitive cost than our previous provider of these
services. We have no long-term agreement with Handl-It.
DURSTRAND INTERNATIONAL LIMITED
On April 28, 1999, we entered into a distribution agreement with Durstrand
International Limited, a British Virgin Islands company. 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, when approved by the
appropriate regulatory bodies, our contraceptive gel, in the Philippines,
Singapore, Thailand, Indonesia, Malaysia, Cambodia, Myanmar and Vietnam.
Durstrand paid $500,000 for the exclusive rights to the Preventx(R) hand
sanitizer product and will pay $600,000 for the exclusive rights to the
microbicidal contraceptive gel 120 days following approval of claims related to
our products by the FDA. There have been no purchases to date. Durstrand must
purchase a minimum annual amount of either product to maintain its exclusive
rights as follows:
Minimum
Year Ending Annual
April 28, Purchases
--------- ---------
2000 $ 400,000
2001 1,000,000
2002 3,000,000
2003 and thereafter 115% of annual minimum purchases in the
immediately preceding year
Durstrand has not satisfied the minimum purchase requirement of $400,000
that was due by April 2000. As a result, under the terms of the exclusive
distribution agreement, we could revoke Durstrand's exclusivity in the defined
territory. We have not made a decision whether to revoke.
In accordance with the settlement of our suit with IBC, rights to
manufacture, sell and grant distribution rights for the licensed products
outside the United States and Brazil will now be vested in the joint venture
formed with IBC.
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SUNBEAM(TM) 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(TM) and Coleman(R) trademarks in
connection with the sale and distribution, throughout the United States and
Canada, of our hand sanitizer and first aid antiseptic, towelettes, disinfectant
surface spray and baby wipes. 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 annual minimum royalties in the amounts of $20,000, $60,000 and $120,000 in
2000, 2001 and 2002, respectively, or if we fail to achieve minimum sales for
the Sunbeam licensed products.
We are required to pay Coleman(R) a royalty based on net sales of the
Coleman(R) licensed products. Coleman(R) 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 annual minimum royalties in the amounts of
$25,000, $50,000 and $100,000 in 2000, 2001 and 2002, respectively, or if we
fail to achieve minimum sales for the Coleman(R) licensed products.
MANUFACTURING AND QUALITY CONTROL
As part of our August 2000 settlement of all legal disputes between IBC and
us, we each agreed that licensed products would only be manufactured by approved
manufacturers and that the joint venture entered into between the parties would
be responsible for approving such manufacturers. The manufacturing of our hand
sanitizer, licensed to us by IBC, is currently performed by an independent
manufacturer, Canadian Custom Packaging ("CCP"), 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 purchased by CCP. CCP's manufacturing of, and purchase of raw
materials for, the hand sanitizer are done according to IBC's specifications. We
believe that the raw materials required for our products are readily obtainable
from a variety of sources. We have experienced no difficulties or unexpected
costs to date in purchasing the raw materials. CCP's manufacturing facility is
required to meet, and currently meets, good manufacturing practices which
include regulations adopted by the FDA and is subject to periodic inspection by
the agency. It is also ISO 9001 certified.
RESEARCH AND DEVELOPMENT
We currently focus all of our limited research and development resources
and efforts on the research and development of additional applications and
markets for the Preventx(R) antimicrobial and contraceptive products licensed to
us by IBC. In addition, we intend to pursue strategic relationships with
biotechnology companies and research institutions for other products to
complement our line of Preventx(R) products. We spent $14,500 in 1999 and
$31,500 in 1998 for research and development activities.
PROPRIETARY RIGHTS
We license all of the product and manufacturing formulas used in our
disease preventative products from IBC. Although we believe the formulas and
underlying manufacturing techniques are proprietary, they are subject to current
litigation by a third party claiming prior worldwide licensing and marketing
rights. To date, we hold no patents on our products. These products use common
compounds in formulas that we believe are difficult to copy and manufacture. The
IBC formulas are primarily protected by trade secret protections and through
contractual confidentiality obligations of our employees, contracting parties,
independent contractors, manufacturers 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.
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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 before 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 applications for countries
located in their 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, 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 apply, among other things, to 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 will vary based on the type of product,
required testing and the desired product claims and could take a number of years
and involve the expenditure of substantial resources.
The standard process required by the FDA before a new 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;
- 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
use.
If the product is regulated as a prescription drug, or in some cases as an
over-the-counter, non-prescription 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 a "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 and 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 before 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 existing and proposed products (other
than our disinfectant surface spray), depending on the 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 new
drug application. The application review process frequently takes two to four
years or longer to complete and the FDA may require us to perform additional
studies to gain approval that may take several years to complete.
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.
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In 1972, the FDA instituted an ongoing review process to evaluate the
safety and effectiveness of over-the-counter drugs. Through this process, the
FDA issues regulations called monographs, that set forth the specific active
ingredients, dosages, indications and labeling statements for over-the-counter
drugs that the FDA generally recognizes as safe, effective and branded properly
and therefore not subject to premarket approval. Over-the-counter drugs not
covered by proposed or final regulations are subject to premarket 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 monographs, a hand sanitizer monograph and a first-aid antiseptic
monograph.
The active ingredient in our hand sanitizer 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 permit for our claim that our product's hand
sanitizing capabilities are long-lasting. If we wish to make claims that are not
specifically allowed in the hand sanitizer monograph, we may be required to
independently substantiate the claims to the FDA. We believe that all of our
current claims are allowable under the proposed hand sanitizer and first-aid
antiseptic monographs.
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
("WHO") to be sold. A country must request WHO acceptance before the WHO will
evaluate the product. FDA acceptance is not a substitute for foreign
governmental approval or clearance.
We have obtained all necessary governmental approvals required to market
the hand sanitizer in Canada. Currently, our Southeast Asia distributor has not
obtained applicable approvals in any of the countries within its territory.
COMPETITION
PREVENTX(R) HAND SANITIZER
There are a number of competitors in the consumer hand sanitizer 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. Some of the
competitive products have active ingredients similar to Preventx(R).
Alcohol-based hand sanitizers in the United States are sold largely based on
price competition. However, we feel that the benefits of the IBC alcohol free
formula justify a slight premium over the alcohol-based products.
BABY WIPES
Together, Kimberly-Clark Corporation and Proctor and Gamble Co. account for
approximately 69% of the baby wipe market. All other manufacturers, including
Drypers Corporation and Playtex Products, Inc. share the remaining 31% of the
market. Products are classified as super-premium, premium, private label,
average and low end. We believe that our baby wipe will be sold as a super
premium product due to the benefits that it is expected to offer the consumer.
Using a formulation very similar to that found in the hand sanitizer, our baby
wipes will be alcohol- free, non-irritating, non-toxic, anti-bacterial and
long-lasting. Through additional testing to be performed, we also believe we
will be able to present the product as aiding in the prevention of diaper rash.
As a result, we believe that our product will have significant advantages over
products on the market today and permit us to command a premium price.
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DISINFECTANT SURFACE SPRAY
There are numerous competitors in the surface cleaning market, both in the
United States and worldwide, including Reckitt & Coleman Inc. (which markets the
Lysol brand), Clorox Corporation and Dial Corporation.
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 other sprays
that cannot be used near food because they are lethal to ingest. We intend to
sell the product at a premium price. 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.
MICROBICIDAL CONTRACEPTIVE GEL
There are a number of microbicidal products that are in various stages of
development, several of which we believe are in Phase III clinical trials at
this time. However, all of the other products in Phase III trials use
nonoxynol-9 in their formulas, which can cause genital irritation. In fact, a
Phase III study of a nonoxynol-9 product completed in June 2000 resulted in a
lower incidence of HIV infection for the placebo, rather than for the
nonoxynol-9 product. As a result, some organizations are calling for a total ban
of nonoxynol-9 products based on the premise that nonoxynol-9 actually promotes
the transmission of HIV. Our gel, which does not contain nonoxynol-9 and, in a
clinical trial, did not cause genital irritation, 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 purposes
of the first two phases of the 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 positive
results from the standpoint of safety and in vitro effectiveness. The third
phase of the trials will be funded by the NIH and will demonstrate the efficacy
of the gel in vivo. Most competitive products currently on the market recommend
the use of a condom or diaphragm with their product and do not include claims
that they kill STDs or other infectious disease.
The microbicidal contraceptive gel, if approved in the United States, will
be sold as a vaginal contraceptive gel and anti-infective barrier. The product
will be sold at a premium over 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.
Many of our competitors have substantially greater financial and marketing
resources than we have.
EMPLOYEES
As of August 18, 2000, we employed eight full-time personnel. These
employees are involved in executive, corporate administration, operations, and
sales and marketing functions.
PROPERTIES
Our corporate facility is located in a suburb of Cleveland, Ohio and
consists of approximately 2,000 square feet of executive office space. We lease
this facility for a monthly base rent of $1,850. The lease expires in January
2002. We believe that our facilities are adequate for our needs for the
foreseeable future.
LEGAL PROCEEDINGS
We are the plaintiff in an action that was filed in the United States
District Court, Southern District of Florida Case No.00-8300. In this action in
federal court, the Company brought suit against IBC, David Thornburgh, M.D., and
Sara Gomez for fraud in the inducement, tortious interference with a business
relationship and breach of contract in connection with the Company's original
license from IBC of certain technology. In August 2000, we announced that all
legal disputes between IBC and our company have been resolved. We entered into a
settlement agreement with IBC on August 9, 2000. This case against IBC has been
settled by the filing of a Stipulation of Dismissal with the United States
District Court on August 17, 2000.
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In the federal action, a company called Optima Holding Co. Ltd. intervened
claiming that it has an exclusive prior right to use the same technology by
virtue of a joint venture agreement entered into between IBC and Optima. Optima
has asserted claims against us for injunctive relief, conversion and tortious
interference with a business relationship. On August 18, 2000, Optima, together
with Mercury Technology Corp. and Mercury Technology Corp. (collectively
"Mercury") amended its original intervention complaint to add two counts of
patent infringement against both us and IBC, alleging that we willfully
infringed U.S. Patent Nos. 3,594,468 and 4,321,277. As noted above, although we
have settled our claims against IBC and have filed a dismissal of the federal
action, this may not dismiss the intervention by Optima and Mercury.
We are also a defendant in an action that was 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 state court action
alleges that we tortiously interfered with Optima and Mercury's contractual
relationship with IBC. Optima and Mercury claim that they had prior rights to
the IBC formulation and products and that we induced IBC to breach that
agreement. Optima and Mercury have requested an unspecified amount of damages
against us. In a separate action that has now been consolidated with the first
action in the same court, IBC has requested a declaratory judgment that IBC
properly terminated its development and distribution contract with Optima and
Mercury. Optima and Mercury also seek injunctive relief to prevent IBC and its
managers and directors from allowing IBC to have further dealings with us. The
state court action was informally abated while the parties pursued their
remedies in the federal action. If the federal action is dismissed, it is likely
that the state court action will resume. If we are not successful in the state
court action, or in the federal action, we could lose the right to market, sell
or manufacture our hand sanitizer product and other products currently under
development.
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EXECUTIVE COMPENSATION
The following table is a summary of the compensation paid to our Chief
Executive Officer and each executive officer that earned over $100,000 in total
salary and bonus for each of our three most recently completed fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------------------------- ----------
Securities
Under Options
Name and Other Annual Granted/SARs All Other
Principal Position Year Salary($) Bonus($) Compensation($) Granted(#) Compensation($)
------------------ ---- --------- -------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Richard C. Adamany 1999 $ 49,039 -- -- 1,500,000 --
President and Chief
Executive Officer (1)
Bennett S. Rubin 1999 $ 49,039 -- -- 1,500,000 --
Executive Vice President
and Chief Operating
Officer (1)
Stephen D. Hayter 1999 $ 183,160 -- -- 329,942 --
Former President and 1998 $ 186,923 -- -- 1,400,000 --
Chief Executive Officer (2) 1997 $ 189,539 -- -- 300,000 --
Raymond E. Dean 1999 $ 160,300 -- -- 174,905 --
Former Chief Operations 1998 $ 135,000 -- -- 700,000 --
Officer (3) 1997 $ 40,500 -- -- 300,000 --
</TABLE>
----------
(1) Mssrs. Adamany and Rubin joined Empyrean in September 1999 and therefore no
compensation information for 1998 and 1997 is provided.
(2) Mr. Hayter resigned as President and Chief Executive Officer in December
1999.
(3) Mr. Dean resigned as a Director in November 1999 and as Chief Operations
Officer in December 1999.
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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 or
Options/SARS Employees in Base Price
Name Granted # Fiscal Year ($/Share) Expiration Date
---- --------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
Richard C. Adamany 1,500,000 34.5% $ 0.45 December 8, 2009
Bennett S. Rubin 1,500,000 34.5% $ 0.45 December 8, 2009
Stephen D. Hayter 329,942 7.6% $ 0.38 February 5, 2009
</TABLE>
We have never issued stock appreciation rights.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-money
Acquired Options/SARs Options/SARs
on Value at Fiscal Year-end at Fiscal Year-end
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- -------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Richard C. Adamany -- -- 250,000/1,250,000 $22,500/$112,500
Bennett S. Rubin -- -- 250,000/1,250,000 $22,500/$112,500
Stephen D. Hayter -- -- 1,350,570/0 $56,091/$0
</TABLE>
EMPLOYMENT AGREEMENTS
Richard C. Adamany, our President and Chief Executive Officer works under
an employment agreement effective as of September 7, 1999. Mr. Adamany earned an
annualized base salary of $150,000 until December 31, 1999. His annual base
salary increased to $180,000 on January 1, 2000. Under the employment agreement,
Mr. Adamany is to become a director. The Board has nominated Mr. Adamany for
election as a director by the shareholders. Mr. Adamany is entitled to
participate in a future incentive compensation program if 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 shares for resale. If Mr. Adamany is terminated
without cause, we are obligated to provide Mr. Adamany 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. 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 the company 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 was granted
options to purchase 1.5 million shares of common stock at an exercise price
equal to the fair market value on December 8, 1999. The first option to purchase
50,000 shares of common stock vested upon execution of the employment agreement.
Options to purchase 90,000 shares each vested on the last day of each of the
second, third, fifth and sixth months following the execution of the employment
agreement. Options to purchase 20,000 and 70,000 shares vested on the last day
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of the fourth month and the first day of the fifth month respectively. 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.
Bennett S. Rubin, our Executive Vice President and Chief Operating Officer,
works under an employment agreement effective as of September 7, 1999. Mr. Rubin
earned an annualized base salary of $150,000 until December 31, 1999. His annual
base salary increased to $170,000 on January 1, 2000. Under the employment
agreement, Mr. Rubin is to become a director. The Board has nominated Mr. Rubin
for election as a director by the shareholders. Mr. Rubin is entitled to
participate in a future incentive compensation program if 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 those shares for resale. 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
and this indemnification will survive his termination. We have agreed to
continue liability insurance until five years following Mr. Rubin's termination
of employment.
In addition, under his employment agreement, Mr. Rubin was granted options
to purchase 1.5 million shares of common stock at an exercise price equivalent
to the fair market value on December 8, 1999. The first option to purchase
50,000 shares of common stock vested upon execution of the employment agreement.
Options to purchase 90,000 shares each vested on the last day of each of the
second, third, fifth and sixth months following the execution of the employment
agreement. Options to purchase 20,000 and 70,000 shares vested on the last day
of the fourth month and the first day of the fifth month respectively. 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.
Brenda K. Brown, our Vice President and Chief Financial Officer, began her
employment with Empyrean on August 1, 2000. Ms. Brown's annual base salary is
$105,000 plus an incentive compensation plan based upon the attainment of
specific individual objectives as well as company performance. Ms. Brown was
granted options to purchase 125,000 shares of common stock at an exercise price
equivalent to the fair market value on the date of issuance. A portion of the
options will vest over time while the balance of the options will vest according
to the same performance criteria as the criteria for Mssrs. Adamany and Rubin.
Ms. Brown's employment is not pursuant to an employment agreement.
Stephen D. Hayter, our former President, Chief Executive Officer, and
Chairman of the Board, worked under an employment agreement effective as of
September 1, 1999 with a base salary of $180,000 per year. Effective December
31, 1999, Mr. Hayter resigned as President and Chief Executive Officer of the
Company and executed a Confidential Settlement Agreement and Release with the
Company. Under this agreement Mr. Hayter remains a director of the Company and
is entitled to receive as severance his base salary of $180,000 per year and
benefits through December 31, 2000. The Stock Option Agreements and Stock Option
Certificates between the Company and Mr. Hayter were also amended to provide
that the expiration date for each of the vested options shall be the earlier to
occur of: (a) the date which is twelve months after Mr. Hayter ceases to be a
director of the Company or (b) the first business day prior to the ten year
anniversary of the date of grant of each option. Under the Confidential
Settlement 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. Mr. Hayter is not being renominated for election as a
director in The Reincorporation Proposal.
Raymond E. Dean, our former Chief Operations Officer, resigned in December
1999 and executed a Confidential Settlement Agreement and Release with the
Company. Under this agreement Mr. Dean was entitled to receive as severance his
base salary of $130,000 per year and benefits through February 29, 2000, which
were paid in full. The Stock Option Agreements and Stock Option Certificates
between the Company and Mr. Dean were also amended to provide that the
expiration date for each of the vested options shall be the earlier to occur of:
(a) the date which is nine months after the effective date of a "Registration
Statement" or (b) the first business day prior to the ten year anniversary of
the date of grant of each option. Under the Confidential Settlement agreement,
we have agreed to register shares issuable upon exercise of options granted to
Mr. Dean under our stock plan and have agreed to register the resale of those
shares under an effective Form S-3 Registration Statement, if available.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of August 18, 2000 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, other than International
Bioscience Corporation, is c/o Empyrean Bioscience, Inc., 23800 Commerce Park
Road, Suite A, Cleveland, Ohio 44122. The business address of International
Bioscience Corporation is 777 South Flager Drive, Phillips Point Building, East
Tower, Suite 909, West Palm Beach, Florida 33401.
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 41,325,741 common shares issued
and outstanding as of August 18, 2000, 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 August 18, 2000, 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
August 18, 2000. 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 August 18, 2000.
Portion
Total Amount Represented
Name of of Beneficial by Options Percent
Beneficial Owner Ownership and Warrants of Class
---------------- --------- ------------ --------
Lawrence D. Bain (1)(2) 7,088,836 1,129,750 16.7%
Richard C. Adamany 900,000 600,000 2.1%
Bennett S. Rubin 900,000 600,000 2.1%
Robert G.J. Burg II 153,336 100,000 *
Michael Cicak 1,123,336 0 2.7%
Dr. Andrew J. Fishleder 311,336 145,000 *
Stephen D. Hayter 1,661,543 1,450,570 3.9%
Brenda K. Brown 1,200 0 *
International Bioscience Corporation (2) 5,821,062 345,012 14.0%
Directors and executive officers as a 12,139,587 4,025,320 26.8%
group (eight persons)
----------
* less than 1%
(1) The totals for Mr. Bain include 1,501,750 shares owned beneficially by
Uptic Investment Corp., a company owned 100% by Mr. Bain.
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<PAGE>
(2) The totals for Mr. Bain include 5,000,000 shares owned of record by
International Bioscience Corporation and 226,000 shares under currently
exercisable options issued to IBC, all of which are subject to a voting
agreement wherein Mr. Bain has been granted an irrevocable proxy to vote
these shares. IBC is free to sell the shares and any shares resulting from
the exercise of options in accordance with applicable securities laws. Such
shares sold will not be subject to the voting agreement unless a certain
volume of sales is exceeded by IBC within a 90-day period. Shares obtained
under the exercise of options are also subject to the voting agreement.
Should Mr. Bain cease to be a director of Empyrean, he will be succeeded by
the then current chairman of the board of directors of Empyrean, provided,
however, that Mr. Bain grant an irrevocable proxy to vote his shares to his
successor. At the time Mr. Bain ceases to be a director of Empyrean, should
he elect not to assign his rights to his successor under an irrevocable
proxy or should his total share ownership of Empyrean shares be less than
his ownership as of August 9, 2000, the date the agreement was executed,
the voting agreement shall be null and void.
As of August 18, 2000, to our knowledge, there are no arrangements that
may, at a subsequent date, result in a change in control of Empyrean.
The directors have served in their respective capacities since their
election or appointment and will serve until their respective terms expire 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. The Board has nominated Mr.
Adamany and Mr. Rubin for election as directors by the shareholders. Other than
as described for these individuals, there are no arrangements or understandings
regarding election between any two or more directors or executive officers.
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DESCRIPTION OF OUR CAPITAL STOCK
The following is a summary description of the capital stock we intend to
issue as a Delaware corporation. For a more complete description of the rights
and other terms of our capital stock, we direct you to the discussion of
stockholder rights in sections entitled "Significant Differences between the
Corporation Laws of Wyoming and Delaware" and "Dissenters Rights" in this
proxy/prospectus. We direct you also to our Delaware Certificate of
Incorporation and Bylaws. Together, these sections and the following provide a
description of the material rights of our capital stock.
COMMON STOCK
Our authorized common stock consists of 90,000,000 shares of common stock,
par value $.0001 per share. 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. 100 shares of Empyrean Delaware common stock are currently issued and
outstanding and are owned by Empyrean Wyoming.
PREFERRED STOCK
Our authorized shares of preferred stock consists of 10,000,000 shares, par
value of $.0001 per share. Our directors are authorized by our Certificate of
Incorporation to issue preferred stock in one or more series and to create and
attach special rights and restrictions to a series of shares. No shares of
preferred stock have been issued.
ESCROW SHARES
An additional 710,000 shares of Empyrean common stock reserved for the
exercise of warrants were issued and are held in escrow under the terms of an
Escrow Agreement dated July 9, 1998 among Empyrean, Kaplan Gottbetter &
Levenson, LLP and the warrant holders. Shares of our Delaware corporation issued
in exchange for these shares will similarly be held in escrow.
WARRANTS
Set forth below is a table showing the number of warrants to purchase our
common stock that will be outstanding on the effective date of the merger, the
exercise prices payable upon an election to exercise, and the term of each of
these warrants:
Currently Exercise
Original Issuance Date Outstanding Price/Share Expiration
---------------------- ----------- ----------- ----------
July 15, 1998 (1) 795,492 $1.05595 July 9, 2001
Various (November 1,512,762 $ 0.50 2 years from Issuance
1999 - March 2000)
March 17, 1999 180,000 $ 0.75 March 17, 2001
May 5, 1999 500,000 $ 0.50 May 4, 2004
May 27, 1999 500,000 $ 0.75 May 26, 2001
----------
Total 3,488,254
==========
----------
(1) These warrants were issued to purchasers of debentures of Empyrean issued
in a private placement on the same date.
51
<PAGE>
1998 STOCK PLAN
Empyrean's shareholders approved the Empyrean Diagnostics Inc. 1998 Stock
Plan in November 1998. 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. Shareholder approval of the proposed amendment to the Plan
will increase the number of shares of our common stock available for grant from
6,000,000 shares to 8,000,000 shares. 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.
52
<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:
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 a one-time grant of
250,000 stock options exercisable for three years at $0.83 per share. The
250,000 stock options were granted on June 16, 1998 and remain outstanding. The
agreement was for a term of three years starting June 16, 1998. We terminated
this agreement effective October 15, 1999.
ANDREW POLLET
Mr. Pollet was a director between March 24, 1997 and November 20, 1998.
Pollet Law, a law firm which Mr. Pollet founded and is the principal
shareholder, provided us with legal services. We incurred legal expenses from
Pollet Law in the amount of $64,518 in 1999, $127,329 in 1998 and $93,975 in
1997.
LAWRENCE D. BAIN
Mr. Bain was appointed a director on August 6, 1999 and was appointed the
Chairman of the Board on January 1, 2000. In April 1998, we entered into an
engagement agreement with Uptic Investment 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 Uptic has purchased upon exercise
of these warrants 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 were
recorded in the amounts of $213,275 in 1998 and $301,000 in 1999, in accordance
with SFAS 123 for the fair value of the warrants.
Uptic Investment Corp., a company solely owned by Mr. Bain, made a loan of
$250,000 with an interest rate of 10% to the Company in February 1999 in
exchange for a promissory note and warrants to purchase 100,000 shares of common
stock at a price of $0.10. In September 1999, the indebtedness was reduced by
$12,500 through Uptic's exercise of warrants to purchase 250,000 shares of
common stock at a price of $0.01 and 100,000 shares of common stock at a price
of $0.10. The $237,500 loan balance was retired in December 1999 when Uptic
acquired 475,000 shares of common stock and warrants to purchase 118,750 shares
of common stock at a price of $0.50 through the Company's private placement of
securities.
Uptic Investment Corp. made a loan of $150,000 with an interest rate of 10%
to the Company in February 2000 in exchange for a promissory note and options to
purchase 75,000 shares of common stock at a price of $0.50. The Company repaid
the loan in full in March 2000.
MICHAEL CICAK
Mr. Cicak was appointed a director on May 26, 1999. In February 1999, Mr.
Cicak made a loan of $200,000 with an interest rate of 10% to the Company in
exchange for a promissory note and warrants to purchase 80,000 shares of common
stock at a price of $0.10. In September 1999, the indebtedness was fully
extinguished through Mr. Cicak's exercise of warrants to purchase 320,000 shares
of common stock at a price of $0.60 and 80,000 shares of common stock at a price
of $0.10.
53
<PAGE>
ANDREW J. FISHLEDER, MD
Dr. Fishleder was appointed a director on November 20, 1998. In February
1999, Dr. Fishleder made a loan of $50,000 with an interest rate of 10% to the
Company in exchange for a promissory note and warrants to purchase 20,000 shares
of common stock at a price of $0.10. In September 1999, the indebtedness was
reduced by $2,000 when Dr. Fishleder exercised warrants to purchase 20,000
shares of common stock at a price of $0.10. The $48,000 loan balance was retired
in February 2000 in exchange for 96,000 shares of common stock and warrants to
purchase 24,000 shares of common stock at a price of $0.50 that were issued
through the Company's private placement of securities.
RICHARD C. ADAMANY
Mr. Adamany was appointed Executive Vice President, Chief Operating Officer
and Chief Financial Officer on September 7, 1999 and was promoted to President,
Chief Executive Officer and Chief Financial Officer on January 1, 2000. He
relinquished the title of Chief Financial Officer on August 1, 2000. Mr. Adamany
is nominated for election as a director in this reincorporation proposal. Mr.
Adamany made a loan of $50,000 with an interest rate of 10% to the Company in
November 1999 in exchange for a promissory note. In December 1999, the
indebtedness was extinguished in exchange for 100,000 shares of common stock and
warrants to purchase 25,000 shares of common stock at a price of $0.50 that were
issued through the Company's private placement of securities. In February 2000,
Mr. Adamany made a loan of $50,000 with an interest rate of 10% to the Company
in exchange for a promissory note and options to purchase 25,000 shares of
common stock at a price of $0.50. In February 2000, the indebtedness was
extinguished in exchange for 100,000 shares of common stock and warrants to
purchase 25,000 shares of common stock at a price of $0.50 that were issued
through the Company's private placement of securities.
BENNETT S. RUBIN
Mr. Rubin was appointed Executive Vice President and Chief Marketing
Officer on September 7, 1999 and was promoted to Executive Vice President and
Chief Operating Officer on January 1, 2000. Mr. Rubin is nominated for election
as a director in this reincorporation proposal. Mr. Rubin made a loan of $50,000
with an interest rate of 10% to the Company in November 1999 in exchange for a
promissory note. In December 1999, the indebtedness was extinguished in exchange
for 100,000 shares of common stock and warrants to purchase 25,000 shares of
common stock at a price of $0.50 that were issued through the Company's private
placement of securities. In February 2000, Mr. Rubin made a loan of $50,000 with
an interest rate of 10% to the Company in exchange for a promissory note and
options to purchase 25,000 shares of common stock at a price of $0.50. In
February 2000, the indebtedness was extinguished in exchange for 100,000 shares
of common stock and warrants to purchase 25,000 shares of common stock at a
price of $0.50 that were issued through the Company's private placement of
securities.
INTERNATIONAL BIOSCIENCE CORPORATION
In August 2000, as part of the settlement of our litigation with IBC,
Empyrean Wyoming granted IBC an option to purchase 2,226,000 shares of Empyrean
Wyoming common stock. The options have an exercise price of $0.83 per share and
vest based upon IBC's completion of critical strategic initiatives.
INDEBTEDNESS OF MANAGEMENT AND OTHERS TO THE COMPANY
In 1997, Mr. Stephen D. Hayter, a Director and Former President and Chief
Executive Officer, 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.
SHARES BEING REOFFERED; PLAN OF DISTRIBUTION
This prospectus, as amended or supplemented, if appropriate, may be used by
the stockholders listed below to sell their shares. Resales may be made in the
manner described in this prospectus, as amended or supplemented, or under an
exemption from the Securities Act. Resales by the affiliates may be made
directly to investors or through a securities firm acting as an underwriter,
broker or dealer. When resales are to be made through a securities firm, such
securities firm may be engaged to act as the affiliates' agent in the sale of
the shares by such affiliate, or the securities firm may purchase shares from
the affiliate as principal and thereafter resell such shares from time to time.
The fees earned by or paid to such securities firm may be the normal stock
exchange commission or negotiated commissions or underwriting discounts through
other securities dealers, and customary commissions or concessions to such other
dealers may be allowed. Sales of shares may be at negotiated prices, at fixed
prices, at market prices or at prices related to market prices then prevailing.
Any such sales may be made in the over-the-counter market, by block trade, in
special or other offerings, directly to investors or through a securities firm
acting as agent or principal, or a combination of such methods. Any
participating securities firm may be indemnified against certain liabilities,
including liabilities under the Securities Act. Any participating securities
54
<PAGE>
firm may be deemed to be an underwriter within the meaning of the Securities
Act, and any commission earned by such firm may be deemed to be underwriting
discounts or commissions under the Securities Act.
In connection with resales, a prospectus supplement, if required, will be
filed pursuant to Rule 424(b) of the Securities Act, disclosing the name of the
selling stockholder, the participating securities firm, if any, the number of
shares involved and other details of such resale to the extent applicable.
<TABLE>
<CAPTION>
Amount of Amount of
Securities Shares Available Securities
Owned Prior to for Sale Under Owned After Percent
Name(1) the Offering Reoffer the Offering(6) of Class
------- ------------ --------- --------------- --------
<S> <C> <C> <C> <C>
Lawrence D. Bain 1,762,836(2) 1,762,836(2) 0 4.2%
Robert G.J. Burg II 53,336 53,336 0 *
Michael Cicak 1,123,336 1,123,336 0 2.7%
Andrew Fishleder, MD 211,336(3) 211,336(3) 0 *
Stephen D. Hayter 210,973 210,973 0 *
Bennett S. Rubin 400,000(4) 400,000(4) 0 1.0%
Richard C. Adamany 400,000(4) 400,000(4) 0 1.0%
International Bioscience 7,821,062(5) 7,821,062(5) 0 17.9%
Corporation
Brenda K. Brown 1,200 1,200 0 *
</TABLE>
----------
* less than 1%
(1) Messrs. Bain, Burg, Cicak, Fishleder and Hayter are currently members of
the Board. Mr. Hayter has not been nominated to the Board this year.
Messrs. Adamany and Rubin are the President and Chief Executive Officer and
Executive Vice President and Chief Operating Officer, respectively. Messrs.
Adamany and Rubin have been nominated to the Board. Ms. Brown is the Vice
President and Chief Financial Officer. International Bioscience Corporation
owns more than 5% of the stock of Empyrean.
(2) Includes 728,750 shares to be issued upon exercise of warrants and 75,000
shares to be issued upon exercise of options. Mr. Bain beneficially owns
808,000 shares, 618,750 shares to be issued upon exercise of warrants and
75,000 shares to be issued upon exercise of options through Uptic
Investment Corp., a company 100% owned by Mr. Bain.
(3) Includes 45,000 shares to be issued upon exercise of warrants.
(4) Includes 75,000 shares to be issued upon exercise of warrants and 25,000
shares to be issued upon exercise of options.
(5) Includes 119,012 shares to be issued upon exercise of warrants and
2,226,000 shares to be issued upon exercise of options, 2,000,000 of which
are not yet vested.
(6) Assumes the sale of all shares available for reoffer.
55
<PAGE>
PRICE OF COMMON STOCK
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 closing bid prices of
the common stock for the periods indicated. The quotations were obtained from
the website located at www.thomsoninvest.net and reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not represent actual
transactions.
High Low
---- -----
2000
Second Quarter $1.94 $0.50
First Quarter $3.56 $0.50
1999
Fourth Quarter $0.80 $0.45
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
LEGAL MATTERS
The validity of the Empyrean Delaware shares to be issued in connection
with the reincorporation proposal and selected tax matters relating to the
reincorporation proposal will be passed upon by Benesch, Friedlander, Coplan &
Aronoff LLP.
EXPERTS
Grant Thornton LLP, independent auditors, have audited our consolidated
financial statements as of December 31, 1998 and 1999, and for the years then
ended, as set forth in their report thereon, which financial statements and
report are included elsewhere in this Joint Proxy Statement/Prospectus. These
consolidated financial statements are included in reliance on their report,
given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-4 under the
Securities Act of 1933, as amended with respect to the securities offered by
this Joint Proxy Statement/Prospectus. This Joint Proxy Statement/Prospectus,
which is a part of the Registration Statement, does not contain all of the
information in the Registration Statement because parts are omitted in
accordance with the rules and regulations of the SEC. For further information
with respect to us and the offering described in this document, reference is
made to the entire Registration Statement.
The Registration Statement we have filed and any reports, proxy statements,
information statements, and other information we later file with the SEC under
the Exchange Act may be inspected and copied at the public reference facilities
of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street N.W., Washington,
D.C. 20549 and at the SEC's regional offices at Seven World Trade Center, 13th
Floor, New York, New York 10048, and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of these materials can be obtained
from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates, and can also be obtained
electronically through the SEC's Electronic Data Gathering, Analysis and
Retrieval System at the SEC's Internet web site (http://www.sec.gov).
56
<PAGE>
CONTENTS
Page
----
Report of Independent Certified Public Accountants...........................F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets.............................................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
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIOD ENDING JUNE 30, 2000
Condensed Consolidated Balance Sheets..................................F-17
Condensed Consolidated Statements of Operations........................F-18
Condensed Consolidated Statement of Stockholders' Equity (Deficit).....F-19
Condensed Consolidated Statements of Cash Flows........................F-20
Notes to Condensed Consolidated Financial Statements...................F-21
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
BOARD OF DIRECTORS AND STOCKHOLDERS
EMPYREAN BIOSCIENCE, INC.
We have audited the accompanying consolidated balance sheets of Empyrean
Bioscience, Inc., and its wholly-owned subsidiary as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the 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, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States.
The accompanying consolidated financial statements have been prepared assuming
that Empyrean Bioscience, Inc., will continue as a going concern. As shown in
the consolidated financial statements, Empyrean Bioscience, Inc., incurred a net
loss of $4,785,000 during the year ended December 31, 1999, and, as of that date
Empyrean Bioscience, Inc. has a deficit in stockholders' equity of $1,662,000.
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 consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
GRANT THORNTON LLP
San Francisco, California
February 10, 2000
F-2
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
DECEMBER 31,
--------------------
1999 1998
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 286 $ 63
Accounts receivable 7 --
Prepaid expenses and deposits 49 168
Inventory 284 16
Other 3 10
-------- --------
Total current assets 629 257
EQUIPMENT AND IMPROVEMENTS 52 57
-------- --------
Total assets $ 681 $ 314
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 2,045 $ 438
Deferred revenue 100 --
Short-term notes payable 198 --
-------- --------
Total current liabilities 2,343 438
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, authorized 100,000,000 shares, without
par value; issued and outstanding (1999: 31,522,109;
1998: 26,399,824) 21,494 18,247
Accumulated deficit (23,156) (18,371)
-------- --------
Total stockholders' deficit (1,662) (124)
-------- --------
Total liabilities and stockholders' deficit $ 681 $ 314
======== ========
See accompanying notes to financial statements
F-3
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
----------------------
1999 1998
-------- --------
Net revenues $ 662 $ 10
Cost of sales 109 3
-------- --------
Gross profit 553 7
Selling, general and administrative 4,814 2,913
Research and development 15 31
Restructuring charge 345 --
Write-down of inventory -- 29
-------- --------
5,174 2,973
-------- --------
Loss from operations (4,621) (2,966)
Interest expense (174) --
Loss on disposal of fixed assets -- (210)
Other, net 10 29
-------- --------
Other income -(expense) (164) (181)
-------- --------
Net loss $ (4,785) $ (3,147)
======== ========
Basic and diluted loss per share $ (0.17) $ (0.14)
======== ========
Weighted average number of shares outstanding 28,108 22,884
======== ========
See accompanying notes to financial statements
F-4
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balances, January 1, 1998 21,227 $ 15,431 $(15,224) $ 207
Common stock issued for cash 2,680 1,078 -- 1,078
Stock options and warrants exercised for cash 1,799 725 -- 725
Common stock issued for debt 197 124 -- 124
Common stock issued for expenses 171 114 -- 114
Common stock issued for license rights 325 223 -- 223
Fair value of option and warrant grants -- 552 -- 552
Net loss -- -- (3,147) (3,147)
-------- -------- -------- --------
Balances, December 31, 1998 26,399 18,247 (18,371) (124)
Common stock issued for cash 2,460 1,230 -- 1,230
Stock options and warrants exercised for cash 1,125 577 -- 577
Common stock issued for license rights 100 70 -- 70
Common stock issued for debt 1,485 556 -- 556
Cancellation of escrow shares (47) -- -- --
Fair value of option and warrant grants -- 814 -- 814
Net loss -- -- (4,785) (4,785)
-------- -------- -------- --------
Balances, December 31, 1999 31,522 $ 21,494 $(23,156) $ (1,662)
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------
1999 1998
------- -------
Cash flows from operating activities:
Net loss $(4,785) $(3,147)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation 15 79
Options and warrants issued for services 814 553
Loss on write-downs and allowances 71 213
Issuance of common stock for expenses
and license rights 70 337
Changes in operating assets and liabilities:
Accounts receivable (7) --
Prepaid expenses and deposits 119 (153)
Inventory (339) --
Other receivables 7 19
Accounts payable and accrued liabilities 1,607 298
Deferred revenue 100 --
------- -------
Net cash used by operating activities (2,328) (1,801)
------- -------
Cash flows from investing activities:
Payments on note receivable -- 51
Proceeds from sales of fixed assets -- 3
Purchase of fixed assets (10) (41)
------- -------
Net cash provided (used) by investing activities (10) 13
------- -------
Cash flows from financing activities:
Issuance of common stock 1,807 1,803
Proceeds of short-term notes payable 900 --
Payment of short-term notes payable (146) --
------- -------
Net cash provided by financing activities 2,561 1,803
------- -------
Net increase in cash and cash equivalents 223 15
Cash and cash equivalents at beginning of period 63 48
------- -------
Cash and cash equivalents at end of period $ 286 $ 63
======= =======
Noncash financing and investing activities:
Conversion of debt to common stock $ 556 $ 124
See accompanying notes to financial statements
F-6
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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. Through its wholly-owned subsidiary, the Company distributes
and markets products designed to prevent diseases. The Company is
identifying strategic corporate partners to both fund and distribute the
Preventx(R) line of products, which was licensed to the Company and
developed by International Bioscience Corporation ("IBC").
The Company's summary of significant accounting policies applied in the
preparation of these financial statements follows:
REVENUE RECOGNITION
The Company recognizes revenues upon shipment or when no significant
obligations remain and collectability of the amount is probable.
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 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 their 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:
Office equipment and furniture - 20% declining balance Leasehold
improvements - lesser of 5 years or the term of the lease
ADVERTISING
The Company recognizes advertising expenses as they are incurred.
F-7
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. A total of 9,039 and 6,985 options, warrants and
contingent share issuances for 1999 and 1998, respectively, have been
excluded from the calculation of loss per share as their inclusion would be
anti-dilutive.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation to employees and members
of the board of directors using the intrinsic value method in accordance
with the APB No. 25, "Accounting for Stock Issued to Employees."
Stock-based compensation to consultants and others are accounted for using
the fair value method of SFAS No. 123 "Stock-based Compensation."
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
instruments. These instruments consist of cash, cash equivalents, accounts
receivable, accounts payable and short-term notes payable. The balance
sheet carrying amounts of these instruments approximate the estimated fair
values based on the short-term nature of such instruments.
SEGMENT REPORTING
The Company's business is currently conducted in a single operating
segment. In the future, we expect to operate in several segments based on
the type of customer such as commercial, institutional and retail. The
Company's chief operating decision maker is the Chief Executive Officer who
reviews a single set of financial data that encompasses our entire
operation for the purpose of making operating decisions and assessing
performance.
F-8
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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.
As a result, 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 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.
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 pursue a working capital
line of credit to be secured by our accounts receivable and inventory. We
may also raise funds through the issuance of either debt or equity
instruments. However, such funds may not be available on favorable terms or
at all. Given the company's history of successfully attracting investors to
fund operations, management believes that seeking additional equity and
debt financing is a viable plan. Additionally, our relationship with
Wal-Mart Stores, Inc. should provide a more stable foundation on which to
promote and obtain future funding.
NOTE 3 - EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are comprised of the following as of December
31:
1999 1998
------- -------
Office equipment and furniture $ 117 $ 107
Leasehold improvements 10 10
------- -------
127 117
Accumulated depreciation (75) (60)
------- -------
$ 52 $ 57
======= =======
NOTE 4 - DISTRIBUTION AGREEMENT
In May 1999, the Company executed a distribution agreement with Durstrand
International Limited ("Durstrand") granting Durstrand the exclusive right
to distribute the Company's licensed products in certain Southeast Asian
markets. Durstrand paid a non-refundable fee of $600 for these rights of
which $100 was deferred pending shipment of product to Durstrand. The
Company recognized $500 of the fee paid as revenue in quarter ended June
30, 1999, as the Company had performed all of its obligations under the
agreement. Durstrand is obligated to make an additional $600 payment once
approval for additional products is received from the US Food and Drug
Administration. No royalties are payable to IBC as a result of this
agreement.
F-9
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 4 - DISTRIBUTION AGREEMENT (CONTINUED)
In connection with the distribution agreement, the Company paid $330 in the
quarter ended June 30, 1999, for consulting services provided on behalf of
the Company and recorded the amount paid as a prepaid expense. After
considering the terms of the agreement and the nature of the consulting
services received, the Company determined the $330 should have been
recognized as an expense in the quarter ended June 30, 1999, as the fee
paid would not benefit future periods. Had the fee been expensed in the
quarter ended June 30, 1999, the previously reported interim financial
information for the quarter ended June 30, 1999, would be restated as
follows:
PREVIOUSLY AS
REPORTED RESTATED
(UNAUDITED) (UNAUDITED)
-------- --------
Net revenues $ 534 $ 534
Selling, general and adminstrative expense 1,121 1,451
Net loss 671 1,001
Loss per share $ (0.02) $ (0.04)
NOTE 5 - SHORT-TERM NOTES PAYABLE
In February 1999, the Company entered into promissory note agreements in
the aggregate amount of $800, of which $500 was with current directors. 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 per share. The
fair value of the warrants was estimated on the date of grant using the
Black-Scholes option pricing model to be $117 and was recorded as interest
expense over the term of the promissory notes. Promissory notes in the
amount of $218 were settled by offsetting the amounts payable against the
proceeds receivable from the exercise of 810,000 previously issued
warrants. An additional $238 was settled by issuance of 475,000 shares of
the Company's common stock and $146 was settled by cash payments. As of
December 31, 1999, promissory notes in the amount of $198 are currently due
and payable.
In November 1999, the Company entered into promissory note agreements with
two officers of the Company in the aggregate amount of $100. The promissory
notes were due and payable one month from the loan date and have a fixed
interest rate of 10%, payable at the end of the loan period. As of December
31, 1999, the $100 loan balance was converted into 200,000 shares of common
stock.
NOTE 6 - STOCKHOLDERS' EQUITY
The Company's authorized preferred stock consists of 100,000,000 shares of
Class "A" with a par value of $10 per share and 100,000,000 shares of Class
"B" with a par value of $50 per share. No preferred stock has been issued.
F-10
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
The Company's Stock Plan 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 ten years after the grant date. The stock options are
exercisable during involvement with the Company and after involvement has
ceased, if the Board of Directors so approve. The exercise price of the
options is not less than the fair 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 option
grants 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:
1999 1998
------- -------
Net loss
As reported $(4,785) $(3,147)
Pro forma (5,947) (3,932)
Basic and diluted loss per share
As reported $(0.17) $(0.14)
Pro forma (0.21) (0.17)
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 94% in 1999 and 96% in 1998.
A summary of the status of the Company's stock options as of December 31,
1999 and 1998, and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 4,970,000 $ 0.81 2,391,000 $ 0.64
Granted 4,449,000 0.46 2,925,000 0.91
Exercised (375,000) 0.40 (133,000) 0.47
Expired (2,411,000) 0.84 (213,000) 0.55
----------- -----------
Outstanding at end of year 6,633,000 0.70 4,970,000 0.81
=========== ===========
Weighted-average fair value of options
granted during the year $ 0.66 $ 0.56
</TABLE>
F-11
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information concerning options outstanding
at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ---------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
------------ --------- ------------ ------- --------- -------
$0.38 - 0.45 3,898,000 9.0 $ 0.43 1,383,000 $ 0.41
0.55 - 0.69 1,150,000 2.4 0.59 1,150,000 0.59
0.80 - 0.95 1,585,000 1.1 0.85 1,585,000 0.85
--------- ---------
6,633,000 0.70 4,118,000 0.66
========= =========
The Company generally has issued one warrant for the purchase of one share
of common stock with each share of common stock that it has issued for
cash, except for shares issued upon exercise of options or warrants. The
following table summarizes the warrant activity for the years then ended
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
WARRANTS PRICE WARRANTS PRICE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 2,015,000 $ 0.57 2,637,000 $ 0.46
Issued 3,030,000 0.48 1,045,000 0.57
Exercised (1,488,000) 0.40 (1,667,000) 0.40
Expired (1,152,000) 0.75 -- --
----------- -----------
Outstanding at end of year 2,405,000 $ 0.48 2,015,000 $ 0.57
=========== ===========
</TABLE>
NOTE 7 - INCOME TAXES
Deferred tax assets consist of the following at December 31,:
1999 1998
--------- ---------
Net operating loss and tax credit carryforwards $ 8,069 $ 5,615
Other 12 17
Intangible asset - tax basis 647 1,094
--------- ---------
8,728 6,726
Less valuation allowance (8,728) (6,726)
--------- ---------
$ -- $ --
========= =========
The increase in the valuation allowance was $2,002 in 1999 and $1,325 in
1998.
F-12
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 7 - INCOME TAXES (CONTINUED)
Cumulative net operating losses of approximately $20,960 in 1999 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 reported taxes:
1999 1998
------- -------
Loss before income taxes $ 4,785 $ 3,147
======= =======
Tax benefit at statutory federal income tax rate (34%) 1,627 1,070
State tax, net of federal benefit 375 255
Change in valuation allowance (2,002) (1,325)
------- -------
$ - $ -
======= =======
NOTE 8 - LEASES
The Company conducts its business primarily in leased facilities. On March
26, 1998, the Company entered into a commercial lease for 4,343 square feet
in Phoenix, Arizona. This lease was terminated with no future obligations
on January 31, 2000. On February 1, 2000, the Company entered into a two
year commercial lease for 2,000 square feet at its current facility in
Cleveland, Ohio.
The Company is a co-signer on leased office space in Vancouver, B.C.,
occupied by a former director. All payments associated with this lease are
paid directly to the landlord by the director.
The schedule of minimum future rental payments and future sublease income
follows:
FUTURE
MINIMUM FUTURE
YEAR ENDING RENTAL SUBLEASE
DECEMBER 31, PAYMENTS INCOME
------------ -------- --------
2000 $ 58 $ 26
2001 22 --
2002 2 --
------- -------
$ 82 $ 26
======= =======
Total rent expense, net of sublease income received, was $58 and $42 for
the years ended December 31, 1998 and 1999, respectively.
NOTE 9 - LICENSES AND ROYALTIES
The Company entered into an agreement on April 29, 1997, and subsequently
amended in February 1998 with IBC, formerly known as Geda International
Marketing Co. Ltd., whereby the Company obtained the marketing and
distribution rights for a 10-year period to a microbiocide formulation
developed by IBC in certain geographic areas. The formulation stops the
transmission of communicable diseases through bodily contact.
F-13
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 9 - LICENSES AND ROYALTIES (CONTINUED)
The Company is required to pay royalties equal to the greater of 2% of net
sales or $1.35 per liter manufactured of the IBC products or minimum
guaranteed royalties, as follows.
FUTURE
MINIMUM
YEAR ENDING GUARANTEED
DECEMBER 31, PAYMENTS
------------ --------
2000 $ 735
2001 915
2002 1,215
2003 1,458
2004 1,758
Thereafter 7,576
--------
$ 13,657
========
We are a defendant in an action which was 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 IBC. Optima and Mercury claim that they had prior rights to the IBC
formulation and that we induced IBC to breach that agreement. Optima and
Mercury have requested an unspecified amount of damages against us.
Plaintiffs also seek injunctive relief to prevent IBC and its managers and
directors from allowing IBC to have further dealings with us. In a separate
action that has now been consolidated with the first action in the same
court, IBC has requested a declaratory judgment that IBC properly
terminated its development and distribution contract with Optima and
Mercury. If we are not successful in this action, we could lose the right
to market, sell or manufacture products containing the formulation. The
discovery in these actions is proceeding. Although IBC 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 license distribution and manufacturing rights
from third parties related to the IBC products. In consideration for these
rights, the Company paid $50 in cash and issued 325,000 shares of common
stock valued at $223. The Company is required to pay a royalty equal to 5%
of the net revenues of certain products that contain the lotion.
In 1999, the Company purchased the distribution rights from a third party
to sell the IBC products in Canada. In consideration for these rights, the
Company issued 100,000 shares of common stock valued at $70 and is required
to pay a royalty equal to 5% of its net sales in Canada for certain
products that contain the IBC formulation.
F-14
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 9 - LICENSES AND ROYALTIES (CONTINUED)
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 Canada, of our hand sanitizer and first aid antiseptic,
sanitizing wet wipes, disinfectant surface spray and sanitizing baby wipes.
The licenses expire on December 31, 2002. We can renew the licenses until
December 31, 2005 if we meet the renewal terms under the agreement. As
consideration, the Company paid to Coleman and Sunbeam prepaid royalties in
the amount of $15. For the period of October 1, 1999 through December 31,
2000, the Company is required to pay royalties ranging from 5%-6% of net
sales of licensed products sold and for the period of January 1, 2001
through December 31, 2002 the Company is required to pay 7% of net sales.
The Company is required to pay guaranteed minimum amounts comprised of
royalties, as follows.
FUTURE
MINIMUM
YEAR ENDING GUARANTEED
DECEMBER 31, PAYMENTS
------------ --------
2000 $ 45
2001 110
2002 220
------
$ 375
======
NOTE 10 - RELATED PARTY TRANSACTIONS
On June 16, 1998, the Company entered into a three year agreement with a
company controlled by former director to provide strategic planning and
business development services for a monthly fee of $6 and a one-time grant
of 250,000 immediately exercisable stock options at $0.83 per share
expiring three years from the date of the grant. The Company incurred total
expenses on this contract of $162 in 1998 of which $36 was payable in cash
and the balance of $126 represents the fair value of the stock options
granted. Additionally, $64 was payable in cash under this contract in 1999.
The contract was cancelled by the Company effective in October 1999.
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 per share, 250,000 warrants were fully
exercisable in January 1999 at an exercise price of $0.01 per share and the
remaining 500,000 were exercisable in May 1999 at an exercise price of
$0.50 per share. Consulting expenses, representing the fair value of the
stock warrants issued in accordance with SFAS 123, of $213 and $301 were
recorded in 1998 and 1999, respectively.
The company incurred legal expenses of $127 in 1998 and $64 in 1999 with a
law firm founded by a former director. Accrued and outstanding expenses to
this firm were $64 at December 31, 1999.
F-15
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 11 - REVENUES
Net revenues are comprised of the following for the year ending December
31:
1999 1998
------- -------
Distribution rights $ 550 $ --
Product sales 112 10
------- -------
Net revenues $ 662 $ 10
======= =======
NOTE 12 - RESTRUCTURING CHARGES
The Company recorded a restructuring charge of $345 in 1999 consisting of
involuntary termination benefits of $263 and other related reorganization
costs of $82. This charge resulted from a business reorganization approved
by the Board of Directors in December 1999 that included a facility
closure, relocation of the corporate headquarters into a more cost
effective location, severance costs for two Arizona based personnel and the
write down of abandoned fixed assets to estimated fair value less cost to
sell. As of December 31, 1999, both employees had been terminated and
severance payments and benefits are payable to December 31, 2000. At
December 31, 1999, no other reorganization costs had been paid. All
reorganization costs including severance payments are expected to be paid
prior to December 31, 2000.
F-16
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
June 30, December
2000 1999
-------- --------
(unaudited) (audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 1,015 $ 286
Accounts receivable .................................. 25 7
Prepaid expenses and deposits ........................ 50 49
Inventory ............................................ 207 284
Other ................................................ -- 3
-------- --------
Total current assets ............................... 1,297 629
EQUIPMENT AND IMPROVEMENTS ............................. 40 52
-------- --------
Total assets ....................................... $ 1,337 $ 681
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ............. $ 1,846 $ 2,045
Deferred revenue ..................................... 100 100
Short-term note payable .............................. -- 198
-------- --------
Total current liabilities .......................... 1,946 2,343
COMMITMENTS AND CONTINGENCIES .......................... -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, authorized 100,000,000 shares,
without par value; issued and outstanding
(2000: 36,325,741; 1999: 31,522,109) ............... 24,011 21,494
Accumulated deficit .................................. (24,620) (23,156)
-------- --------
Total stockholders' equity (deficit) ............... (609) (1,662)
-------- --------
Total liabilities and stockholders' equity (deficit) $ 1,337 $ 681
======== ========
See accompanying notes to financial statements
F-17
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
-------------------- --------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues ................................ $ 106 $ 534 $ 458 $ 587
Cost of sales ............................... 61 5 252 22
-------- -------- -------- --------
Gross profit .......................... 45 529 206 565
Selling, general and administrative ......... 906 1,456 1,662 2,563
-------- -------- -------- --------
Loss from operations .................. (861) (927) (1,456) (1,998)
Other, net .................................. -- 3 (25) (1)
Interest expense ............................ -- (79) (6) (112)
Interest income ............................. 16 2 23 2
-------- -------- -------- --------
Other income (expense) ...................... 16 (74) (8) (111)
-------- -------- -------- --------
Net loss .................................... $ (845) $ (1,001) $ (1,464) $ (2,109)
======== ======== ======== ========
Basic and diluted loss per share ............ $ (0.02) $ (0.04) $ (0.04) $ (0.08)
======== ======== ======== ========
Weighted average number of shares outstanding 36,305 27,679 34,849 26,838
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements
F-18
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
------------------- Accumulated
Shares Amount Deficit Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balances, January 1, 2000 ................... 31,522 $ 21,494 $(23,156) $ (1,662)
Common stock issued for cash ................ 2,904 1,452 -- 1,452
Stock options and warrants exercised for cash 740 405 -- 405
Common stock issued for royalties ........... 476 238 -- 238
Common stock issued for debt and services ... 683 345 -- 345
Fair value of options and warrant grants .... -- 77 -- 77
Net loss .................................... -- -- (1,464) (1,464)
-------- -------- -------- --------
Balances, June 30, 2000 ..................... 36,325 $ 24,011 $(24,620) $ (609)
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements
F-19
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six months ended
--------------------
June 30, June 30,
2000 1999
------- -------
Cash flows from operating activities:
Net cash used by operating activities .............. $(1,220) $(1,325)
Cash flows from investing activities:
Proceeds from sales of fixed assets ................ 5 --
Purchase of capital assets ......................... (13) (9)
------- -------
Net cash used by investing activities ........... (8) (9)
Cash flows from financing activities:
Issuance of common stock ........................... 1,857 661
Proceeds of short-term notes payable ............... 250 800
Payments of short-term note payable ................ (150) --
------- -------
Net cash provided by financing activities ....... 1,957 1,461
------- -------
Net increase in cash and cash equivalents ....... 729 127
Cash and cash equivalents at beginning of period ..... 286 63
------- -------
Cash and cash equivalents at end of period ........... $ 1,015 $ 190
======= =======
See accompanying notes to financial statements
F-20
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The financial information included herein for the six months ended June 30,
2000 and 1999, and the financial information as of June 30, 2000, 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, 1999. 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 - GOING CONCERN
We incurred net losses in 1998 and 1999 and expect to incur net losses at
least through 2000. We expect operations to generate negative cash flow
through at least 2000 and we currently have no credit line available to us.
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 pursue a working capital
line of credit to be secured by our accounts receivable and inventory. 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. These factors raise doubts about our ability to continue as a going
concern and our audit report contained in our 1999 annual report on Form
10-KSB filed with the U.S. Securities and Exchange Commission on March 30,
2000 contains an explanatory paragraph with respect to this matter.
NOTE 3 - SHORT-TERM NOTES PAYABLE
In February 2000, the Company entered into promissory note agreements in
the aggregate amount of $250 with various officers and directors. The
promissory notes were due and payable six months from the loan date and had
a fixed interest rate of 10%, payable monthly. On February 23, 2000,
promissory notes in the amount of $298, including $198 due and payable as
of December 31, 1999, were converted into 596,000 shares of common stock.
The remaining promissory note in the amount of $150 was paid in full in
March 2000. The Company has no promissory notes due and payable as of June
30, 2000.
NOTE 4 - LEGAL PROCEEDINGS
We are a defendant in an action which was 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 International Bioscience Corporation ("IBC"). Optima and Mercury claim
that they had prior rights to the IBC formulation and products and that we
induced IBC to breach that agreement. Optima and Mercury have requested an
unspecified amount of damages against us. In a separate action that has now
been consolidated with the first action in the same court, IBC has
requested a declaratory judgment that IBC properly terminated its
development and distribution contract with Optima and Mercury. Plaintiffs
F-21
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 4 - LEGAL PROCEEDINGS (CONTINUED)
also seek injunctive relief to prevent IBC and its managers and directors
from allowing IBC 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. This would materially and adversely affect the
Company. The discovery in this action is proceeding.
On April 10, 2000, we filed suit in U.S. District Court for the Southern
District of Florida against IBC alleging breach and default on its
exclusive license agreement with us and seeking a declaration that the
exclusive license agreement is in full force and effect as well as
compensatory damages. Additionally, we asked the Court to issue an
injunction which would, if granted, require IBC to maintain the status quo
while the discovery process and litigation proceeds. Following our request
for preliminary injunction, IBC purported to terminate the exclusive
license agreement. Through our license agreement, we have the exclusive
right to manufacture, sell and distribute products based on a formula
developed by IBC. We believe IBC has disregarded key provisions in our
exclusive license agreement.
On May 2, 2000, the U.S. District Court denied our request for preliminary
injunction. The Court's decision does not affect the merits of the case nor
our claim for money damages against IBC, but defers them to a full trial.
Our claim for the full rights accorded to us under the exclusive license
agreement, which is the center of our dispute with IBC, will not impact our
current operations. The Court observed in its Order, and IBC acknowledged
in its pleadings filed with the Court, that our rights to sell the hand
sanitizer in the United States and Canada arise from different and separate
agreements with IBC, and such rights are not affected by this lawsuit.
If an unfavorable decision were to be rendered against use at the full
trial, our business could be materially and adversely affected. While no
assurance can be given on the ultimate outcome, we believe we will be
successful should a full trial occur. The trial has been scheduled for June
2001.
NOTE 5 - NET REVENUES
Net revenues are comprised of the following:
Three months ended Six months ended
---------------- ----------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------ ------ ------ ------
Distribution rights .............. $ -- $ 517 $ -- $ 517
Product sales .................... 106 17 458 70
------ ------ ------ ------
Net revenues ................... 106 534 458 587
====== ====== ====== ======
NOTE 6 - STOCKHOLDERS' EQUITY
The Company has granted options to employees, directors and others as well
as warrants to debt holders and investors. For option grants to
non-employees, the Company recognizes consulting or interest expense equal
to the fair value of the grant. At June 30, 2000, 7,973,000 options and
warrants were exercisable at a weighted average price of $0.64 per share.
F-22
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the status of stock options and warrants as of June 30, 2000,
and changes during the six months ended on that date is presented below.
<TABLE>
<CAPTION>
Options Warrants
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Outstanding at January 1, 2000 6,633,000 $ .70 2,405,000 $ .67
Granted 650,000 .55 1,538,000 .50
Exercised (285,000) .54 (455,000) .55
Expired (185,000) .81 -- --
---------- ------ ---------- ------
Outstanding at June 30, 2000 6,813,000 $ .69 3,488,000 $ .64
========== ====== ========== ======
</TABLE>
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 - RESTRUCTURING CHARGE
The Company recorded a restructuring charge of $345 in 1999 consisting of
involuntary termination benefits of $263 and other related reorganization
costs of $82. This charge resulted from a business reorganization approved
by the Board of Directors in December 1999 that included a facility
closure, relocation of the corporate headquarters into a more cost
effective location, severance costs for two Arizona based personnel and the
write down of abandoned fixed assets to estimated fair value less cost to
sell. As of December 31, 1999, both employees had been terminated and
severance payments and benefits are payable to December 31, 2000. As of
June 30, 2000, $140 in reorganization costs have been paid and applied
against the restructuring accrual. The remaining reorganization costs
consist of severance payments and are expected to be paid prior to December
31, 2000.
F-23
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger, is made as of September __, 2000, by and
among Empyrean Bioscience, Inc., a Wyoming corporation ("EBW") and Empyrean
Bioscience, Inc., a Delaware corporation ("EBD").
W I T N E S S E T H:
WHEREAS, EBW is a corporation duly organized and existing under the laws of
the State of Wyoming;
WHEREAS, EBD is a corporation duly organized and existing under the laws of
the State of Delaware;
WHEREAS, the authorized capital stock of EBW is: (i) 100,000,000 shares of
common stock, without par value (the "EBW Common Stock") of which 41,325,741
shares are issued and outstanding; and (ii)100,000,000 shares of Class A
Preferred Stock, $10.00 par value and 100,000,000 share of Class B Preferred
Stock, $50.00 par value (collectively, the "EBW Preferred Stock"), of which no
shares are issued and outstanding;
WHEREAS, the authorized capital stock of EBD is: (i) 90,000,000 shares of
common stock, par value $.0001 per share ("EBD Common Stock"), of which 100
shares are issued and outstanding, and (ii) 10,000,000 shares of Preferred Stock
("EBD Preferred Stock"), par value $.0001 per share, of which no shares are
issued and outstanding;
WHEREAS, the Boards of Directors of EBW and EBD deem it advisable and in
the best interests of their respective corporations and shareholders that EBW be
merged with and into EBD, with EBD being the surviving corporation (the
"Reincorporation Proposal");
WHEREAS, the Boards of Directors of EBW and EBD have approved this
Agreement by resolutions duly adopted by their respective Boards of Directors in
accordance with the laws of their respective jurisdictions of incorporation; and
WHEREAS, EBW and EBD desire to effect the Reincorporation Proposal as a
plan of reorganization in accordance with the provisions of Section 368(a)(1)(F)
of the Internal Revenue Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, and in accordance with applicable law, the parties hereto agree as
follows:
ARTICLE I
REINCORPORATION PROPOSAL
1.01 SURVIVING CORPORATION.
(a) The effective time of the Reincorporation Proposal (the "Effective
Time") shall occur at the latest of: (i) time and date that shareholders of EBW
approve this Agreement and the Reincorporation Proposal; (ii) the time and date
that a certificate of merger is duly filed with the Secretary of State of
Delaware with respect to the Reincorporation Proposal or such later date and
time as is set forth therein; and (iii) the time and date that articles of
merger are duly filed with the Secretary of State of Wyoming with respect to the
Reincorporation Proposal or such later date and time as is set forth therein.
(b) At the Effective Time, EBW shall be merged with and into EBD, with EBD
being the surviving corporation of the Reincorporation Proposal. At the
Effective Time, the separate corporate existence of EBW shall cease and EBD
shall possess all the rights, privileges, powers, and franchises of a public and
private nature and be subject to all the restrictions, disabilities, and duties
of each of EBW and EBD (collectively, the "Constituent Corporations"); and all
and singular, the rights, privileges, powers and franchises of each of the
Constituent Corporations, and all property, real, personal, or mixed, and all
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<PAGE>
debts due to each of the Constituent Corporations on whatever account, as well
for stock subscriptions as all other things in action belonging to each of the
Constituent Corporations, shall be vested in EBD; and all property, rights, and
privileges, powers, and franchises, and all and every other interest shall be
thereafter as effectually the property of EBD as they were of the respective
Constituent Corporations, and the title to any real estate vested by deed or
otherwise, in either of such Constituent Corporations shall not revert or be in
any way impaired by reason of the Merger; but all rights of creditors and all
liens upon any property of EBW shall be preserved unimpaired. To the extent
permitted by law, any claim existing or action or proceeding pending by or
against either of the Constituent Corporations may be prosecuted as if the
Merger had not taken place. All debts, liabilities, and duties of the respective
Constituent Corporations shall thenceforth attach to EBD and may be enforced
against it to the same extent as if such debts, liabilities, and duties had been
incurred or contracted by it. All corporate acts, plans, policies, agreements,
arrangements, approvals, and authorizations of EBW, its shareholders, Board of
Directors and committees thereof, officers and agents which were valid and
effective immediately prior to the Effective Time, shall be taken for all
purposes as the acts, plans, policies, agreements, arrangements, approvals, and
authorizations of EBD and shall be effective and binding thereon as the same
were with respect to EBW. The employees and agents of EBW shall become the
employees and agents of EBD and continue to be entitled to the same rights and
benefits which they enjoyed as employees and agents of EBW. The requirements of
any plans or agreements of EBW involving the issuance or purchase by EBW of
certain shares of its capital stock shall be satisfied by the issuance or
purchase of a like number of shares of EBD.
1.02 CERTIFICATE OF INCORPORATION AND BYLAWS.
(a) From and after the Effective Time, the Certificate of Incorporation of
EBD, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of EBD, until duly amended, in accordance with the
laws of the State of Delaware.
(b) From and after the Effective Time, the Bylaws of EBD, as in effect
immediately prior to the Effective Time, shall be the Bylaws of EBD, until duly
amended, in accordance with the laws of the State of Delaware.
1.03 DIRECTORS AND OFFICERS
(a) The directors of EBD shall, from and after the Effective Time and until
their respective successors have been duly elected or appointed and qualified,
or with the earlier of the death, resignation or removal in accordance with the
Certificate of Incorporation and Bylaws of EBD, shall be the following:
Director Term
-------- ----
Robert G.J. Burg II 1 year
Michael Cicak 1 year
Dr. Andrew J. Fishleder 2 years
Lawrence D. Bain 2 years
Richard C. Adamany 3 years
Bennett S. Rubin 3 years
(b) The officers of EBD shall, from and after the Effective Time and until
their respective successors are duly elected or appointed and qualified, or
until their earlier death, resignation or removal in accordance with the Bylaws
of EBD, shall be the following:
Name Office
---- ------
Richard C. Adamany President
Bennett S. Rubin Executive Vice President
Brenda K. Brown Vice President
Richard C. Adamany Treasurer
Bennett S. Rubin Secretary
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<PAGE>
1.04 TERMS OF MERGER.
(a) At the Effective Time, the shares of capital stock of EBW shall be
converted into shares of capital stock of EBD as follows:
(i) each share of EBW Common Stock issued and outstanding immediately
prior to the Effective Time shall, automatically and without further act of
EBW, EBD, or any holder thereof, be extinguished and converted into one (1)
issued and outstanding and fully paid and nonassessable share of EBD Common
Stock subject to the same terms, conditions, and restrictions, if any, as
existed immediately prior to the Effective Time; and
(ii) each share of EBW Common Stock held in the treasury immediately
prior to the Effective Time, if any, shall, automatically and without
further act of EBW, EBD, or any holder thereof, be extinguished and
converted into one (1) fully paid and nonassessable share of EBD Common
Stock to be held in the treasury of EBD subject to the same terms,
conditions, and restrictions, if any, as existed immediately prior to the
Effective Time.
(b) Each person who, as a result of the Reincorporation Proposal, holds one
or more certificates representing one or more shares of EBW Common Stock may
surrender any such certificate to EBD, and, upon such surrender, EBD shall,
within a reasonable time, deliver to such person, in substitution and exchange
therefor, one or more certificates evidencing the number of shares of EBD Common
Stock that such person is entitled to receive in accordance with the terms of
this Agreement, in substitution for the number of shares of EBW Common Stock
represented by each certificate so surrendered; provided, however, that no such
holder shall be required to surrender any such certificate until such
certificate otherwise would be surrendered for transfer on the books of the
issuing corporation in the ordinary course of business.
(c) At the Effective Time, all of the shares of capital stock of EBD issued
or outstanding immediately prior to the Effective Time shall, automatically and
without further act of EBW, EBD, or any holder thereof, be canceled and cease to
exist, without any consideration being payable therefor.
(d) At the Effective Time, each option to purchase a share of EBW Common
Stock outstanding immediately prior to the Effective Time, if any, shall
automatically and without further act of EBW, EBD, or any holder thereof, become
an option to purchase one (1) share of EBD Common Stock, subject to the same
terms and conditions.
ARTICLE II
MISCELLANEOUS
2.01 CONSENT TO SERVICE OF PROCESS. EBD hereby consents and agrees,
effective as of the Effective Time, to be sued and served with process in the
State of Wyoming in any proceeding for the enforcement of the rights, if any, of
a dissenting shareholder of EBW against EBD. EBD hereby irrevocably appoints the
Wyoming Secretary of State as its agent to accept service of process in any such
proceeding from and after the Effective Time. EBD hereby agrees that it will
promptly pay to the dissenting shareholders of EBW the amount, if any, to which
they shall be entitled under the Business Corporation Act of the State of
Wyoming with respect to dissenting shareholders.
2.02 ACCOUNTING MATTERS. Except as herein provided with respect to the
cancellation of the outstanding shares of EBW, EBD agrees that, upon the
Effective Time, the assets, liabilities, reserves, and accounts of EBW and EBD
shall be taken up or continued on the books of EBD in the amounts at which such
assets, liabilities, reserves, and accounts shall have been carried on the books
of EBW and EBD immediately prior to the Effective Time, subject to such
adjustments, and such elimination of intercompany items, as may be appropriate
to give effect to the Reincorporation Proposal.
2.03 EXPENSES OF REINCORPORATION PROPOSAL. From and after the Effective
Time, EBD shall pay all unpaid expenses of carrying this Agreement into effect
and accomplishing the Reincorporation Proposal.
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<PAGE>
2.04 FURTHER ASSURANCES. If, at any time from and after the Effective Time,
EBD shall consider or be advised that any further assignment or assurance in law
is necessary or desirable to vest in EBD the title to any property or rights of
EBW, the proper officers of EBD are hereby authorized, in the name of EBW or
otherwise, to execute and make all such proper assignments and assurances in
law, and to do all other things necessary or proper to vest such property or
rights in EBD and otherwise to carry out the purposes of this Agreement.
2.05 APPROVAL. This Agreement shall be submitted for approval by the
holders of EBW Common Stock at an annual or special meeting of shareholders, and
this Agreement constitutes the approval thereof by written consent of EBW in its
capacity as sole shareholder of EBD.
2.06 TERMINATION AND ABANDONMENT. At any time prior to the Effective Time
and for any reason, this Agreement may be terminated and abandoned by the Board
of Directors of EBW, notwithstanding approval of this Agreement by the
shareholders of EBW and EBD. Upon any such termination, this Agreement shall
become null and void and have no effect, without any liability to any person on
the part of EBW or EBD or their shareholders, directors, or officers.
2.07 AMENDMENT. At any time prior to the Effective Time and for any reason,
this Agreement may be amended, notwithstanding approval of this Agreement by the
shareholders of EBW or EBD, by an agreement in writing executed in the same
manner as this Agreement; provided, however, that after approval of this
Agreement by the shareholders of EBW, this Agreement may not be amended, without
such further approval as is required by law, to the extent that such amendment
would: (i) alter or change the amount or kind of shares to be received by the
shareholders of EBD or EBW in the Reincorporation Proposal; (ii) alter or change
any term of the Certificate of Incorporation of EBD; or (iii) effect any
alteration or change that would adversely affect the shareholders of EBW or EBD.
EMPYREAN BIOSCIENCE, INC.
a Wyoming corporation
By:
------------------------------------
Name:
Title:
EMPYREAN BIOSCIENCE, INC.
a Delaware corporation
By:
------------------------------------
Name:
Title:
A-4
<PAGE>
ANNEX B
ARTICLE 13
DISSENTERS' RIGHTS
17-16-1301. DEFINITIONS.
(a) As used in this article:
(i) "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the record
shareholder;
(ii) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving, new, or acquiring
corporation by merger, consolidation, or share exchange of that issuer;
(iii) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under W.S. 17-16-1302 and who exercises that right when
and in the manner required by W.S. 17-16-1320 through 17-16-1328;
(iv) "Fair value," with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion would
be inequitable;
(v) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans, or, if none, at a rate that is
fair and equitable under all the circumstances;
(vi) "Record shareholder" means the person in whose names shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on file
with a corporation;
(vii) "Shareholder" means the record shareholder or the beneficial
shareholder.
17-16-1302. RIGHT TO DISSENT.
(a) A shareholder is entitled to dissent from, and to obtain payment of the
fair value of his or her shares in the event of, any of the following corporate
actions:
(i) Consummation of a plan of merger or consolidation to which the
corporation is a party if:
(A) Shareholder approval is required for the merger or the
consolidation by W.S. 17-16-1103 or 17-16-1111 or the Articles of
Incorporation and the shareholder is entitled to vote on the merger or
consolidation; or
(B) The corporation is a subsidiary that is merged with its
parent under W.S. 17-16-1104.
(ii) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
(iii) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale or
exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which all
or substantially all of the net proceeds of the sale will be distributed to
the shareholders within one (1) year after the date of sale;
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(iv) An amendment of the Articles of Incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preferential right of the shares;
(B) Creates, alters or abolishes a right in respect of
redemption, including a provision respecting a sinking fund for the
redemption or repurchase, of the shares;
(C) Alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities;
(D) Excludes or limits the right of the shares to vote on any
matter, or to cumulate votes, other than a limitation by dilution
through issuance of shares or other securities with similar voting
rights; or
(E) Reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be
acquired for cash under W.S. 17-16-604.
(v) Any corporate action taken pursuant to a shareholder vote to the
extent the Articles of Incorporation, Bylaws, or a resolution of the Board
of Directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his or her
shares under this article may not challenge the corporate action creating his or
her entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
17-16-1303. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(a) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his or her name only if he or she dissents with respect
to all shares beneficially owned by any one (1) person and notifies the
corporation in writing of the name and address of each person on whose behalf he
or she asserts dissenters' rights. The rights of a partial dissenter under this
subsection are determined as if the shares as to which he or she dissents and
his or her other shares were registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares
held on his or her behalf only if:
(i) He or she submits to the corporation the record shareholder's
written consent to the dissent not later than the time the beneficial
shareholder asserts dissenters' rights; and
(ii) He does so with respect to all shares of which he or she is the
beneficial shareholder or over which he or she has power to direct the
vote.
17-16-1320. NOTICE OF DISSENTERS' RIGHTS.
(a) If proposed corporate action creating dissenters' rights under W.S.
17-16-1302 is submitted to a vote at a shareholders' meeting, the meeting notice
shall state that shareholders are or may be entitled to assert dissenters'
rights under this article and be accompanied by a copy of this article.
(b) If corporate action creating dissenters' rights under W.S. 17-16-1302
is taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in W.S. 17-16-1322.
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17-16-1321. NOTICE OF INTENT TO DEMAND PAYMENT.
(a) If proposed corporate action creating dissenters' rights under W.S.
17-16-1302 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights shall deliver to the corporation before the
vote is taken written notice of his or her intent to demand payment for his or
her shares if the proposed action is effectuated and shall not vote his or her
shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection (a)
of this section is not entitled to payment for his or her shares under this
article.
17-16-1322. DISSENTERS' NOTICE.
(a) If proposed corporate action creating dissenters' rights under W.S.
17-16-1302 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of W.S. 17-16-1321.
(b) The dissenters' notice shall be sent no later than ten (10) days after
the corporate action was taken, and shall:
(i) State where the payment demand shall be sent and where and when
certificates for certificated shares shall be deposited;
(ii) Inform holders of uncertificated shares to what extent transfer
of the shares will be restricted after the payment demand is received;
(iii) Supply a form for demanding payment that includes the date of
the first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not he or she acquired beneficial
ownership of the shares before that date;
(iv) Set a date by which the corporation shall receive the payment
demand, which date may not be fewer than thirty (30) nor more than sixty
(60) days after the date the notice required by subsection (a) of this
section is delivered; and
(v) Be accompanied by a copy of this article.
17-16-1323. DUTY TO DEMAND PAYMENT.
(a) A shareholder sent a dissenters' notice described in W.S. 17-16-1322
shall demand payment, certify whether he or she acquired beneficial ownership of
the shares before the date required to be set forth in the dissenters' notice
pursuant to W.S. 17-16-1322(b)(iii), and deposit his or her certificates in
accordance with the terms of the notice.
(b) The shareholder who demands payment and deposits his or her share
certificates under subsection (a) of this section retains all other rights of a
shareholder until these rights are canceled or modified by the taking of the
proposed corporate action.
(c) A shareholder who does not demand payment or deposit his or her share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his or her shares under this article.
17-16-1324. SHARE RESTRICTIONS.
(a) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under W.S. 17-16-1326.
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(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
17-16-1325. PAYMENT.
(a) Except as provided in W.S. 17-16-1327, as soon as the proposed
corporate action is taken, or upon receipt of a payment demand, the corporation
shall pay each dissenter who complied with W.S. 17-16-1323 the amount the
corporation estimates to be the fair value of his or her shares, plus accrued
interest.
(b) The payment shall be accompanied by:
(i) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen (16) months before the date of payment, an
income statement for that year, a statement of changes in shareholders'
equity for that year, and the latest available interim financial
statements, if any;
(ii) A statement of the corporation's estimate of the fair value of
the shares;
(iii) An explanation of how the interest was calculated;
(iv) A statement of the dissenter's right to demand payment under W.S.
17-16-1328; and
(v) A copy of this article.
17-16-1326. FAILURE TO TAKE ACTION.
(a) If the corporation does not take the proposed action within sixty (60)
days after the date set for demanding payment and depositing share certificates,
the corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it shall send a new
dissenters' notice under W.S. 17-16-1322 and repeat the payment demand
procedure.
17-16-1327. AFTER-ACQUIRED SHARES.
(a) A corporation may elect to withhold payment required by W.S. 17-16-1325
from a dissenter unless he or she was the beneficial owner of the shares before
the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of his or her demand. The corporation shall send with its offer a statement of
its estimate of the fair value of the shares, an explanation of how the interest
was calculated, and a statement of the dissenter's right to demand payment under
W.S. 17-16-1328.
17-16-1328. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.
(a) A dissenter may notify the corporation in writing of his or her own
estimate of the fair value of his or her shares and amount of interest due, and
demand payment of his or her estimate, less any payment under W.S. 17-16-1325,
or reject the corporation's offer under W.S. 17-16-1327 and demand payment of
the fair value of his or her shares and interest due, if:
(i) The dissenter believes that the amount paid under W.S. 17-16-1325
or offered under W.S. 17-16-1327 is less than the fair value of his or her
shares or that the interest due is incorrectly calculated;
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(ii) The corporation fails to make payment under W.S. 17-16-1325
within sixty (60) days after the date set for demanding payment; or
(iii) The corporation, having failed to take the proposed action, does
not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty (60) days after the date set
for demanding payment.
(b) A dissenter waives his or her right to demand payment under this
section unless he or she notifies the corporation of his or her demand in
writing under subsection (a) of this section within thirty (30) days after the
corporation made or offered payment for his or her shares.
17-16-1330. COURT ACTION.
(a) If a demand for payment under W.S. 17-16-1328 remains unsettled, the
corporation shall commence a proceeding within sixty (60) days after receiving
the payment demand and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the proceeding
within the sixty (60) day period, it shall pay each dissenter whose demand
remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in the district court of
the county where a corporation's principal office, or if none in this state, its
registered office, is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign corporation was
located.
(c) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties shall be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) of this section is plenary and exclusive. The court may
appoint one (1) or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers described
in the order appointing them, or in the amendment to it. The dissenters are
entitled to the same discovery rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to judgment
for:
(i) The amount, if any, by which the court finds the fair value of his
or her shares, plus interest, exceeds the amount paid by the corporation;
or
(ii) The fair value, plus accrued interest, of his or her
after-acquired shares for which the corporation elected to withhold payment
under W.S. 17-16-1327.
17-16-1331. COURT COSTS AND COUNSEL FEES.
(a) The court in an appraisal proceeding commenced under W.S. 17-16-1330
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under W.S. 17-16-1328.
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(i) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of W.S. 17-16-1320 through 17-16-1328; or
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(ii) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by this article.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 145 of the Delaware General Corporation Law
(the "Delaware GCL"), as amended from time to time ("Section 145"), which
provides for indemnification of directors and officers of a corporation in
certain circumstances. In accordance with Section 145 of the Delaware General
Corporation Law, our Certificate of Incorporation provides that no director of
Empyrean shall be personally liable to Empyrean or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (1) for
any breach of the director's duty of loyalty to Empyrean or its stockholders,
(2) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (3) in respect of certain unlawful
dividend payments or stock redemptions or repurchases, or (4) for any
transaction from which the director derived an improper personal benefit. In
addition, our Certificate of Incorporation provides that if the Delaware General
Corporation Law is amended to authorize the further elimination or limitation of
the liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Additionally, Article 8 of our Delaware By-Laws provides, among other
matters, that the right to indemnification is a contract right, that we are
expressly authorized to procure insurance, that advancement of expenses by
Empyrean is mandatory (except as limited by law) and for procedural mechanisms
for the benefit of indemnified parties.
Article 8 of our Delaware By-Laws provides for indemnification of directors
and officers of Empyrean. The provisions of Article 8, among other matters,
require us to indemnify certain persons to the fullest extent authorized by the
Delaware GCL, as the same may now exist or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
registrant to provide broader indemnification rights than such law permitted the
registrant to provide prior to such amendment). Article 8 provides that the
right to indemnification is a contract right and makes advances of expenses
incurred in defending a proceeding mandatory, provided that if required by the
Delaware GCL, the person seeking such advances furnishes an undertaking to us to
repay all amounts so advanced if it shall be determined by a final adjudication
that the person who received such expenses is not entitled to be indemnified.
Article 8 also expressly provides that any person claiming indemnification may
sue the registrant for payment of amounts due, that Empyrean in such case will
have the burden of proving that the claimant has not met the standards of
conduct which make it permissible to indemnify the person for the amount claimed
under the Delaware GCL (except in the case of a claim for advancement of
expenses, where the required undertaking, if any, has been tendered, in which
case it shall not be a defense that the person has not met the applicable
standards of conduct) and that neither the failure by Empyrean to have made a
determination that indemnification is proper, nor an actual determination by
Empyrean that the claimant has not met the applicable standard of conduct, is a
defense to the action or creates a presumption that the claimant has not met the
applicable standards of conduct.
Empyrean currently maintains directors' and officers' liability insurance
to supplement the protection provided in our Delaware Certificate of
Incorporation, as amended, our Delaware By-Laws, and to fund payments that the
we may be required to make under any such provisions. Such insurance is
renewable annually and is subject to standard terms and conditions, including
exclusions from coverage.
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
2.1 Form of Agreement and Plan of Merger, dated as of September __, 2000,
between Empyrean Bioscience, Inc. (Wyoming) and Empyrean Bioscience
Inc. (Delaware) (Included as Annex A to the proxy statement/prospectus
forming a part of this Registration Statement and incorporated herein
by reference.)
3.1(a) Form of Certificate of Incorporation of Empyrean Delaware.
3.1(b) Articles of Incorporation and Bylaws of Empyrean Wyoming.(1)
3.2 Form of Bylaws of Empyrean Delaware.
4.1 Convertible Debenture and Warrant Purchase Agreement by and among
Empyrean and purchasers thereof and related Warrant.(1)
4.4 Form of "Series K" Warrant Certificate Dated March 17, 1999 between
Empyrean and the Purchasers thereof.(1)
4.5 Form of "Series L" Warrant Certificate between Empyrean and the
Purchasers thereof.(1)
4.6 Form of "Series M" Warrant Certificate between Empyrean and the
Purchasers thereof.
4.7 Certificate of Empyrean Delaware Common Stock.(1)
4.8 Warrant Agreement with Uptic Investment Corp. dated May 5, 1999.
5 Opinion of Benesch, Friedlander, Coplan & Aronoff LLP as to the
legality of the Empyrean Delaware common stock being registered
hereby.
8 Opinion of Benesch, Friedlander, Coplan & Aronoff LLP as to tax
matters.
10.1 License Agreement dated as of February 21, 1998 between Empyrean and
Geda International Marketing Co., Ltd.(1)
10.2 Sub-license Agreement dated as of July 20, 1998 between Empyrean and
Prevent-X, Inc.(1)
10.3 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. (1)
10.4 1998 Stock Option Plan and Form of Stock Option Agreement.(1)
10.5 Employment Agreement for Stephen D. Hayter dated September 1, 1999.(1)
10.6 Confidential Settlement Agreement and Release for Stephen D. Hayter
dated December 31, 1999. (1)
10.7 Employment Agreement for Richard C. Adamany dated September 7,
1999.(1)
10.8 Employment Agreement for Bennett S. Rubin dated September 7, 1999.(1)
10.9 Distribution Agreement between Empyrean and Durstrand International
dated April 28, 1998. (1)
10.10 License Agreement between the Coleman Company, Inc. and Empyrean dated
October 1, 1999. (1)
10.11 License Agreement between the Sunbeam Corporation and Empyrean dated
October 1, 1999. (1)
10.12 Settlement Agreement between Empyrean and IBC dated August 9, 2000
(incorporated by reference to the Company's current report filed on
Form 8-K filed August 10, 2000)
10.13 Joint Venture Agreement between Empyrean and IBC dated August 9,
2000(incorporated by reference to the Company's current report filed
on Form 8-K filed August 10, 2000)
10.14 IBC-Empyrean, L.L.C. Operating Agreement dated August 9, 2000
(incorporated by reference to the Company's current report filed on
Form 8-K filed August 10, 2000)
10.15 Put Agreement between IBC and Empyrean dated August 9, 2000
(incorporated by reference to the Company's current report filed on
Form 8-K filed August 10, 2000)
10.16 Nonqualified Stock Option Agreement between Empyrean and IBC dated
August 9, 2000 (incorporated by reference to the Company's current
report filed on Form 8-K filed August 10, 2000)
10.17 Voting Agreement between Lawrence D. Bain and IBC dated August 9, 2000
(incorporated by reference to the Company's current report filed on
Form 8-K filed August 10, 2000)
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10.18 License Agreement from IBC to Empyrean dated August 9, 2000
(incorporated by reference to the Company's current report filed on
Form 8-K filed August 10, 2000)
10.19 Trademark License from IBC to Empyrean dated August 9, 2000
(incorporated by reference to the Company's current report filed on
Form 8-K filed August 10, 2000)
10.20 Trademark License from Empyrean to IBC-Empyrean LLC dated August 9,
2000 (incorporated by reference to the Company's current report filed
on Form 8-K filed August 10, 2000)
10.21 Trademark License from Empyrean to IBC dated August 9, 2000
(incorporated by reference to the Company's current report filed on
Form 8-K filed August 10, 2000)
21.1 Subsidiaries of Empyrean (1)
23.1 Consent of Grant Thornton LLP
23.2 Consent of Benesch, Friedlander, Coplan & Aronoff LLP (included as
part of its opinion filed as Exhibit 5 and Exhibit 8 and incorporated
herein by reference.)
27.1 Financial Data Schedule (incorporated by reference to the Company's
Quarterly Report on Form 10-QSB filed August 9, 2000).
99.1 Form of Proxy. (1)
----------
(1) Previously filed.
ITEM 22. UNDERTAKINGS.
(1) The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed pursuant
to paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
(3) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11, or 13 of this form, within one business day of
receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(4) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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(5) The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(1) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(2) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement;
(3) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(6) Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 20 above, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
If a claim of indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in a successful defense of
any action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Cleveland, State of Ohio
on August 31, 2000.
EMPYREAN BIOSCIENCE, INC.
----------------------------------------
Registrant
By /s/ Richard C. Adamany President and Chief Date: August 31, 2000
---------------------------- Executive Officer
Richard C. Adamany
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed bth following persons in the capacities
and on the dates indicated.
By /s/ Lawrence D. Bain Chairman of the Board Date: August 31, 2000
----------------------------
Lawrence D. Bain
By /s/ Richard C. Adamany President and Chief Date: August 31, 2000
---------------------------- Executive Officer
Richard C. Adamany
By /s/ Bennett S. Rubin Executive Vice Date: August 31, 2000
---------------------------- President and Chief
Bennett S. Rubin Operating Officer
By /s/ Robert G.J. Burg II Director Date: August 31, 2000
----------------------------
Robert G.J. Burg II
By /s/ Andrew J. Fishleder Director Date: August 31, 2000
----------------------------
Andrew J. Fishleder, MD
By /s/ Michael Cicak Director Date: August 31, 2000
----------------------------
Michael Cicak
By /s/ Stephen D. Hayter Director Date: August 31, 2000
----------------------------
Stephen D. Hayter
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