As Filed With the Securities and Exchange Commission on January 17, 2001
File No. 333-84147
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 6 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 Incorporation) (Primary Standard Industrial (I.R.S. Employer
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
January __, 2001 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.
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.
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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.
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 50,140,740 (1) $20,367,168(2) $5,091.79(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) 3,369,500 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) Based on the price of the Common Stock of $0.4062 per share on January 16,
2001, as quoted on the Over-the-Counter Bulletin Board. This amount has
been previously paid.
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____________, 2001
Dear Stockholder:
We will hold an annual meeting of stockholders on ____________, 2001, 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;
(b) To elect six (6) directors;
(c) To approve an amendment to our 1998 Stock Plan to reserve an
additional number of shares for issuance under the 1998 Stock Plan;
and
(d) 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 __________, 2001.
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 _____________, 2001.
YOUR VOTE IS IMPORTANT.
By Order of the Board of Directors:
Bennett S. Rubin Secretary
Cleveland, Ohio
_______________, 2001
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 January 17, 2001
EMPYREAN BIOSCIENCE, INC.
50,140,740 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. . The shares that are the subject of this Joint Proxy
Statement/Prospectus are shares of our Delaware company that will be issued to
our stockholders in the merger. Of these 50,140,740 shares, 14,188,824 shares
are being offered for resale by the "selling shareholders."
We are electing six directors of our Wyoming company. These directors
will serve as the six directors of our Delaware company as approved.
Directors will be elected by a plurality of the votes of the shares
present in person or represented by proxy at the annual meeting and entitled to
vote on the election of directors.
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: ______________, 2001
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,
for each of the director nominees identified in this document, and for the
amendment to our 1998 Stock Plan. 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.
_______________, 2001
<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 in lotion and
towelette forms. 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 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 stockholders' 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
We are electing six directors of the Wyoming company. The Board has
recommended Richard C. Adamany, Lawrence D. Bain, Robert C. J. Burg, Michael
Cicak, Andrew J. Fishleder, and Bennett S. Rubin for election as directors. Each
would serve at least until the 2002 Annual Meeting and until his successor has
been elected and qualified.
If the reincorporation proposal is approved, our Delaware company will
have a classified, or "staggered" board of directors. Our Delaware Board will
consist of two "Class I" directors for a one-year term, two "Class II" directors
for two-year terms, and two "Class III" directors for three-year terms. Our
directors will be classified as indicated in the table below, each to serve
until the Annual Meeting stated in the table and until his successor has been
elected and qualified.
THROUGH ANNUAL
NOMINEE CLASS MEETING IN:
------- ----- -----------
Robert C. J. Burg II I 2002
Michael Cicak I 2002
Andrew J. Fishleder, M.D. II 2003
Lawrence D. Bain II 2003
Richard C. Adamany III 2004
Bennett S. Rubin III 2004
<PAGE>
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. A vote of a
plurality of the shares present in person or represented by proxy will approve
the six directors named 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 January 16,
2001, 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.
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
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended Nine Months
December 31 Ended September 30
-------------------- --------------------
1998 1999 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
SELECTED CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Product sales 10 112 100 496
Distribution rights revenue -- 550 550 --
------- ------- ------- -------
Net revenues 10 662 650 496
Cost of sales 3 109 34 267
Gross profit 7 553 616 229
Litigation settlement expense -- -- -- 5,434
Selling, general and administrative expense 2,944 4,829 3,263 2,223
Write-down of inventory 29 -- -- --
Restructuring charge -- 345 -- --
Loss from operations (2,966) (4,621) (2,647) (7,428)
Other expense, net (181) (164) (155) 11
Net loss (3,147) (4,785) (2,802) (7,417)
Net loss per share (0.14) (0.17) (0.10) (0.20)
Weighted average shares outstanding 22,884 28,108 27,519 36,305
At December 31, 1999 At September 30, 2000
-------------------- ---------------------
SELECTED CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents 286 233
Working capital (1,714) (1,648)
Total assets 681 550
Long-term obligations -- --
Stockholders' equity (deficit) (1,662) (1,607)
</TABLE>
3
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS TOGETHER WITH ALL OF THE
OTHER INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE YOU 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. Stockholders
can currently change the composition of our entire Board at one annual meeting.
If we adopt a "staggered" Board, stockholders will be able to change the
composition of the entire Board at three successive annual meetings.
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.
4
<PAGE>
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. In April 1999, the FDA took an adverse position regarding the
marketing of a lotion, made and sold by the Andrew Jergens Co., that contained
an active ingredient similar to the one in our hand sanitizer and first-aid
antiseptic. If the FDA decides similarly regarding our hand sanitizer and
first-aid antiseptic, we would be required to modify the labeling and marketing
of our product using only the claims allowed for first-aid antiseptic products.
As a result, sales of our hand sanitizer and first-aid antiseptic, our primary
product, could suffer and we could go out of business.
FDA hand sanitizer regulations require that hand sanitizers be marketed
for hand use only. We believe that our marketing claims comply with this FDA
requirement. Our product is labeled as a hand sanitizer and first-aid antiseptic
and its hand sanitizer 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 and first-aid antiseptic also claims that it helps
prevent bacterial contamination or skin infection on minor cuts, scrapes and
burns. We are unaware that the Jergens product made the same or similar claims.
We understand that the Jergens product has been discontinued. Our label claims
that our hand sanitizer and first-aid antiseptic is long lasting. That claim is
not provided for under either the hand sanitizer monograph or the first-aid
antiseptic monograph. However, based on studies conducted by IBC, we believe we
could independently substantiate this claim to the FDA if required. We do not
make prophylactic claims with respect to our hand sanitizer and first-aid
antiseptic.
If the FDA prohibited the use of benzalkonium chloride in our hand
sanitizer and first-aid antiseptic, we would be forced to market this product
using only the claims allowed for first-aid antiseptic products. 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 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.
5
<PAGE>
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.
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 first-aid antiseptic 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 and first-aid antiseptic or any
other products under development. If that were to occur, IBC has agreed to
assign us certain 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 in 2000 and at least through 2001. 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 $7,417,000 for the nine months ended September 30, 2000. We may never
make a profit. These losses are due in part to expenses associated with sales
and marketing, overhead, market development and in 2000, the settlement of our
litigation with IBC. As a result, our accumulated deficit has increased from
$12,629,000 at December 31, 1996 to $30,573,000 at September 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.
6
<PAGE>
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.
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 manufacturers' sales representatives
and on marketing and distribution companies to market and distribute our
products. Accordingly, sales of our products depend largely on the strength and
financial condition of others, the expertise and relationships of our
manufacturers' sales representatives, marketers and distributors with customers,
and the interest of these parties in selling and marketing our products. Our
manufacturers' sales 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 manufacturers' sales representatives and
distributors, we may not generate sufficient revenues and profits. If our
relationships with our third party manufacturers' sales 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.
Canadian Custom Packaging ("CCP"), the sole third party manufacturer for
the IBC formulation that is used in our current product , purchases raw
materials used in the manufacture of our product from various suppliers. Since
we do not have a written agreement, CCP could terminate our arrangement at any
time. CCP and our suppliers may not be able to supply our product in a timely or
cost-effective manner or in accordance with specifications. We maintain an
inventory of these finished products and carry contingent business interruption
insurance on CCP's facility. A lengthy 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
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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.
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 government
regulation. To sell some or all of our drug products within the United States,
we must comply with FDA guidelines or, through IBC, 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. IBC 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 the right under our license agreement from
IBC to independently seek FDA approval of any of the IBC 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 and/or IBC fail 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 ,
suppliers and CCP, our third party manufacturer, 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
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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 2000 were
derived from our hand sanitizer and first-aid antiseptic product. Towelettes
were introduced in the fourth quarter of 2000. The GEDA Plus(R) microbicidal
contraceptive gel will not be available for sales, marketing and distribution in
the United States until an IND (Investigative New Drug) number is obtained from
the FDA by IBC and Phase III studies acceptable to the FDA are completed. These
studies must successfully demonstrate that the gel is safe and effective both as
a contraceptive and as a preventative of sexually transmitted diseases. 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 lotion and towelette products and the
disinfectant surface cleaner introduced in December 2000. 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 NO RESEARCH AND DEVELOPMENT RIGHTS UNDER OUR LICENSE AGREEMENT WITH IBC
AND OUR SUCCESS DEPENDS IN PART ON IBC'S RESEARCH AND DEVELOPMENT EFFORTS. IBC'S
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 expended only
limited amounts on research and development of infectious disease preventative
products in 1999 and 2000. Additionally, effective with the settlement of the
lawsuit with IBC in August 2000, responsibility for research and development of
products based on the IBC formulation rests exclusively with IBC. Since our only
products on the market to date are our hand sanitizer and first-aid antiseptic
lotion and towelette products, our success depends heavily on the ability of IBC
to develop additional products using the IBC formulation. Unless IBC is able to
obtain and devote sufficient resources to research and development efforts, we
may only have limited product offerings based on the IBC formulation 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 THROUGH OUR JOINT VENTURE WITH IBC 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 through
our joint venture with IBC. 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
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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.
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 January 16, 2001, we have 43,282,986 shares of common stock
issued and outstanding, and we have outstanding warrants and options to purchase
13,062,293 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, during 2000, the closing bid price of our common stock quoted on the
Over-The-Counter Bulletin Board ranged from a low of $0.24 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 ___________, 2001 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 ____________, 2001.
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;
(b) To elect six (6) directors;
(c) To approve an amendment to our 1998 Stock Plan to increase the
number of shares reserved for issuance under the 1998 Stock Plan;
and
(d) 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. The Board unanimously recommends that
stockholders vote FOR the election of its six recommended candidates for the
board of 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 ____________, 2001 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 ____________ 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. Directors
will be elected by a plurality of the votes of the shares present in person or
represented by proxy at the annual meeting and entitled to vote on the election
of directors. Approval of the amendment to our 1998 Stock Plan requires a vote
of a majority of the outstanding shares of our common stock.
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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
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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I. 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
As a Wyoming-incorporated company, we are governed by the corporate law
of Wyoming. While Wyoming corporate law has not presented us with any difficult
or adverse legal issues, we feel that Delaware corporate law is better suited to
our company because of its greater familiarity to prospective investors and
because of the other reasons discussed below.
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. Although we have not had any
difficulties to date in recruiting and retaining directors, 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.
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ANTI TAKEOVER IMPLICATIONS
Our company is not currently the subject of any hostile takeover
attempts. We cannot predict if or when our company will be subject to hostile
takeover attempts. Delaware law, more so than Wyoming law, positions us to take
protective measures to deter hostile takeover attempts if any should occur. 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 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.
A change of control could be discouraged by adopting a "classified" or
"staggered" board. A hostile takeover attempt could be less attractive if those
making the attempt would need three successive annual meetings to change the
composition of the entire Board instead of one.
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.
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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.
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.
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.
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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 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.
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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
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.
SIGNIFICANT DIFFERENCES BETWEEN EMPYREAN DELAWARE AND EMPYREAN WYOMING
CERTIFICATE OF INCORPORATION AND BYLAWS
The differences in the Certificate of Incorporation and Bylaws of
Empyrean Delaware make a hostile takeover of Empyrean Delaware more difficult.
STOCKHOLDER POWER TO CALL SPECIAL STOCKHOLDER 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 stockholders 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.
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ACTION BY WRITTEN CONSENT OF STOCKHOLDERS.
Under Wyoming law, the stockholders may execute a stockholder action by
written consent in lieu of a meeting of stockholders 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 stockholders, 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 stockholders may not take action by written consent.
All action by stockholders must be taken at a meeting. Accordingly,
this provision will prevent a majority stockholder from approving any proposal
quickly without the knowledge of other stockholders.
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.
The existence of authorized and unissued preferred shares might be
considered as having the effect of discouraging an attempt by another person or
entity, through the acquisition of a substantial number of shares of common
stock, to acquire control of Empyrean with a view to effecting a merger, sale of
assets or similar transaction, since the issuance of preferred shares could be
used to dilute the share ownership and voting rights of such person or entity.
Further, the preferred shares could be privately placed with purchasers who
might support incumbent management, making a change in control of Empyrean and
removal of incumbent management more difficult.
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. A "staggered" board may inhibit a third
party from making an acquisition proposal if the third party would need three
successive annual meetings to change the composition of the entire Board instead
of one. 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 stock 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 stock, 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
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.
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The Delaware Certificate of Incorporation and the new Delaware Bylaws
provide that, after giving preference to any rights of holders of preferred
stock, 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.
POSSIBLE ADVERSE CONSEQUENCES OF CERTAIN PROVISIONS OF EMPYREAN DELAWARE
CERTIFICATE OF INCORPORATION AND BYLAWS
The overall effect of many of these provisions may be to render more
difficult the removal of incumbent directors and officers of Empyrean. The
imposition of advance notice and substantive nominee information requirements
may be disadvantageous to stockholders because it may be more difficult to
remove or replace directors, even if such removal or replacement would be
beneficial to stockholders generally. The notice procedure may limit to some
degree the ability of stockholders to initiate discussion at a stockholders
meeting. It will also preclude the conducting of business at a particular
meeting if the proper notice procedures have not been followed.
Empyrean is not proposing these changes in response to any effort to
obtain control of Empyrean. Empyrean is not aware of any existing or planned
effort to obtain control or to otherwise change management. Nevertheless, the
Board believes that it is in the long-term interest of the stockholders to
anticipate future contingencies and that it is preferable to act now, when such
actions can be taken after deliberative thought. Other than the provision
discussed above, the Board does not contemplate adopting or recommending any
further amendments to the Certificate of Incorporation and Bylaws or other
documents which would affect persons attempting to acquire control of Empyrean.
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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:
* 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
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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 requires the affirmative vote
of the holders of a majority of the outstanding shares of Empyrean Wyoming
common stock.
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:
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* 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.
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.
II. ELECTION OF DIRECTORS
Pursuant to our new Delaware company's Certificate of Incorporation,
the board of directors is divided into three classes with each director serving
a three-year term (after the initial term). The directors of Class I hold office
until the scheduled annual meeting of stockholders in 2002, the directors of
Class II hold office until the scheduled annual meeting of stockholders in 2003,
The directors of Class III hold office until the scheduled annual meeting of
stockholders in 2004. Stockholders will elect the directors of each Class for
three-year terms at the appropriate annual meetings of stockholders.
Unless otherwise directed, all proxies (unless revoked or suspended)
will be voted for the election of six nominees for directors set forth below.
If, for any reason, any nominee is unable to accept such nomination or to serve
as director, an event not currently anticipated, the person named as proxies
reserve the right to exercise their discretionary authority to substitute such
other person or persons, as the case may be, as a substitute nominee, or the
Board has the authority to reduce the number of management nominees to such
extent as they shall deem advisable. We are not aware of any reason why any
nominee should become unavailable for election, or if elected, should be unable
to serve as a director. Set forth below is certain information with respect to
the nominees.
The following information is derived from information supplied by the
director nominees and is presented with respect to the nominees for election as
Class I to serve for an initial term of one year and until the election and
qualification of their respective successors, Class II directors to serve for a
term of two years, and until the election and qualification of their respective
successors and the nominees for election as Class III directors to serve for a
term of three years, and until the election and qualification of their
respective successors.
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NOMINEES FOR DIRECTOR WHOSE TERM EXPIRES IN 2002 (CLASS I)
AGE (AS OF HAS BEEN A DIRECTOR OF
NAME OF NOMINEE JANUARY 16, 2001) EMPYREAN WYOMING SINCE
--------------- ----------------- ----------------------
Robert C. J. Burg, II 43 1998
Michael Cicak 63 1999
NOMINEES FOR DIRECTOR WHOSE TERM EXPIRES IN 2003 (CLASS II)
AGE (AS OF HAS BEEN A DIRECTOR OF
NAME OF NOMINEE JANUARY 16, 2001) EMPYREAN WYOMING SINCE
--------------- ----------------- ----------------------
Lawrence C. Bain 50 1999
Andrew J. Fishleder, M.D. 47 1998
NOMINEES FOR DIRECTOR WHOSE TERM EXPIRES IN 2004 (CLASS III)
AGE (AS OF HAS BEEN A DIRECTOR OF
NAME OF NOMINEE JANUARY 16, 2001) EMPYREAN WYOMING SINCE
--------------- ----------------- ----------------------
Richard C. Adamany 48 --
Bennett S. Rubin 43 --
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, 48, 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, 43, 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.
From 1998 to 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 1995 and 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 and director of McMaster Motor Inc., a newly formed
private company and was the President of Solar Cells, Inc., a private holding
company from 1996 to 2000 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 in 2000. The
Audit Committee met three times in 2000. 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.
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MEETING ATTENDANCE.
The Board of Directors had seven meetings in 2000. All of the directors
attended the February 9, 2000, June 27, 2000, August 3, 2000, September 26, and
November 10, 2000 meetings. Mr. Burg was unable to attend the April 5, 2000
meeting. Mr. Cicak was unable to attend the April 9, 2000 meeting.
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.
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 1,720,461 shares remained available for grant as of January 16, 2001.
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,"
"PLAN," "HOPE," 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 acquired certain rights to use a microbicide formulation
from International Bioscience Corporation. We market, sell and distribute
innovative personal care products based on this and other third party or
purchased formulations that are intended to prevent the spread of infectious
disease. To date, we have introduced two products. The first is marketed as both
the Preventx(R) hand sanitizer and first-aid antiseptic and the Coleman(R) hand
sanitizer and first-aid antiseptic with Advanced Preventx(R), and is sold in
both lotion and towelette forms. Sales of the towelettes began in the fourth
quarter of 2000. In December 2000, we announced the introduction of the
Coleman(R) Antibacterial Surface Disinfectant Cleaner, which can remove most of
the organisms present on surfaces that can cause infectious disease. The
Antibacterial Surface Disinfectant Cleaner is not based on the IBC formulation,
but is a formulation sub-registered from a third party that is registered with
the EPA. The introduction of this product allows us to offer our customers a
more complete line of infectious disease prevention products. 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. We perform the market
research to determine, amongst other things, the product claims that we would
like to make while IBC develops the formulation to meet these claims, performs
the required testing and insures compliance with the appropriate government
regulations. Additional preventative products that we anticipate marketing
utilizing formulations similar to the one used in our hand sanitizer and
first-aid antiseptic include a disinfectant surface spray, baby wipes, and the
GEDA Plus(R) microbicidal contraceptive gel. Our disinfectant surface spray that
is based on the IBC formulation must obtain regulatory approval from the FDA to
enable us to market the product for use on food surfaces, which we estimate will
take at least 12 months. When the IBC formulation has been approved by the FDA
and is available for sale, we intend to introduce it as an improved product
offering to the surface spray that we announced in December 2000. IBC plans to
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apply for an Investigative New Drug (IND) number from the FDA for the baby wipes
subsequent to the receipt of an IND number for the GEDA Plus(R) microbicidal
contraceptive gel. An IND number will enable IBC to commence testing that will
be recognized by the FDA. We estimate that the testing and approval process for
the baby wipes will take at least six months from the receipt of the IND number.
The application process to obtain an IND number for the GEDA Plus(R)
microbicidal contraceptive gel is underway. The gel must undergo clinical trials
and obtain regulatory approval prior to marketing. The gel will be tested to
determine its effectiveness in preventing HIV as well as other sexually
transmitted diseases, all of which have different rates of transmission as well
as gestation periods for infection within the human body. As a result, we
anticipate the clinical trials for certain sexually transmitted diseases will
require a minimum of six months while other sexually transmitted diseases such
as HIV will require at least 18 months from the receipt of the IND number.
The limited revenues and substantial start-up costs associated with
introducing our new line of preventative products have significantly affected
our current financial condition and operations. We 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
in 2000 and at least through 2001. We expect operations to generate negative
cash flow in 2000 and at least through 2001 and 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. These
factors raise doubts about our ability to continue as a going concern and our
audit report in our annual report on Form 10-KSB filed with the SEC on March 30,
2000 contained 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 Preventx(R) preventative products as
well as additional preventative products that we can market utilizing the
formulation used in our hand sanitizer and first-aid antiseptic as well as other
third-party formulations.
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 nine
months of 2000. Accordingly, we do not believe comparing costs as a percentage
of revenues from year to year is meaningful.
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Our total revenues in the nine months ended September 30, 2000 were
$496,000 compared with $650,000 in the nine months ended September 30, 1999.
Product sales increased in the nine months ending September 30, 2000 to $496,000
from $100,000 in the nine months ending September 30, 1999 due primarily to
shipments to Wal-Mart Stores, Inc. in 2000, which represented approximately 64%
of total revenues for the nine months then ended. However, total revenues
decreased due to receiving Southeast Asia distribution right payments in the
amount of $550,000 in the first nine months of 1999 as compared to $0 in the
first nine months of 2000.
Product sales were lower in the third quarter of 2000 compared with the
first and second quarters of the year as there were no major shipments of
initial stocking orders, such as the shipments to Wal-Mart of Preventx(R) and
Coleman(R) products in the first and second quarters. We anticipate that our
sales efforts will reverse this trend in the fourth quarter of 2000.
Our gross margin from product sales decreased to 46% in the nine months
ended September 30, 2000 from 50% in the nine months ended September 30, 1999.
Sales during the nine months ended September 30, 2000 were primarily made to
retail customers, which generally yield higher volumes but lower selling prices
than the institutional channel into which we sold in the nine months ended
September 30, 1999. Additionally, product costs are higher in the retail channel
due to the cost of labeling and packaging to effectively reach the end consumer.
Operating expenses increased to $7,657,000 in the nine months ended
September 30, 2000 from $3,263,000 in the nine months ended September 30, 1999
primarily due to the following:
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* Litigation settlement expenses of $5,434,000 related to the lawsuit
and subsequent settlement agreement with IBC were incurred in the
nine months ended September 30, 2000 compared to $0 in the nine
months ended September 30, 1999.
* Expenses for royalties decreased to $64,000 in the nine months ended
September 30, 2000 from $372,000 in the nine months ended September
30, 1999, primarily due to the elimination of the guaranteed minimum
royalty with IBC beginning with the fiscal year 2000. A minimum IBC
royalty accrual of $365,000 was included in the results for the nine
months ended September 30, 1999. Partially offsetting this benefit
is an increase in the IBC royalty rate from 2% of net sales to 5% of
net sales beginning August 9, 2000, sub-license royalty expenses
associated with increased sales of our hand sanitizer in the nine
months ended September 30, 2000 versus the nine months ended
September 30, 1999, and royalties related to licensing agreements
with Coleman Corporation and Sunbeam Corporation that were not in
place in the first nine months of 1999.
* Consulting expenses decreased to $441,000 in the nine months ended
September 30, 2000 from $1,222,000 in the nine months ended
September 30, 1999 primarily due to less expense recorded for stock
option grants to consultants and less reliance on paid consultants
in the nine months ended September 30, 2000. Additionally, we
incurred, in connection with our Southeast Asia distribution
agreement, consulting services in the amount of $330,000 in the nine
months ended September 30, 1999 as compared to $0 in the nine months
ended September 30, 2000.
* Fees relating to third party distribution of our hand sanitizer
decreased to $77,000 in the nine months ended September 30, 2000
compared with $375,000 in the nine months ended September 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 distribution rights decreased to $0 in the nine months
ended September 30, 2000 from $70,000 in the nine months ended
September 30, 1999 due to a payment for the Canadian distribution
rights to the IBC formulation in 1999.
* Legal expenses increased to $353,000 in the nine months ended
September 30, 2000 compared to $236,000 in the nine months ended
September 30, 1999. The increase was due primarily to expenses
related to the filing of an amended registration statement with the
U.S. Securities and Exchange Commission.
* Interest expense decreased to $6,000 in the nine months ended
September 30, 2000 from $157,000 in the nine months ended September
30, 1999 due to greater amortization of the fair value of warrants
issued to promissory note holders and interest on loans in 1999.
We incurred a net loss in the nine months ended September 30, 2000 of
$7,417,000 compared to a net loss of $2,802,000 in the nine months ended
September 30, 1999. The losses in the first nine months of 2000 and 1999 were
due primarily to limited revenues that were substantially exceeded by our costs
of operations, and in 2000, the expense related to the lawsuit and settlement
with IBC. Our net loss per share for the nine months ended September 30, 2000
was $0.20 compared to a net loss per share of $0.10 in the nine months ended
September 30, 1999. The loss per share increased primarily as a result of the
factors affecting net loss as discussed above, partially offset by an increase
in the weighted average number of shares outstanding to 36,305,074 in the nine
months ended September 30, 2000 from 27,519,375 in the nine months ended
September 30, 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. The distributor also paid $100,000 that could
be applied toward its year one minimum purchase requirement of $400,000. The
Company recorded this amount as deferred revenue. To date, the distributor has
not ordered any product and is in violation of its minimum purchase obligation.
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We are required under the contract to give the distributor 60 days written
notice to cure this default. Notice was served in October 2000. We will
recognize the $100,000 as revenue upon the earlier of shipment of the product to
the distributor or the expiration of the cure period. Since no effort was made
by the distributor to cure, in January 2001 we served notice that the
distributors rights were no longer exclusive. 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 that 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 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 September 30,
2000, both employees have been terminated and we have paid involuntary
termination benefits and other related reorganization costs in the amount of
$209,000. All reorganization costs including severance payments are expected to
be paid prior to December 31, 2000.
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. During the fiscal years 1997, 1998, and
1999 and the nine months ended September 30, 2000, we raised a total of
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$7,528,000 through these means. We also issued stock to satisfy $5,352,000 of
obligations, including stock valued at $3,300,000 that was issued to settle the
litigation with IBC. In addition, the proceeds from promissory notes that were
repaid in cash during this time period were $296,000. Until such time as we are
able to generate significant cash flow from operations through increased sales
of our products, we will be required to continue our reliance on investor
financing to fund our operations. At September 30, 2000, cash and cash
equivalents totaled $233,000, an increase of $91,000 from September 30, 1999.
Current liabilities at September 30, 2000, consisting primarily of accounts
payable and accrued liabilities, exceeded current assets by $1,648,000.
During the nine months ended September 30, 2000, net cash used in
operating activities was $1,998,000, primarily due to a net loss of $7,417,000.
Non-cash expenses of $5,079,000 were incurred in the period.
In the nine months ended September 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 September 30, 2000, we have paid all of our debt with cash or by
converting promissory notes into the Company's common stock.
In December 2000, we completed a private placement of 1,305,617 shares
of common stock to four vendors who accepted the shares in exchange for
cancellation of $522,247 in trade payable indebtedness owed by the Company. In
addition, 125,000 shares of common stock were sold to an officer of the Company
for $50,000.
Our future royalty requirements will affect liquidity. We are required
to pay royalties to various licensors, including IBC, of up to 17% of net sales.
The settlement with IBC will have a favorable effect on near-term liquidity as a
result of the elimination of the minimum royalty payment. The previous license
agreement required a minimum royalty payment of $735,000 to be paid no later
than January 30, 2001. This payment is no longer required.
As of September 30, 2000, we had no debt service or capital expenditure
obligations.
We have previously disclosed that we would need to raise additional
capital during fiscal year 2000 or secure a line of credit. In November 2000, we
secured a one-year, $1,000,000 revolving line of credit from a bank with an
interest rate equal to the bank's prime rate plus 1/2%. The line of credit is
secured by the signature guarantees of several officers and directors and their
wives, which in turn are secured by the assets of the Company. In return for
their guarantees, we have granted these officers and directors, collectively,
450,000 shares of the Company's common stock. As of January 10, 2001, borrowings
of $513,000 were outstanding under the line of credit. We believe that this line
of credit will be sufficient to meet our cash flow requirements until early
2001, at which time we plan to raise additional equity financing and repay
outstanding borrowings under the revolving line of credit. However, there can be
no assurance that such equity financing will be available on favorable terms or
at all.
We anticipate a substantial increase in cash outlays associated with
increased marketing and sales of our Preventx(R) preventative product line.
Although the IBC settlement requires us to use reasonable efforts to expend up
to $10,000,000 over five years to market licensed products in the territory, we
believe that 100% of our expenditures will qualify to satisfy this commitment
since we are purely a sales and marketing company whose products are primarily
derived from the IBC formulations. We do not believe that incremental outlays
beyond the level projected in our business and marketing plans will be needed
solely to satisfy the IBC settlement commitment.
We will incur additional expenditures associated with the market
development of additional preventative products that we can market utilizing
similar formulations to the one used in our hand sanitizer and first-aid
antiseptic. These cash outlays could include, but are not limited to, market
testing, package design, advertising, point of sale displays, inventory
purchases and a sales and marketing campaign. Our investment in working capital
is also expected to increase as we broaden our product line and obtain new
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customers. Additionally, if the joint venture company formed as part of the
settlement with IBC incurs net cash outlays , we may be obligated to make
capital contributions to or arrange financing for the joint venture.
We do not have existing capital resources or credit lines available
that are sufficient to fund our operations and capital requirements as presently
planned over the next twelve months. We plan to raise additional funds through
the issuance of either debt or equity instruments. We may also pursue a working
capital line of credit to be secured by our accounts receivable and inventory.
However, such funds may not be available on favorable terms or at all. To repay
borrowings under the line of credit, maintain our current expense level of
approximately $3,000,000 to $4,000,000 per year and meet the costs associated
with our increased marketing, sales and market development efforts, it is likely
that we will need to raise a minimum of $3,000,000 to $5,000,000 of additional
capital during fiscal year 2001, dependent upon the magnitude of funds generated
from operations. We expect cash receipts from customers to increase in 2001 due
to greater anticipated sales volume from additional customers and a broader
product line. The 2001 financing requirement may exceed our historical funding
requirement, which averaged approximately $2,400,000 per year in the fiscal
years 1997, 1998 and 1999. Also, should the FDA issue final regulations that are
consistent with its current proposed regulations with respect to our hand
sanitizer and first-aid antiseptic, we may experience an adverse effect on
liquidity. Although we believe we would have twelve months to address any
changes which may be necessary regarding the labeling of our hand sanitizer and
first-aid antiseptic, the effort required to undertake the changes may cause our
financial condition and results of operations to deteriorate and our business
may ultimately fail.
During 2000, in excess of $400,000 was raised from the exercise of
outstanding stock options and warrants. However, this did not negate the need to
raise additional funds through issuance of debt and equity instruments or with
credit lines.
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 two products. The first is marketed as both the Preventx(R) hand
sanitizer and first-aid antiseptic and the Coleman(R) hand sanitizer and
first-aid antiseptic with Advanced Preventx(R) and is sold in lotion and
towelette forms. Sales of towelettes began in the fourth quarter of 2000. In
December 2000, we announced the introduction of the Coleman(R) Antibacterial
Surface Disinfectant Cleaner, which can remove most of the organisms present on
surfaces that can cause infectious disease. The Antibacterial Surface
Disinfectant Cleaner is not based on the IBC formulation, but is a formulation
sub-registered from a third party that is registered with the EPA. The
introduction of this product allows us to offer our customers a more complete
line of infectious disease prevention products. 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. We perform the market research
to determine, amongst other things, the product claims that we would like to
make while IBC develops the formulation to meet these claims, performs the
required testing and insures compliance with the appropriate government
regulations. Additional preventative products that we anticipate marketing
utilizing formulations similar to the one used in our hand sanitizer and
first-aid antiseptic include a disinfectant surface spray, baby wipes and the
GEDA Plus(R) microbicidal contraceptive gel. Our disinfectant surface spray that
is based on the IBC formulation must obtain regulatory approval from the FDA to
enable us to market the product for use on food surfaces, which we estimate will
take at least 12 months. When the IBC formulation has been approved by the FDA
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and is available for sale, we intend to introduce it as an improved product
offering to the surface spray that we announced in December 2000. IBC plans to
apply for an Investigative New Drug (IND) number from the FDA for the baby wipes
subsequent to the receipt of an IND number for the GEDA Plus(R) microbicidal
contraceptive gel. An IND number will enable IBC to commence testing that will
be recognized by the FDA. We estimate that the testing and approval process for
the baby wipes will take at least six months from the receipt of the IND number.
The process to prepare an application to obtain an IND number for the GEDA
Plus(R) microbicidal contraceptive gel is underway. The gel must undergo
clinical trials and obtain regulatory approval prior to marketing. The gel will
be tested to determine its effectiveness in preventing HIV as well as other
sexually transmitted diseases, all of which have different rates of transmission
as well as gestation periods for infection within the human body. As a result,
we anticipate the clinical trials for certain sexually transmitted diseases will
require a minimum of six months while other sexually transmitted diseases such
as HIV will require at least 18 months from the receipt of the IND number. In
December 2000, we announced the initiation of clinical trials for the GEDA
Plus(R) microbicidal contraceptive gel by IBC in Brazil.
We incurred net losses in 1998, 1999 and in the nine months ended
September 30, 2000 and expect to incur net losses at least through 2001, which
will cause our company to have a negative net worth. We expect operations to
generate negative cash flow in 2000 and through at least 2001 and 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. 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 and first-aid antiseptic, 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 and first-aid antiseptic sold under our Preventx(R) brand name
and as a hand sanitizer and first-aid antiseptic with Advanced Preventx(R) sold
under the Coleman(R) brand name. IBC has developed formulations similar to the
one used in our hand sanitizer and first-aid antiseptic that will be utilized
for a variety of other products that we can market. These products will include
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 the GEDA
Plus(R) 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 a 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.
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 antiseptics can
inactivate it. 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 first-aid antiseptic 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:
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* 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.
Our hand sanitizer and first-aid antiseptic lotion and towelettes and
our disinfectant surface spray product are 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 the GEDA Plus(R)
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 first-aid antiseptic
and intend to market and distribute additional products we may introduce,
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 . 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.
Phase I and phase II clinical trials were performed to study the safety
of the 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. In 1997, the GEDA Plus(R) microbicidal contraceptive gel
was 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. NIH had conducted preclinical studies on the GEDA Plus (R)
microbicidal contraceptive gel that confirmed the results of studies provided to
NIH by IBC. The IBC studies were conducted by independent laboratories. The
Phase I and phase II studies were not conducted 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 relying on the ability of
IBC to provide us with superior products based on IBC formulations that we can
market 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
infectious disease preventative products and position ourselves to benefit from
this expansion.
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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. Should any court judgment be entered precluding our rights to the
products, IBC has agreed as part of our overall litigation settlement to secure
its obligations to us by granting us the highest priority perfected security
interest IBC is permitted to assign in IBC's rights in commercializing the
products in the United States.
We are also a defendant in an action that was filed by Integration
Commercialization Solutions, Inc. on November 14, 2000 in the United States
District Court, Central District of California, Southern Division. The action
alleges that we breached a contract and seeks damages of at least $445,000 plus
interest and attorneys fees. The company intends to defend the suit vigorously.
The FDA has taken an adverse position with respect to a lotion product
of the Andrew Jergens Co. that contains an active ingredient similar to the one
used in our hand sanitizer and first-aid antiseptic. We believe that our product
marketing claims are different than the Jergens product claims. The Jergens
product claims to be a lotion, which implies that 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 first-aid
antiseptic and describes in the hand sanitizer 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 helps prevent bacterial contamination or skin
infection on minor cuts, scrapes and burns, 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 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. While neither the
hand sanitizer monograph nor the first-aid antiseptic monograph provide for
labeling as both a hand sanitizer and first-aid antiseptic, we believe that our
labeling is permissible under both monographs considered together. Our claim
that our product is long lasting is not provided for under either the hand
sanitizer monograph or the first-aid antiseptic monograph. However, based on
studies conducted by IBC, we believe we could independently substantiate that
claim to the FDA if required.
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 and first-aid antiseptic is our primary product, such
adverse action by the FDA could cause us to go out of business. If FDA
pre-market approvals were to be required, which we do not believe will be the
case, we would have to rely on IBC to obtain these approvals as we are accorded
no rights to do so under our license agreement.
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).
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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.
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. IBC's disinfectant surface spray, which
is similar to our hand sanitizer and first-aid antiseptic, 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 IBC's 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.
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 .
We intend to sell our baby wipes as a super premium product due to the
benefits that they will offer to the consumer. Utilizing an IBC formulation
similar to that found in the hand sanitizer and first-aid antiseptic, we believe
our baby wipes will be alcohol-free, non-irritating, non-toxic, anti-bacterial
and long lasting. Through additional testing to be performed by IBC, we also
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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.
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 the GEDA Plus(R) 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.
Other over-the-counter gels and salves have recently been introduced
that 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.
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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. The GEDA Plus(R) microbicidal
contraceptive gel will also use octoxynol-9, unlike competing products that
utilize nonoxynol-9, an active ingredient that has been shown to cause lesions,
ulcerations and other irritations.
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 that competitive products may cause, 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
infectious 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 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 distributors, adding
international distributors through the joint venture with IBC 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 except the current version
of the disinfectant surface spray 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. When the
disinfectant surface spray based on the IBC formulation has been
approved by the FDA and is available for sale, we intend to introduce
it as an improved product offering to the surface spray that we
announced in December 2000. We intend to continue to leverage the brand
awareness and market acceptance of our hand sanitizer and first-aid
antiseptic product to create market demand for our moist towelettes,
baby wipes, disinfectant surface spray and the GEDA Plus(R)
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.
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PRODUCTS AND TECHNOLOGIES
To date, we have introduced two products. The first is marketed as both
the Preventx (R) hand sanitizer and first-aid antiseptic and the Coleman (R)
hand sanitizer and first-aid antiseptic with Advanced Preventx (R) and is sold
in both lotion and towelette forms. In December 2000, we announced the
introduction of the Coleman (R) Antibacterial Surface Disinfectant Cleaner,
which can remove most of the organisms present on surfaces that can cause
infectious disease. The Antibacterial Surface Disinfectant Cleaner is not based
on the IBC formulation, but is a formulation sub-registered from a third party
that is registered with the EPA. We anticipate several additional preventative
products based upon IBC formulations including baby wipes, disinfectant surface
spray and the GEDA Plus(R) 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 AND FIRST-AID ANTISEPTIC
Our hand sanitizer and first-aid antiseptic product was launched in the
United States in March 1999. Our hand sanitizer and first-aid antiseptic lotion
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 and first-aid antiseptic will not damage latex gloves or other
products.
Our hand sanitizer and first-aid antiseptic 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 and first-aid
antiseptic 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
germs to develop increased resistance. Alcohol and triclosan based
products may 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 bacteria to develop increased
resistance as well as the mutation of some germs.
* 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 and
first-aid antiseptic 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 and first-aid antiseptic not only alleviates dry
skin conditions that may be caused by alcohol or triclosan based
products, it actually helps nourish and moisturize 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 and first-aid
antiseptic product to further promote its soothing effects. In
addition, our product helps prevent bacterial contamination or skin
infection on minor cuts, scrapes and burns, in contrast to alcohol
based products that can cause painful discomfort when in contact
with minor skin injuries. Our hand sanitizer and first-aid
antiseptic also does not cause irritation to mucosal tissues in the
nose, unlike alcohol and triclosan based products.
Presently, our hand sanitizer and first-aid antiseptic is sold at
retail stores in 2 and 8 ounce plastic bottles, in the commercial, industrial
and institutional markets in 2, 8 and 16 ounce plastic bottles and in all sizes
on our website, www.preventx.com. We also intend to offer a bulk refillable
dispenser that dispenses a pre-measured amount of the product.
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As an extension of our existing hand sanitizer and first-aid antiseptic
product line, we began to offer the hand sanitizer and first-aid antiseptic on a
moist towelette in the fourth quarter of 2000. The towelette offers all the
advantages of our hand sanitizer and first-aid antiseptic 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 is packaged in three configurations: easy-to-use plastic
"Canister Pak" dispensers, personal-sized resealable pouch boxes and boxes of
individually wrapped towelettes. The packaging is conveniently sized for
household and travel use and both the canister pak and resealable pouch are
resealable to keep the product moist. The towelette is sold under both the
Preventx(R) and Coleman(R) brands.
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. We perform the market research to determine, amongst other
things, the product claims that we would like to make while IBC develops the
formulation to meet these claims, performs the required testing and insures
compliance with the appropriate government regulations. To make many of the
following product claims, IBC will have to file an IND with the FDA and conduct
clinical trials to support the claims. In the future, we may also market, sell
and distribute products based on other third party or purchased formulations.
FUTURE INFECTIOUS DISEASE PREVENTATIVE PRODUCTS
DISINFECTANT SURFACE SPRAY
Our disinfectant surface spray that is based on the IBC formulation
does not contain the thickening and aloe vera additives contained in our hand
sanitizer and first-aid antiseptic, 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 that is based on the IBC formulation
will have all of the same advantages as our hand sanitizer and first-aid
antiseptic 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, the IBC 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 that is
based on the IBC formulation in the United States after IBC has obtained
approval from the FDA, which will enable us to market the product for use on
food surfaces. We estimate that this approval process will take at least twelve
months from the submission of the application, and that IBC will submit the
application in 2001.
BABY WIPES
Utilizing a similar formulation as our hand sanitizer and first-aid
antiseptic, IBC has developed a baby wipe for the retail market. In addition to
claiming the product is non-toxic and long lasting, it is our intention to have
IBC obtain regulatory approval to claim that our baby wipes aid in the
prevention of diaper rash. We believe these claims, if approval to make them is
obtained, would give our baby wipes a significant advantage in the market place
over other wipes on the market today.
IBC plans to apply for an Investigative New Drug (IND) number from the
FDA for the baby wipes subsequent to the receipt of an IND number for the GEDA
Plus(R) microbicidal contraceptive gel, as discussed below. An IND number will
enable IBC to commence testing that will be recognized by the FDA. We estimate
that the testing and approval process for the baby wipes will take at least six
months from the receipt of the IND number.
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GEDA PLUS(R) MICROBICIDAL CONTRACEPTIVE GEL
The GEDA Plus(R) microbicidal contraceptive gel has been developed by
IBC, and IBC is responsible for preparing and conducting all clinical trials
required to obtain approval from the FDA under the terms of our license
agreement with IBC. Phase I and II clinical trials, the purposes of which were
to study the safety of the contraceptive gel when used in women and its
effectiveness against STDs in an in vitro environment, have been completed with
positive results. We announced the commencement of a Phase III clinical trial in
Brazil in December 2000. The clinical trial in Brazil will determine whether the
gel effectively kills a host of STDs and other infectious diseases, in addition
to its contraceptive properties, and is safe. The process to prepare an
application to obtain an IND number from the FDA, which will enable IBC to begin
Phase III trials that will be recognized by the FDA, is currently underway. The
Company is hopeful that the application will be formally submitted to the FDA in
2001. Upon initiation and successful completion of the Phase III clinical trial
and results showing safety and effectiveness, IBC will file a new drug
application with the FDA for its approval.
The GEDA Plus(R) microbicidal contraceptive gel will not be sold in the
United States until IBC obtains an IND number, completes Phase III clinical
trials and obtains approval of the FDA. FDA approval is not assured. The first
part of the Phase III study in the United States has yet to begin and will
address the effectiveness of the product in preventing the transmission of
gonorrhea, chlamydia, and trichomonas vaginalis. Because the STDs included in
the first part of the Phase III study have relatively high rates of transmission
and relatively short gestation periods for infection within the human body, we
anticipate that the clinical trials for the first part of the Phase III study
will require a minimum of six months from the receipt of the IND number.
The second part of the Phase III testing will address the effectiveness
of the product in preventing the transmission of HIV. Because HIV has a slower
rate of transmission and a longer gestation period for infection within the
human body, we anticipate that the clinical trials for the second part of the
Phase III study will require at least 18 months from the receipt of the IND
number.
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 use 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 Phase III studies are successfully completed and
FDA approval is obtained, we will be able to offer a product in the United
States that can capture significant market share and also increase the market
for non-prescription contraceptive products.
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' sales 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. In
the fourth quarter of 2000, we announced the receipt of purchase orders from
Amway Corporation and the Eckerd drugstore chain. Before that time we sold our
product to smaller commercial and institutional customers.
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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 future products utilizing
IBC formulations through the same channels. Our Southeast Asia distributor was
granted exclusive rights (subject to minimum purchase requirements) in
designated territories and was responsible for obtaining and maintaining
required foreign regulatory approvals for our products. We served notice in
October 2000 that this exclusivity would be revoked if Durstrand did not
purchase at least $200,000 of product within 60 days. Since no effort was made
by Durstrand to cure, in January 2001 we served notice that their rights were no
longer exclusive. Through the joint venture formed with IBC, we anticipate
granting distributorships in other territories that will have similar
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 and first-aid antiseptic product has been launched
at Wal-Mart Stores, Inc., Do-It-Best Corp., the Eckerd drug chain 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 and
first-aid antiseptic 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 and first-aid antiseptic 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 and future products .
DEPENDENCE ON SIGNIFICANT CUSTOMERS AND SUPPLIERS
Wal-Mart Stores, Inc. comprised 13% of our product sales in 1999 and a
one-time sale to a large pharmaceutical company comprised 38%. In the first nine
months of 2000, Wal-Mart Stores, Inc. accounted for 64% of our net revenues. We
recently began sales to Do-It-Best Corp. and the Eckerd drug chain and we
believe during 2001 that 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.
Presently, Canadian Custom Packaging ("CCP")is the sole manufacturer of
the IBC formulation used in our hand sanitizer and first-aid antiseptic
products. We do not have a written agreement with this supplier. We believe that
the raw materials required for our product are readily obtainable from a variety
of sources and CCP has experienced no difficulties or unexpected costs to date
in purchasing the raw materials. Although we have experienced no difficulties or
unexpected costs in purchasing finished products from CCP, we are exposed to the
risk that CCP will be unable or unwilling to supply our product in a timely or
cost efficient manner or at all. We have addressed this risk by maintaining an
inventory level that is adequate to meet our customers' demands during a short
supply interruption, and by obtaining contingent business interruption insurance
coverage on CCP's facility. However, a lengthy delay or interruption in the
supply of raw 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. If CCP became unable or unwilling to supply our product,
we believe that a new supplier could be qualified and begin production within
sixty days.
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STRATEGIC RELATIONSHIPS
INTERNATIONAL BIOSCIENCE CORPORATION LICENSE
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 the GEDA
Plus(R) microbicidal contraceptive gel, with a commitment to invest, if
necessary, up to $10 million to fulfill all requirements for FDA approval of the
product. The trials will test the efficacy and safety of the GEDA Plus(R)
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
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
and first-aid antiseptic 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.
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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.
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 and
first-aid antiseptic 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 and first-aid antiseptic 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.
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DURSTRAND INTERNATIONAL LIMITED
On April 28, 1999, we entered into a distribution agreement with
Durstrand International Limited, a British Virgin Islands company. The agreement
provided Durstrand with exclusive rights for three years (and automatic renewal
for two additional ten-year terms if the agreement's provisions were met by both
parties), to distribute the Preventx(R) hand sanitizer and, when approved by the
appropriate regulatory bodies, the GEDA Plus(R) 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 and first-aid antiseptic product and was to pay $600,000 for the
exclusive rights to the GEDA Plus(R) microbicidal contraceptive gel 120 days
following approval of claims related to our products by the FDA. There have been
no purchases to date. Durstrand was to have purchased a minimum annual amount of
either product to maintain its exclusive rights as follows:
YEAR ENDING APRIL 28, MINIMUM ANNUAL 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 served notice in October 2000 of our intent
to revoke Durstand's exclusivity in the defined territory if Durstrand did not
purchase at least $200,000 of product within 60 days. Since no effort was made
by Durstrand to cure, in January 2001 we served notice that their rights were no
longer exclusive.
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.
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 and first-aid antiseptic, licensed to us by IBC, is
currently performed by an independent manufacturer, Canadian Custom Packaging, a
Canadian entity located in Toronto, Ontario. CCP is the sole manufacturer of the
IBC formulation and performs production and filling of the lotion product into
tubes and bottles, labeling and packaging. CCP supplies the lotion formulation
in bulk to towelette manufacturers who apply the lotion to the towelettes and
label and package the finished product. 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 and first-aid antiseptic are done according to
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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
Effective with the settlement of the lawsuit with IBC in August 2000,
responsibility for research and development of products based on the IBC
formulation rests exclusively with IBC. We currently focus all of our market
research and development resources and efforts on the research and development
of additional applications and markets for the Preventx(R) antimicrobial
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
With the exception of the surface disinfectant cleaner announced in
December 2000, we license all of the product and manufacturing formulas used in
our infectious 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.
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.
REQUIREMENTS IN THE UNITED STATES
The production, distribution and marketing of our products and IBC's
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.
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Domestic and foreign manufacturing establishments, such as CCP, the
sole manufacturer of the IBC formulation, 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 the FDA or other
agencies note violations 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 our
existing and proposed products (other than our disinfectant surface spray
introduced in December 2000), 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 by the FDA. The application review process frequently
takes two to four years or longer to complete and the FDA may require IBC to
perform additional studies to gain approval that may take several years to
complete.
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 pre-market approval. Over-The-Counter drugs not
covered by proposed or final regulations are subject to pre-market review and
approval through the New Drug Application process.
Under the FDA's current monograph OTC regulations, active product
ingredients are classified as one of three categories: (i) Category 1 -
ingredients recognized as safe, effective and not misbranded; (ii) Category 2 -
ingredients not recognized as safe or effective, or ingredients that are
misbranded; and (iii) Category 3 - ingredients that require further testing
prior to being designated Category 1 or 2.
We currently market our hand sanitizer and first-aid antiseptic product
under two separate proposed monographs, a hand sanitizer monograph and a
first-aid antiseptic monograph. We believe that all of our current product
claims are allowable under the proposed hand sanitizer and first-aid monographs.
However, benzalkonium chloride, the active ingredient in our hand sanitizer and
first-aid antiseptic, is designated as a Category 1 ingredient for first-aid
antiseptics and as a Category 3 ingredient for hand sanitizers.
The monographs for hand sanitizers as well as first-aid antiseptics are
proposed and we are unable to predict when the regulations will be finalized.
The FDA has not announced any timetable for issuing final monographs. While it
is permissible to market products with active ingredients classified as Category
3 under a proposed monograph, unless our active ingredient is included as a
Category 1 ingredient in the final hand sanitizer monograph, we may not be able
to identify the product as a hand sanitizer and may not be permitted to make all
of the claims that we currently make. Should any changes be necessary, we
believe that we would have twelve months to change our product labeling once the
final regulations were issued.
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 lesser developed countries 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.
During its period of exclusivity, our Southeast Asia distributor had
not obtained applicable approvals in any of the countries within its territory.
COMPETITION
PREVENTX(R) HAND SANITIZER AND FIRST-AID ANTISEPTIC
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
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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 similar to that found in the hand sanitizer and first-aid
antiseptic, our baby wipes will be alcohol- free, non-irritating, non-toxic,
anti-bacterial and long-lasting. Through additional testing to be performed by
IBC, 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.
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 with the IBC formulation
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 the IBC 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.
GEDA PLUS(R) 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, much controversy surrounds other products in Phase III
trials whose formulations contain nonoxynol-9 , 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 does not contain nonoxynol-9
and, in a clinical trial, did not cause genital irritation.
The GEDA Plus(R) 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 January 16, 2001, 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.
47
<PAGE>
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.
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. (Delaware) and Mercury Technology
Corp. (Bahamas) (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.
Empyrean and IBC have each filed motions in the federal action seeking the
dismissal of Mercury's patent infringement claims. Mercury has since dropped its
claim of infringement of U.S. Patent No. 3,594,468. 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. Should any court judgment be entered precluding our rights to the
products, IBC has agreed as part of our overall litigation settlement to secure
its obligations to us by granting us the highest priority perfected security
interest IBC is permitted to assign in IBC's rights in commercializing the
products in the United States.
We are also a defendant in an action that was filed by Integration
Commercialization Solutions, Inc. on November 14, 2000 in the United States
District Court, Central District of California, Southern Division. The action
alleges that we breached a contract and seeks damages of at least $445,000 plus
interest and attorneys fees. The company intends to defend the suit vigorously.
48
<PAGE>
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.
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>
49
<PAGE>
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. 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
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. 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
50
<PAGE>
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 annualized base
salary was $105,000 until December 31, 2000, plus an incentive compensation plan
based upon the attainment of specific individual objectives as well as company
performance. Her annual base salary increased to $110,250 on January 1, 2001.
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 the grant. 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 remained a director of the Company and
was 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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of January 16, 2001 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 Flagler 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
51
<PAGE>
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 43,282,986 common shares
issued and outstanding as of January 16, 2001, 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 January
16, 2001, 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 January 16, 2001. 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 January 16, 2001.
<TABLE>
<CAPTION>
PORTION
TOTAL AMOUNT REPRESENTED
NAME OF OF BENEFICIAL BY OPTIONS PERCENT
BENEFICIAL OWNER OWNERSHIP AND WARRANTS OF CLASS
---------------- --------- ------------ --------
<S> <C> <C> <C> <C>
Lawrence D. Bain (1)(2) 9,618,384 3,379,750 20.6%
Richard C. Adamany 1,050,000 600,000 2.4%
Bennett S. Rubin 1,050,000 600,000 2.4%
Robert G.J. Burg II 167,178 100,000 *
Michael Cicak 1,137,178 0 2.6%
Dr. Andrew J. Fishleder 327,637 145,000 *
Stephen D. Hayter 1,675,385 1,450,570 3.7%
Brenda K. Brown 126,200 0 *
International Bioscience Corporation (2) 7,821,062 2,345,012 17.2%
Directors and executive officers
as a group (eight persons) 15,151,962 6,275,320 30.6%
</TABLE>
* less than 1%
(1) The totals for Mr. Bain include 1,764,997 shares owned beneficially by
Uptic Investment Corp., a company owned 100% by Mr. Bain.
(2) The totals for Mr. Bain include 5,000,000 shares owned of record by
International Bioscience Corporation and 2,226,000 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 January 16, 2001, 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.
52
<PAGE>
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:
<TABLE>
<CAPTION>
CURRENTLY EXERCISE
ORIGINAL ISSUANCE DATE OUTSTANDING PRICE/SHARE EXPIRATION
---------------------- ----------- ----------- ----------
<S> <C> <C> <C>
July 15, 1998 (1) 795,492 $ 1.05595 July 9, 2001
Various (November 1999 - March 2000) 1,512,762 $ 0.50 2 years from Issuance
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
=========
</TABLE>
(1) These warrants were issued to purchasers of debentures of Empyrean issued
in a private placement on the same date.
53
<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 were approved for
grant under the Plan, of which 1,720,461 shares were available for grant as of
January 16, 2001. 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.
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.
54
<PAGE>
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.
In September 2000, we granted Mr. Bain options to purchase 250,000
shares of common stock at a price of $0.73 for his role in negotiating the
settlement with IBC. In accordance with SFAS 123, litigation settlement expense
of $178,000 was recorded for the fair value of the options.
In November 2000, Mr. Bain, his wife, and Uptic Investment Corp.
guaranteed a one-year, $1,000,000 revolving line of credit extended to the
Company by a bank. These personal guarantees were required by the lender and
were in turn secured by the assets of the Company. In return for their
guarantees, Mr. Bain, his wife, and Uptic Investment Corp. were collectively
granted 150,000 shares of the Company's common stock.
The Company reimburses Uptic Investment Corp. for expenses incurred on
behalf of the Company principally for travel and travel-related expenses of
Company directors and officers. The Company believes that amounts reimbursed to
Uptic approximate the cost at which these services could be obtained directly
from a non-affiliated third party. The expenses eligible for reimbursement
totaled $5,353 in 1999 and $76,090 in 2000. Of the 2000 expenses, $44,153 was
incurred in conjunction with the negotiation and settlement of the litigation
with IBC. In December 2000, Mr. Bain agreed to accept, on behalf of Uptic,
113,247 shares of common stock in the Company in lieu of cash reimbursement for
$45,299 of the 2000 expenses. The shares were valued at $0.40 per share, which
was the market price of the common stock on the date these shares were issued.
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.
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.
55
<PAGE>
In November 2000, Mr. Adamany and his wife guaranteed a one-year
$1,000,000 revolving line of credit extended to the Company by a bank. These
personal guarantees were required by the lender and were in turn secured by the
assets of the Company. In return for their guarantees, Mr. Adamany and his wife
were collectively granted 150,000 shares of the Company's common stock.
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.
In November 2000, Mr. Rubin, his wife, and a personal trust for the
benefit of his family guaranteed a one-year $1,000,000 revolving line of credit
extended to the Company by a bank. These personal guarantees were required by
the lender and were in turn secured by the assets of the Company. In return for
their guarantees, Mr. Rubin, his wife and the trust were collectively granted
150,000 shares of the Company's common stock.
INTERNATIONAL BIOSCIENCE CORPORATION
In August 2000, as part of the settlement of our litigation with IBC,
Empyrean granted IBC 5,000,000 shares of common stock and an option to purchase
2,226,000 shares of common stock. The options have an exercise price of $0.83
per share and have all vested 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. All but the last three of the stockholders
listed in the table below could be deemed an affiliate of the Company. 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 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.
56
<PAGE>
None of the stockholders listed below has indicated to the Company that
he, she or it intents to engage in passive market making transactions or in
short selling activities. Passive market making transactions or short selling
activities, if undertaken, are restricted by the requirements of Regulation M of
the Securities Exchange Act.
<TABLE>
<CAPTION>
AMOUNT OF SHARES AMOUNT OF
SECURITIES AVAILABLE SECURITIES
OWNED PRIOR TO FOR SALE OWNED AFTER PERCENT
NAME (1) THE OFFERING UNDER REOFFER THE OFFERING(6) OF CLASS
-------- ------------ ------------- --------------- --------
<S> <C> <C> <C> <C>
Lawrence D. Bain 2,292,384(2) 2,292,384(2) 0 5.2%
Robert G.J. Burg II 67,178 67,178 0 *
Michael Cicak 1,137,178 1,137,178 0 2.6%
Andrew Fishleder, MD 227,637(3) 227,637(3) 0 *
Stephen D. Hayter 224,815 224,815 0 *
Bennett S. Rubin 550,000(4) 550,000(4) 0 1.3%
Richard C. Adamany 550,000(4) 550,000(4) 0 1.3%
International Bioscience Corporation 7,821,062(5) 7,821,062(5) 0 17.2%
Brenda K. Brown 126,200 126,200 0 *
William A. Downing , Jr. 60,711 60,711 0 *
Stroock & Stroock & Lavan LLP 1,069,159 1,069,159 0 2.5%
Ulmer &Berne LLP 62,500 62,500 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 325,000
shares to be issued upon exercise of options. Mr. Bain beneficially owns
1,071,247 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.
(6) Assumes the sale of all shares available for reoffer.
57
<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
Fourth Quarter $0.79 $0.24
Third Quarter $1.41 $0.50
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, 1999 and 1998 , 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).
58
<PAGE>
CONTENTS
Page
----
Report of Independent Certified Public Accountants...........................F-2
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
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 NINE MONTH PERIOD ENDING SEPTEMBER 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 9,039,000 and 6,985,000 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)
September 30, December 31,
2000 1999
-------- --------
(unaudited) (audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................... $ 233 $ 286
Accounts receivable ............................. 30 7
Prepaid expenses and deposits ................... 15 49
Inventory ....................................... 231 284
Other ........................................... -- 3
-------- --------
Total current assets .......................... 509 629
Equipment and improvements ...................... 41 52
-------- --------
Total assets .................................. $ 550 $ 681
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ........ $ 2,057 $ 2,045
Deferred revenue ................................ 100 100
Short-term notes payable ........................ -- 198
-------- --------
Total current liabilities ..................... 2,157 2,343
COMMITMENTS AND CONTINGENCIES ..................... -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, authorized 100,000,000 shares,
without par value; issued and outstanding
(2000: 41,346,222; 1999: 31,522,109) .......... 28,966 21,494
Accumulated deficit ............................. (30,573) (23,156)
-------- --------
Total stockholders' equity (deficit) .......... (1,607) (1,662)
-------- --------
Total liabilities and stockholders'
equity (deficit) ............................ $ 550 $ 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 Nine months ended
--------------------- ---------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues .................................... $ 49 $ 63 $ 496 $ 650
Cost of sales ................................... 27 11 267 34
-------- -------- -------- --------
Gross profit .............................. 22 52 229 616
Selling, general and administrative ............. 978 906 2,159 2,891
Royalties ....................................... (345) 124 64 372
Litigation settlement expense ................... 5,360 -- 5,434 --
-------- -------- -------- --------
Operating expenses ........................ 5,993 1,030 7,657 3,263
Loss from operations ...................... (5,971) (978) (7,428) (2,647)
Other, net ...................................... 10 (1) (14) (2)
Interest expense ................................ (1) (45) (6) (156)
Interest income ................................. 8 1 31 3
-------- -------- -------- --------
Other income (expense) .................... 17 (45) 11 (155)
-------- -------- -------- --------
Net loss ........................................ $ (5,954) $ (1,023) $ (7,417) $ (2,802)
======== ======== ======== ========
Basic and diluted loss per share ................ $ (0.15) $ (0.04) $ (0.20) $ (0.10)
======== ======== ======== ========
Weighted average number of shares outstanding.... 39,207 28,456 36,305 27,519
======== ======== ======== ========
</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 ................. 704 360 -- 360
Common stock issued for litigation settlement ............. 5,000 3,300 -- 3,300
Fair value of options granted for litigation settlement.... -- 1,595 -- 1,595
Fair value of other option and warrant grants ............. -- 122 -- 122
Net loss .................................................. -- -- (7,417) (7,417)
-------- -------- -------- --------
Balances, September 30, 2000 .............................. 41,346 $ 28,966 $(30,573) $ (1,607)
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements
F-19
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
-------------------------------
September 30, September 30,
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net cash used by operating activities ............. $(1,998) $(1,719)
Cash flows from investing activities:
Proceeds from sales of fixed assets .................. 5 --
Purchase of capital assets ............................. (17) (9)
------- -------
Net cash used by investing activities ............. (12) (9)
Cash flows from financing activities:
Issuance of common stock ............................. 1,857 1,008
Proceeds of short-term notes payable ................. 250 800
Payments of short-term note payable .................. (150) --
------- -------
Net cash provided by financing activities.......... 1,957 1,808
------- -------
Net increase (decrease) in cash
and cash equivalents ............................ (53) 79
Cash and cash equivalents at beginning of period........ 286 63
------- -------
Cash and cash equivalents at end of period ............. $ 233 $ 142
======= =======
</TABLE>
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 quarters and nine month
periods ended September 30, 2000 and 1999, and the financial information as
of September 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 in
2000 and at least through 2001. We expect operations to generate negative
cash flow in 2000 and through at least 2001. 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. In November 2000, we secured a one-year, $1,000 revolving
line of credit from a bank, secured by the signature guarantees of several
officers and directors and their wives, which in turn are guaranteed by the
assets of the Company. We believe this line of credit will be sufficient to
meet our cash flow requirements until early 2001, at which time we plan to
raise additional equity financing and repay outstanding borrowings under
the line of credit. We may also 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, a
working capital line of credit and/or equity or debt financing 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 nine 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
September 30, 2000.
F-21
<PAGE>
NOTE 4 - 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 International
Bioscience Corporation (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 (see Note 8).
Optima Holding Co. Ltd. intervened in our lawsuit against IBC, 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. (Delaware) and Mercury
Technology Corp. (Bahamas) (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. Empyrean and IBC have each filed motions in the
federal action seeking the dismissal of Mercury's patent infringement
claims. Mercury has since dropped its claim of infringement of U.S. Patent
No. 3,594,468. 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. Should any court judgment be entered precluding our
rights to the products, IBC has agreed as part of our overall litigation
settlement to secure its obligations to us by granting us the highest
priority perfected security interest IBC is permitted to assign in IBC's
rights in commercializing the products in the United States.
F-22
<PAGE>
NOTE 5 - NET REVENUES
Net revenues are comprised of the following:
Three months ended Nine months ended
-------------------- --------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
----- ----- ----- -----
Product sales ................. $ 49 $ 30 $ 496 $ 100
Distribution rights ........... -- 33 -- 550
----- ----- ----- -----
Net revenues ............. 49 63 496 650
===== ===== ===== =====
NOTE 6 - STOCKHOLDERS' EQUITY
On February 23, 2000, the Company completed a private placement of
6,151,050 shares of common stock that generated gross proceeds of $3,076.
Of this amount, cash proceeds of $750 and $1,452 were received in the
fourth quarter of 1999 and the first quarter of 2000, respectively, and
$874 resulted from the conversion of promissory notes and royalties payable
to common stock. As of September 30, 2000, we have paid all of our debt
with cash or by converting promissory notes into the Company's common
stock.
The Company has granted options to employees, directors and others. The
Company has also granted warrants to debt holders and investors. For
options granted to non-employees, the Company recognizes consulting,
interest, or litigation settlement expense equal to the fair value of the
options. At September 30, 2000, 10,411,710 options and warrants were
exercisable at a weighted average price of $0.69 per share.
A summary of the status of stock options and warrants as of September 30,
2000, and changes during the nine 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 ............................ 3,263,000 .76 1,538,000 .50
Exercised .......................... (285,000) .54 (455,000) .55
Expired ............................ (188,000) .80 -- --
---------- ----- ---------- -----
Outstanding at September 30, 2000 .... 9,423,000 $ .69 3,488,000 $ .68
========== ===== ========== =====
</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
F-23
<PAGE>
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
September 30, 2000, $209 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.
NOTE 8 - LITIGATION SETTLEMENT EXPENSE
In April 2000, the Company filed suit in the U.S. District Court for the
Southern District of Florida against IBC alleging breach and default on its
exclusive license agreement with us. The Company announced the resolution
of all legal disputes with IBC in August 2000. Under the terms of the
settlement, Empyrean retains the rights to licensed products in the United
States, IBC retains the rights to licensed products in Brazil, and a 50/50
joint venture company formed by Empyrean and IBC obtains rights to licensed
products in the rest of the world. We intend to account for the joint
venture under the equity method of accounting. Empyrean is obligated to use
IBC's GEDA(R) trademark on all its products. IBC has the right to use
Empyrean's Preventx(R) trademark on its products. In addition, the
settlement includes a new product license agreement between Empyrean and
IBC that increases the royalty rate from 2% of net sales to 5% of net sales
in the United States beginning August 9, 2000 but eliminates the minimum
royalties called for under the prior license agreement beginning January 1,
2000. Empyrean will also receive a 5% royalty on IBC's net sales in Brazil.
Additionally, IBC has agreed to raise up to $10,000, if necessary, for
future clinical trials for a microbicidal contraceptive gel and Empyrean
has agreed to expend up to $10,000, if necessary, in the future to market
the licensed products.
In conjunction with this settlement, the Company issued 5,000,000 shares of
common stock and granted 2,226,000 options to purchase common stock to IBC
at an exercise price of $0.83 per share. The market value of the common
stock issued was $3,300 and the fair value of the options on the date of
grant equaled $1,417. In addition, the Company incurred $539 of legal and
other expenses related to the suit and its settlement and awarded stock
options with a fair value of $178 to a director for his role in negotiating
the settlement. These amounts, totaling $5,434, were expensed as litigation
settlement expense. In addition, an accrual for minimum royalties to IBC of
$358 that was established in the first and second quarters of 2000 was
reversed in the third quarter as a result of the elimination of minimum
royalties retroactive to January 1, 2000.
NOTE 9 - CASH FLOW STATEMENT
During 2000, the Company has entered into the following non-cash
transactions:
* The Company issued 5,000,000 shares of common stock, valued at $3,300,
and granted 2,226,000 options to purchase common stock, valued at
$1,417, to IBC in conjunction with the resolution of all legal claims
between the two companies and the establishment of a new 50/50 joint
venture by the two companies. The Company also granted 250,000 options
to purchase common stock, valued at $178, to a director for his role
in negotiating the settlement with IBC.
* The Company issued 1,072,050 shares of common stock, valued at $536,
to various parties for the conversion of promissory notes and
royalties payable by the Company to common stock.
* The Company issued 108,063 shares of common stock, valued at $62, and
granted 257,500 options to purchase common stock, valued at $122, to
various consultants and other parties in compensation for services and
loans provided to the Company.
NOTE 10 - SUBSEQUENT EVENT
In November 2000, the Company secured a one-year, $1,000 revolving line of
credit from a bank with an interest rate equal to the bank's prime rate
plus 1/2%. The line of credit is secured by the signature guarantees of
several officers and directors and their wives, which in turn are secured
by the assets of the Company. In return for their guarantees, the Company
granted these officers and directors, collectively, 450,000 shares of the
Company's common stock. As of November 13, 2000, no borrowings under the
line of credit were outstanding.
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ANNEX A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger, is made as of January __, 2001, 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 43,282,986
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
A-1
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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
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 until their earlier death, resignation or removal in accordance with the
Certificate of Incorporation and Bylaws of EBD, shall be those persons who are
elected as directors of EBW on the date that the shareholders of EBW approve
this Agreement and the Reincorporation Propose.
(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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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.
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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.
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;
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(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;
(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.
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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.
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.
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(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.
(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.
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(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;
(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.
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(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
(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 January __, 2001,
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 (1)
3.1(b) Articles of Incorporation and Bylaws of Empyrean Wyoming (1)
3.2 Form of Bylaws of Empyrean Delaware (1)
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 (1)
4.7 Certificate of Empyrean Delaware Common Stock.(1)
4.8 Warrant Agreement with Uptic Investment Corp. dated May 5, 1999.(1)
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 17, 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 17, 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 17, 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 17, 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 17, 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 17, 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 17, 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 17, 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 17, 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 17, 2000)
10.22 Promissory Note dated November 16, 2000 in favor of The Huntington
National Bank
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)
99.1 Form of Proxy
----------
(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 January 17, 2001.
EMPYREAN BIOSCIENCE, INC.
----------------------------------------
Registrant
By /s/ Richard C. Adamany President and Chief Date: January 17, 2001
--------------------------- Executive Officer
Richard C. Adamany
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
By /s/ Lawrence D. Bain Chairman of the Board Date: January 17, 2001
---------------------------
Lawrence D. Bain
By /s/ Richard C. Adamany President and Chief Date: January 17, 2001
--------------------------- Executive Officer
Richard C. Adamany
By /s/ Bennett S. Rubin Executive Vice Date: January 17, 2001
--------------------------- President and Chief
Bennett S. Rubin Operating Officer
By /s/ Brenda K. Brown Vice President Date: January 17, 2001
--------------------------- and Chief Financial
Brenda K. Brown Officer
By /s/ Robert G.J. Burg II Director Date: January 17, 2001
---------------------------
Robert G.J. Burg II
By /s/ Andrew J. Fishleder Director Date: January 17, 2001
---------------------------
Andrew J. Fishleder, MD
By /s/ Michael Cicak Director Date: January 17, 2001
---------------------------
Michael Cicak
By /s/ Stephen D. Hayter Director Date: January 17, 2001
---------------------------
Stephen D. Hayter
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