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As filed with the Securities and Exchange Commission on August 29, 2000
Registration No. 333-35644
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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OPTICON MEDICAL, INC.
(f/k/a Immune Response, Inc.)
(Exact name of Registrant as specified in its charter)
Delaware 421450 42-1426742
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
7001 Post Road, Suite 100
Dublin, Ohio 43106
(614) 336-2000
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
William J. Post, President
Opticon Medical, Inc.
7001 Post Road, Suite 100
Dublin, Ohio 43016
(614) 336-2000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
William J. Kelly, Jr.
Porter, Wright, Morris & Arthur LLP
41 South High Street
Columbus, Ohio 43215
(614) 227-2136
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [x]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
PURSUANT TO RULE 414(d) OF THE SECURITIES ACT OF 1933, THE REGISTRANT HEREBY
EXPRESSLY ADOPTS THE REGISTRATION STATEMENT NO. 333-35644 OF THE PREDECESSOR
ISSUER, IMMUNE RESPONSE, INC. AS ITS OWN REGISTRATION STATEMENT FOR ALL PURPOSES
OF THE SECURITIES ACT OF 1933 AND THE SECURITIES AND EXCHANGE ACT OF 1934.
THE REGISTRANT AGREES TO AMEND 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.
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PROSPECTUS-FIRST AMENDED
OPTICON MEDICAL, INC.
7001 Post Road
Dublin, Ohio 43016
(614) 336-2000
5,455,385 SHARES OF COMMON STOCK
($.0001 par value)
This prospectus may be used only by the stockholders listed under the section
entitled "selling stockholders" in this prospectus for their resale of up to
5,455,385 shares of our common stock. The 5,455,385 shares are shares of our
common stock which these stockholders will receive upon conversion of preferred
stock or exercise of warrants or shares received as payment of dividends on the
preferred stock which they currently own. We will not receive any proceeds from
the sale of the shares by the selling stockholders.
Our common stock is currently quoted and traded on the National Association of
Securities Dealers OTC Bulletin Board under the symbol "OPMI." On August 22,
2000, the closing sale price of the common stock was $1.50 per share.
YOU SHOULD CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 5 BEFORE PURCHASING OUR
COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is August 29, 2000.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary .................................................................................. 3
Risk Factors......................................................................................... 5
Forward Looking Statements May Prove to be Inaccurate................................................ 11
Use of Proceeds...................................................................................... 11
Price Range of Common Stock.......................................................................... 11
Dividend Policy...................................................................................... 11
Determination of Offering Price...................................................................... 11
Management's Discussion and Analysis................................................................. 13
Business............................................................................................. 14
Management........................................................................................... 19
Principal Stockholders............................................................................... 23
Related Party Transactions........................................................................... 25
Description of Capital Stock......................................................................... 25
Selling Stockholders................................................................................. 28
Plan of Distribution................................................................................. 30
Legal Matters........................................................................................ 31
Experts.............................................................................................. 31
Changes in and Disagreements with Accountants on Accounting and Financial Information................ 31
Financial Statements................................................................................. F-1
</TABLE>
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You should rely on the information contained in this prospectus. We have not
authorized anyone to provide you with different information. We are not making
an offer of these securities in any jurisdiction where the offer or sale is not
permitted. You should not assume that the information contained in this
prospectus is accurate as of any date other than the date on the front cover of
this prospectus.
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PROSPECTUS SUMMARY
THIS SUMMARY PROVIDES AN OVERVIEW OF SELECTED INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS AND DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER.
THEREFORE, YOU SHOULD ALSO READ THE MORE DETAILED INFORMATION IN THIS PROSPECTUS
AND OUR FINANCIAL STATEMENTS. WHEN WE REFER IN THIS PROSPECTUS TO THE "COMPANY,"
"WE," "US," AND "OUR," WE MEAN OPTICON MEDICAL, INC., A DELAWARE CORPORATION,
TOGETHER WITH OUR SUBSIDIARIES AND THEIR RESPECTIVE PREDECESSORS, UNLESS
OTHERWISE INDICATED. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS AND
INFORMATION RELATING TO OPTICON MEDICAL, INC. SEE "FORWARD-LOOKING STATEMENTS
MAY PROVE TO BE INACCURATE" ON PAGE 11.
OUR BUSINESS
Our predecessor, Immune Response, Inc. was incorporated on May 24,
1984, as Med-Mark Technologies, Inc. for the purpose of marketing medical
products. We became Immune Response, Inc. on November 10, 1986. We established
and operated the Clinical Testing and Research Division until May 1991, when we
sold all of our assets to Infinity Laboratories, Inc. due to a lack of
commercial viability. Until recently, we had been inactive, seeking and
evaluating alternative business opportunities.
On February 25, 2000, as part of a merger among us, Opticon Medical,
Inc., an Iowa corporation, and Opticon Acquisition Corporation, a Delaware
corporation and our wholly-owned subsidiary, we acquired the business of Opticon
Medical, Inc., a development stage enterprise formed to develop, manufacture,
and market disposable devices to manage and control the symptoms of urinary
incontinence in adults. In the merger, Opticon Medical, Inc. was merged into our
wholly-owned subsidiary, which then changed its name from Opticon Acquisition,
Inc. to Opticon Medical, Inc. On July 27, 2000, pursuant to shareholder
approval, Immune Response merged into its wholly-owned subsidiary, Opticon
Medical, Inc. As a result of the mergers, our sole business now consists of the
research and development activities relating to the OPTICON(TM), a disposable,
silicone indwelling valved catheter designed to manage urinary incontinence, and
other related products for urology markets.
We are a development stage company, and to date have had no sales and
generated no revenues.
We are located at 7001 Post Road, Dublin, Ohio 43016, telephone:
(614) 336-2000.
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THE OFFERING
Common stock offered by the selling stockholders 5,455,385 shares (1)
Common stock outstanding as of August 22, 2000 7,691,762 shares (2)
Use of Proceeds We will not receive any
proceeds from the sale
of the common stock.
Over the Counter Bulletin Board Symbol OPMI
(1) Includes:
- 4,615,385 shares which may be received by the selling stockholders upon
conversion of their preferred stock assuming a market value of $1.00 per
share at the time of conversion.
- 540,000 shares which may be received as payment for dividends on the
preferred stock assuming a market value of $1.00 per share at the time of
conversion.
- 300,000 shares which may be received upon exercise of warrants held by
the selling stockholders.
(2) Does not include:
- 976,020 shares of common stock issuable upon exercise of warrants
outstanding as of August 22, 2000.
- 1,418,196 shares of common stock issuable upon exercise of stock options
outstanding as of August 22, 2000.
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RISK FACTORS
An investment in our common stock is highly speculative, involves a
high degree of risk, and should be made only by investors who can afford a
complete loss. You should carefully consider the following risk factors, as well
as the other information contained in this prospectus, before purchasing our
common stock.
WE ARE A DEVELOPMENT STAGE ENTERPRISE AND MAY NEVER HAVE POSITIVE EARNINGS OR
CASH FLOW
Our current business is limited to research and development activities
relating to the OPTICON(TM) and related products, from which we have yet to
derive any revenues. Therefore, our business is subject to risks incident to any
early stage business, including the absence of earnings. As of December 31,
1999, we had an accumulated deficit of $4,365,416. Until a successful commercial
launch of the OPTICON(TM) (which is by no means assured) we will realize little,
if any, revenue, and will be dependent upon the proceeds from our recent
debenture/preferred stock financing and follow-on rounds of capitalizations to
fund operations. See "Business - Recent Developments."
WE HAVE NEVER HAD ANY SALES OR REVENUES AND HAVE A HISTORY OF LOSSES. WE ALSO
ANTICIPATE FUTURE LOSSES.
We have been engaged primarily in the research, development and testing
of the OPTICON(TM) and related products. We have not had any commercial sales or
generated any revenues from the OPTICON(TM) or any other product to date and
have experienced operating losses since our inception, including those for
fiscal year 1999 totaling $799,873. We expect to incur substantial operating
losses and the rate at which such losses are incurred is expected to increase
relative to prior years as we prepare for the commercialization of the
OPTICON(TM). Until a successful commercial launch of the OPTICON(TM), which is
by no means assured, we will realize little, if any, revenue, and will be
dependent upon the proceeds of our recent debenture/preferred stock financing to
fund operations. There can be no assurance that we will ever generate revenues
or achieve profitability.
WE NEED TO RAISE ADDITIONAL CAPITAL IN 2000 IN ORDER TO BE SUCCESSFUL
We will likely incur substantial expenditures during 2000 to further
the development and commercialization of the OPTICON(TM). We do not currently
have adequate funds to accomplish our objectives and anticipate that we may need
to raise additional capital in 2000. We are unsure whether capital will be
available at that time.
WE FACE CERTAIN PRODUCT DEVELOPMENT RISKS AND THE UNCERTAINTY OF REGULATORY
APPROVAL
The OPTICON(TM) device is new and, accordingly, its safety and efficacy
has not yet been established. The production and marketing of our products,
including the OPTICON(TM), and our ongoing research and development activities
are subject to regulations by numerous government authorities in the United
States and other countries. The manufacture and sale of the OPTICON(TM) and
future products are subject to Food and Drug Administration review and approval,
which can be an expensive, lengthy and uncertain process. We received 510(k)
allowance to market the OPTICON(TM) Direct, a non-valved product, as a drainage
device in the United States, although we do not anticipate marketing the
OPTICON(TM) Direct at least until after introducing the OPTICON(TM). In February
1998, the FDA approved our petition to permit us to conduct human trials on
acute patient populations requiring short-term urinary management and to seek
market clearance for short-term use of the OPTICON(TM) via a 510(k) submission
rather than via the lengthier Pre-Market Approval process. The FDA, however,
currently requires the more extensive PMA process for qualifying transurethral
devices for the long-term management of incontinence. Once chronic use trials
begin, a PMA filing is expected within 24 months. The approval process for a PMA
application
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entails longer and more complicated regulatory review, often taking 6 to 12
months or longer from the time of filing.
Failure to complete clinical trials or obtain the necessary FDA
allowances or approvals, or to complete clinical trials or obtain such
allowances or approvals on a timely basis, would have a material adverse effect
on our business, financial condition and results of operations. In addition, the
FDA and various state agencies inspect medical device manufacturers (including
contract manufactures, such as we intend to employ) from time to time to
determine whether they are in compliance with applicable regulations, including
ones concerning manufacturing, testing, quality control and product labeling
practices. Noncompliance with applicable regulatory requirements (including
noncompliance by our third-party contract manufacturers) can result in, among
other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant pre-market clearance or approval for devices, withdrawal of marketing
clearances or approvals, and criminal prosecution. The FDA also has the
authority to request recall, repair, replacement or refund of the cost of any
device we manufacture or distribute.
OUR PRODUCTS FACE THE UNCERTAINTY OF MARKET ACCEPTANCE
The OPTICON(TM) represents a new approach to managing certain types of
urinary incontinence, and there can be no assurance that the OPTICON(TM) will
gain any significant degree of market acceptance even if necessary regulatory
clearances or approvals are obtained. We believe that recommendations by
physicians may be significant for market acceptance of the OPTICON(TM), and
there can be no assurance that we will obtain any such recommendations. In
addition, there can be no assurance that urinary incontinence sufferers in the
United States and abroad will accept the OPTICON(TM). Further, the incontinence
and urological device industry is highly competitive. In order to compete
successfully against other products, we must maintain competitive pricing.
Insufficient market acceptance of the OPTICON(TM) would have a material adverse
effect on our business, financial condition and results of operations.
OUR SUCCESS IS COMPLETELY DEPENDENT UPON THE SUCCESS OF THE OPTICON(TM)
Although we intend to develop a family of products for urology and
incontinence care, we expect that substantially all of our revenues in the
near-term will be derived from the OPTICON(TM). Failure to successfully
commercialize the OPTICON(TM) would have a material adverse effect on our
business, financial condition and results of operations.
WE DO NOT HAVE ANY MANUFACTURING CONTRACTS AND WILL BE DEPENDENDENT UPON THIRD
PARTIES FOR MANUFACTURING
Initially, we expect to contract with third parties for all of our
manufacturing and there can be no assurance that we will be able to enter into
acceptable contracts with appropriate third parties. In addition, we have
contracted with third parties for the creation of tooling, assembly, packaging
and sterilization. As a result, we will be dependent on such third parties to
produce our products efficiently and on a timely basis. Further, we will be
dependent on such third parties' quality control procedures. Failure of such
third parties to maintain adequate quality control or to manufacture products in
sufficient quantities and on a timely and cost-effective basis could have a
material adverse effect on our business, financial condition and results of
operations. Any interruption in supplies would also have a material adverse
effect on our business, financial condition and results of operations.
WE DO NOT HAVE ANY MARKETING AND SALES SUPPORT
We currently have no employees dedicated solely to marketing and sales.
We expect to market our products initially through distribution alliances. In
the future, we expect to market our products for the incontinence market in part
through a direct sales force. There can be no assurance that we can build a
distribution alliance or an effective sales force, attract and retain our own
qualified marketing and sales group in the United States, or otherwise design
and implement an effective marketing and sales strategy for the OPTICON(TM) or
any future products we develop.
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We expect to market our products internationally principally through
distributors or strategic alliances. There can be no assurance that we will be
able to engage such distributors or strategic partners or that if retained such
distributors or partners will be able to successfully market and sell our
products.
OUR PRODUCTS FACE SIGNIFICANT COMPETITION AND OUR COMPETITORS MAY DEVELOP MORE
EFFECTIVE PRODUCTS
Our ability to compete in the urinary incontinence management field
will depend primarily upon physician and consumer acceptance of the OPTICON(TM)
device, consistency of product quality and delivery, price, technical capability
and the training of health care professionals and consumers. Other factors
within and outside our control will also affect our ability to compete,
including our product development and innovation capabilities, our ability to
obtain required regulatory clearances, our ability to protect the proprietary
technology included in our products, our manufacturing and marketing
capabilities, our third-party reimbursement status, and our ability to attract
and retain skilled employees. Certain of our competitors have significantly
greater financial, technical, research, marketing, sales, distribution and other
resources than we have. The OPTICON(TM) is intended to be a management option
for the treatment of urinary incontinence, but it is not a permanent cure. The
development of new treatments that offer a permanent cure for urinary
incontinence could have a material adverse effect on our business, financial
condition and results of operations. There can be no assurance that our
competitors will not succeed in developing or marketing technologies and
products that are more effective or commercially attractive than any products
that we may offer, nor can there be any assurance that such competitors will not
succeed in obtaining regulatory clearance, introducing or commercializing any
such products before we do. Such developments could have a material adverse
effect on our business, financial condition and results of operations.
WE MAY NOT BE ABLE TO PROTECT OUR PATENTS OR PRODUCE OR MAINTAIN PROPRIETARY
TECHNOLOGY
Our ability to compete effectively will depend, in part, on our ability
to develop and maintain proprietary aspects of our technology. Although we have
a number of patents relating to the shape of the balloon and to the design and
function of the discharge valve, there can be no assurance that our patents will
not be challenged, invalidated or circumvented in the future. Legal standards
related to the enforceability, scope and validity of patents are in transition
and are subject to uncertainty due to broad judicial discretion and evolving
case law. Moreover, there can be no assurance that our competitors, many of
which have substantial resources and have made substantial investments in
competing technologies, will not seek to apply for and obtain patents that will
prevent, limit or interfere with our ability to make, use and sell our products
either inside or outside the United States. The defense and prosecution of
patent litigation or other legal or administrative proceedings related to
patents is both costly and time-consuming, even if the outcome is favorable to
us. An adverse outcome could subject us to significant liabilities to third
parties, require disputed rights to be licensed from others or require us to
cease making, using or selling any products. There also can be no assurance that
any licenses required under any patents or proprietary rights would be made
available on terms acceptable to us, if at all.
We also rely on unpatented proprietary technology, and there can be no
assurance that others may not independently develop the same or similar
technology or otherwise obtain access to our unpatented proprietary technology.
In addition, we cannot be certain that others will not independently develop
substantially equivalent or superseding proprietary technology, or that an
equivalent product will not be marketed in competition with our products,
thereby substantially reducing the value of our proprietary rights. There can be
no assurance that any confidentiality agreements between us and our employees,
consultants or contractors will provide meaningful protection for our trade
secrets, know-how or other proprietary information in the event of any
unauthorized use or disclosure of such trade secrets, know-how or other
proprietary information.
OUR PRODUCTS MAY NOT BE ELIGIBLE FOR THIRD-PARTY REIMBURSEMENT
In the United States and many foreign countries, third-party
reimbursement is currently generally available
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for surgical procedures for incontinence, but generally unavailable for
patient-managed products such as diapers and pads. Although we believe that
users of the OPTICON(TM) may ultimately be eligible for third-party
reimbursement, there can be no assurance that such reimbursement will become
available. The availability of third-party reimbursement for the OPTICON(TM) in
Europe will vary from country to country. If third-party reimbursement is
unavailable in the relevant European country or in the United States, consumers
will have to pay for the OPTICON(TM) themselves, resulting in greater relative
out-of-pocket costs of the OPTICON(TM) as compared to surgical procedures and
other management options for which third-party reimbursement is available.
Changes in the availability of third-party reimbursement for the OPTICON(TM),
for products of our competitors or for surgical procedures may affect the
pricing of the OPTICON(TM) or the relative cost to the consumer. We are not able
to predict the effect that the availability or unavailability of third-party
reimbursement for the OPTICON(TM) may have on the commercialization of the
OPTICON(TM) abroad or, ultimately, in the United States, but such effect may be
significant.
OUR PRODUCTS FACE INTERNATIONAL SALES AND OPERATIONS RISK
We intend to sell the OPTICON(TM) and any future products to customers
outside the United States as well as domestically. International sales and
operations may be limited or disrupted by the imposition of government controls,
export license requirements, political instability, market instability, trade
restrictions, changes in tariffs or difficulties in staffing and managing
international operations. Foreign regulatory agencies often establish product
standards different from those in the United States, and any inability to obtain
foreign regulatory approvals on a timely basis could have an adverse effect on
our international business and our financial condition and results of
operations. Additionally, our business, financial condition and results of
operations may be adversely affected by fluctuations in currency exchange rates
as well as increases in duty rates and difficulties in obtaining export
licenses. There can be no assurance that we will be able to successfully
commercialize the OPTICON(TM) or any future product in any foreign market.
WE ARE DEPENDENT ON KEY PERSONNEL AND NEED ADDITIONAL PERSONNEL
We are currently dependent on the services of our officers and
directors as well as our founder and other consultants. Our success is also
dependent in large part upon our ability to attract and retain key management
and operating personnel. Qualified individuals are in high demand and are often
subject to competing offers. In the immediate future, we will need to add
additional skilled personnel and to retain consultants in the areas of research
and development, regulatory affairs, marketing and manufacturing. There can be
no assurance that we will be able to attract and retain the qualified personnel
needed for our business. The loss of the services of one or more members of our
research or management group or the inability to hire additional personnel as
needed, would likely have a material adverse effect on our business, financial
condition and prospects. In addition, we do not have in force key man life
insurance policies on any of our key officers.
AS A MANUFACTURER AND MARKETER OF A CONSUMER PRODUCT, WE COULD EXPERIENCE
PRODUCT LIABILITY CLAIMS AND WE MAY NOT HAVE ADEQUATE INSURANCE COVERAGE
We face an inherent business risk of exposure to product liability
claims in the event that a consumer is adversely affected by our prospective
products. Based on the nature of the OPTICON(TM) technology and our preliminary
clinical results, we are hopeful that the OPTICON(TM) may potentially lower
infection rates compared to traditional Foley catheters. Because the OPTICON(TM)
is a foreign body in the urethra, however, there is always a chance of urinary
tract infection. The OPTICON(TM) is also subject to other potential risks that
apply to all indwelling catheters and devices, including urethral complications
(balloon inflation in the urethra, urethral stricture, damage to the urethra if
catheter removal is attempted while balloon is inflated) and bladder
complications (hematuria due to irritation or infection, polypoid cystitis
associated with long-term use, bladder perforation). There can be no assurance
that our existing $2 million umbrella insurance policy is adequate to protect us
from any liability we might incur in connection with the clinical studies or
sales of the OPTICON(TM). In addition, we may require increased product
liability coverage as the OPTICON(TM) is commercialized. Such insurance is
expensive, and there can be no assurance that such insurance in the future will
be available on commercially reasonable terms, or at all, or that such
insurance, even if obtained, would adequately cover any product liability claim.
A product liability or
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other claim with respect to uninsured liabilities or in excess of insured
liabilities could have a material adverse effect on our business, financial
condition and prospects.
YOU MAY HAVE DIFFICULTY BUYING AND SELLING OUR COMMON STOCK
Our common stock is currently traded in the over-the-counter market on
the OTC Bulletin Board. There can be no assurance that our common stock will
continue to be listed on the OTC Bulletin Board or that a market for our common
stock will exist in the future should our stockholders wish to sell any of their
shares. There is no assurance that, if a market exists in the future, that it
will be an active, liquid or continuous trading market. The stock market has
experienced extreme price and volume fluctuations and volatility that has
particularly affected the market prices of many technology, emerging growth, and
developmental companies. Such fluctuations and volatility have often been
related or disproportionate to the operating performance of such companies.
Factors such as announcements of the introduction of enhanced services or
related products by us or our competitors may have a significant impact on the
market price of our common stock.
BECAUSE OUR COMMON STOCK IS A "PENNY STOCK," TRADING IN IT IS SUBJECT TO THE
PENNY STOCK RULES WHICH COULD AFFECT YOUR ABILITY TO RESELL THE STOCK IN THE
MARKET
Our common stock is currently trading at a price below $5.00 per share,
subjecting trading in the stock to certain rules promulgated under the
Securities Exchange Act of 1934 requiring additional disclosures by
broker-dealers. These rules generally apply to any non-NASDAQ equity security
that has a market price of less than $5.00 per share, subject to certain
exceptions (a "penny stock"). Such rules require the delivery, prior to any
penny stock transaction, of a disclosure schedule explaining the penny stock
market and the risks associated therewith and impose various sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors (generally defined as an investor
with a net worth in excess of $1,000,000 or annual income exceeding $200,000
individually or $300,000 together with a spouse). For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to the sale. The broker-dealer also must disclose the
commissions payable to the broker-dealer, current bid and offer quotations for
the penny stock and, if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Such information must be provided to the customer orally or in
writing before or with the written confirmation of trade sent to the customer.
Monthly statements must be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in penny
stocks. The additional burdens imposed upon broker-dealers by such requirements
could discourage broker-dealers from effecting transactions in our common stock
which could severely limit the market liquidity of our common stock and our
stockholders' ability to sell them.
WE HAVE NEVER PAID A DIVIDEND AND DO NOT ANTICPATE DOING SO IN THE FORESEEABLE
FUTURE
We have never paid or declared a dividend on our common stock and do
not anticipate doing so in the foreseeable future. We have accumulated
substantial losses since our inception and there can be no assurance that our
operations will result in sufficient revenues to enable us to operate at
profitable levels or to generate positive cash flow. Any earnings generated from
our operations will be used to finance our business and growth.
THE ISSUANCE OF THE COMMON STOCK TO THE SELLING STOCKHOLDERS MAY CAUSE DOWNWARD
PRICING PRESSURE AND WILL DILUTE OUR STOCKHOLDERS' PERCENTAGE OF OWNERSHIP
The shares of preferred stock held by the selling stockholders are
convertible into common stock at a 35% discount to the market price of the
common stock at the time of conversion, which means that the potential dilution
of our stockholders' ownership will increase as our stock price goes down, since
the preferred stock is convertible at a floating rate that is a discount to the
market price. If the selling stockholders were to convert the preferred stock at
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the prevailing market price as of the date of this prospectus, the conversion
would result in the issuance of approximately 3,134,408 additional shares of
common stock to the selling stockholders. In addition, the sale of the common
stock issued upon conversion of the preferred stock and exercise of the warrants
issued to the selling stockholders will put downward pricing pressure on our
common stock.
We also expect to issue additional shares of our common stock to pay
dividends on the preferred stock, further diluting our stockholders' ownership
and putting additional downward pricing pressure on the common stock.
We also have outstanding options and warrants to purchase common stock
that were issued pursuant to the exchange of options and warrants held by
Opticon Medical, Inc. stockholders before the merger. Additional warrants were
issued to the selling stockholders. If some or all of these options and warrants
are exercised, our stockholders would experience a dilution in their percentage
of ownership and their voting power.
If we issue equity securities to raise funds, each stockholder's
interest may be reduced. Further, such equity securities may have rights,
preferences, or privileges senior to the common stock.
THE CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK MAY LIMIT YOUR ABILITY TO
INFLUENCE MATTERS
Our directors, executive officers and principal stockholders (5% or
greater) collectively beneficially own or have the right to acquire under
currently exercisable options approximately 71.63% of our outstanding shares of
common stock. As a result, these stockholders will be able to exercise
significant influence over matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. Such
concentration of ownership may have the effect of delaying or preventing a
change in control.
VOLATILITY OF MEDICAL TECHNOLOGY COMPANIES' SECURITIES MAY ADVERSELY EFFECT THE
MARKET PRICE OF YOUR STOCK
Market prices of securities of medical technology companies, including
the shares of our common stock, have experienced significant volatility from
time to time. There may be volatility in the market price of our common stock
due to factors that may not relate to our performance. Various factors and
events, such as announcements by us or our competitors concerning new product
developments, governmental approvals, regulations or actions, developments or
disputes relating to patent or proprietary rights and public concern over
product liability may have a significant impact on the market price our common
stock.
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<PAGE> 13
FORWARD LOOKING STATEMENTS MAY PROVE TO BE INACCURATE
We have made forward-looking statements in this prospectus that are
subject to risks and uncertainties. When we use the words "believe," "expect,"
"anticipate" or similar expressions, we are making forward-looking statements.
Because many factors can materially affect results, including those listed under
"Risk Factors," you should not regard our inclusion of forward-looking
information as a representation by us or any other person that our objectives or
plans will be achieved. Our assumptions relating to budgeting, research, sales,
results and market penetration and other management decisions are subjective in
many respects and thus are susceptible to interpretations and periodic revisions
based on actual experience and business developments, the impact of any of which
may cause us to alter our capital expenditures or other budgets, which may in
turn affect our business, financial position, results of operations and cash
flows. Therefore, you should not place undue reliance on forward-looking
statements contained in this prospectus, which speak only as of the date of this
prospectus. Factors that might cause actual results to differ from those
anticipated in the forward-looking statements include, but are not limited to,
those described in "Risk Factors." We undertake no obligation to publicly update
or revise any forward-looking statements.
USE OF PROCEEDS
The proceeds from the sale of the shares offered by this prospectus
will be received directly by the selling stockholders. We will not receive any
proceeds from the sale of the shares. We will, however, receive the exercise
price for any warrants which are exercised by the selling stockholders. We will
use any funds we receive for general working capital purposes.
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the over-the-counter market since
July 1988. Trading in the our common stock was reported by National Quotation
Service's "Pink Sheets" until January 1992 when the common stock ceased being
quoted. Effective July 1999, our common stock is admitted for quotation on the
NASD OTC Bulletin Board under the symbol "IMUN." Effective July 27, 2000, as a
result of the merger of Immune Response, Inc. with and into Opticon Medical,
Inc, we began trading under the new symbol "OPMI" on the NASD OTC Bulletin
Board. The following table sets forth, for the periods indicated, the high and
low bid per share, as reported by Nasdaq Trading & Market Services.
Third Quarter 1999 ............................... $0.9375 $0.5
Fourth Quarter 1999 .............................. $0.7 $0.25
First Quarter 2000 ............................... $6.5 $0.39
Second Quarter 2000 .............................. $3.5 $0.375
Third Quarter 2000 (through August 21, 2000) ..... $1.75 $0.94
The bid price quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
On August 22, 2000, the last reported sale price of our common stock
was $1.50 per share. On August 22, 2000, there were 706 holders of record of
shares of our common stock. This figure excludes an indeterminate number of
stockholders whose shares are held in "street" or "nominee" name.
DIVIDEND POLICY
We have not paid a dividend on our common stock and do not anticipate
paying any dividends in the foreseeable future. We may never pay cash dividends
or distributions on our common stock. Whether we pay cash dividends in the
future will be at the discretion of our Board of Directors and will be dependent
upon our financial condition, results of operations, capital requirements, and
any other factors that the Board of Directors decides is relevant.
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<PAGE> 14
DETERMINATION OF OFFERING PRICE
The common stock offered by this prospectus may be offered by the
selling stockholders from time to time in transactions reported on the NASD OTC
Bulletin Board, in negotiated transactions, or otherwise, or by a combination of
these methods, at fixed prices which may be changed, at market prices at the
time of sale, at prices related to market prices or at negotiated prices. As
such, the offering price is indeterminate as of the date of this prospectus. See
"PLAN OF DISTRIBUTION."
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<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
Our working capital, derived from a Debenture/Preferred Stock financing
completed in February 2000, was $1,736,780 at the end of the second quarter,
and is expected to fund our planned operations into the second quarter of 2001,
after which additional funds will be required for further business development.
We will continue to apply our existing cash resources to executing the current
stage of our business plan, specifically across four initiatives -
infrastructure, product development, regulatory approval and manufacturing
scale-up. Broadly, it is our plan to advance development to the point that
initial market introduction of the OPTICON(TM) device is considered imminent,
thereby establishing the basis for subsequent funding.
We have been methodically building our organization and internal
capabilities, and will continue the hiring of key employees as the demands of
the business call for the requisite financial, engineering and management
skills. We have successfully recruited management and operating personnel in
both the areas of product development/engineering and clinical and regulatory
affairs. While the recruiting of additional operating personnel in these areas
is expected, we plan to continue to use outside contractors to some extent, as
the needs of the business dictate. We expect that manufacturing and assembly
operations will be contracted to outside sources, and the process of qualifying
and specifying these contractors is nearing completion. Marketing and business
development management will be added to the organization later in the cycle as
the product approaches market readiness. We currently expect to employ directly
a total of some 8-10 associates by the end of 2000.
The primary focus of our product development activity currently centers
on integrating the final specifications of the first-generation female device
and creating the initial tooling which will facilitate the assembly of finished
devices for use in clinical trial. A final packaging design is also being
specified and sourced. A series of test equipment and test protocols have been
acquired or developed and are in routine use within our research and development
facility to better demonstrate product performance characteristics, to
facilitate failure mode analysis, and to further specify quality standards. We
plan to move the male-gender version of the device from prototype to pilot stage
following the completion of this critical phase of development for the female
configuration. We also hope to proceed in other developmental areas such as a
suprapubic configuration and an artificial sphincter, but the extent to which we
will be able to pursue development will be limited by resource constraints and
the prioritization of first-generation market entry.
Conducting clinical trials to support a 510(k) submission for
short-term urinary management is our primary objective in regulatory affairs. We
have drafted a trial protocol which we plan to finalize with assistance from our
previously assembled network of clinical investigators, after which we plan to
consult with the FDA for guidance prior to proceeding. A meeting with FDA is
scheduled for early September. We believe that a statistically valid sampling of
patients can be studied over a relatively short 4-5 month time frame once the
Institutional Review Boards of each of our investigative sites grant their
approval to proceed. Assuming trial results remain satisfactory, we expect to
have made our submission to the FDA before the end of the first quarter of 2001.
Within that period of time, it is also our goal to have essentially completed
the process necessary to apply for the European CE marking - the regulatory
requirement for entering major foreign markets.
Finally, production tooling is being preliminarily specified and
sourced so that we will be able to equip one or more contract manufacturers for
producing product components in scale quantities. Once we obtain regulatory
clearance, this will enable a marketing-level manufacturing capacity and provide
for meeting initial unit cost forecasts. Such tooling is significant in cost and
we have not been successful in attempting to arrange debt or leasing in advance
to mitigate the cash flow impact, primarily due to our pre-revenue status. This
may have an adverse impact by accelerating the need for cash infusion by several
months. We expect that we will need to raise additional capital early in 2001 in
order to complete development and commercialization of our first product.
Underlying the operating plan described above is the objective to
secure sales and distribution channels to the urology markets in both the U.S.
and Europe. We continue to have dialog with a number of the established market
participants for creating a strategic alliance and as we get closer to
demonstrating market readiness, it is likely that one or more of these
discussions will become more meaningful and definitive.
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<PAGE> 16
BUSINESS
BACKGROUND
Immune Response, Inc. was incorporated in the State of Colorado on May
24, 1984, as Med-Mark Technologies, Inc. for the purpose of marketing medical
products. When we were unable to obtain suitable products, we ceased operations
and remained inactive from July 1985 until November 10, 1986, when we changed
our name to Immune Response, Inc. From November 1986 until May 1991, we were a
biomedical firm engaged in three levels of activity - clinical testing, clinical
research, and basic research.
We operated the Clinical Testing and Research Division until May 1991,
when the Board of Directors, following an analysis of the results of the
Division's operations, determined that the operations were not commercially
viable and that it was highly unlikely the Division would ever be profitable.
Accordingly, on May 10, 1991, we entered into an Asset Purchase Agreement with
Infinity Laboratories, Inc. pursuant to which we sold to Infinity all of our
assets relating to our laboratory services. We suspended our biomedical
activities following this transaction and were inactive except for evaluating
alternative business opportunities.
On January 8, 1996, we announced that we had executed an agreement to
merge with Ocurest Laboratories, Inc. of Palm Beach Gardens, Florida. Concurrent
with executing the merger agreement, we made a secured loan to Ocurest in the
amount of $125,000. On February 23, 1996, we announced the mutual termination of
our merger agreement. As part of the mutual termination agreement, Ocurest
repaid the aforementioned loan with interest. In addition, Ocurest agreed to pay
us a fee of $10,000, with interest, upon the successful completion of its
planned initial public offering which fee was paid during the fourth quarter of
1996.
On February 10, 1997, at an Annual Meeting of Stockholders, our
stockholders approved a one-for-one hundred (1 for 100) reverse stock split
whereby every one hundred shares of our $.0001 par value common stock were
converted to one share of $.0001 par value common stock and approved a reduction
in the number of authorized shares from 950,000,000 to 25,000,000 effective
March 3, 1997. As a result, our issued shares were decreased from 312,470,000 to
3,124,700 and outstanding shares decreased from 294,970,000 to 2,949,700.
RECENT DEVELOPMENTS
On December 9, 1999, we entered into an Agreement and Plan of
Reorganization with Opticon Acquisition Corporation, a Delaware corporation and
our wholly-owned subsidiary, and Opticon Medical, Inc., an Iowa corporation,
("Opticon Iowa"), providing for the merger of Opticon Iowa with and into Opticon
Acquisition Corporation.
The stockholders of Opticon Iowa approved and adopted the Agreement and
Plan of Reorganization at a special meeting held on January 28, 2000. The merger
became effective February 25, 2000 and as a result, Opticon Acquisition
Corporation changed its name to Opticon Medical, Inc.
At the effective date of the merger, each outstanding share of common
stock, no par value, Series A Preferred Stock, no par value, and Series B
Preferred Stock, no par value, of Opticon Iowa, totaling 4,482,906 shares and
held by approximately 88 shareholders, was converted into the right to receive
1.23 shares of Immune Response, Inc. common stock, $.0001 par value. A total of
5,513,974 Immune Response shares were issued in the merger. All shares issued in
the merger were issued pursuant to exemptions from registration under the
Securities Act of 1933. The merger consideration was determined based upon
arms-length negotiations between us and Opticon Iowa.
As a result of the merger, all outstanding options, warrants, or other
purchase rights of Opticon Medical, Inc. were converted into the right to
receive the number of shares of our common stock as would have been issued or
delivered upon the exercise of such options, warrants and rights immediately
prior to the effectiveness of the merger. At the effective date of the merger,
there were outstanding an aggregate of 1,968,517 options and warrants, which by
reason of the merger may be exercised for approximately 2,421,276 shares of our
common stock.
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<PAGE> 17
The transaction between us and Opticon Medical, Inc, was a business
combination between an operating enterprise (Opticon Medical, Inc.) and a "shell
company" (Immune Response, Inc.), in which we were the issuer of securities and
the operating enterprise was determined to be the acquiring enterprise for
financial reporting purposes. In this case, the business combination was being
treated for financial reporting purposes as an issuance of securities by Opticon
Medical, Inc. which has credited equity for the fair value of the tangible net
assets of Immune Response (i.e., no goodwill or intangible assets were
recognized in this transaction). Costs related to this transaction were charged
directly to equity.
The historical financial statements of Opticon Iowa have been presented
as the historical financial statements of the combined enterprise and the assets
and liabilities of Immune Response were accounted for as required by the
purchase method of accounting without regard to which enterprise is the
surviving enterprise. The results of the operations of Immune Response are
included in the financial statements of the combined enterprise only from the
date of acquisition. The equity of Opticon Iowa has been presented as the equity
of the combined enterprise; however, the capital stock account of Opticon Iowa
has been adjusted to reflect the par value of our outstanding stock after giving
effect to the number of shares issued in the business combination. The
difference between the capital stock account of Opticon Iowa and our capital
stock account has been recorded as an adjustment to additional paid-in capital
of the combined enterprise. For periods prior to the business combination, the
equity of the combined enterprise is the historical equity of Opticon Iowa,
prior to the merger retroactively restated to reflect the number of shares
received in the business combination. The accumulated deficit of Opticon Iowa,
will be carried forward after the acquisition. Earnings (loss) per share for
periods prior to the business combination have been restated to reflect the
number of equivalent shares received by the shareholders of Opticon in the
merger.
Immediately following the merger, we entered into Securities Purchase
Agreements with certain investors, whereby investors purchased $3 million in
principal amount of 6% convertible debentures and warrants to purchase 300,000
shares of our common stock at a price of $6.60 per share. The debentures were
convertible, either in whole or in part, into common shares, at any time at the
option of the holder, and from time to time, at a conversion price per share of
common stock equal to the lesser of: (a) $4.50 or (b) 65% of the market price of
our common stock. Any principal amount of debentures outstanding on the third
anniversary of the issuance were automatically convertible into common stock at
the conversion price unless the common stock issuable on such conversion would
exceed 19.99% of the common stock outstanding on the mandatory conversion date,
in which case our shareholders would have to approve the issuance of the common
stock in excess of the 19.99% threshold. In the event of no shareholder
approval, any unconverted portion of the debentures were required to be redeemed
for cash.
The debentures were recorded at the amount of gross proceeds of $3
million, less the fair value of the warrants, which were valued at $775,000. The
calculated conversion price at February 25, 2000, the first available conversion
date, was $2.93 per share. In accordance with the FASB's Emerging Issues Task
Force Issue 98-5, the difference between this conversion price and the market
price of $4.50 per share was reflected as additional interest expense of
$1,613,013 in the combined company's statement of operations for the quarter
ended March 31, 2000.
On March 17, 2000, the debentures were exchanged for 3,000 shares of
Series A 6% Convertible Preferred Stock. The preferred stock has identical terms
and conditions to the debentures, except that the holders of preferred stock are
entitled to cumulative dividends rather than interest, payable quarterly in cash
or common stock. At the time of conversion, the principal balance of the
debentures was $2,246,528, and accrued interest was $9,250. On the conversion
date, we also netted the deferred debt issuance costs of $440,159, previously
recorded as an asset, with the carrying value of the preferred stock. The
dividends were accrued at June 30, 2000, in the amount of $51,781.
On July 27, 2000, Immune Response merged into its wholly-owned
subsidiary, Opticon Medical, Inc., a Delaware corporation. The merger was
approved at our Annual Meeting of Shareholders and became effective on July 27,
2000. As a result, our corporate structure was consolidated into a single entity
domiciled in Delaware, and began trading under the new symbol "OPMI" on the OTC
Bulletin Board. We continue our operations as a development stage enterprise
formed to develop, manufacture, and market disposable devices for use in urology
and for the management and control of the symptoms of urinary incontinence in
adults. Our current focus is on the development activities and regulatory
approval process relating to its initial product, the OPTICON(TM) , a
disposable, silicone indwelling valved catheter, to be first indicated for use
in acute, short-term urinary management.
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<PAGE> 18
At the effective date of the merger, each outstanding share of common
stock of Immune Response was converted automatically into one share of our
common stock, par value $0.0001 per share, and each outstanding share of Immune
Response preferred stock was converted into one share of our Series A, 6%
Convertible Preferred Stock, par value $0.0001 per share.
All outstanding options, warrants and other rights to purchase Immune
Response common stock were converted into options, warrants or rights to
purchase the same number of shares of Opticon Medical common stock.
OVERVIEW
Our current business began in 1994, as an Iowa corporation formed to
develop, manufacture, and market a series of innovative, proprietary,
cost-effective, disposable devices designed to manage and control the symptoms
of urinary incontinence in adults. Urinary incontinence, the involuntary loss of
urine, affects an estimated 18 million people in the United States, the vast
majority of which are female. Urinary incontinence can be an intrusive,
debilitating, and embarrassing condition that has a significant impact on a
patient's quality of life. Our founder, Fouad A. Salama, M.D., conceived,
produced, and tested a series of devices which showed promise for treating
individuals suffering from urinary incontinence, and his efforts ultimately
resulted in the OPTICON(TM) device and its associated patents, which formed the
basis of our business. We have recently relocated to Dublin, Ohio, and are
preparing to enter into the commercialization phase of business development.
Our initial product is the OPTICON(TM), a disposable, silicone,
indwelling valved catheter designed to manage urinary incontinence in females.
We have also developed the OPTICON(TM) Direct, a non-valved, continuous drainage
device to be used in the same manner as a Foley catheter. Because of the greater
innovation and distinct value of the OPTICON(TM) (valved) device, we intend to
market the OPTICON(TM) Direct on an opportunistic basis and only after the
OPTICON(TM) has been introduced commercially. We have developed prototypes of
male versions of the devices as well. We believe that the OPTICON(TM) device
represents a whole new modality in the management of urinary incontinence,
particularly for the moderate-to-severely incontinent patient who fails to be
satisfied by wearing absorbent pads or adult diapers, or for whom specific
surgical remedies or other treatments are not available. Additionally, early
clinical trial experience has suggested that our technology will have
applications within the short-term urinary management market as well. The
OPTICON(TM) is more functional than urethral plugs or patches and more
convenient than traditional Foley catheters. Individuals using the OPTICON(TM)
will remain dry and odor free and better able to engage in normal life
activities with reduced fear and embarrassment.
We expect to initially use a contract manufacturer to produce the
OPTICON(TM) and are pursuing arrangements with various vendors for different
phases of manufacturing, including tooling, component parts assembly,
sterilization, and packaging. We plan to market the products in the United
States using multiple distribution channels, including a direct sales force and
alliances with major health care companies. We also expect to develop
distribution relationships and corporate alliances for international
distribution.
Prior to the merger, we had had no sales, generated no revenues, and,
until the completion of the financing, have operated as a "virtual corporation"
by combining the contributions of a small number of direct full-time employees
with the services of a host of third-party contractors. We intend to apply
working capital toward more fully establishing its directly employed
infrastructure, completing its clinical trials for short-term use of the valved
device, further progressing its product development projects, and establishing
its initial market channels. We will continue to outsource expertise in the
legal and financial disciplines and expect to continue with contract
manufacturing at least through the first two years of market experience.
MARKET AND COMPETITIVE BUSINESS CONDITIONS
We believe that our principal competition will come initially from
existing urinary incontinence products, such as adult diapers and absorbents,
with additional competition from existing catheters and surgical products. Also,
pharmaceutical products have been introduced which have been shown to have a
certain effectiveness for urge incontinence. Procter & Gamble, Kimberly-Clark,
PMP, Inc., and Johnson & Johnson lead the market for diapers
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<PAGE> 19
and pads. The urological division of C.R. Bard is the market leader for current
indwelling catheters and supply products, holding over 50% of the market through
its branded and original equipment manufactured product lines. Other significant
participants in this market include Hollister, Sherwood, Rusch, Kendall, and
Mentor. Their primary market thrust continues to be in the area of traditional
urinary management. Bard also leads the United States market for bulking agents
with Contigen(TM), a collagen-based material which is injected into the
pertinent tissues for Intrinsic Sphincter Deficiency related incontinence.
We believe that we are well positioned to ultimately compete within a
total domestic market that currently exceeds $1.2 billion annually. We estimate
similarly sized opportunities in markets overseas.
GOVERNMENTAL REGULATIONS
Government regulation in the United States and other countries is a
significant factor in the development and marketing of our products and in our
ongoing manufacturing and research and development activities. We and our
products are subject to regulation by numerous governmental authorities,
primarily the United States Food and Drug Administration and corresponding
foreign agencies, under a number of statutes including the Food, Drug and
Cosmetic Act, as amended. Manufacturers of medical devices must comply with
applicable provisions and associated government regulations governing the
development, testing, manufacturing, labeling, marketing, and distribution of
medical devices and the reporting of certain information regarding their safety.
The FDC Act requires certain clearances from the FDA before medical devices,
such as the OPTICON(TM), can be marketed.
In August 1996, we received 510(k) allowance from the FDA to market the
OPTICON(TM) Direct as a drainage device. We expect to obtain FDA 510(k)
allowance and to have the OPTICON(TM) (valved) product market-ready for
short-term use, and plan to enter the market for short-term urinary management
for indications requiring use for 14 or fewer days. Thereafter, we intend to
seek an Investigational Device Exemption to permit clinical trials regarding
chronic use of the OPTICON(TM) and then file a Pre-Market Approval application
to obtain approval to market the OPTICON(TM) for chronic use in the United
States. The process for a Pre-Market Approval application often takes in excess
of 2 1/2 years, including the clinical trial process and subsequent
consideration from the FDA. In addition, we intend to seek ISO and CE mark
certification, which will facilitate the marketing of the OPTICON(TM) in Europe.
Conducting the clinical trials to support a 510(k) submission for
short-term urinary management is the primary objective in regulatory affairs. A
trial protocol has been drafted and will be brought to final form with
assistance from our previously assembled network of clinical investigators,
after which we will collaborate with the FDA to gain agreement to proceed to
trial. A meeting with FDA is now scheduled for early September. We believe that
a statistically valid sampling of patients can be studied over a relatively
short 4-5 month time frame once the Institutional Review Boards of each of our
investigative sites grant their approval to proceed. Assuming trial results
remain satisfactory, we expect to have made our submission to the FDA before the
end of the first quarter of 2001. Within that period of time, it is also our
goal to have essentially completed the process necessary to apply for the
European CE marking - the regulatory requirement for entering major foreign
markets.
PATENTS AND TRADEMARKS
Following the initial research and development of our core technology,
an initial United States patent was issued in 1990 relating to the one-way
disposable urinary control valve. Several subsequent patents and patent
extensions have been issued, the most recent of which was in December 1997, and
notice of allowance for claims relating to a new discharge valve was received in
March 1998. Patents relating to this core technology have also been issued in
Canada, Australia, Japan, North Korea, South Korea, and a number of countries
throughout Europe, including those countries participating in the Patent
Cooperation Treaty.
Issued patent claims apply to the proprietary shape of the retention
balloon and to the method for adjusting length and anchoring the device in
place. The design and function of the discharge valve is also patented.
Continuing development has resulted in additional patent applications, and in
April 1999, a new patent was issued for a surgically implantable artificial
sphincter. We originally acquired an exclusive and irrevocable license to the
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<PAGE> 20
OPTICON(TM) and its related technology from Dr. Salama. In 1997, we entered into
an ongoing exclusive consulting agreement with Dr. Salama, wherein Dr. Salama
assigned ownership of all existing patents, and will assign all future patents
he develops in the fields of urology, urogynecology, and urinary incontinence
care, directly to us.
EMPLOYEES
As of August 22, 2000, we employed 5 full time employees and used the
services of several external consultants. None of our employees are subject to a
collective bargaining agreement, and we consider our relationships with our
employees to be good.
PROPERTIES
We lease approximately 4,100 square feet of space at 7001 Dublin Road,
Suite 100, Dublin, Ohio 43016, at an annual net rent of $58,997, under a lease
that expires on September 30, 2001.
LEGAL PROCEEDINGS
We are not currently involved in any material pending legal
proceedings.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended, and file reports, proxy statements and other
information with the Securities and Exchange Commission. These reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Securities and Exchange Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the Securities and Exchange
Commission's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, IL 60661 and Seven World Trade Center,
13th Floor, New York, New York 10048. You can obtain copies of these materials
from the Public Reference Section of the Securities and Exchange Commission upon
payment of fees prescribed by the Securities and Exchange Commission. You may
obtain information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission's Web site contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Securities and Exchange Commission. The address of that site is
http://www.sec.gov.
We have filed a registration statement on Form SB-2 with the Securities
and Exchange Commission under the Securities Act with respect to the securities
offered in this prospectus. This prospectus, which is filed as part of a
registration statement, does not contain all of the information set forth in the
registration statement, some portions of which have been omitted in accordance
with the Securities and Exchange Commission's rules and regulations. Statements
made in this prospectus as to the contents of any contract, agreement or other
document referred to in this prospectus are not necessarily complete and are
qualified in their entirety by reference to each such contract, agreement or
other document which is filed as an exhibit to the registration statement. The
registration statement may be inspected without charge at the public reference
facilities maintained by the Securities and Exchange Commission, and copies of
such materials can be obtained from the Public Reference Section of the
Securities and Exchange Commission at prescribed rates
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<PAGE> 21
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME TITLE AGE
---- ----- ---
<S> <C> <C>
William J. Post President, Chief Executive Officer and Director 49
Walter L. Sembrowich, Ph.D. Chairman of the Board and Director 57
Ronald E. Eibensteiner Director 49
David Lundquist Director 57
Fouad A. Salama, M.D. Director 60
David B. Bittner Treasurer and Chief Financial Officer 33
John LaMarche Vice President of Operations 50
</TABLE>
Mr. Post has served as our President, Chief Executive Officer and
Director since joining us in March 1997. Mr. Post has 24 years of experience in
the health care industry, with significant experience in new business
development and turnarounds. Prior to joining us, Mr. Post had been employed
from 1993 as Senior Vice President, Sales and Marketing of Medex, Inc., a
medical device manufacturer in the fields of fluid and drug delivery and
infusion systems. From 1988 to 1993, he served as Vice President, Sales and
Marketing of Spectramed, Inc., a manufacturer and marketer of devices for
hemodynamic monitoring and cardiovascular access, and, after Ohmeda/BOC Health
Care acquired Spectramed, served as Vice President of Field Operations, where he
had full profit and loss responsibility for a $100 million division. From 1987
to 1988, Mr. Post was Director of Worldwide Marketing and New Business
Development for Instrumentation Laboratories, Inc., and from 1985 to 1987 he was
Director of Marketing for Travenol-Genentech Diagnostics, a division of Baxter.
Dr. Sembrowich has served as our Chairman of the Board and a Director
since January 1996 and was our Acting Chief Executive Officer from October 1996
to March 1997. Dr. Sembrowich is Founder, Chairman and CEO of Birch Point
Medical, Inc., a privately held development-stage company specializing in
non-invasive transdermal drug delivery systems. He is also President and founder
of Aviex, Inc., a provider of investment and development services to start-up
and early stage medical companies. Dr. Sembrowich co-founded Diametrics Medical,
Inc., a manufacturer and marketer of point-of-care blood chemistry testing
systems, where he served as CEO from 1990 to 1993 and Director and Co-Chairman
until 1996. He was also a founder of Arden Medical Systems, Inc., a manufacturer
and marketer of clinical chemistry measurement products for physician offices,
where he served as Director and Vice President of Scientific Affairs from 1983
to 1988. Johnson & Johnson acquired Arden Medical in 1987. Dr. Sembrowich is a
current Director of St. Jude Medical, the world's leading supplier of mechanical
heart valves, and serves on the board of Integ Incorporated. He has also been
Director for Minnesota Project Innovation and has served as Chairman and review
board member for the National Institutes of Health Small Business Innovative
Research program.
Mr. Eibensteiner has served as a Director since January 1996. Since
1983, Mr. Eibensteiner has been involved in the formation of several technology
companies and in 1991, founded Wyncrest Capital, Inc. to focus exclusively on
early-stage seed investment opportunities in the Minneapolis/St. Paul area.
Prior to starting Wyncrest Capital, he was co-founder of Diametrics Medical and
provided the seed capital for OnHealth Network Company (formerly IVI
Publishing). From 1983 to 1987, Mr. Eibensteiner was co-founder of Arden Medical
Systems and served as its Chief Financial Officer until its sale to Johnson &
Johnson in 1987. Currently, Mr. Eibensteiner is a
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<PAGE> 22
Director of IntraNet Solutions Inc., a provider of Web-based document management
solutions for corporate intranets, and is Chairman of the Board of OneLink
Communications, Inc., a company specializing in the transformation of raw
telecommunications data into visual business intelligence.
Mr. Lundquist has served as a Director since February 1995. Mr.
Lundquist is the Managing Partner of Lundquist, Schiltz & Associates, an
investment management firm. From 1991 to 1996, he was Vice Chairman of New
Heritage Associates, a company in partnership with Meredith Corporation, engaged
in the acquisition and operation of cable television systems. Until December
1990, Mr. Lundquist was Executive Vice President of Finance for Heritage
Communications, Inc., one of the largest cable television operators in the
country. From 1978 to 1980, he was Vice President of Finance for First Data and
from 1975 to 1977 was Treasurer of Valmont Industries. Mr. Lundquist serves on
the boards of QTech Systems, C.E. Software, MarketLink, Genesis Systems Group,
Ltd., and Horizon Technologies. He is also Director and Vice Chairman of Da-Lite
Screen Company.
Dr. Salama is our founder and is the inventor of its core technology,
and has served as a Director since our inception. From 1994 to 1996, he served
as our President and CEO, and thereafter as Executive Vice President of
Scientific and Medical Affairs. In November 1997, we entered into a consulting
agreement with Dr. Salama, whereby we retained him to render his exclusive
developmental services and design expertise in the areas of urology,
urogynecology and continence care. From 1973 to 1993, Dr. Salama was Associate
Professor of Medicine at the College of Osteopathic Medicine and Surgery in Des
Moines, Iowa, and practiced internal medicine and cardiology in West Des Moines,
Iowa. Currently, Dr. Salama is a private practitioner of internal medicine in
Temecula, California.
Mr. Bittner was appointed our Treasurer and Chief Financial Officer in
February 2000. Mr. Bittner is the founder of Growth Management Solutions, Inc.
incorporated in 1994. GMS administers financial management functions for
entrepreneurial businesses. Mr. Bittner has led GMS since its inception and has
personally served in a financial advisory capacity to several GMS clients. Prior
to this, Mr. Bittner worked at Price Waterhouse as a CPA managing audits of both
Fortune 500 firms and mid-market companies, as well as working as a management
consultant for the Center for Entrepreneurship, where he advised clients on
matters including process reengineering and management systems design. In
addition, Mr. Bittner worked for CID, an Indianapolis-based venture capital
firm, serving as roving CFO for several of CID's portfolio companies.
Mr. LaMarche has been our Vice President of Operations since September
1994 and served as a Director from September 1994 to June 1998. From 1993 to
1994, LaMarche consulted to health care and health insurance companies. Between
1977 and 1993, Mr. LaMarche held line management positions with CIGNA and
Equitable Life, where his responsibilities included managing 150 employees,
multiple offices and a $22 million operating budget. Effective February 11,
2000, Mr. LaMarche has submitted his resignation as Vice President of Operations
and will leave the employ of the Company in May 2000.
At the February 23, 2000 meeting of the Board of Directors, the Board
authorized the formation of an Audit Committee and a Compensation Committee.
Both the Audit Committee and Compensation Committee consists of Messrs.
Sembrowich, Lundquist, and Eibensteiner. As of the date of this prospectus,
there has been one meeting of the Audit Committee, and no meeting of the
Compensation Committee.
Our Board of Directors met 5 times during the year ended December 31,
1999.
Directors who are not employees receive no cash compensation for their
services, but receive stock options as compensation for their services. For
Board service during 1999, we granted options to purchase 10,000 shares of
common stock (exercisable at the fair market value on the date of grant) to
Messrs. Sembrowich, Eibensteiner, Lundquist, and Salama. In addition, we
reimburse Directors for out-of-pocket expenses for attending Board meetings.
Each director serves until the next annual meeting of our stockholders
and until his or her successor has been elected or until his or her prior death,
resignation or removal. Each executive officer holds office until his or her
successor has been appointed or until his or her prior death, resignation or
removal. There are no family
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<PAGE> 23
relationships among our directors and executive officers.
-21-
<PAGE> 24
SUMMARY COMPENSATION TABLE
The table below gives information regarding all annual, long-term and
other compensation paid by us to our Chief Executive Officer, our only executive
officer whose total annual salary and bonus exceeded $100,000 for services
rendered during any of the years indicated below. The individual listed below in
this table is referred to elsewhere in this prospectus as the "named executive
officer."
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------- ------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS COMPENSATION
($) ($) ------------ ($)
SECURITIES
UNDERLYING
OPTIONS
(#)
--------------------------------- ---- --------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
William J. Post, President and
Chief Executive Officer 1999 $160,000 $60,000(1) - -
1998 $160,000 $60,000(2) 150,000 -
1997 $133,333 $30,000(3) 250,000 -
</TABLE>
(1) $50,000 was deferred with interest at a rate of 10% per annum. The
deferral was paid in March 2000.
(2) $30,000 was deferred with interest at a rate of 10% per annum. The
deferral was paid in March 2000.
(3) $30,000 was deferred with interest at a rate of 10% per annum. The
deferral was paid in March 2000.
OPTIONS GRANTED IN LATEST FISCAL YEAR
No stock options were granted during 1999 to the named executive
officer.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth the number and value of stock
options held by the named executive officer at December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR-END IN-THE-MONEY OPTIONS AT
(#) FISCAL YEAR-END ($)(1)
-------------------------- ------------------------
SHARES
ACQUIRED VALUE
ON REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME EXERCISE ($)
(#)
---- --------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William J. Post 0 $0 492,000 0 $0 $0
</TABLE>
(1) Represents the total gain which would be realized if all in-the-money
options held at year end were exercised, determined by multiplying the
number of shares underlying the options by the difference between the
per share option exercise price and the per share fair market value at
year end ($0.39 on December 31, 1999). An option is in-the-money if
the fair market value of the underlying shares exceeds the exercise
price of the option.
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<PAGE> 25
EMPLOYMENT AGREEMENTS
In March 1997, we entered into an employment agreement with Mr. Post,
which provides, among other things, for a salary of $160,000, payment of bonus
compensation upon achievement of certain milestones, grant of an option to
purchase 250,000 shares of our common stock, indemnification for certain
breaches of his fiduciary duty as a director, continuation of his then current
base salary for a period of 12 months (or such lesser period until he finds
other full-time employment) if we terminate his employment without "cause" (as
such term is defined in such agreement), and a covenant not to compete and not
to solicit our employees during the term of his employment and for two years
following the termination of his employment for any reason. Such employment
agreement has an initial term of two years and is automatically extended for
successive one year periods unless either party objects to such extension at
least 30 days prior to the end of the initial term or any extension term. In
light of our limited financial resources, we amended such employment agreement
in February 1998 to defer Mr. Post's unpaid bonuses earned in 1997 and 1998,
which deferred amount accrued interest at a rate of 10%. The deferrals continued
in 1999. In March 2000, we paid the deferrals with interest.
In September 1997, we entered into an employment agreement with Mr.
LaMarche, which agreement provides, among other things, for a salary of
$100,000, indemnification for certain breaches of his fiduciary duty as a
director, continuation of his then current base salary for a period of four
months (or such lesser period until he finds other full-time employment) if we
terminate his employment without "cause" (as such term is defined in such
agreement), and a covenant not to compete and not to solicit our employees
during the term of his employment and for two years following the termination of
his employment for any reason. Such employment agreement had an initial term
ending December 31, 1997, but is automatically extended for successive one year
periods unless either party objects to such extension at least 30 days prior to
the end of any extension term. In light of our limited financial resources, such
employment agreement was amended in February 1998 to defer 27% of Mr. LaMarche's
1998 salary, which deferred amount accrued interest at a rate of 10%. The
deferrals continued in 1999. In March 2000, the deferrals were paid with
interest.
In November 1997, we entered into a four-year consulting agreement with
Dr. Salama, pursuant to which Dr. Salama agreed to render his exclusive
developmental services and design expertise in the areas of urology,
urogynecology and incontinence care. In return for his services, Dr. Salama
received $110,000 per year for the first two years of the agreement and will
receive $75,000 per year for the remaining two years as well as reasonable and
necessary out-of-pocket expenses. The consulting agreement also provides that
Dr. Salama will assign directly to us all future patents developed during the
consulting period or within one year thereafter and relating to our business. In
connection with the consulting agreement, we also entered into an agreement with
Dr. Salama, providing, among other things, for (i) assignment to us of all of
Dr. Salama's existing patents relating to our business, (ii) continuation and
extension of certain benefits and stock options, (iii) mutual release of claims,
and (iv) a two-year noncompetition agreement.
-23-
<PAGE> 26
PRINCIPAL STOCKHOLDERS
The following table provides information regarding the beneficial
ownership of our common stock as of August 22, 2000 by:
- each stockholder known by us to be the beneficial
owner of more than 5% of our common stock;
- each director;
- the named executive officer; and
- all directors and executive officers as a group.
We have determined beneficial ownership in accordance with the rules of
the Securities and Exchange Commission. Unless otherwise indicated, the persons
and entities included in the table have sole voting and investment power with
respect to all shares beneficially owned, subject to applicable community
property laws. Shares of our common stock subject to options that are either
currently exercisable or exercisable within 60 days of August 22, 2000, are
treated as outstanding and beneficially owned by the option holder for the
purpose of computing the percentage ownership of the option holder. However,
these shares are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
SHARES BENEFICIALLY OWNED
---------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
----------------------------------------------- --------- --------
Ronald E. Eibensteiner(1) 1,308,090 16.2%
John LaMarche(2) 175,275 2.2%
David J. Lundquist(3) 492,431 6.2%
William J. Post(4) 634,680 7.8%
Fouad A. Salama, M.D.(5) 1,151,514 14.6%
Walter L. Sembrowich, Ph.D.(6) 386,847 4.8%
Iowa Seed Capital Corporation(7) 519,372 6.7%
Wayne Mills(8) 595,647 7.6%
Henry Fong(9) 525,167 6.8%
The Shaar Fund, Ltd.(10) 1,576,964 20.1%
Augustine Fund, L.P(11) 1,038,086 13.3%
Zakeni, Ltd.(12) 259,522 3.4%
All directors and executive officers as a group 4,148,837 44.3%
(6 persons)(13)
----------
(1) Includes 270,600 shares which may be purchased under stock options and
warrants exercisable within 60 days of August 22, 2000 held by Mr.
Eibensteiner, and 975,990 shares (including 88,245 options and
warrants exercisable within 60 days of August 22, 2000) held by
Wyncrest Capital, Inc., of which Mr. Eibensteiner claims beneficial
ownership.
(2) Includes 135,915 shares which may be purchased under stock options and
warrants exercisable within 60 days of August 22, 2000.
(3) Includes 249,290 shares which may be purchased under stock options and
warrants exercisable within 60 days of August 22, 2000.
(4) Includes 492,000 shares which may be purchased under stock options and
warrants exercisable within 60 days of August 22, 2000.
(5) Includes 206,757 shares which may be purchased under stock options and
warrants exercisable within 60 days of August 22, 2000.
(6) Includes 236,474 shares which may be purchased under stock options and
warrants exercisable within 60 days of August 22, 2000.
-24-
<PAGE> 27
(7) Includes 44,436 shares which may be purchased under stock options and
warrants exercisable within 60 days of August 22, 2000.
(8) Includes 98,400 shares which may be purchased under stock options and
warrants exercisable within 60 days of August 22, 2000.
(9) Includes 49,200 shares which may be purchased under stock options and
warrants exercisable within 60 days of August 22, 2000.
(10) Includes 1,505,534 shares which may be purchased upon conversion of
the preferred stock and exercise of the warrants.
(11) Includes 1,038,086 shares which may be purchased upon conversion of
the preferred stock and exercise of the warrants.
(12) Includes 259,521 shares which may be purchased upon conversion of the
preferred stock and exercise of the warrants.
(13) Includes 1,679,281 shares which may be purchased under stock options
and warrants exercisable within 60 days of August 22, 2000.
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<PAGE> 28
RELATED PARTY TRANSACTIONS
On November 29, 1999, Opticon Medical, Inc., the Iowa corporation,
issued a Promissory Note to us for the sum of $100,000. The loan was made for
the purpose of covering Opticon Medical, Inc., the Iowa corporation's operating
expenses pending the merger. We financed the loan through our Private Placement
Offering in November 1999. We settled the Promissory Note, together with accrued
interest at a rate of 8.5%, as part of the merger.
DESCRIPTION OF CAPITAL STOCK
The following brief description of certain provisions of our Conformed
Certificate of Incorporation and Amended and Restated Bylaws does not purport to
be complete and is subject in all respects to the provisions of the Certificate
and Bylaws, copies of which have been filed as exhibits to the registration
statement of which this prospectus is a part.
Our authorized capital stock consists of 25,000,000 shares of common
stock, $0.0001 par value, and 1,000,000 shares of preferred stock, $0.0001 par
value. There are currently outstanding 7,691,762 shares of common stock, and
3,000 shares of preferred stock. All outstanding shares of common stock are
fully paid and non-assessable.
COMMON STOCK
Holders of validly issued and outstanding shares of common stock are
entitled to one vote per share of record on all matters to be voted upon by
stockholders. At a meeting of stockholders at which a quorum is present, a
majority of the votes cast decides all questions, unless the matter is one upon
which a different vote is required by express provision of law or our
Certificate or Bylaws. Our Certificate does not provide stockholders the right
to cumulate their votes in the election of directors. As a result, holders of
more than 50% of the outstanding shares can elect all of our directors.
Stockholders have no preemptive or other rights to subscribe for additional
shares nor any other rights to convert their common stock into any other
securities.
Subject to the preferences that may be applicable to the holders of any
outstanding shares of preferred stock, holders of common stock are entitled to
such dividends as may be declared by the Board of Directors out of funds legally
available therefor. The payment by us of dividends, if any, rests within the
discretion of our Board of Directors and will depend upon our operating results,
financial condition and capital expenditure plans, as well as other factors
considered relevant by the Board of Directors. Upon our liquidation, dissolution
or winding-up, the assets legally available for distribution to stockholders are
distributable ratably among the holders of common stock at that time
outstanding, subject to prior distribution rights of our creditors and
preferential rights of any outstanding shares of preferred stock.
PREFERRED STOCK
Our Certificate authorizes the Board of Directors to issue up to
1,000,000 shares of preferred stock in one or more series and to establish such
relative dividend, redemption, liquidation, conversion and other powers,
preferences, rights, qualifications, limitations and restrictions as the Board
of Directors may determine without further approval of our stockholders. The
issuance of preferred stock by the Board of Directors could be used, under
certain circumstances, as a method of delaying or preventing a change in control
and could permit the Board of Directors, without any action by holders of common
stock, to issue preferred stock which could have a detrimental effect on the
rights of holders of common stock, including loss of voting control. In certain
circumstances, this could have the effect of decreasing the market price of the
common stock.
The issuance of any series of preferred stock, and the relative powers,
preferences, rights, qualifications, limitations and restrictions of such
series, if and when established, will depend upon, among other things, our
future capital needs, the then-existing market conditions and other factors
that, in the judgment of the Board of Directors, might warrant the issuance of
preferred stock.
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<PAGE> 29
SERIES A, 6% CONVERTIBLE PREFERRED STOCK
On February 24, 2000, the directors authorized the designation of 3,000
shares of preferred stock as the "Series A, 6% Convertible Preferred Stock".
These shares were issued pursuant to an Exchange Agreement between us and the
selling stockholders whereby the selling stockholders received an equal number
of preferred stock for their interests in the debentures. See "Selling
Stockholders."
Each share of preferred stock has a stated value of $1,000 and is
entitled to receive dividends at a rate of six (6%) percent per annum of the
stated value per share thereof. Dividends are cumulative from the date of issue,
whether or not declared for any reason and whether or not there are funds
legally available for the payment thereof. Each dividend is payable at our
option, in common stock or cash on a pro rata basis, in equal quarterly amounts
on each March 31, June 30, September 30 and December 31 of each year the Series
A Preferred Stock is outstanding, beginning on June 30, 2000.
Except as otherwise provided by the Delaware General Corporation Law,
the holders of the preferred stock have no voting rights.
The shares of preferred stock are convertible at any time into shares
of common stock, at a price equal to the lesser of: (a) $4.50 and (b) 65% of the
average of the closing bid prices of the common stock as reported by the OTC/BB
for the five (5) consecutive trading days immediately prior to conversion,
subject to adjustment for certain events. We will mandatorily convert the
preferred shares into common stock on February 25, 2003.
WARRANTS
We issued to the selling stockholders warrants to purchase 300,000
shares of our common stock. They are exercisable by the selling stockholders at
any time until February 28, 2005, at a purchase price equal to $6.60 per share.
The warrants issued to the selling stockholders contain provisions that
protect the holder against dilution by adjustment of the exercise price and
number of shares to be received upon exercise. Adjustments will occur in the
event, among others, of a merger, stock split or reverse stock split, stock
dividend or recapitalization. We are not required to issue fractional shares
upon the exercise of the warrants. The holder of the warrants will not possess
any rights as a stockholder until the holder exercises the warrants.
The warrants may be exercised upon surrender on or before the
expiration date of the warrants at our offices, with an exercise form completed
and executed as indicated, accompanied by payment of the exercise price for the
number of shares for which the warrant is being exercised. The exercise price is
payable by check or bank draft payable to our order or by wire transfer.
For the life of the warrants, the holder has the opportunity to profit
from a rise in the market price of the common stock without assuming the risk of
ownership of the shares of common stock issuable upon the exercise of the
warrant. The warrant holder should be expected to exercise the warrant at a time
when we would likely be able to obtain any needed capital by an offering of
common stock on terms more favorable than those provided for by the warrant.
Furthermore, the term on which we could obtain additional capital during the
life of the warrant may be adversely affected.
TRANSFER AGENT
The Transfer Agent and registrar for our common stock is Corporate
Stock Transfer, Inc., Denver, Colorado.
CERTAIN PROVISIONS OF OUR ARTICLES AND BYLAWS
STOCKHOLDER ACTION BY WRITTEN CONSENT
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<PAGE> 30
Our Bylaws provide that any action that may be taken at a meeting of
our stockholders may be taken without a meeting if such action is authorized by
the unanimous written consent of all stockholders entitled to vote at a meeting
for such purposes. Since we have numerous stockholders, it is not likely that
action by unanimous written consent of the stockholders is feasible.
SPECIAL MEETINGS
Our Bylaws provide that special meetings of our stockholders may be
called by the Board, by our President or by one or more written demands for the
meeting, stating the purposes for which it is to be held, signed and dated by
the holders of shares representing at least 10 percent of all the votes entitled
to be cast on any issue proposed to be considered at the meeting. This
provisions may make it difficult for stockholders to take action opposed by the
Board.
AMENDMENTS TO OUR BYLAWS
Our Bylaws provide that they may be amended or repealed by the
stockholders or, except to the extent limited by Delaware law, by the Board of
Directors.
INDEMNIFICATION
Our directors and officers are entitled to statutory rights to be
indemnified by us against litigation-related liabilities and expenses if the
director or officer is either successful in the defense of litigation or is
otherwise not to have engaged in willful misconduct, knowingly violated the law,
failed to deal fairly with us or our stockholders or derived an improper
personal benefit in the performance of his duties to us. These rights are
incorporated in our Certificate and Bylaws. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to our directors,
officers, and controlling persons, we have been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities, other than
the payment by us of expenses incurred or paid by our directors, officers or
controlling persons in connection with any securities being registered, we will,
unless in the opinion of counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by us is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issues.
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<PAGE> 31
SELLING STOCKHOLDERS
The 5,455,385 shares of our common stock described in this prospectus
includes 4,615,385 shares which may be issued to the selling stockholders upon
exchange of their preferred stock, 540,000 shares which may be issued as payment
for dividends on the preferred stock, plus 300,000 shares which may be issued
upon exercise of their warrants. Except for the ownership of the preferred stock
and the warrants (and any shares upon conversion or exercise thereof), the
selling stockholders have not had a material relationship within the past three
years with us. The shares of common stock are being registered to permit public
secondary trading of the shares, and the selling stockholders may offer the
shares for resale from time to time. See "PLAN OF DISTRIBUTION."
The warrants were issued by us in February 2000, and are exercisable at
a price equal to $6.60 per share. Pursuant to an Exchange Agreement between us
and the selling stockholders, the preferred stock was issued in exchange for
certain debentures issued by us in February 2000. The preferred stock and any
dividends accrued thereon may be converted into common stock at any time. The
preferred stock is entitled to cumulative annual dividends at the rate of 6% of
stated value payable in common stock at the time of each conversion, and is
convertible into shares of our common stock based on the conversion price at the
time of conversion. The conversion price is an amount equal to the lesser of (a)
$4.50 and (b) 65% of the average of the closing bid prices of the common stock
for the five business days prior to conversion. The conversion price is subject
to equitable adjustment upon the occurrence of certain events, such as stock
splits, stock dividends, reclassifications or combinations.
A selling stockholder is prohibited from converting any portion of the
preferred stock which would result in the selling stockholder being deemed the
beneficial owner, in accordance with the provisions of Rule 13d-3 under the
Exchange Act, of 5.00% or more of the then issued and outstanding common stock.
As required by the Exchange Agreement and related Registration
Rights Agreement, in recognition of the fact that selling stockholders may wish
to be legally permitted to sell any shares of common stock acquired upon
conversion of the preferred stock or exercise of the warrants, or received as
payment for dividends on the preferred stock when they deem appropriate, we have
filed with the Commission under the Securities Act a registration statement on
Form SB-2, of which this prospectus forms a part, with respect to the resale of
the shares of common stock by the selling stockholders from time to time on the
OTC Bulletin Board or in privately-negotiated transactions.
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<PAGE> 32
Information regarding beneficial ownership of our common stock by the
selling stockholders as of August 22, 2000 follows. The table assumes that the
selling stockholders sell all shares offered under this prospectus. We can make
no assurance as to how many of the shares offered that the selling stockholders
will in fact sell.
<TABLE>
<CAPTION>
NAME OF SELLING STOCKHOLDER NUMBER OF SHARES PERCENTAGE OF COMMON NUMBER OF SHARES BEING
BENEFICIALLY OWNED BEFORE STOCK OWNED BEFORE OFFERED HEREBY
OFFERING (1) OFFERING
<S> <C> <C> <C>
The Shaar Fund, Ltd.(2)
c/o Shaar Advisory Services, Ltd.
62 King George Street, A pt. 4F
Jerusalem, Israel
Attn; Sam Levinson 1,576,964 20.1% 1,576,964
Augustine Fund, L.P.(3)
Attn: Tom Duszynski
141 W. Jackson Blvd., Ste. 2182 1,038,086 13.3% 1,038,086
Chicago, Illinois 60604
Zakeni, Ltd.(4)
c/o Sheldon Salzman
620 Wilson Avenue #501
Toronto, Ontario 259,522 3.4% 259,522
Canada M3K 1Z3
Levana Fund, N.V.(5)
Attn: Mr. Maxo Benalal
Riviera Palace
6 Rue de Genets 103,809 1.3% 103,809
MC-98000 Monaco
Barry Seidman(6)
P.O. Box 9813 134,951 1.8% 134,951
Rancho Santa Fe, CA 92067
Dale N. Steen DDS IRA(7)
c/o Dale N. Steen, DDS
1656 30th Street 20,762 0.3% 20,762
Boulder, CO 80301
</TABLE>
(1) Represents the number of shares of our common stock owned by the selling
stockholders as of the date of this prospectus, plus approximately the aggregate
number of shares of our common stock which the selling stockholders would be
entitled to acquire upon conversion of the preferred stock, assuming a market
price upon conversion of $1.64 per share, and upon exercise of the warrants. The
selling stockholders currently beneficially own approximately 3,134,093 shares
in the aggregate, but the actual number of shares which may be beneficially
owned by them on any future date will depend on the aggregate principal amount
of preferred stock then outstanding, the conversion price(s) on the date(s)
preferred stock has been converted, and the number of shares of our common stock
which have previously been sold by them pursuant to this registration statement.
(2) Includes 1,327,392 shares of common stock which would be held upon
conversion of the preferred stock and 150,000 shares that would be held upon
exercise of the warrants. As of the date of this prospectus, Shaar has converted
85 shares of preferred stock into 99,572 shares of common stock.
(3) Includes 938,086 shares of common stock which would be held upon conversion
of the preferred stock and 100,000 shares that would be held upon exercise of
the warrants.
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<PAGE> 33
(4) Includes 234,522 shares of common stock which would be held upon conversion
of the preferred stock and 25,000 shares that would be held upon exercise of the
warrants.
(5) Includes 93,809 shares of common stock which would be held upon conversion
of the preferred stock and 10,000 shares that would be held upon exercise of the
warrants.
(6) Includes 121,951 shares of common stock which would be held upon conversion
of the preferred stock, and 13,000 shares that would be held upon exercise of
the warrants.
(7) Includes 18,762 shares of common stock which would be held upon conversion
of the preferred stock, and 2,000 shares that would be held upon exercise of the
warrants.
PLAN OF DISTRIBUTION
Although we have not been advised of any selling stockholders' plans to
do so, the selling stockholders may sell the shares from time to time in
transactions in over-the-counter transactions reported on the OTC Bulletin
Board, in negotiated transactions, or otherwise, or by a combination of these
methods, at fixed prices which may be changed, at market prices at the time of
sale, at prices related to market prices or at negotiated prices. A selling
stockholder shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if it deems the purchase price to be
unsatisfactory at any particular time. The selling stockholders may effect these
transactions by selling the shares to or through broker-dealers, who may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders or the purchasers of the shares for whom the broker-dealer
may act as an agent or to whom they may sell the shares as a principal, or both.
The compensation to a particular broker-dealer may be in excess of customary
commissions.
Broker-dealers who act in connection with the sale of the shares may be
underwriters. Profits on any resale of the shares as a principal by such
broker-dealers and any commissions received by such broker-dealers may be
underwriting discounts and commissions under the Securities Act.
Any broker-dealer participating in transactions as agent may receive
commissions from a selling stockholder and, if they act as agent for the
purchaser of the shares, from the purchaser. Broker-dealers may agree with a
selling stockholder to sell a specified number of shares at a stipulated price
per share and, to the extent a broker-dealer is unable to do so acting as agent
for the selling stockholder, to purchase as principal any unsold shares at a
price required to fulfill the broker-dealer commitment to the selling
stockholder. Broker-dealers who acquire shares as a principal may resell the
shares from time to time in transactions (which may involve crosses and block
transactions and which may involve sales to and through other broker-dealers,
including transactions of the nature described above) in the over-the-counter
market, in negotiated transactions or otherwise at market prices prevailing at
the time of sale or at negotiated prices, and may pay to or receive from the
purchasers of the shares commissions computed as described above. To the extent
required under the Securities Act, a supplemental prospectus will be filed,
disclosing:
- the name of the broker-dealers;
- the number of shares involved;
- the price at which the shares are to be sold;
- the commissions paid or discounts or concessions
allowed to the broker-dealers, where applicable;
- that broker-dealers did not conduct any investigation to
verify the information in this prospectus, as supplemented; and
- other facts material to the transaction.
-31-
<PAGE> 34
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the shares may not simultaneously engage in
market making activities with the common stock for a period beginning when the
person becomes a distribution participant and ending upon the person's
completion of participation in a distribution, including stabilization
activities in the common stock to effect covering transactions, to impose
penalty bids or to effect passive market making bids. In addition, we and the
selling stockholders will be subject to applicable provisions of the Exchange
Act, including Rule 10b-5 and to the extent we and the selling stockholders are
distribution participants, Regulation M. These rules and regulations may affect
the marketability of the shares.
The selling stockholders will pay any commissions associated with the
sale of the shares. The shares offered by this prospectus are being registered
to comply with contractual obligations, and we have paid the expenses of the
preparation of this prospectus. We have also agreed to indemnify the selling
stockholders against liabilities, including liabilities under the Securities
Act, or, if the indemnity is unavailable, to contribute toward amounts required
to be paid the liabilities.
LEGAL MATTERS
The validity of the shares offered hereby has been passed upon for us
by Porter, Wright, Morris & Arthur LLP, 41 South High Street, Columbus, Ohio
43215.
EXPERTS
The financial statements of Opticon Medical, Inc. (f/k/a Immune
Response, Inc.)(a development stage enterprise) as of December 31, 1999, and for
the year ended December 31, 1999 and the period from May 14, 1984 (inception) to
December 31, 1999, included herein and elsewhere in the registration statement
have been audited by KPMG LLP, independent certified public accountants. Such
financial statements have been included herein and in the registration statement
in reliance upon the report of KPMG LLP, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The cumulative statements of operations, stockholders' equity, and cash
flows for the period May 14, 1984 (inception) to December 31, 1999 include
amounts for the period from May 14, 1984 (inception) to December 31, 1998 and
for the year ended December 31, 1998, which were audited by other auditors whose
report has been furnished to KPMG LLP, and KPMG LLP's opinion, insofar as it
relates to the amounts included for the period May 14, 1984 through December 31,
1998 is based solely on the report of the other auditors.
The report of KPMG LLP covering the December 31, 1999, financial
statements contains an explanatory paragraph that states that the Company's
recurring losses from operations raise substantial doubt about the entity's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of that uncertainty.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On November 2, 1999, we dismissed Davis & Co., CPA's, P.C. as our
independent certified public accountant. There have been no adverse opinions,
disclaimers of opinion or qualifications or modifications as to audit scope or
accounting principles regarding the reports of Davis on our financial statements
for each of the fiscal years ended December 31, 1998 and 1997, or any subsequent
interim period. Our Board of Directors approved the change of accountants and
that action was ratified by our Board of Directors as we had no formal audit
committee.
For the fiscal years ended December 31, 1998 and 1997, the auditors
report contained a qualification as to uncertainty which read as follows:
-32-
<PAGE> 35
"The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 8, the
Company has minimal capital resources presently available to meet obligations
which normally can be expected to be incurred by similar companies, and has
accumulated deficit of ($924,145) at December 31, 1998. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 8. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty."
Simultaneously with the dismissal of Davis, we approved and engaged
Gelfond Hochstadt Pangburn, P.C. to act as our independent certified public
accountant as successor to Davis. During our fiscal years ended December 31,
1998 and 1997, or subsequent interim period, we had not consulted with Gelfond
regarding the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on our financial statements, or any other matter that was the subject
of disagreement or a reportable condition.
On March 13, 2000, we dismissed Gelfond as our independent certified
public accountant. Gelfond has not issued any opinions on our financial
statements, and, therefore, there have been no adverse opinions, disclaimers of
opinion or qualifications or modification as to audit scope or accounting
principles regarding any report of Gelfond on our financial statements. Our
Board of Directors approved the change of accountants and that action was
ratified by our Board of Directors. There were no disagreements with Gelfond on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope of procedures leading to their dismissal. The
dismissal is a result of the change of the our Board of Directors and the moving
of our principal office to Dublin, Ohio, as a result of our merger with Opticon
Medical.
Simultaneously with the dismissal of our former accountants, we
approved and engaged KPMG LLP to act as our independent certified public
accountant as successor to Gelfond. During our two most recent fiscal years and
subsequent interim periods we have not consulted with KPMG regarding the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the our financial statements, or any matter that was the subject of a
disagreement or a reportable condition.
There were no reportable conditions, in each case, during either of our
two most recent fiscal years or any subsequent interim period.
-33-
<PAGE> 36
FINANCIAL STATEMENTS
OPTICON MEDICAL, INC.
(FORMERLY IMMUNE RESPONSE, INC.)
INDEX TO FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
Audited Financial Statements of Immune Response, Inc. (a development stage enterprise)
<S> <C>
Independent Auditors' Reports.................................................................... F-2
Balance Sheet, December 31, 1999................................................................. F-4
Statements of Operations, Years ended December 31, 1999 and 1998 and the
period from May 14, 1984 (date of inception) to December 31, 1999........................... F-5
Statements of Changes in Stockholders' Equity (Deficit) and Comprehensive Income, Years ended
December 31, 1999 and 1998 and the period from May 14, 1984
(date of inception) to December 31, 1999.................................................... F-6
Statements of Cash Flows, Years ended December 31, 1999 and 1998 and the
period from May 14, 1984 (date of inception) to December 31, 1999........................... F-10
Notes to Financial Statements.................................................................... F-12
Audited Financial Statements of Opticon Medical, Inc. (a development stage enterprise)
Independent Auditors' Reports.................................................................... F-18
Balance Sheets, December 31, 1999 and 1998....................................................... F-20
Statement of Operations, Years ended December 31, 1999 and 1998 and the
period from July 28, 1994 (date of inception) to December 31, 1999.......................... F-21
Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1999 and 1998 and the period from July 28, 1994
(date of inception) to December 31, 1999.................................................... F-22
Statements of Cash Flows, Years ended December 31, 1999 and 1998 and the
period from July 28, 1994 (date of inception) to December 31, 1999.......................... F-23
Notes to Financial Statements.................................................................... F-24
Pro Forma Condensed Consolidated Financial Statements (unaudited)
Pro Forma Condensed Consolidated Balance Sheet.............................................. F-36
Pro Forma Condensed Consolidated Statement of Operations.................................... F-37
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.................... F-38
Independent Auditor's Report F-40
Unaudited Financial Statements of Opticon Medical, Inc.
Unaudited Balance Sheets June 30, 2000 and December 31, 1999.................................... F-41
Unaudited Statements of Operations for the Three Months ended June 30, 2000 and 1999, and the
Period from July 28, 1984 (date of inception) to June 30, 2000.............................. F-42
Unaudited Statements of Cash Flows for the Three Months Ended June 30, 2000 and 1999, and the
Period from July 28, 1984 (date of inception) to June 30, 2000.............................. F-43
Notes to Unaudited Financial Statements June 30, 2000............................................ F-44
</TABLE>
F-1
<PAGE> 37
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Immune Response, Inc.:
We have audited the accompanying balance sheet of Immune Response, Inc. (a
development stage enterprise) as of December 31, 1999, and the related
statements of operations, stockholders' equity and comprehensive income,
and cash flows for year ended December 31, 1999 and for the period from May
14, 1984 (inception) to December 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
cumulative statements of operations, stockholders' equity, and cash flows
for the period May 14, 1984 (inception) to December 31, 1999 include
amounts for the period from May 14, 1984 (inception) to December 31, 1998
and for the year ended December 31, 1998, which were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as
it relates to the amounts included for the period May 14, 1984 through
December 31, 1998 is based solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Immune Response, Inc. (a development
stage enterprise) as of December 31, 1999, and the results of its
operations and its cash flows for each of the year ended December 31, 1999
and for the period May 14, 1984 (inception) to December 31, 1999, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 6 to the
financial statements, the Company has suffered recurring losses from
operations that raise substantial doubt about its ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from this uncertainty.
/S/ KPMG LLP
KPMG LLP
Columbus, Ohio
March 25, 2000
F-2
<PAGE> 38
9137 E. Mineral Circle, Suite 110
Englewood, Colorado 80112-3422
303-792-3900, Fax 303-792-2811
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Immune Response, Inc.
We have audited the accompanying statements of operations, changes in
stockholders' equity (deficit) and cash flows of Immune Response, Inc. (a
development stage company) for the year ended December 31, 1998, and for the
period from inception (May 14, 1984) to December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Immune
Response, Inc. (a development stage company) for the year ended December 31,
1998, and for the period from inception (May 14, 1984) to December 31, 1998, in
conformity with generally accepted accounting principles.
The accompanying financial statements referred to above have been prepared
assuming that the Company will continue as a going concern. The Company has
minimal capital resources presently available to meet obligations which normally
can be expected to be incurred by similar companies, and has an accumulated
deficit of ($924,145) at December 31, 1998. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The Company
has no significant fixed commitments as of December 31, 1998 or March 23, 1999.
Management believes that the remaining minimal cash flow requirements needed to
pursue potential mergers or other business opportunities can be met through use
of the Company's current cash balance and additional sales of IntraNet stock.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Davis & Co., CPAs, P.C.
Davis & Co., CPAs, P.C.
Certified Public Accountants
Englewood, Colorado
March 23, 1999
F-3
<PAGE> 39
IMMUNE RESPONSE, INC.
(a development stage enterprise)
Balance Sheet
December 31, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 90,366
Investment securities 18,093
Deferred merger costs 18,226
Note receivable from Opticon Medical Inc. 100,000
Interest receivable from related parties 1,537
--------------
Total assets $ 228,222
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 21,630
Accounts payable to related party 4,461
Interest payable to related party 22,453
--------------
Total liabilities 48,544
Stockholders' equity:
Common stock, $.0001 par value; 25,000,000
shares authorized; 2,041,566 shares
issued; 1,983,233 shares outstanding 204
Additional paid-in capital 1,207,284
Stock subscription receivable (100,000)
Deficit accumulated during the development stage (944,602)
Accumulated other comprehensive income -
net unrealized appreciation on investment securities 16,792
Treasury stock, at cost (58,333 shares) --
--------------
Total stockholders' equity 179,678
--------------
Total liabilities and stockholders' equity $ 228,222
==============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 40
IMMUNE RESPONSE, INC.
(a development stage enterprise)
Statements of Operations
Years Ended December 31, 1999 and 1998 and the Period from Inception
(May 14, 1984) to December 31, 1999
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM
INCEPTION
FOR THE YEARS (MAY 14, 1984)
ENDED DECEMBER 31, TO DECEMBER 31,
1999 1998 1999
-------------- -------------- -----------------------
<S> <C> <C> <C>
Revenue:
Interest income $ 2,184 408 127,861
Laboratory test income -- -- 50,187
Revenue from sale of marketing
rights to related party -- -- 7,004
Miscellaneous income -- 13 12,710
Gain on sale of investment securities 19,564 -- 211,753
Debt forgiveness income -- -- 35,147
-------------- -------------- -----------------------
21,748 421 444,662
Expenses:
Write-off of deferred warrant
registration costs -- -- 29,422
Loss on sale of laboratory -- -- 74,710
Realized loss on investment -- -- 178,668
Laboratory supplies -- -- 55,244
Consulting fees to related parties -- -- 37,500
Interest -- -- 138,306
Abandoned license agreement costs -- -- 50,000
Research and development -- -- 28,680
Rent -- -- 79,232
Salary -- -- 275,287
Depreciation and amortization -- -- 34,848
Bad debt expense -- -- 17,971
General and administrative 42,205 9,068 389,396
-------------- -------------- -----------------------
42,205 9,068 1,389,264
-------------- -------------- -----------------------
Net loss $ (20,457) (8,647) (944,602)
============== ============== =======================
Net loss per common share $ (0.02) (0.01) (1.12)
============== ============== =======================
Weighted average number
of common shares 1,180,494 983,233 842,720
============== ============== =======================
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 41
IMMUNE RESPONSE, INC.
(a development stage company)
Statements of Stockholder' Equity (Deficit) and Comprehensive Income
For the Period from Inception (May 14, 1984) to December 31, 1999
<TABLE>
<CAPTION>
ADDITIONAL STOCK
COMMON STOCK PAID-IN SUBSCRIPTION
SHARES AMOUNT CAPITAL RECEIVABLE
------------- ---------- -------------- -----------------
<S> <C> <C> <C> <C>
Shares of common stock issued to officers and
directors during the formation of the Company
in exchange for services valued at $.0003 per share 300,000 $ 30 60 --
Shares of common stock issued during the
formation of the Company in exchange for cash of
$.30 per share to unrelated individuals 46,667 5 13,995 --
Net loss and comprehensive loss -- -- -- --
------------- ---------- -------------- -----------------
Balance at December 31, 1984 346,667 35 14,055 --
Net loss and comprehensive loss -- -- -- --
------------- ---------- -------------- -----------------
Balance at December 31, 1985 346,667 35 14,055 --
Shares of common stock issued to unrelated
individuals in December 1986 in exchange for
cash of:
$.15 per share 46,667 5 6,995 --
$.015 per share 5,000 1 74 --
Net loss and comprehensive loss -- -- -- --
------------- ---------- -------------- -----------------
Balance at December 31, 1986 398,334 41 21,124 --
Shares of common stock issued to unrelated
individuals in exchange for cash of:
$.15 per share in:
April 1987 6,667 1 999 --
May 1987 33,333 3 4,997 --
June 1987 33,333 3 4,997 --
$.075 per share in:
April 1987 33,333 3 2,497 --
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED TOTAL
DURING THE OTHER STOCKHOLDERS'
DEVELOPMENT COMPREHENSIVE EQUITY
STAGE INCOME (DEFICIT)
------------------ -------------------- -------------------
<S> <C> <C> <C>
Shares of common stock issued to officers and
directors during the formation of the Company
in exchange for services valued at $.0003 per share -- -- 90
Shares of common stock issued during the
formation of the Company in exchange for cash of
$.30 per share to unrelated individuals -- -- 14,000
Net loss and comprehensive loss (11,185) -- (11,185)
------------------ -------------------- -------------------
Balance at December 31, 1984 (11,185) -- 2,905
Net loss and comprehensive loss (64,398) -- (64,398)
------------------ -------------------- -------------------
Balance at December 31, 1985 (75,583) -- (61,493)
Shares of common stock issued to unrelated
individuals in December 1986 in exchange for
cash of:
$.15 per share -- -- 7,000
$.015 per share -- -- 75
Net loss and comprehensive loss (17,557) -- (17,557)
------------------ -------------------- -------------------
Balance at December 31, 1986 (93,140) -- (71,975)
Shares of common stock issued to unrelated
individuals in exchange for cash of:
$.15 per share in:
April 1987 -- -- 1,000
May 1987 -- -- 5,000
June 1987 -- -- 5,000
$.075 per share in:
April 1987 -- -- 2,500
</TABLE>
(Continued)
F-6
<PAGE> 42
IMMUNE RESPONSE, INC.
(a development stage company)
Statements of Stockholder' Equity (Deficit) and Comprehensive Income
For the Period from Inception (May 14, 1984) to December 31, 1999
<TABLE>
<CAPTION>
ADDITIONAL STOCK
COMMON STOCK PAID-IN SUBSCRIPTION
SHARES AMOUNT CAPITAL RECEIVABLE
------------- ---------- -------------- -----------------
<S> <C> <C> <C> <C>
Shares of common stock issued in August 1987
in exchange for cash of $.15 per share to:
Related parties 91,667 $ 9 13,741 --
Others 53,333 5 7,995 --
Shares of common stock issued in August 1987
to an officer and director in exchange for
services valued at $.15 per share 50,000 5 7,495 --
Net loss and comprehensive loss -- -- -- --
------------- ---------- -------------- -----------------
Balance at December 31, 1987 700,000 70 63,845 --
Shares of common stock issued in July 1988,
pursuant to a public offering for cash of
$3 per share, net of issuance costs of $199,761 300,000 30 700,209 --
Shares of common stock issued to underwriter
in July 1988, pursuant to public offering for
cash of $.0003 per share 9,600 1 2 --
Shares of common stock issued in October 1988,
pursuant to exercise of Class B warrants,
for cash of $6 per share 1,000 -- 6,000 --
Shares of common stock issued in October and
November 1988, pursuant to exercise of
Class A warrants, for cash of $4.50 per share,
net of issuance costs of $100 18,233 2 81,948 --
Net loss and comprehensive loss -- -- -- --
------------- ---------- -------------- -----------------
Balance at December 31, 1988 1,028,833 103 852,004 --
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED TOTAL
DURING THE OTHER STOCKHOLDERS'
DEVELOPMENT COMPREHENSIVE EQUITY
STAGE INCOME (DEFICIT)
------------------ -------------------- -------------------
<S> <C> <C> <C>
Shares of common stock issued in August 1987
in exchange for cash of $.15 per share to:
Related parties -- -- 13,750
Others -- -- 8,000
Shares of common stock issued in August 1987
to an officer and director in exchange for
services valued at $.15 per share -- -- 7,500
Net loss and comprehensive loss (41,815) -- (41,815)
------------------ -------------------- -------------------
Balance at December 31, 1987 (134,955) -- (71,040)
Shares of common stock issued in July 1988,
pursuant to a public offering for cash of
$3 per share, net of issuance costs of $199,761 -- -- 700,239
Shares of common stock issued to underwriter
in July 1988, pursuant to public offering for
cash of $.0003 per share -- -- 3
Shares of common stock issued in October 1988,
pursuant to exercise of Class B warrants,
for cash of $6 per share -- -- 6,000
Shares of common stock issued in October and
November 1988, pursuant to exercise of
Class A warrants, for cash of $4.50 per share,
net of issuance costs of $100 -- -- 81,950
Net loss and comprehensive loss (102,626) -- (102,626)
------------------ -------------------- -------------------
Balance at December 31, 1988 (237,581) -- 614,526
</TABLE>
(Continued)
F-7
<PAGE> 43
IMMUNE RESPONSE, INC.
(a development stage company)
Statements of Stockholder' Equity (Deficit) and Comprehensive Income
For the Period from Inception (May 14, 1984) to December 31, 1999
<TABLE>
<CAPTION>
ADDITIONAL STOCK
COMMON STOCK PAID-IN SUBSCRIPTION
SHARES AMOUNT CAPITAL RECEIVABLE
------------- ---------- -------------- -----------------
<S> <C> <C> <C> <C>
Shares of common stock issued in January 1989,
pursuant to the exercise of 3,433 "A" warrants
at $4.50 per share, net of issuance costs of $184 3,433 $ -- 15,266 --
Shares of common stock issued in January 1989,
pursuant to the exercise of 9,300 "A" warrants
at $4.50 per share, net of issuance costs of $70 9,300 1 41,779 --
Net loss and comprehensive loss -- -- -- --
------------- ---------- -------------- -----------------
Balance at December 31, 1989 1,041,566 104 909,049 --
Net loss and comprehensive loss -- -- -- --
------------- ---------- -------------- -----------------
Balance at December 31, 1990 1,041,566 104 909,049 --
Shares received from employee as part of
June 1991 sale of laboratory assets (58,333) (6) -- --
Shares placed in treasury in June 1991 58,333 6 -- --
Net loss and comprehensive loss -- -- -- --
------------- ---------- -------------- -----------------
Balance at December 31, 1991 1,041,566 104 909,049 --
Net loss and comprehensive loss -- -- -- --
------------- ---------- -------------- -----------------
Balance at December 31, 1992 1,041,566 104 909,049 --
Net loss and comprehensive loss -- -- -- --
------------- ---------- -------------- -----------------
Balance at December 31, 1993 1,041,566 104 909,049 --
Net loss and comprehensive loss -- -- -- --
------------- ---------- -------------- -----------------
Balance at December 31, 1994 1,041,566 104 909,049 --
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED TOTAL
DURING THE OTHER STOCKHOLDERS'
DEVELOPMENT COMPREHENSIVE EQUITY
STAGE INCOME (DEFICIT)
------------------ -------------------- -------------------
<S> <C> <C> <C>
Shares of common stock issued in January 1989,
pursuant to the exercise of 3,433 "A" warrants
at $4.50 per share, net of issuance costs of $184 -- -- 15,266
Shares of common stock issued in January 1989,
pursuant to the exercise of 9,300 "A" warrants
at $4.50 per share, net of issuance costs of $70 -- -- 41,780
Net loss and comprehensive loss (210,550) -- (210,550)
------------------ -------------------- -------------------
Balance at December 31, 1989 (448,131) -- 461,022
Net loss and comprehensive loss (170,446) -- (170,446)
------------------ -------------------- -------------------
Balance at December 31, 1990 (618,577) -- 290,576
Shares received from employee as part of
June 1991 sale of laboratory assets -- -- (6)
Shares placed in treasury in June 1991 -- -- 6
Net loss and comprehensive loss (247,279) -- (247,279)
------------------ -------------------- -------------------
Balance at December 31, 1991 (865,856) -- 43,297
Net loss and comprehensive loss (61,434) -- (61,434)
------------------ -------------------- -------------------
Balance at December 31, 1992 (927,290) -- (18,137)
Net loss and comprehensive loss (40,873) -- (40,873)
------------------ -------------------- -------------------
Balance at December 31, 1993 (968,163) -- (59,010)
Net loss and comprehensive loss (95,355) -- (95,355)
------------------ -------------------- -------------------
Balance at December 31, 1994 (1,063,518) -- (154,365)
</TABLE>
(Continued)
F-8
<PAGE> 44
IMMUNE RESPONSE, INC.
(a development stage company)
Statements of Stockholder' Equity (Deficit) and Comprehensive Income
For the Period from Inception (May 14, 1984) to December 31, 1999
<TABLE>
<CAPTION>
ADDITIONAL STOCK
COMMON STOCK PAID-IN SUBSCRIPTION
SHARES AMOUNT CAPITAL RECEIVABLE
------------- ---------- -------------- -----------------
<S> <C> <C> <C> <C>
Net income -- $ -- -- --
Net unrealized change in investment securities -- -- -- --
Comprehensive income
------------- ---------- -------------- -----------------
Balance at December 31, 1995 1,041,566 104 909,049 --
Net income -- -- -- --
Net unrealized change in investment securities -- -- -- --
Comprehensive income
------------- ---------- -------------- -----------------
Balance at December 31, 1996 1,041,566 104 909,049 --
Net loss -- -- -- --
Net unrealized change in investment securities -- -- -- --
Comprehensive loss
------------- ---------- -------------- -----------------
Balance at December 31, 1997 1,041,566 104 909,049 --
Net loss -- -- -- --
Net unrealized change in investment securities -- -- -- --
Comprehensive loss
------------- ---------- -------------- -----------------
Balance at December 31, 1998 1,041,566 104 909,049 --
Net loss -- -- -- --
Net unrealized change in investment securities -- -- -- --
Comprehensive loss
Shares of common stock issued at $.30 per share,
net of issuance costs of $1,665, in:
October 1999 113,333 11 33,989 --
November 1999 886,667 89 264,246 (100,000)
------------- ---------- -------------- -----------------
Balance at December 31, 1999 2,041,566 $ 204 1,207,284 (100,000)
============= ========== ============== =================
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED TOTAL
DURING THE OTHER STOCKHOLDERS'
DEVELOPMENT COMPREHENSIVE EQUITY
STAGE INCOME (DEFICIT)
------------------ -------------------- -------------------
<S> <C> <C> <C>
Net income 106,276 -- 106,276
Net unrealized change in investment securities -- 48,260 48,260
------------------
Comprehensive income 154,536
------------------ -------------------- -------------------
Balance at December 31, 1995 (957,242) 48,260 171
Net income 71,435 -- 71,435
Net unrealized change in investment securities -- (44,028) (44,028)
Comprehensive income 27,407
------------------ -------------------- -------------------
Balance at December 31, 1996 (885,807) 4,232 27,578
Net loss (29,691) -- (29,691)
Net unrealized change in investment securities -- (93) (93)
------------------
Comprehensive loss (29,784)
------------------ -------------------- -------------------
Balance at December 31, 1997 (915,498) 4,139 (2,206)
Net loss (8,647) -- (8,647)
Net unrealized change in investment securities -- (838) (838)
------------------
Comprehensive loss (9,485)
------------------ -------------------- -------------------
Balance at December 31, 1998 (924,145) 3,301 (11,691)
Net loss (20,457) -- (20,457)
Net unrealized change in investment securities -- 13,491 13,491
------------------
Comprehensive loss (6,966)
------------------
Shares of common stock issued at $.30 per share,
net of issuance costs of $1,665, in:
October 1999 -- -- 34,000
November 1999 -- -- 164,335
------------------ -------------------- -------------------
Balance at December 31, 1999 (944,602) 16,792 179,678
================== ==================== ===================
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE> 45
IMMUNE RESPONSE, INC.
(a development stage company)
Statements of Cash Flows
Years Ended December 31, 1999 and 1998 and the Period from Inception
(May 14, 1984) to December 31, 1999
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM
INCEPTION
FOR THE YEARS (MAY 14, 1984)
ENDED DECEMBER 31, TO DECEMBER 31,
1999 1998 1999
-------------- -------------- -----------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (20,457) (8,647) (944,602)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation -- -- 34,848
Abandoned license agreement costs -- -- 50,000
Services for stock 34,000 -- 41,597
Bad debt expense -- -- 10,887
Realized net gain on investment securities (19,564) -- (33,083)
Write-off of deferred warrant
registration costs -- -- 29,422
Changes in assets and liabilities:
Increase in deferred merger costs (18,226) -- (18,226)
Increase in notes receivable (100,000) -- (392,395)
Increase in interest receivable (1,537) -- (1,537)
Increase in accounts payable to related party -- 515 4,461
Increase in interest payable to
related party -- -- 22,453
Increase in accounts payable to others 20,399 1,502 21,630
-------------- -------------- -----------------------
Net cash used by operating activities (105,385) (6,630) (1,174,545)
-------------- -------------- -----------------------
Cash flows from investing activities:
Proceeds from sale of investment securities 22,221 -- 320,291
Purchase of certificates of deposit -- -- (75,278)
Redemption of certificates of deposit -- -- 75,278
Capital expenditures -- -- (92,094)
Disposal of laboratory assets -- -- 57,246
Purchase of license agreement -- -- (50,000)
Acquisition of investment - related party -- -- (7,000)
-------------- -------------- -----------------------
Net cash provided by investing activities 22,221 -- 228,443
-------------- -------------- -----------------------
</TABLE>
(continued)
F-10
<PAGE> 46
IMMUNE RESPONSE, INC.
(a development stage company)
Statements of Cash Flows, continued
Years Ended December 31, 1999 and 1998 and the Period from Inception
(May 14, 1984) to December 31, 1999
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM
INCEPTION
FOR THE YEARS (MAY 14, 1984)
ENDED DECEMBER 31, TO DECEMBER 31,
1999 1998 1999
-------------- -------------- -----------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of notes payable to bank $ -- -- 50,000
Proceeds from issuance of notes payable to
related party and other -- -- 144,964
Payments to retire notes payable to bank -- -- (50,000)
Payments to retire notes payable to others -- -- (68,864)
Payments to retire notes payable to related party -- -- (76,100)
Increase in deferred warrant registration costs -- -- (29,422)
Proceeds from issuance of common stock 164,335 -- 1,065,891
-------------- -------------- -----------------------
Net cash provided by financing activities 164,335 -- 1,036,469
-------------- -------------- -----------------------
Net increase (decrease) in cash and cash
equivalents 81,171 (6,630) 90,367
-------------- -------------- -----------------------
Cash and cash equivalents at beginning of period 9,195 15,825 --
-------------- -------------- -----------------------
Cash and cash equivalents at end of period $ 90,366 9,195 90,367
============== ============== =======================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ -- -- 138,306
============== ============== =======================
NON-CASH FINANCING ACTIVITIES:
Common stock issued in exchange for stock
subscription receivable $ 100,000 -- 100,000
Investment in common stock of related entity
received in exchange for marketing rights -- -- 7,000
Exchange of note receivable for investment in SAC -- -- 281,506
============== ============== =======================
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE> 47
IMMUNE RESPONSE, INC.
(A development stage enterprise)
Notes to Financial Statements
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
Immune Response, Inc. (the Company) was incorporated under the
laws of the State of Colorado on May 14, 1984 as Med Mark
Technologies, Inc. and was inactive during the period from July 1,
1985 to November 9, 1986. On November 10, 1986, the Company
changed its name to Immune Response, Inc. and resumed its
organizational activities.
Until the Company sold its laboratory assets in May 1991, the
Company performed research and provided testing facilities for
disorders of the immune system. Although the Company received
laboratory test income and revenue from the sale of marketing
rights in 1990 and early 1991, the amounts received were minimal
and did not represent revenues from the Company's principal
planned line of business. The Company has been inactive since the
sale of its lab assets in May 1991. The Company's Directors do
maintain some minimal level of activity which is performed at
another entity affiliated with the Directors. The Company
reimburses the affiliated entity for these activities. These
amounts are included in accounts payable to related parties in the
accompanying balance sheet. The Company also owes $22,453 in
accrued interest to this entity.
The accompanying financial statements have been prepared on the
basis that the Company will continue as a going concern, which
contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has
incurred operating losses in each period since inception. There is
no assurance that the Company will be profitable in the future.
(b) CASH AND CASH EQUIVALENTS
Cash equivalents consist of money market funds. For purposes of
the statement of cash flows, the Company considers all highly
liquid debt instruments with original maturities of three months
or less to be cash equivalents.
(c) INVESTMENT SECURITIES
Investment securities at December 31, 1999 consist of equity
securities. The Company classifies its equity securities as
available-for-sale. These securities are recorded at fair value.
Unrealized holding gains and losses on available for sale
securities are excluded from earnings and are reported as a
separate component of other comprehensive income until realized.
Realized gains and losses from the sale of available-for-sale
securities are determined on a specific identification basis.
A decline in the market value of available-for-sale securities
below cost that is deemed to be other than temporary results in a
reduction in carrying amount to fair value. The impairment is
charged to earnings and a new cost basis for the security is
established. Dividend income is recognized when earned.
F-12
<PAGE> 48
IMMUNE RESPONSE, INC.
(A development stage enterprise)
Notes to Financial Statements
(d) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(e) FINANCIAL INSTRUMENTS
At December 31, 1999 and 1998, the financial statement carrying
amounts of cash and cash equivalents, current assets, current
liabilities and current notes receivable approximated the fair
value of these instruments because of the short-term maturity of
these instruments. The fair value of investment securities are
based on quoted market prices at the reporting date for those
investments.
(f) RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of Statement of Financial
Accounting Standards "(SFAS") No. 130, "Reporting Comprehensive
Income" in 1998. SFAS No. 130 requires the Company to report in
its financial statements, in addition to its net loss,
comprehensive income (loss), which includes all changes in equity
during a period from non-owner sources including, as applicable,
foreign currency items, minimum pension liability adjustments and
unrealized gains and losses on certain investments in debt and
equity securities. During 1999, the Company had unrealized holding
gains of $33,055, less a reclassification adjustment for gains
realized in income $19,564.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way that public enterprises report
information about operating segments. It also establishes
standards for related disclosures about products and services,
geographic areas and major customers. The Company has determined
that it does not have any reportable segments.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other
contracts, and for hedging activities. Subsequently, the FASB
issued SFAS No. 137 which deferred the effective date of SFAS No.
133. SFAS No. 137 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. This statement is not
expected to affect the Company, as the Company does not have any
derivative instruments or engage in hedging activities.
F-13
<PAGE> 49
IMMUNE RESPONSE, INC.
(A development stage enterprise)
Notes to Financial Statements
(g) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(h) NET INCOME (LOSS) PER COMMON SHARE
The net loss per common share is computed by dividing the net
income (loss) by the weighted average number of shares outstanding
for each period shown. There are no differences in basic and
diluted loss per share for the Company related to any of the years
presented. The net loss per common share for all periods presented
excludes any common shares issuable upon exercise of outstanding
stock options or warrants since such inclusion would be
antidilutive.
2. INVESTMENT SECURITIES
In January of 1994, the Company converted its Class B preferred stock of
MacGregor Sports and Fitness into 133,904 shares of unrestricted common
stock. This conversion was completed in April of 1994 resulting in the
Company owning 167,360 unrestricted shares of MacGregor's common stock
at December 31, 1994. During the fourth quarter of 1995, the Company
sold 133,904 of the shares in the open market for $208,567. During
January of 1996, the Company sold an additional 27,500 shares in the
open market for $89,503 leaving 5,956 shares still owned by the Company.
MacGregor successfully merged with Technical Publishing Solutions, Inc.
on July 31, 1996 and the combined entity was renamed IntraNet Solutions.
IntraNet provides integrated solutions to large corporations for the
management and distribution of business critical information contained
in documents using proprietary and standard internet technologies. In
October 1996, IntraNet declared a 1-for-4 reverse stock split resulting
in 1,489 shares still owned by the Company at December 31, 1998. During
1999, the Company sold 1,000 shares on the open market for $22,221,
leaving 489 shares still owned by the Company.
At December 31, 1999, the Company's historical cost of the securities
was $1,301. The fair value at that date was $18,093, resulting in an
unrealized gain of $16,792. At December 31, 1998, the Company's
historical cost of the securities was $3,958. The fair value at that
date was $7,259, resulting in an unrealized gain of $3,301.
F-14
<PAGE> 50
IMMUNE RESPONSE, INC.
(A development stage enterprise)
Notes to Financial Statements
3. NOTE RECEIVABLE FROM OPTICON MEDICAL INC.
On November 29, 1999, the Company executed a 8.5% note payable with
Opticon Medical Inc. On December 9, 1999, the Company entered into an
Agreement and Plan of Reorganization, providing for the merger of the
Opticon Medical Inc. into the Company. This transaction closed on
February 25, 2000 (see Note 6).
4. INCOME TAXES
The Company has net operating loss carryforwards of approximately
$860,000 at December 31, 1999, which can be used to offset future
taxable income. These net operating loss carryforwards, if not used,
will expire in the years 2000-2019. The Company had a deferred tax asset
of $292,000 and $302,000 at December 31, 1999 and 1998, respectively,
that relates primarily to the aforementioned net operating losses. A
valuation allowance equal to the full amount of the related deferred tax
asset has been recorded due to the uncertainty of realization of the
deferred tax asset.
Under Sections 382 and 383 of the Internal Revenue Code (IRC) of 1986,
as amended, the utilization of the net operating loss carryforwards may
be limited under the change in stock ownership rules.
5. STOCKHOLDERS' EQUITY
On July 5, 1988, the Company completed a sale of 300,000 units of its
$.0001 par value common stock in a public offering. Net proceeds from
the sale were $700,239 after deducting the Underwriter's commission of
$90,000 and direct offering costs of $109,761.
Each unit consisted of one share of the Company's common stock, one
Class A common stock purchase warrant and one Class B common stock
purchase warrant. One Class A unit warrant entitles the holder to
purchase one share of common stock at $4.50 per share. One Class B unit
warrant entitles the holder to purchase one share of common stock at
$6.00 per share. The Class A and Class B warrants expired on December
16, 1995.
F-15
<PAGE> 51
IMMUNE RESPONSE, INC.
(A development stage enterprise)
Notes to Financial Statements
STOCKHOLDERS' EQUITY (continued)
In October and November, 1988, Class A warrants to purchase a total of
18,233 shares of common stock of the Company were exercised at $4.50 per
share for total proceeds of $81,950, net of costs. In October 1988,
Class B warrants to purchase 1,000 shares of common stock were exercised
at $6.00 per share for total proceeds of $6,000. In January 1989, Class
A warrants to purchase a total of 12,733 shares of common stock of the
Company were exercised at $4.50 per share for total proceeds of $57,046,
net of costs.
During October and November 1999, the Company sold 1,000,000 shares of
common stock at a price of $0.30. The Company received cash proceeds of
$166,000, less issuance costs of $1,665, for 553,334 shares. In
addition, the Company executed a stock subscription agreement for
$100,000 for 333,333 shares and issued 113,333 shares to the Company's
Officers/Directors at fair value in settlement of outstanding fees. The
stock subscription receivable accrues interest at 8.5% per year. This
receivable was collected in January 2000.
On February 10, 1997, the Company's shareholders approved a 1-for-100
reverse split whereby every one hundred shares of the Company's $.0001
par value common stock were converted to one share of $.0001 par value
common stock. The shareholders also approved a reduction in the number
of authorized shares from 950,000,000 to 25,000,000 effective March 3,
1997. The financial statements herein have been adjusted to reflect the
1-for-100 reverse stock split back to the date of inception.
On January 20, 2000, The Company's shareholders approved a 1-for-3
reverse stock split and authorized 1,000,000 shares of preferred stock
and an increase in the authorized capital stock to 26,000,000 shares.
The financial statements herein have been adjusted to reflect the
1-for-3 reverse stock split back to the date of inception.
(6) SUBSEQUENT EVENTS AND LIQUIDITY
On December 9, 1999, the Company entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") with Opticon Medical Inc., an
Iowa Corporation. The Merger became effective February 25, 2000.
At the effective date of the Merger, each outstanding share of Opticon
common and preferred stock was converted to the right to receive 1.23
shares of Company common stock, $.0001 par value, so that, in the
aggregate, the holders of the Opticon's stock would, on the effective
date, hold 80% of the outstanding common stock of the Company, on a
fully diluted basis.
The Merger Agreement provided that the Company assume Opticon's rights
and obligations under all of Opticon's outstanding options, warrants and
other purchase rights. As a result, on the effective date, the right of
any holder of an outstanding option, warrant, or other purchase right,
was converted into the right to receive the number of shares of Company
common stock as would have been issued or delivered to the holder if it
had exercised the warrant or option and received the shares of Opticon
stock upon such exercise immediately prior to the effectiveness of the
Merger. At the option of the holder, the Debentures may be converted,
either in whole or in part, into common shares, at any time, and from
time to time, at a conversion price per share of common stock equal to
the lesser of: (a) $4.50 and (b) 65% of the market price of the Company.
On the third anniversary of the Debentures, the Company shall convert
all debt outstanding at the conversion price unless such conversion
would exceed 19.99% of the common stock outstanding on the mandatory
conversion date, unless the Company's shareholders approve the issuance
of an amount of the common stock in excess of the 19.99% threshold. In
the event of no shareholder approval, any amounts in excess of the
19.99% threshold are to be redeemed in cash.
F-16
<PAGE> 52
IMMUNE RESPONSE, INC.
(A development stage enterprise)
Notes to Financial Statements
SUBSEQUENT EVENTS AND LIQUIDITY (continued)
The transaction between Opticon and the Company is a business
combination between an operating enterprise (Opticon) and a "shell
company," (the Company) in which the shell company is the issuer of
securities and the operating enterprise has been determined to be the
acquiring enterprise for financial reporting purposes. Thus, the
business combination will be treated for financial reporting purposes as
an issuance of securities by Opticon.
Immediately following the merger, the Company entered into Securities
Purchase Agreements with certain investors whereby the Company agreed to
sell, and the Investors to purchase $3 million in principal amount of 6%
convertible debentures and warrants to purchase 300,000 shares of the
Company's common stock.
The convertible debt will be recorded at the amount of gross proceeds
less the fair value of the warrants. The calculated conversion price at
February 25, 2000, the first available conversion date, was $2.93 per
share. In accordance with the FASB's Emerging Issues Task Force Issue
98-5, the difference between this conversion price and the market price
of $4.50 per share will be reflected as additional interest expense in
the merged company's statement of operations for the quarter ended March
31, 2000.
On March 22, 2000, the convertible debentures were exchanged for 3,000
shares of Series A 6% Preferred Stock. The Preferred Stock has
conversion terms identical to the Convertible Debentures. In addition,
the Preferred Stockholders will be entitled to 6% dividends payable
quarterly in cash or common stock.
The Company has suffered recurring losses from operations. The merged
company intends to use the proceeds from the convertible debentures, as
well as proceeds from potential future debt or equity financing, to more
fully establish its infrastructure and continue Opticon's research and
development activities. There can be no assurance that the Company will
be able to raise sufficient capital to fully establish its
infrastructure and continue to execute its business plans. These
circumstances raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
F-17
<PAGE> 53
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Opticon Medical Inc.
We have audited the accompanying balance sheet of Opticon Medical Inc. (a
development stage enterprise) as of December 31, 1999, and the related
statements of operations, stockholders' equity (deficit), and cash flows
for year ended December 31, 1999 and for the period from July 28, 1994
(inception) to December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
cumulative statements of operations, stockholders' equity (deficit), and
cash flows for the period July 28, 1994 (inception) to December 31, 1999
include amounts for the period from July 28, 1994 (inception) to December
31, 1998 and year ended December 31, 1998, which were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as
it relates to the amounts included for the period July 28, 1994 through
December 31, 1998 is based solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Opticon Medical Inc. (a development
stage enterprise) as of December 31, 1999, and the results of its
operations and its cash flows for each of the year ended December 31, 1999
and for the period July 28, 1994 (inception) to December 31, 1999, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 8 to the
financial statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raise substantial doubt
about its ability to continue as a going concern. The financial statements
do not include any adjustments that might result from this uncertainty.
/s/ KPMG LLP
KPMG LLP
Columbus,Ohio
March 24, 2000
F-18
<PAGE> 54
INDEPENDENT AUDITORS' REPORT
To Opticon Medical Inc.:
We have audited the accompanying balance sheets of Opticon Medical Inc. (a
development stage company) as of December 31, 1998, and the related
statements of operations, stockholders' equity and cash flows for the year
ended December 31, 1998, and the period from July 28, 1994 (inception) to
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Opticon Medical Inc. as
of December 31, 1998, and the results of its operations and its cash flows
for the year ended December 31, 1998, and the period from July 28, 1994
(inception) to December 31, 1998, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that
Opticon Medical Inc. will continue as a going concern. As discussed in Note
1 to the financial statements, Opticon Medical Inc. has suffered recurring
losses from operations that raises substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
LUND KOEHLER COX & ARKEMA, LLP
Minneapolis, Minnesota
August 12, 1999
F-19
<PAGE> 55
OPTICON MEDICAL INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
--------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,736 51,961
Deferred merger costs 32,344 --
Prepaid expenses and other current assets 1,031 2,641
--------------- --------------
Total current assets 47,111 54,602
Property and equipment, net 44,099 75,436
Intangibles, net of accumulated amortization of $69,700 in 1999
and $58,084 in 1998 127,801 139,416
Deposits 7,264 7,264
--------------- --------------
Total assets $ 226,275 276,718
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligations $ 4,644 6,776
Note payable to Immune Response, Inc. 100,000 --
Accounts payable 43,273 61,578
Accrued compensation and related taxes 168,178 93,410
Accrued liabilities due to related parties for consulting services 99,727 38,687
Accrued interest to related parties 21,446 7,606
--------------- --------------
Total current liabilities 437,268 208,057
Capital lease obligations, net of current portion 480 5,261
--------------- --------------
Total liabilities 437,748 213,318
Stockholders' equity (deficit):
Preferred stock, no par value, 20,000,000 shares authorized:
Series A convertible preferred stock, 1,200,000 shares authorized,
1,062,613 shares issued and outstanding in 1999 and 1998; 1,541,581 1,541,581
liquidation preference of $1,593,950
Series B convertible preferred stock, 4,000,000 shares authorized,
932,778 and 582,778 shares issued and outstanding in 1999 1,394,167 869,167
and 1998, respectively; liquidation preference of $1,399,167
Common stock, no par value, 20,000,000 shares authorized,
2,487,495 shares issued and outstanding in 1999 and 1998 1,139,695 1,139,695
Additional paid-in capital 78,500 78,500
Deficit accumulated during the development stage (4,365,416) (3,565,543)
--------------- --------------
Total stockholders' equity (deficit) (211,473) 63,400
--------------- --------------
Total liabilities and stockholders' equity (deficit) $ 226,275 276,718
=============== ==============
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE> 56
OPTICON MEDICAL INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Statements of Operations
Years Ended December 31, 1999 and 1998 and the Period from July 28, 1994
(date of inception) to December 31, 1999
<TABLE>
<CAPTION>
CUMULATIVE
FROM
JULY 28, 1994
FOR THE YEARS (INCEPTION) TO
ENDED DECEMBER 31, DECEMBER 31,
1999 1998 1999
-------------- -------------- ----------------------
<S> <C> <C> <C>
Costs and expenses:
Selling, general and administrative $ 550,382 459,569 1,829,256
Research and development 166,761 148,924 1,218,764
Clinical and regulatory 31,136 305,202 929,457
Depreciation of property and equipment 29,991 27,157 134,374
Amortization of intangible assets 11,615 92,613 150,695
-------------- -------------- ----------------------
Loss from operations (789,885) (1,033,465) (4,262,546)
-------------- -------------- ----------------------
Other income (expense):
Interest income 4,621 7,601 50,935
Interest expense (14,609) (136,360) (153,805)
-------------- -------------- ----------------------
Total other expense (9,988) (128,759) (102,870)
-------------- -------------- ----------------------
Loss before income taxes (799,873) (1,162,224) (4,365,416)
Provision for income taxes -- -- --
-------------- -------------- ----------------------
Net loss $ (799,873) (1,162,224) (4,365,416)
============== ============== ======================
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE> 57
OPTICON MEDICAL INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Statements of Stockholders' Equity (Deficit)
For the Period from July 28, 1994 (Date of Inception) to December 31, 1999
<TABLE>
<CAPTION>
PREFERRED STOCK
SERIES A CONVERTIBLE SERIES B CONVERTIBLE
---------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Balance - July 28, 1994 (inception) -- $ -- -- --
Issuance of shares to founder -- -- -- --
Issuance of shares for services -- -- -- --
Net loss -- -- -- --
------------- ------------ ----------- -------------
Balance - December 31, 1994 -- -- -- --
Issuance of shares at $1.00 per share -- -- -- --
Net loss -- -- -- --
------------- ------------ ----------- -------------
Balance - December 31, 1995 -- -- -- --
Issuance of shares at $1.00 per share -- -- -- --
Issuance of shares at $1.00 per share -- -- -- --
Issuance of Series A Convertible
preferred stock at $1.50 per share,
net of issuance costs 713,967 1,035,508 -- --
Net loss -- -- -- --
------------- ------------ ----------- -------------
Balance - December 31, 1996 713,967 1,035,508 -- --
Conversion of debt at $.77 per share -- -- -- --
Issuance of Series A Convertible
preferred stock at $1.50 per share,
net of issuance costs 348,646 506,073 -- --
Net loss -- -- -- --
------------- ------------ ----------- -------------
Balance - December 31, 1997 1,062,613 1,541,581 -- --
Issuance of warrants in connection
with convertible debentures -- -- -- --
Conversion of debt and accrued interest
at $1.50 per share, net of issuance costs -- -- 582,778 869,167
Net loss -- -- -- --
------------- ------------ ----------- -------------
Balance - December 31, 1998 1,062,613 1,541,581 582,778 869,167
Issuance of Series B Convertible
preferred stock at $1.50 per share -- -- 350,000 525,000
Net loss -- -- -- --
------------- ------------ ----------- -------------
Balance - December 31, 1999 $ 1,062,613 1,541,581 932,778 1,394,167
============= ============ =========== =============
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
-------------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
----------- ------------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance - July 28, 1994 (inception) -- -- -- -- --
Issuance of shares to founder 1,500,000 219,350 -- -- 219,350
Issuance of shares for services 37,500 5,350 -- -- 5,350
Net loss -- -- -- (5,350) (5,350)
----------- ------------- -------------- ----------------- ---------------
Balance - December 31, 1994 1,537,500 224,700 -- (5,350) 219,350
Issuance of shares at $1.00 per share 467,495 467,495 -- -- 467,495
Net loss -- -- -- (244,982) (244,982)
----------- ------------- -------------- ----------------- ---------------
Balance - December 31, 1995 2,004,995 692,195 -- (250,332) 441,863
Issuance of shares at $1.00 per share 32,500 32,500 -- -- 32,500
Issuance of shares at $1.00 per share 300,000 300,000 -- -- 300,000
Issuance of Series A Convertible
preferred stock at $1.50 per share,
net of issuance costs -- -- -- -- 1,035,508
Net loss -- -- -- (770,440) (770,440)
----------- ------------- -------------- ----------------- ---------------
Balance - December 31, 1996 2,337,495 1,024,695 -- (1,020,772) 1,039,431
Conversion of debt at $.77 per share 150,000 115,000 -- -- 115,000
Issuance of Series A Convertible
preferred stock at $1.50 per share,
net of issuance costs -- -- -- -- 506,073
Net loss -- -- -- (1,382,547) (1,382,547)
----------- ------------- -------------- ----------------- ---------------
Balance - December 31, 1997 2,487,495 1,139,695 -- (2,403,319) 277,957
Issuance of warrants in connection
with convertible debentures -- -- 78,500 -- 78,500
Conversion of debt and accrued interest
at $1.50 per share, net of issuance costs -- -- -- -- 869,167
Net loss -- -- -- (1,162,224) (1,162,224)
----------- ------------- -------------- ----------------- ---------------
Balance - December 31, 1998 2,487,495 1,139,695 78,500 (3,565,543) 63,400
Issuance of Series B Convertible
preferred stock at $1.50 per share -- -- -- -- 525,000
Net loss -- -- -- (799,873) (799,873)
----------- ------------- -------------- ----------------- ---------------
Balance - December 31, 1999 2,487,495 1,139,695 78,500 (4,365,416) (211,473)
=========== ============= ============== ================= ===============
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE> 58
OPTICON MEDICAL INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Statements of Cash Flows
Years Ended December 31, 1999 and 1998 and the Period from July 28, 1994
(date of inception) to December 31, 1999
<TABLE>
<CAPTION>
CUMULATIVE FROM
JULY 28, 1994
FOR THE YEARS (INCEPTION) TO
ENDED DECEMBER 31, DECEMBER 31,
1999 1998 1999
--------------- --------------- ----------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (799,873) (1,162,224) (4,365,416)
Adjustment to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 41,607 119,770 285,070
Loss on disposal 1,345 -- 1,344
Amortization of original issuance discount -- 78,500 78,500
Changes in operating assets and liabilities:
Prepaid expenses and other assets (30,734) 2,154 (40,639)
Accounts payable (18,305) 60,979 81,960
Accrued liabilities 135,808 62,628 229,218
Accrued interest to related parties 13,840 55,899 70,614
--------------- --------------- ----------------------
Cash used in operating activities (656,312) (782,294) (3,659,349)
Cash flows from investing activities:
Purchases of property and equipment -- (37,899) (158,306)
Purchases of intangibles -- -- (59,147)
--------------- --------------- ----------------------
Cash used in investing activities -- (37,899) (217,453)
Cash flows from financing activities:
Proceeds from the issuance of Series A
convertible preferred stock, net -- -- 1,541,581
Proceeds from the issuance of Series B
convertible preferred stock 525,000 -- 525,000
Proceeds from the issuance of common stock -- -- 805,345
Proceeds from the issuance of note payable to Immune
Response, Inc. 100,000 -- 100,000
Proceeds from convertible debentures with warrants -- 525,000 525,000
Proceeds from convertible promissory note with
warrants -- 300,000 300,000
Proceeds from long-term debt -- -- 115,000
Series B convertible preferred stock issuance costs -- (5,000) (5,000)
Payments on capital lease obligations (6,913) (6,036) (16,389)
--------------- --------------- ----------------------
Cash provided by financing activities 618,087 813,964 3,890,537
Increase (decrease) in cash and cash equivalents (38,225) (6,229) 13,735
Cash and cash equivalents, beginning of period 51,961 58,190 --
--------------- --------------- ----------------------
Cash and cash equivalents, end of period $ 13,736 51,961 13,735
=============== =============== ======================
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest $ 769 1,962 4,692
=============== =============== ======================
NONCASH INVESTING ACTIVITY:
Equipment acquired through capital lease obligations $ -- -- 21,513
=============== =============== ======================
NONCASH FINANCING ACTIVITIES:
Conversion of debt in exchange for common stock $ -- -- 115,000
=============== =============== ======================
Conversion of debt and accrued interest in exchange for
Series B convertible preferred stock $ -- 874,167 874,167
=============== =============== ======================
Issuance of common stock in exchange for intangibles $ -- -- 219,350
=============== =============== ======================
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE> 59
OPTICON MEDICAL INC.
(a development stage enterprise)
Notes to the Financial Statements
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
Opticon Medical Inc. (the Company) was incorporated in Iowa on
July 28, 1994 and is currently headquartered in Dublin, Ohio. The
Company was formed to design, develop and market innovative,
cost-effective disposable devices to manage and control the
symptoms of urinary incontinence in adults. The Company plans to
market its product in the United States and other world markets
using multiple distribution channels.
The accompanying financial statements have been prepared on the
basis that the Company will continue as a going concern, which
contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has
incurred operating losses in each period since inception. There is
no assurance that the Company will be profitable in the future.
(b) CASH AND CASH EQUIVALENTS
Cash equivalents consist of overnight repurchase agreements with
an initial term of less than three months. For purposes of the
statement of cash flows, the Company considers all highly liquid
debt instruments with original maturities of three months or less
to be cash equivalents.
(c) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Property and
equipment under capital leases are stated at the present value of
the minimum lease payments.
Depreciation on property and equipment is calculated using
accelerated methods (primarily double declining balance) over the
estimated useful lives of the assets ranging from three to seven
years. Property and equipment held under capital leases and
leasehold improvements are amortized straight line over the
shorter of the lease term or estimated useful life of the asset
and is included in depreciation. Maintenance, repairs and minor
renewals are expensed when incurred.
(d) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense when
incurred.
(e) INTANGIBLES
The Company's founder paid certain patent and intellectual
property costs prior to incorporating the Company. The founder
contributed this property in exchange for common stock valued at
$219,350. These amounts were capitalized and are being amortized
using the straight-line method over 17 years. Intellectual
property consists of designs, concepts and inventions related to
the Company's urinary product development.
F-24
<PAGE> 60
OPTICON MEDICAL INC.
(a development stage enterprise)
Notes to the Financial Statements
(f) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(g) FINANCIAL INSTRUMENTS
At December 31, 1999 and 1998, the financial statement carrying
amounts of cash and cash equivalents, current assets, current
liabilities and current notes payable approximated the fair value
of these instruments because of the short-term maturity of these
instruments.
(h) RECENT PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other
contracts, and for hedging activities. Subsequently, the FASB
issued SFAS No. 137 which deferred the effective date of SFAS No.
133. SFAS No. 137 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. This statement is not
expected to affect the Company, as the Company does not have any
derivative instruments or engage in hedging activities.
(i) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(j) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
Long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future net undiscounted cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less cost to sell.
F-25
<PAGE> 61
OPTICON MEDICAL INC.
(a development stage enterprise)
Notes to the Financial Statements
(k) ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations, in accounting for its fixed plan stock options.
As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock
exceeded the exercise price. SFAS No. 123, "Accounting for
Stock-Based Compensation," established accounting and disclosure
requirements using a fair value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No.
123, the Company has elected to continue to apply the intrinsic
value-based method of accounting described above, and has adopted
the disclosure requirements of SFAS No. 123.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Leasehold improvements (useful life of 3 years) $ 35,198 36,543
Tooling, fixtures and equipment (useful lives of 5-7 years) 143,275 142,276
--------------- ---------------
Total 178,473 179,819
Less: accumulated depreciation and amortization 134,374 104,383
--------------- ---------------
Property and equipment, net $ 44,099 75,436
=============== ===============
</TABLE>
Included in property and equipment is approximately $22,000 of equipment
under capital leases at December 31, 1999 and 1998. Accumulated
amortization on this equipment was approximately $18,000 and $12,000 at
December 31, 1999 and 1998, respectively.
F-26
<PAGE> 62
OPTICON MEDICAL INC.
(a development stage enterprise)
Notes to the Financial Statements
3. LEASES
The Company has one operating lease having an initial or remaining
noncancelable lease term in excess of one year for its principal office
facility and has various other capital leases for property and
equipment. The Company's operating lease requires annual base rent,
including the Company's pro rata share of real estate taxes and
operating expenses. Future minimum lease payments under the
noncancelable leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------------- ----------------
<S> <C> <C>
Year ending December 31:
2000 $ 4,851 59,780
2001 489 45,315
---------------- ----------------
Total minimum lease payments 5,340 105,095
================
Less amount representing interest (at rates of
12.4% to 13.2%) (216)
----------------
Present value of minimum lease payments 5,124
Less: current portion of capital lease obligations 4,644
----------------
Capital lease obligations, less current portion $ 480
================
</TABLE>
Total rent expense was $58,997 in 1999 and $66,398 in 1998.
4. NOTE PAYABLE TO IMMUNE RESPONSE
On November 29, 1999, the Company executed a 8.5% note payable with
Immune Response, Inc. On December 9, 1999, the Company entered into an
Agreement and Plan of Reorganization, providing for the merger of the
Company into Immune Response, Inc. This transaction closed on February
25, 2000 (see Note 8).
F-27
<PAGE> 63
OPTICON MEDICAL INC.
(a development stage enterprise)
Notes to the Financial Statements
5. INCOME TAXES
The Company has net operating loss carryforwards of approximately $4.1
million at December 31, 1999, which can be used to offset future taxable
income. These net operating loss carryforwards, if not used, will expire
in the years 2009-2019. The Company had a deferred tax asset of
$1,504,000 and $1,050,000 at December 31, 1999 and 1998, respectively,
that relates primarily to the aforementioned net operating losses. A
valuation allowance equal to the full amount of the related deferred tax
asset has been recorded due to the uncertainty of realization of the
deferred tax asset.
Under Sections 382 and 383 of the Internal Revenue Code (IRC) of 1986,
as amended, the utilization of the net operating loss carryforwards may
be limited under the change in stock ownership rules.
6. STOCKHOLDERS' EQUITY
PRIVATE PLACEMENTS OF COMMON STOCK AND WARRANTS - During 1995 and 1996,
the Company sold 499,995 shares of its common stock in a private
placement for $1.00 per share and received net proceeds of $499,995. A
second private placement of common stock was completed in 1996 for
300,000 shares of common stock for $1.00 per share and resulted in net
proceeds of $300,000. In connection with the second private placement,
the Company issued warrants to purchase 300,000 shares of common stock
at $1.00. The warrants are exercisable for 10 years.
CONVERSION OF DEBT - During 1994, the Company entered into a venture
agreement with Iowa Seed Capital Corporation. The venture agreement
provided for a convertible loan of $115,000 and required the Company to
pay a percentage of revenues in lieu of interest as defined in the
agreement. The loan was converted into 150,000 shares of common stock in
November 1997.
During January 1998, the Company approved the issuance of Series 1998
Convertible Debentures (the Debentures) of up to $750,000. The
Debentures accrued interest at 10%, and were secured by substantially
all of the assets of the Company. During 1998, the Company issued
Debentures in the amount of $525,000 and issued detachable warrants to
purchase an aggregate of 378,512 shares of common stock at an exercise
price of $1.50 exercisable for ten years. The proceeds from the issuance
of the Debentures and warrants were allocated between the Debentures and
warrants based on the relative fair value of the two securities at the
time of issuance. The resulting original issuance discount of $71,500
was amortized as interest expenses during the year ended December 31,
1998. The principal and accrued interest on the Debentures were
converted into 378,512 shares of the Company's Series B convertible
preferred stock in December 1998 at a conversion price of $1.50 per
share.
During August 1998, a stockholder of the Company advanced the Company
$300,000 pursuant to a convertible promissory note. The convertible
promissory note accrued interest at 6%. The principal and four months'
accrued interest on the loan were converted into 204,266 shares of the
Company's Series B preferred stock in December 1998 at a conversion
price of $1.50 per share. Concurrent with the issuance of the
convertible promissory note, the Company also issued a ten year warrant
to purchase 30,000 shares of common stock of the Company to the
stockholder at an exercise price of $1.50 per share. The proceeds from
the issuance of the convertible promissory note and warrants were
allocated between the convertible promissory note and warrants based on
the relative fair value of the two securities at the time of issuance.
The resulting original issuance discount of $7,000 was amortized as
interest expense during the year ended December 31, 1998.
F-28
<PAGE> 64
OPTICON MEDICAL INC.
(a development stage enterprise)
Notes to the Financial Statements
STOCKHOLDERS' EQUITY (continued)
PRIVATE PLACEMENT OF SERIES A CONVERTIBLE PREFERRED STOCK - During 1996
and 1997, the Company sold 1,062,633 shares of Series A convertible
preferred stock (Series A preferred stock) in a private offering for
$1.50 per share and received net proceeds of $1,541,581. Dividends are
payable on the Series A preferred stock only if declared by the Board of
Directors. No dividends have been declared to date. The Series A
preferred stockholders are entitled to a liquidation preference of $1.50
per share. Series A preferred shares are eligible to vote on stockholder
matters on an "as if converted" basis with holders of the Company's
common stock. The Series A preferred stock is convertible at the option
of the holder into common stock at any time on a share-for-share basis.
The Series A preferred stock will be automatically converted into common
stock upon the occurrence of a significant initial public offering.
SERIES B CONVERTIBLE PREFERRED STOCK - During 1998, the Company
converted debt and accrued interest of $874,167 into 582,778 shares of
Series B convertible preferred stock (Series B preferred stock).
Dividends are payable on the Series B preferred stock only if declared
by the Board of Directors. No dividends have been declared to date. The
Series B preferred stockholders are entitled to a liquidation preference
of $1.50 per share. Series B preferred shares are eligible to vote on
stockholder matters on an "as if converted" basis with holders of the
Company's common stock. The Series B preferred stock is convertible at
the option of the holder into common stock at any time on a
share-for-share basis. The Series B preferred stock will be
automatically converted into common stock upon the occurrence of a
significant initial public offering.
In February, May and June 1999, the Company sold 350,000 shares of its
Series B convertible preferred stock in a private placement for $1.50
per share, and received gross proceeds of $525,000. Concurrent with the
issuance of the Series B preferred shares, the Company also issued five
year warrants to purchase 60,000 shares of common stock of the Company
at an exercise price of $2.00 per share.
STOCK OPTION PLANS - The Company adopted an Incentive Stock Option Plan,
pursuant to which options to acquire an aggregate of 1,000,000 shares of
the Company's common stock may be granted at fair market value as
determined by the Board of Directors. In general, the options granted
vest as determined by the Board of Directors ranging from immediately to
four years, and expire five or ten years from the date of the grant. In
addition, the Company adopted a Director Stock Option Plan, pursuant to
which options to acquire an aggregate of 1,000,000 shares of the
Company's common stock may be granted at fair market value as determined
by the Board of Directors. In general, the options granted vest as
determined by the Board of Directors ranging from immediately to three
years, and expire five or ten years from the date of grant.
F-29
<PAGE> 65
OPTICON MEDICAL INC.
(a development stage enterprise)
Notes to the Financial Statements
STOCKHOLDERS' EQUITY (continued)
The Company applies APB Opinion 25 "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for its stock
options. According, no compensation cost has been recognized for its
stock options. Had compensation cost for the Company's stock options
been determined based on the fair value at the grant dates consistent
with the method of Statement of Financial Accounting Standards No. 123
"Accounting for Stock Based Compensation" (Statement 123), the Company's
net loss would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
CUMULATIVE
FROM JULY 28,
1994
YEAR ENDED YEAR ENDED (INCEPTION ) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999
------------------------ ------------------------ -----------------------
Net loss:
<S> <C> <C> <C>
As reported $ 817,423 1,162,224 4,382,966
Pro forma 977,533 1,343,260 4,853,343
</TABLE>
Information regarding the Company's stock options is summarized below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RANGE OF OPTION
OPTIONS EXERCISE PRICE EXERCISE PRICES
------------------ -------------------- --------------------
<S> <C> <C> <C>
Options outstanding, December 31, 1997 813,750 $ 1.01 .20 - 1.10
Granted during 1998 321,255 1.38 1.00 - 1.50
------------------
Options outstanding, December 31, 1998 1,135,005 1.11 .20 - 1.50
Granted during 1999 40,000 1.50 .20 - 1.50
------------------
Options outstanding, December 31, 1999 1,175,005 1.12 .20 - 1.50
------------------
Weighted average fair value of options
granted during 1999 $ 0.36
====================
Weighted average fair value of
options granted during 1998 $ 0.60
====================
</TABLE>
F-30
<PAGE> 66
OPTICON MEDICAL INC.
(a development stage enterprise)
Notes to the Financial Statements
STOCKHOLDERS' EQUITY (continued)
The following table summarizes information about the Company's stock
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -----------------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
AVERAGE REMAINING EXERCISE
RANGE OF EXERCISE CONTRACTUAL
EXERCISE PRICES NUMBER PRICE LIFE NUMBER PRICE
----------------------------------- -------------- ------------- ----------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$0.20 10,000 $0.20 6.75 years 10,000 $0.20
$1.00-$1.50 1,165,005 $1.13 6.14 years 984,560 $1.11
-------------- -----------
$0.20-$1.50 1,175,005 $1.12 6.15 years 994,560 $1.10
============== ===========
</TABLE>
In determining the compensation cost of the options granted, as
specified by Statement 123, the fair value of each option grant has been
estimated on the date of grant using the following assumptions:
Risk free interest rate 5.5%
Expected life of options granted 5-10 years
Expected dividend yield 0%
==============
7. RELATED PARTIES
EMPLOYMENT AGREEMENTS -The Company has employment agreements with two of
its officers. In February 1998, the agreements were amended whereby the
officers elected to defer a portion of their annual compensation. The
deferred amount accrues interest at 10% and is convertible into
approximately 36,000 shares of Series B preferred stock at $1.50 per
share as defined in the amended agreements. At December 31, 1999, the
Company had accrued deferred compensation totaling $164,000. The Company
had also accrued $20,700 at December 31, 1999 in interest under these
agreements, which is included in accrued interest due to related
parties. Subsequent to year-end, the Company settled all of these
obligations in cash, with the exception of $22,000, which was used to
exercise outstanding stock options.
CONSULTING AGREEMENTS - On November 1, 1997, the Company entered into a
consulting agreement with a director, stockholder and the original
founder of the Company. The agreement is for a four-year period and
requires annual consulting fees of $110,000 for the first two years and
$75,000 for the last two years of the agreement. The agreement includes
a two-year non-compete provision. In addition, the Company also has a
consulting agreement with a consulting company affiliated with a member
of the Company's Board of Directors. The Company incurred costs of
$45,150 in 1999 and $60,000 in 1998 under this agreement. Amounts due
under both agreements are included in accrued liability due to related
parties for consulting services in the accompanying balance sheets.
F-31
<PAGE> 67
OPTICON MEDICAL INC.
(a development stage enterprise)
Notes to the Financial Statements
8. SUBSEQUENT EVENTS AND LIQUIDITY
On December 9, 1999, the Company entered into an Agreement and Plan or
Reorganization (the "Merger Agreement") with Immune Response, Inc
(Immune), a Colorado Corporation. The Company's shareholders approved
and adopted the merger agreement on January 28, 2000. The Merger became
effective February 25, 2000.
At the effective date of the Merger, each outstanding share of common
stock, Series A preferred stock, and Series B preferred stock was
converted to the right to receive 1.23 shares of common stock, $.0001
par value, of Immune, so that, in the aggregate, the holders of the
Company's stock would, on the effective date, hold 80% of the
outstanding common stock of Immune, on a fully diluted basis.
The Merger Agreement provided that Immune assume the Company's rights
and obligations under all of the Company's outstanding options, warrants
and other purchase rights. As a result, on the effective date, the right
of any holder of an outstanding option, warrant, or other purchase
right, was converted into the right to receive the number of shares of
Immune common stock as would have been issued or delivered to the holder
if it had exercised the warrant or option and received the shares of
Company stock upon such exercise immediately prior to the effectiveness
of the Merger.
The transaction between Immune and the Company is a business combination
between an operating enterprise (the Company) and a "shell company,"
(Immune) in which the shell company is the issuer of securities and the
operating enterprise has been determined to be the acquiring enterprise
for financial reporting purposes. Thus, the business combination will be
treated for financial reporting purposes as an issuance of securities by
the Company.
Immediately following the merger, Immune entered into Securities
Purchase Agreements with certain investors whereby Immune agreed to
sell, and the Investors to purchase $3 million in principal amount of 6%
convertible debentures and warrants to purchase 300,000 shares of
Immune's common stock at a price of $6.60 per share. At the option of
the holder, the Debentures may be converted, either in whole or in part,
into common shares, at any time, and from time to time, at a conversion
price per share of common stock equal to the lesser of: (a) $4.50 and
(b) 65% of the market price of Immune Response, Inc. On the third
anniversary of the Debentures, Immune shall convert all debt outstanding
at the conversion price unless such conversion would exceed 19.99% of
the common stock outstanding on the mandatory conversion date, unless
Immune's shareholders approve the issuance of an amount of the common
stock in excess of the 19.99% threshold. In the event of no shareholder
approval, any amounts in excess of 19.99% are to be redeemed for cash.
The convertible debt will be recorded at the amount of gross proceeds
less the fair value of the warrants. The calculated conversion price at
February 25, 2000, the first available conversion date, was $2.93 per
share. In accordance with the FASB's Emerging Issues Task Force Issue
98-5, the difference between this conversion price and the market price
of $4.50 per share will be reflected as additional interest expense in
the merged company's statement of operations for the quarter ended March
31, 2000.
F-32
<PAGE> 68
OPTICON MEDICAL INC.
(a development stage enterprise)
Notes to the Financial Statements
SUBSEQUENT EVENTS AND LIQUIDITY (continued)
On March 22, 2000, the convertible debentures were exchanged for 3,000
shares of Series A 6% Preferred Stock. The Preferred Stock has
conversion terms identical to the Convertible Debentures. In addition,
the Preferred Stockholders will be entitled to 6% dividends payable
quarterly in cash or common stock.
The Company has suffered recurring losses from operations and has a net
capital deficiency as of December 31, 1999. The merged company intends
to use the proceeds from the convertible debentures, as well as proceeds
from potential future debt or equity financing, to more fully establish
its infrastructure and continue its research and development activities.
There can be no assurance that the Company will be able to raise
sufficient funds to fully establish its infrastructure and continue its
research and development activities and continue to execute its business
plans. These circumstances raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
F-33
<PAGE> 69
IMMUNE RESPONSE, INC.
Pro Forma Condensed Consolidated Financial Statements
(unaudited)
On December 9, 1999, the Company, Opticon Acquisition Corporation, a Delaware
corporation and wholly-owned subsidiary of the Company ("Sub"), and Opticon
Medical, Inc. (Opticon), an Iowa corporation entered into an Agreement and Plan
of Reorganization (the "Merger Agreement"), providing for the merger of Opticon
with and into Sub (the "Merger").
The Merger Agreement was approved by the Company, acting as sole shareholder of
Sub. The shareholders of Opticon approved and adopted the Merger Agreement at a
special meeting held on January 28, 2000. The Merger became effective February
25, 2000. Through the Certificate of Merger, Sub changed its name to Opticon
Medical, Inc.
At the Effective Date of the Merger, each outstanding share of Common Stock, no
par value, Series A Preferred Stock, no par value, and Series B Preferred Stock,
no par value, of Opticon, totaling 4,482,906 shares (the "Opticon Stock") and
held by approximately 88 shareholders, was converted into the right to receive
1.23 shares of common stock, $.0001 par value, of the Company (the "Company
Common Stock"), so that, in the aggregate, the holders of Opticon Stock would,
on the Effective Date, hold 80% of the outstanding Company Common Stock, on a
fully diluted basis, and the then current shareholders of the Company would
hold, in the aggregate, 20% of the outstanding Company Common Stock on a fully
diluted basis. No fractional shares were issued. All fractional shares of
Company Common Stock to which a holder of Opticon Stock would otherwise be
entitled at the Effective Date were aggregated, and any fractional share
resulting from such aggregation was rounded to the nearest whole. All shares
issued pursuant to the Merger Agreement were issued pursuant to exemptions from
registration under the Securities Act of 1933, as amended (the "Act").
No other consideration was provided in connection with the Merger. The merger
consideration was determined based upon arms-length negotiations between the
Company and Opticon.
The Merger Agreement provided that the Company assume Opticon's rights and
obligations under all of Opticon's outstanding options and warrants and other
purchase rights. As a result, on the Effective Date, the right of any holder of
an outstanding option, warrant, or other purchase right, was converted into the
right to receive the number of shares of Company Common Stock as would have been
issued or delivered to the holder if it had exercised the warrant or option and
received the shares of Opticon Stock upon such exercise immediately prior to the
effectiveness of the Merger. At the Effective Date, there were outstanding an
aggregate of 1,968,517 Opticon options and warrants.
In connection with the Merger, on January 20, 2000, the Company's shareholders
approved a one-for-three reverse stock split and authorized 1,000,000 shares of
preferred stock and an increase in the authorized capital stock to 26,000,000
shares. As a result, prior to the Effective Date, the Company had a total of
1,983,526 shares of Company Common Stock issued and outstanding. In the Merger,
5,513,974 shares of Company Common Stock were issued in exchange for the
outstanding shares of Opticon Stock, causing the Company to have a total of
7,497,500 shares of Company Common Stock issued and outstanding. If all of the
Opticon options and warrants were to be exercised, approximately another
2,421,276 shares of Company Common Stock would be issued.
Immediately following the Merger, the Company entered into Securities Purchase
Agreements with certain investors (the "Investors") whereby the Company agreed
to sell, and the Investors to purchase $3,000,000 in principal amount of 6%
Redeemable Convertible Debentures ("Debentures"), and warrants to purchase
300,000 shares of Company Common Stock ("Warrants"), for an aggregate purchase
price of $3,000,000.
The transaction between the Company and Opticon is a business combination
between an operating enterprise (Opticon) and a "shell company," (the Company)
in which the shell company is the issuer of securities and the operating
enterprise has been determined to be the acquiring enterprise for financial
reporting purposes. In this case, the business combination is being treated for
financial reporting purposes as an issuance of securities by Opticon. Opticon
will credit equity for the fair value of the tangible net assets of the Company
(i.e., no goodwill or intangible assets will be recognized in this transaction).
Costs related to this transaction will be charged directly to equity.
In future filings, the historical financial statements of Opticon (accounting
acquirer) will be presented as the
F-34
<PAGE> 70
historical financial statements of the combined enterprise and the assets and
liabilities of the Company (legal acquirer) will be accounted for as required by
the purchase method of accounting without regard to which enterprise is the
surviving enterprise. The results of operations of the Company (legal acquirer)
will be included in the financial statements of the combined enterprise only
from the date of acquisition. The equity of Opticon will be presented as the
equity of the combined enterprise; however, the capital stock account of Opticon
will be adjusted to reflect the par value of the outstanding stock of the
Company after giving effect to the number of shares issued in the business
combination. The difference between the capital stock account of Opticon and the
capital stock account of the Company will be recorded as an adjustment to
additional paid-in capital of the combined enterprise. For periods prior to the
business combination, the equity of the combined enterprise will be the
historical equity of Opticon prior to the merger retroactively restated to
reflect the number of shares received in the business combination. The
accumulated deficit of Opticon will be carried forward after the acquisition.
Earnings (loss) per share for periods prior to the business combination will be
restated to reflect the number of equivalent shares received by Opticon.
The unaudited Pro Forma Condensed Consolidated Statement of Operations for the
year ended December 31, 1999 gives affect to the acquisition of Opticon as if it
had occurred on January 1, 1999. The Pro Forma Statement of Operations is based
on historical results of operations of the Company and Opticon for the year
ended December 31, 1999. The unaudited Pro Forma Condensed Balance Sheet as of
December 31, 1999 gives effect to the acquisition of Opticon as if the
acquisition has occurred on that date. The Pro Forma Statement of Operations and
the Pro Forma Balance Sheet and accompanying notes (the "Pro Forma financial
information") should be read in conjunction with and are qualified by the
historical financial statements of the Company and Opticon and notes thereto.
The Pro Forma Financial Information is intended for informational purposes only
and is not necessarily indicative of the future financial position or future
results of operations of the consolidated Company after the acquisition of
Opticon, or of the financial position or results of operations of the
consolidated Company that would have actually occurred has the acquisition of
Opticon been effected on January 1, 1999.
F-35
<PAGE> 71
IMMUNE RESPONSE, INC.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
December 31, 1999
<TABLE>
<CAPTION>
IMMUNE OPTICON
ASSETS RESPONSE, INC. MEDICAL, INC.
-------------------- -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents 90,366 13,736
Investment securities 18,093
Deferred merger costs 18,226 32,344
Notes receivable from Opticon Medical Inc. 100,000 --
Interest receivable from related parties 1,537
Prepaid expenses and other current assets -- 1,031
-------------------- -------------------
Total current assets 228,222 47,111
Property and equipment, net -- 44,099
Intangibles, net of accumulated amortization of $69,700 in 1999
and $58,084 in 1998 -- 127,801
Other assets -- 7,264
-------------------- -------------------
Total assets 228,222 226,275
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligations -- 4,644
Note payable to Immune Response, Inc. -- 100,000
Accounts payable 21,631 43,273
Accrued compensation and related taxes -- 168,178
A/P and accrued liabilities to related parties 4,461 99,727
Accrued interest to related parties 22,453 21,446
-------------------- -------------------
Total current liabilities 48,545 437,268
Convertible 6% Debentures --
Capital lease obligations, net of current portion -- 480
-------------------- -------------------
Total liabilities 48,545 437,748
Stockholders' equity (deficit) 179,677 (211,473)
-------------------- -------------------
Total liabilities and stockholders' equity (deficit) 228,222 226,275
==================== ===================
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ASSETS ADJUSTMENTS AS ADJUSTED
--------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents 2,547,265 (b) 2,651,367
Investment securities 18,093
Deferred merger costs (50,570) (a) 0
Notes receivable from Opticon Medical Inc. (100,000) (a) 0
Interest receivable from related parties (745) (a) 792
Prepaid expenses and other current assets 1,031
--------------- -----------------
Total current assets 2,395,950 2,671,283
Property and equipment, net -- 44,099
Intangibles, net of accumulated amortization of $69,700 in 1999
and $58,084 in 1998 -- 127,801
Other assets 452,735 (b) 459,999
--------------- -----------------
Total assets 2,848,685 3,303,182
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligations -- 4,644
Note payable to Immune Response, Inc. (100,000) (a) 0
Accounts payable 40,000 104,904
Accrued compensation and related taxes -- 168,178
A/P and accrued liabilities to related parties -- 104,188
Accrued interest to related parties (745)(a) 43,154
--------------- -----------------
Total current liabilities (60,745) 425,068
Convertible 6% Debentures 2,225,000 (b) 2,225,000
Capital lease obligations, net of current portion -- 480
--------------- -----------------
Total liabilities 2,164,255 2,650,548
(40,000) (a)
(50,570) (a)
775,000 (b)
1,613,013 (b)
Stockholders' equity (deficit) (1,613,013) (b) 652,634
--------------- -----------------
Total liabilities and stockholders' equity (deficit) 2,848,685 3,303,182
=============== =================
</TABLE>
F-36
<PAGE> 72
IMMUNE RESPONSE, INC.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
December 31, 1999
<TABLE>
<CAPTION>
IMMUNE OPTICON
Response, Inc. Medical, Inc.
--------------------- ---------------------
<S> <C> <C>
Costs and expenses:
Selling, general and administrative $ 42,205 550,382
Research and development -- 166,761
Clinical and regulatory -- 31,136
Depreciation of property and equipment -- 29,991
Amortization of intangible assets -- 11,615
--------------------- ---------------------
Loss from operations (42,205) (789,885)
--------------------- ---------------------
Other income (expense):
Interest income 2,184 4,621
Gain on sale of stock 19,564 --
Interest expense -- (14,609)
--------------------- ---------------------
Total other expense 21,748 (9,988)
--------------------- ---------------------
Net loss $ (20,457) (799,873)
===================== =====================
Basic and diluted net loss per share $ (0.02)
---------------------
Weighted average basic and diluted shares outstanding 1,180,494
=====================
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS AS ADJUSTED
--------------------- ---------------
<S> <C> <C>
Costs and expenses:
Selling, general and administrative -- 592,587
Research and development -- 166,761
Clinical and regulatory -- 31,136
Depreciation of property and equipment -- 29,991
Amortization of intangible assets -- 11,615
--------------------- ---------------
Loss from operations -- (832,090)
--------------------- ---------------
Other income (expense):
Interest income (745) 6,060
Gain on sale of stock -- 19,564
745 (a) 745
(150,912)(b) (150,912)
(258,333)(b) (258,333)
Interest expense (1,613,013)(b) (1,627,622)
--------------------- ---------------
Total other expense (2,022,258) (2,010,498)
--------------------- ---------------
Net loss (2,022,258) (2,842,588)
===================== ===============
Basic and diluted net loss per share (0.42)
---------------
Weighted average basic and diluted shares outstanding 5,513,974 (c) 6,694,468
===================== ===============
</TABLE>
F-37
<PAGE> 73
IMMUNE RESPONSE, INC.
Notes to Pro Forma Condensed Consolidated Financial Statements
(unaudited)
1. PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
(a) On December 9, 1999, the Company, Opticon Acquisition Corporation, a
Delaware corporation and wholly-owned subsidiary of the Company
("Sub"), and Opticon Medical, Inc. (Opticon), an Iowa corporation
entered into an Agreement and Plan of Reorganization (the "Merger
Agreement"), providing for the merger of Opticon with and into Sub (the
"Merger").
The Merger Agreement was approved by the Company, acting as sole
shareholder of Sub. The shareholders of Opticon approved and adopted
the Merger Agreement at a special meeting held on January 28, 2000. The
Merger became effective February 25, 2000.
At the Effective Date of the Merger, each outstanding share of Common
Stock, no par value, Series A Preferred Stock, no par value, and Series
B Preferred Stock, no par value, of Opticon, totaling 4,482,906 shares
(the "Opticon Stock") and held by approximately 88 shareholders, was
converted into the right to receive 1.23 shares of common stock, $.0001
par value, of the Company (the "Company Common Stock"), so that, in the
aggregate, the holders of Opticon Stock would, on the Effective Date,
hold 80% of the outstanding Company Common Stock, on a fully diluted
basis, and the then current shareholders of the Company would hold, in
the aggregate, 20% of the outstanding Company Common Stock on a fully
diluted basis. No fractional shares were issued. All fractional shares
of Company Common Stock to which a holder of Opticon Stock would
otherwise be entitled at the Effective Date were aggregated, and any
fractional share resulting from such aggregation was rounded to the
nearest whole. All shares issued pursuant to the Merger Agreement were
issued pursuant to exemptions from registration under the Securities
Act of 1933, as amended (the "Act").
No other consideration was provided in connection with the Merger. The
merger consideration was determined based upon arms-length negotiations
between the Company and Opticon.
In the Merger, 5,513,974 shares of Company Common Stock were issued in
exchange for the outstanding shares of Opticon Stock, causing the
Company to have a total of 7,497,500 shares of Company Common Stock
issued and outstanding.
The transaction between the Company and Opticon is a business
combination between an operating enterprise (Opticon) and a "shell
company," (the Company) in which the shell company is the issuer of
securities and the operating enterprise has been determined to be the
acquiring enterprise for financial reporting purposes. Thus, the
business combination is being treated for financial reporting purposes
as an issuance of securities by Opticon. Opticon credited equity for
the fair value of the tangible net assets of the Company (i.e., no
goodwill or intangible assets were recognized in this transaction).
Costs related to this transaction, totaling $90,570, have been charged
directly to equity.
In addition, the intercompany notes, totaling $100,000, and the related
accrued interest totaling $745 were canceled in the Merger.
(b) In connection with the Merger, the Company entered into Securities
Purchase Agreements with certain investors (the "Investors") whereby
the Company agreed to sell, and the Investors to purchase $3,000,000 in
principal amount of 6% Redeemable Convertible Debentures
("Debentures"), and warrants to purchase 300,000 shares of Company
Common Stock ("Warrants"), for an aggregate purchase price of
$3,000,000.
The Company received gross proceeds from the Debenture issuance of
$3,000,000, less issuance costs of $452,735, resulting in net proceeds
of $2,547,265. The issuance costs, which have been recorded as an
asset, will be amortized as interest expense over the 3 year life of
the Debentures. Total amortization in 1999 if the Debentures had been
outstanding for the entire period would have been $150,912.
F-38
<PAGE> 74
IMMUNE RESPONSE, INC.
Notes to Pro Forma Condensed Consolidated Financial Statements
(unaudited)
The Company also recorded the warrants at their fair value ($775,000
calculated using a Black Sholes valuation model) as a discount on the
face amount of the Debentures with a corresponding credit to additional
paid-in capital. This discount will also be amortized as interest
expense over the 3 year life of the Debentures. Total amortization in
1999 if the Debentures had been outstanding for the entire period would
have been $258,333.
The calculated conversion price of the Debentures at February 25, 2000,
the first available conversion date, was $2.93 per share. In accordance
with the FASB's Emerging Issues Tax Force Issue 98-5, the difference
between this conversion price and the market price of $4.50 per share
were reflected as additional interest expense in the Company's Pro
Forma Condensed Statement of Operations and a credit to additional
paid-in capital in the Pro Forma Condensed Balance Sheet.
(c) In the Merger, 5,513,974 shares of Company Common Stock were issued in
exchange for the outstanding shares of Opticon Stock, causing the
Company to have a total of 7,497,500 shares of Company Common Stock
issued and outstanding. The pro forma based and diluted net loss per
share is computed by dividing the net loss attributable to common
shareholders by the weighted average number of common shares
outstanding. The calculation of the weighted average number of shares
outstanding assumes that shares issued in connection with the Merger
were outstanding for the entire period. Diluted net loss per share
equals basic net loss per share, as common stock equivalents are
anti-dilutive for all pro forma periods presented.
F-39
<PAGE> 75
The Board of Directors
Opticon Medical, Inc. (f/k/a Immune Response, Inc.):
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
Our report dated March 25, 2000, states that we have audited the balance sheet
of Immune Response, Inc. (a development stage enterprise) as of December 31,
1999, and the related statements of operations, stockholders' equity and
comprehensive income, and cash flows for year ended December 31, 1999 and for
the period from May 14, 1984 (inception) to December 31, 1999. The statements of
operations, stockholders' equity, and cash flows for the period May 14, 1984
(inception) to December 31, 1999 include amounts for the period from May 14,
1984 (inception) to December 31, 1998 and for the year ended December 31, 1998,
which were audited by other auditors whose report has been furnished to us, and
our opinion, insofar as it relates to the amounts included for the period May
14, 1984 through December 31, 1998 is based solely on the report of the other
auditors.
Our report dated March 25, 2000, contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations, which raises
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of that uncertainty.
/s/ KPMG LLP
KPMG LLP
Columbus, Ohio
August 28, 2000
F-40
<PAGE> 76
OPTICON MEDICAL, INC.
(FORMERLY IMMUNE RESPONSE, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
Balance Sheets
June 30, 2000
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
ASSETS (UNAUDITED) (SEE NOTE 2)
----------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,852,976 13,736
Deferred merger costs -- 32,344
Prepaid expenses and other current assets 15,014 1,031
----------- ----------
Total current assets 1,867,990 47,111
Property and equipment, net 40,427 44,099
Intangibles, net of accumulated amortization of $72,604 in 2000
and $69,700 in 1999 121,992 127,801
Other assets 4,979 7,264
----------- ----------
Total assets $ 2,035,388 226,275
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligations $ 1,998 4,644
Note payable to Immune Response, Inc. -- 100,000
Accounts payable 30,584 43,273
Accounts payable and accrued liabilities to related parties 6,250 121,173
Dividends payable 51,781 --
Accrued interest on debentures 7,397 --
Accrued compensation and related taxes 30,000 168,178
Other accrued liabilities 12,200 --
----------- ----------
Total current liabilities 140,210 437,268
Capital lease obligations, net of current portion -- 480
----------- ----------
Total liabilities 140,210 437,748
Stockholders' equity (deficit):
Preferred stock, $.0001 par value, 1,000,000 shares authorized:
Series A convertible preferred stock, 3,000 shares authorized,
issued and outstanding at June 30, 2000;
liquidation preference of $3,016,250 1,806,369 --
Common stock, $.0001 par value, 25,000,000 shares authorized,
7,524,560 shares issued and outstanding at June 30, 2000 and 7,497,500
shares issued and outstanding at December 31, 1999
retroactively restated to reflect merger 752 750
Additional paid-in capital 6,602,648 4,153,193
Deficit accumulated during the development stage (6,514,591) (4,365,416)
----------- ----------
Total stockholders' equity (deficit) 1,895,178 (211,473)
----------- ----------
Total liabilities and stockholders' equity (deficit) $ 2,035,388 226,275
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE> 77
OPTICON MEDICAL, INC.
(FORMERLY IMMUNE RESPONSE, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
CUMULATIVE
FROM
JULY 28, 1994
THREE MONTHS ENDED SIX MONTHS ENDED (INCEPTION) TO
JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999 2000
---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Costs and expenses:
Selling, general and administrative $ 163,808 132,679 386,666 292,770 2,215,922
Research and development 75,784 26,794 111,871 69,550 1,330,635
Clinical and regulatory 3,069 6,200 3,069 22,525 932,526
Depreciation of property and equipment 8,087 4,893 15,586 9,786 149,960
Amortization of intangible assets 2,904 2,904 5,808 5,808 156,503
---------- --------- ---------- --------- ----------
Loss from operations (253,652) (173,470) (523,000) (400,439) (4,785,546)
---------- --------- ---------- --------- ----------
Other income (expense):
Interest income 26,258 1,546 35,803 1,546 86,738
Interest expense (758) (12,844) (1,661,979) (13,241) (1,815,784)
---------- --------- ---------- --------- ----------
Total other expense 25,500 (11,298) (1,626,176) (11,695) (1,729,046)
---------- --------- ---------- --------- ----------
Loss before income taxes (228,152) (184,768) (2,149,176) (412,134) (6,514,592)
Income taxes -- -- -- -- --
---------- --------- ---------- --------- ----------
Net loss $ (228,152) (184,768) (2,149,176) (412,134) (6,514,592)
---------- --------- ---------- --------- ----------
Preferred stock dividends $ 44,781 -- 51,781 -- 51,781
---------- --------- ---------- --------- ----------
Net loss attributable to
common stockholders $ (272,933) (184,768) (2,200,957) (412,134) (6,566,373)
========== ========= ========== ========= ==========
Loss per common share (basic and diluted) $ (0.04) (0.03) (0.29) (0.07) (1.36)
========== ========= ========== ========= ==========
Weighted average number of shares outstanding
during period (basic and diluted)
retroactively restated to reflect merger $7,524,560 6,335,978 7,511,553 6,237,569 4,845,291
========== ========= ========== ========= ==========
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE> 78
OPTICON MEDICAL, INC
(FORMERLY IMMUNE RESPONSE, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
CUMULATIVE FROM
JULY 28, 1994
SIX MONTHS ENDED (INCEPTION) TO
JUNE 30, JUNE 30,
2000 1999 2000
---------- -------- ----------
<S> <C> <C> <C>
Cash used in operating activities (738,556) (350,024) (4,397,905)
Cash flows from investing activities:
Purchases of property and equipment (11,914) -- (170,220)
Purchases of intangibles -- -- (59,147)
---------- -------- ----------
Cash used in investing activities (11,914) -- (229,367)
Cash flows from financing activities:
Cash acquired in merger 99,119 -- 99,119
Merger costs (75,548) -- (75,548)
Proceeds from issuance of stock, net of issuance cost -- 525,000 2,866,927
Proceeds from the issuance of note payable to Immune
Response, Inc. -- -- 100,000
Net proceeds from exercise of stock options 22,000 -- 22,000
Proceeds from convertible debentures with warrants 2,547,265 -- 3,372,265
Proceeds from long-term debt -- -- 115,000
Payments on capital lease obligations (3,126) (3,774) (19,515)
---------- -------- ----------
Cash provided by financing activities 2,589,710 521,226 6,480,248
Increase (decrease) in cash and cash equivalents 1,839,240 171,202 1,852,976
Cash and cash equivalents, beginning of period 13,736 51,961 --
---------- -------- ----------
Cash and cash equivalents, end of period $1,852,976 223,163 1,852,976
========== ======== ==========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest $ 28,666 56,746 33,358
========== ======== ==========
NONCASH INVESTING ACTIVITY:
Equipment acquired through capital lease obligations $ -- -- 21,513
========== ======== ==========
NONCASH FINANCING ACTIVITIES:
Cancellation of Immune Response, Inc. debt in merger $ 100,000 -- 100,000
========== ======== ==========
Deferred issuance costs related to merger $ 32,344 -- 32,344
========== ======== ==========
Conversion of debt in exchange for common stock $ -- -- 115,000
========== ======== ==========
Issuance of warrants in connection with convertible debt $ 775,000 -- 775,000
========== ======== ==========
Conversion of debt in exchange for stock $2,547,265 -- 3,421,432
========== ======== ==========
Issuance of common stock in exchange for intangibles $ -- -- 219,350
========== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-43
<PAGE> 79
OPTICON MEDICAL, INC.
(F/K/A IMMUNE RESPONSE, INC.)
Notes to Financial Statements
(Unaudited)
June 30, 2000
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Opticon Medical,
Inc. (formerly Immune Response, Inc. - see Note 4) (the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 10(a) of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 2000 are not necessarily indicative of the results that may be expected for
the year ended December 31, 2000. For further information, refer to the
financial statements and footnotes thereto included in the Company's Form 10-KSB
for the year ended December 31, 1999 as filed with the Securities and Exchange
Commission.
NOTE 2 - MERGER OF IMMUNE RESPONSE, INC. AND OPTICON MEDICAL, INC. (AN IOWA
CORPORATION)
On December 9, 1999, Immune Response, Inc., a Colorado corporation ("Immune"),
Opticon Acquisition Corporation, a Delaware corporation and wholly-owned
subsidiary of Immune ("Sub"), and Opticon Medical, Inc., an Iowa corporation
("Opticon Iowa"), entered into an Agreement and Plan of Reorganization (the
"Merger Agreement"), providing for the merger of Opticon Iowa with and into Sub
(the "Merger").
The Merger Agreement was approved by Immune, acting as sole shareholder of Sub.
The shareholders of Opticon Iowa approved and adopted the Merger Agreement at a
special meeting held on January 28, 2000. The Merger became effective February
25, 2000. Through the Certificate of Merger, Sub changed its name to Opticon
Medical, Inc.
At the Effective Date of the Merger, each outstanding share of Common Stock, no
par value, Series A Preferred Stock, no par value, and Series B Preferred Stock,
no par value, of Opticon Iowa, totaling 4,482,906 shares (the "Opticon Iowa
Stock") and held by approximately 88 shareholders, was converted into the right
to receive 1.23 shares of common stock, $.0001 par value, of Immune (the "Immune
Common Stock"), so that, in the aggregate, the holders of Opticon Iowa Stock
would, on the Effective Date, hold 80% of the outstanding Immune Common Stock,
on a fully diluted basis, and the then current shareholders of Immune would
hold, in the aggregate, 20% of the outstanding Immune Common Stock on a fully
diluted basis. No fractional shares were issued. All fractional shares of Immune
Common Stock to which a holder of Opticon Iowa Stock would otherwise be entitled
at the Effective Date were aggregated, and any fractional share resulting from
such aggregation was rounded to the nearest whole. All shares issued pursuant to
the Merger Agreement were issued pursuant to exemptions from registration under
the Securities Act of 1933, as amended (the "Act"). In addition, notes
outstanding between the two companies, totaling $100,000 were cancelled in
connection with the merger. The merger consideration was determined based upon
arms-length negotiations between Immune and Opticon Iowa.
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<PAGE> 80
The Merger Agreement provided that Immune assume Opticon Iowa's rights and
obligations under all of Opticon Iowa's outstanding options and warrants and
other purchase rights. As a result, on the Effective Date, the right of any
holder of an outstanding option, warrant, or other purchase right, was converted
into the right to receive the number of shares of Immune Common Stock as would
have been issued or delivered to the holder if it had exercised the warrant or
option and received the shares of Opticon Iowa Stock upon such exercise
immediately prior to the effectiveness of the Merger. At the Effective Date,
there were outstanding an aggregate of 1,968,517 Opticon Iowa options and
warrants.
In connection with the Merger, on January 20, 2000, Immune's shareholders
approved a one-for-three reverse stock split and authorized 1,000,000 shares of
preferred stock and an increase in the authorized capital stock to 26,000,000
shares. As a result, prior to the Effective Date, Immune had a total of
1,983,526 shares of Immune Common Stock issued and outstanding. In the Merger,
5,513,974 shares of Immune Common Stock were issued in exchange for the
outstanding shares of Opticon Iowa Stock, causing Immune to have a total of
7,497,500 shares of Immune Common Stock issued and outstanding. If all of the
Opticon Iowa options and warrants had been exercised, approximately another
2,421,276 shares of Immune Common Stock would have been issued.
The transaction between Immune and Opticon Iowa was a business combination
between an operating enterprise (Opticon Iowa) and a "shell company" (Immune),
in which the shell company was the issuer of securities and the operating
enterprise was determined to be the acquiring enterprise for financial reporting
purposes. In this case, the business combination is being treated for financial
reporting purposes as an issuance of securities by Opticon Iowa. Opticon Iowa
has credited equity for the fair value of the tangible net assets of Immune
(i.e., no goodwill or intangible assets were recognized in this transaction).
Costs related to this transaction were charged directly to equity.
In this filing and in future filings, the historical financial statements of
Opticon Iowa (accounting acquirer) has and will be presented as the historical
financial statements of the combined enterprise and the assets and liabilities
of the Immune (legal acquirer) has and will be accounted for as required by the
purchase method of accounting without regard to which enterprise is the
surviving enterprise. The results of operations of Immune (legal acquirer) are
included in the financial statements of the combined enterprise only from the
date of acquisition. The equity of Opticon Iowa is presented as the equity of
the combined enterprise; however, the capital stock account of Opticon Iowa has
been adjusted to reflect the par value of the outstanding stock of Immune after
giving effect to the number of shares issued in the business combination. The
difference between the capital stock account of Opticon Iowa and the capital
stock account of Immune has been recorded as an adjustment to additional paid-in
capital of the combined enterprise. For periods prior to the business
combination, the equity of the combined enterprise is the historical equity of
Opticon Iowa prior to the merger retroactively restated to reflect the number of
shares received in the business combination. The accumulated deficit of Opticon
Iowa will be carried forward after the acquisition. Earnings (loss) per share
for periods prior to the business combination have been restated to reflect the
number of equivalent shares received by Opticon Iowa shareholders in the Merger.
NOTE 3 - CONVERTIBLE PREFERRED STOCK SERIES A
Immediately following the Merger, Immune entered into Securities Purchase
Agreements with certain investors (the Investors") whereby Immune agreed to
sell, and the Investors to purchase $3 million in principal amount of 6%
convertible debentures (the "Debentures") and warrants to purchase 300,000
shares of Immune's common stock (the Warrants") at a price of $6.60 per share.
At the option of the holder, the Debentures were convertible, either in whole or
in part, into common shares, at any time, and from time to time, at a conversion
price per share of common stock equal to the lesser of: (a) $4.50 or (b) 65% of
the market price of Immune Common Stock. Any principal amount of Debentures
outstanding on the third anniversary of the issuance were automatically
convertible into common stock at the conversion price unless the common stock
issuable on such conversion would exceed 19.99% of the common stock outstanding
on the mandatory conversion date, in which case Immune's shareholders would have
to approve the issuance of the common stock in excess of the 19.99% threshold.
In the event of no shareholder approval, any unconverted portion of the
Debentures were required to be redeemed for cash.
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<PAGE> 81
The Debentures were recorded at the amount of gross proceeds of $3 million, less
the fair value of the Warrants, which were valued at $775,000. The calculated
conversion price at February 25, 2000, the first available conversion date, was
$2.93 per share. In accordance with the FASB's Emerging Issues Task Force Issue
98-5, the difference between this conversion price and the market price of $4.50
per share was reflected as additional interest expense of $1,613,013 in the
merged company's statement of operations for the quarter ended March 31, 2000.
On March 17, 2000, the Debentures were exchanged for 3,000 shares of Series A 6%
Convertible Preferred Stock (the "Preferred Stock"). The Preferred Stock has
identical terms and conditions to the Debentures, except that the holders of
Preferred Stock are entitled to cumulative dividends rather than interest,
payable quarterly in cash or common stock. At the time of conversion, the
principal balance of the Debentures was $2,246,528, and accrued interest was
$9,250. On the conversion date, Immune also netted the deferred debt issuance
costs of $440,159, previously recorded as an asset, with the carrying value of
the preferred stock. The dividends were accrued at June 30, 2000, in the amount
of $51,781.
NOTE 4 - SUBSEQUENT EVENTS
MERGER OF IMMUNE RESPONSE, INC. INTO OPTICON MEDICAL, INC. (A DELAWARE
CORPORATION)
On July 27, 2000, Immune merged into its wholly-owned subsidiary, Opticon
Medical, Inc., a Delaware corporation (referred to herein as the "Company"). The
merger was approved at the Annual Meeting of Shareholders and became effective
upon the filing of certificates of merger with the Secretaries of State of
Colorado and Delaware on July 27, 2000.
At the effective date of the merger, each outstanding share of Immune Common
Stock and each outstanding share of Immune Preferred Stock was converted
automatically into one share of Company common stock, par value $0.0001 per
share ("Company Common Stock"), and one share of Company Series A, 6%
Convertible Preferred Stock, par value $0.0001 per share ("Company Preferred
Stock"), respectively.
The Company has assumed and will continue the outstanding stock options and all
other employee benefit plans of Immune. Each outstanding and unexercised option
or other right to purchase shares of Immune Common Stock will become an option
or right to purchase the same number of shares of Company Common Stock on the
same terms and conditions and at the same exercise price applicable to any such
option or stock purchase right as of the date of the effectiveness of the
merger.
ADOPTION OF 2000 STOCK INCENTIVE PLAN
On July 27, 2000, the shareholders of the Company approved the adoption of the
2000 Stock Incentive Plan (the "2000 Plan"). The 2000 Plan is intended to
increase incentive and to encourage stock ownership on the part of (1) employees
of the Company and its affiliates, (2) consultants who provide significant
services to the Company and its affiliates, and (3) directors of the Company who
are employees of neither the Company nor any affiliate ("Non-employee
Directors").
The 2000 Plan permits the granting of stock options and restricted stock awards
(collectively, "Awards") to eligible participants. The total number of shares of
Company Common Stock available for Awards to be granted under the 2000 Plan will
consist of 1,500,000 shares. If an Award expires or is canceled without having
been fully exercised or vested, the unvested or canceled shares generally will
be available again for grants of Awards.
The 2000 Plan is administered by the Compensation and Stock Option Committee of
the Company's Board of Directors (the "Committee"). The members of the Committee
must qualify as "outside directors" under section 162(m) of the Internal Revenue
Code (the "Code"). Subject to the terms of the 2000 Plan, the Committee has the
F-46
<PAGE> 82
sole discretion to determine the key employees and consultants who shall be
granted Awards, the terms and conditions of such Awards, and to construe and
interpret the 2000 Plan. The actual number of employees and consultants who will
receive Awards under the 2000 Plan cannot be determined because eligibility for
participation in the Plan is in the discretion of the Committee. The 2000 Plan
may be amended or terminated by the Board of Directors at any time and for any
reason. Certain material amendments to the 2000 Plan must be approved by the
stockholders.
If a participant engages in a certain activity that is harmful to the Company,
all outstanding and unexercised Awards may be cancelled and terminated. Awards
granted under the 2000 Plan may not be sold, transferred, pledged, assigned, or
otherwise alienated or hypothecated, other than by will or by the applicable
laws of descent and distribution.
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<PAGE> 83
YOU SHOULD RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. THE SELLING STOCKHOLDERS LISTED IN THIS PROSPECTUS
ARE OFFERING TO SELL, AND ARE SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK IN
JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES
TO PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN ANY SUCH JURISDICTION. PERSONS WHO COME INTO POSSESSION OF
THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO
INFORM THEMSELVES ABOUT AND TO OBSERVE AND RESTRICTIONS TO THIS OFFERING AND THE
DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
OPTICON MEDICAL, INC.
5,455,385 SHARES OF COMMON STOCK
PROSPECTUS
AUGUST 29, 2000
<PAGE> 84
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Certificate of Incorporation limits the liability of directors to
stockholders for monetary damages for breach of a fiduciary duty except in the
case of liability: (i) for any breach of their duty of loyalty to us or our
stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (ii) for unlawful
distributions as provided in Section 174 of the Delaware General Corporation
Law; or (iv) for any transaction from which the director derived an improper
personal benefit.
Our Certificate and Bylaws provide for the indemnification of our
directors and officers to the maximum extent permitted by the Delaware General
Corporation Law, against all liability and expense (including attorney's fees)
incurred by reason of the fact that the officer or director served in such
capacity, or in a certain capacity for another entity at our request. Section
145 of the Delaware General Corporation Law provides generally for
indemnification of directors against liability incurred as a result of actions,
suits, or proceedings if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to our best interests.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses relating to the registration of the shares of common stock
being offered hereby, other than underwriting discounts and commissions, will be
borne by the Registrant. The following table shows the amount of such expenses
in connection with the sale and distribution of the shares registered on August
22, 2000:
Item Amount
---- ------
Securities and Exchange Commission
Registration Fee $ 2,612
Legal Fees and Expenses $ 13,700
Accounting Fees and Expenses $ 4,000
Miscellaneous Expenses $ 2,325
Total $ 22,637
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In November 1999 (and prior to a subsequent one-for-three reverse stock
split), we completed the private placement of 3,000,000 shares of common stock,
which was offered on a best efforts basis to accredited investors. The gross
proceeds from the private placement was $300,000 and were used for working
capital. We claimed exemption from registration under Rule 506 of Regulation D
of the Securities Act, and we restricted the sale of stock accordingly.
In February 2000, following the effectiveness of the merger, we sold to
the selling stockholders $3,000,000 in principal amount of 6% Redeemable
Convertible Debentures, and warrants to purchase 300,000 shares of common stock,
for an aggregate purchase price of $3,000,000. The debentures were subsequently
exchanged for 3,000 shares of our Series A 6% Convertible Preferred Stock . The
shares of preferred stock are entitled to cumulative dividends at the rate of 6%
per annum. The warrants are exercisable at a price equal to $6.60 per share. The
preferred stock is convertible from time to time at the option of the holder
into shares of common stock at a conversion price equal to 65% of the average
closing bid price of the common stock for the 5 business days prior to
conversion. Both the preferred stock and the warrants have adjustment features
to compensate for the dilutive issuance by us of common equity (or options,
warrants or other rights convertible into or exercisable for common equity)
while the preferred stock and warrants remain outstanding. We also entered into
a Registration Rights Agreement pursuant to which we are filing this
registration statement on Form SB-2 under the Securities Act for the resale by
the selling stockholders of shares of common stock issuable on conversion of the
preferred stock or
<PAGE> 85
exercise of the warrants, and we will incur substantial penalties if the
registration statement is not declared effective within 180 days of the closing
of the sale of the preferred stock and warrants. Our net proceeds from this
transaction, after payment of fees and expenses, was approximately $2,547,265.
In connection with the debentures, warrants, and shares of preferred
stock, we claimed exemption from registration under Rule 506 of Regulation D of
the Securities Act, and we restricted the sale of stock accordingly.
ITEM 27. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 * Agreement and Plan of Reorganization, dated December
9, 1999, among Immune Response, Inc., Opticon
Medical, Inc., and Opticon Acquisition Corporation.
3.1 *** Conformed Certificate of Incorporation of the
Registrant.
3.2 *** Amended and Restated Bylaws of the Registrant.
4 *** Articles Fourth, Ninth and Tenth of the Registrant's
Conformed Certificate of Incorporation and Articles
II, V, VI, VII and IX of the Registrant's Amended and
Restated Bylaws.
5 ** Opinion of Porter, Wright, Morris & Arthur
10.1 * Lease between Pharmacia & Upjohn Company, successor
by merger to Adria Laboratories, Inc., and Opticon
Medical, Inc., dated August 20, 1998, for the lease
of real property located at 7001 Post Road, Dublin,
Ohio 43016.
10.2 * First Amendment to Lease Agreement between Pharmacia
& Upjohn Company, successor by merger to Adria
Laboratories, Inc., "Landlord," and Opticon Medical,
Inc., "Tenant," dated October 27, 1998.
10.3 * Employment Agreement, dated March 10, 1997, between
Opticon Medical, Inc. and William J. Post.
10.4 * Amendment to Employment Agreement, dated February 12,
1998, between Opticon Medical, Inc. and William J.
Post.
10.5 * Employment Agreement, dated September 9, 1997,
between Opticon Medical, Inc. and John LaMarche.
10.6 * Amendment to Employment Agreement, dated February 12,
1998, between Opticon Medical, Inc. and John
LaMarche.
10.7 * Consulting Agreement, dated November 1, 1997, between
Opticon Medical, Inc. and Dr. Fouad A. Salama, M.D.
10.8 * Employee Stock Option Agreement, dated June 3, 1998,
between Opticon Medical, Inc. and William J. Post.
10.9 * Employee Stock Option Agreement, dated July 26, 1996,
between Medical Device International, Inc. and John
LaMarche.
10.10 * Employee Stock Option Agreement, dated June 3, 1998,
between Opticon Medical, Inc. and John LaMarche.
II-2
<PAGE> 86
10.11 * Form of Director's Stock Option Agreement, dated May
30, 1997, between Opticon Medical, Inc. and Ron
Eibensteiner, Opticon Medical, Inc. and Walter
Sembrowich, and Opticon Medical, Inc. and David
Lundquist.
10.12 * Employee Stock Option Agreement, dated July 26, 1997,
between Medical Device International, Inc. and F.A.
Salama, M.D.
10.13 * Amendment to Employee Stock Opticon Agreement, dated
November 1, 1997, between Opticon Medical, Inc. and
Dr. Fouad A. Salama.
10.14 * Form of Securities Purchase Agreement between Immune
Response, Inc. and the selling stockholders.
10.15 * Form of Registration Rights Agreement between Immune
Response, Inc. and selling stockholders.
10.16 ** Form of Warrant issued by the Registrant to the
selling stockholders.
10.17 *** Registrant's 2000 Stock Incentive Plan.
10.18(R) **** Manufacturing and Supply Agreement dated August 4,
2000 by and between Opticon Medical, Inc. and Medical
Elastomer Development, Inc.
16.1 Letter from Davis & Co., CPA's, P.C., dated November
2, 1999, addressed to the Securities and Exchange
Commission. (Previously filed as Exhibit 16.1 to
Registrant's Current Report on Form 8-K, dated
November 2, 1999, Commission file no. 33-17922-C, and
incorporated herein by reference.)
16.2 Letter from Gelfond Hochstadt Pangburn, P.C., dated
March 14, 2000, addressed to the Securities and
Exchange Commission. (Previously filed as Exhibit
16.1 to Registrant's Current Report on Form 8-K,
dated March 17, 2000, Commission file no. 33-17922-C,
and incorporated herein by reference.)
21 * List of Subsidiaries
23.1 **** Consent of KPMG LLP
23.2 ** Consent of Lund Koehler Cox & Arkema LLP
23.3 ** Consent of Davis & Co., CPA's, P.C.
23.4 ** Consent of Porter, Wright, Morris & Arthur LLP
(contained in Exhibit 5).
24 *** Powers of Attorney
* Previously filed with Registrant's Annual Report on Form 10-KSB, dated
March 30, 2000, Commission file no. 33-17922-C, and incorporated herein
by reference.
** Previously filed with Registrant's Registration Statement on Form SB-2,
dated April 26, 2000, Registration file no. 333-35644.
*** Previously filed with Registrant's Quarterly Report on Form 10-QSB, dated
August 14, 2000, Commission file no. 33-17922-C, and incorporated herein
by reference.
**** Filed with this Amendment.
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<PAGE> 87
(R) Please note that certain confidential commercial information has been
redacted from some of the exhibits to this Post-Effective Amendment to
Form SB-2 in order to preserve the confidentiality of such information.
All of the confidential information which has been redacted is on file
with the Securities and Exchange Commission. Exhibits to this Form SB-2
which have had confidential information redacted are indicated as follows
on the exhibit list above:
(R) Within these exhibits, redacted material is indicated by the following
sign where such redacted text would have appeared in the relevant
exhibit: (**REDACTED**).
ITEM 28. UNDERTAKINGS
The undersigned hereby undertakes:
A. Undertakings Regarding Amendments to this Prospectus and
the Registration Statement
1. To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii) 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 change 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" in the effective Registration Statement; and
(iii) 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.
2. 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.
3. 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.
B. Undertaking in Respect of Indemnification. Insofar as
indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to the registrant's directors,
officers, and controlling persons pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a
directors, officers or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is
asserted by such director, officer, or controlling person in
connection with the securities being registered, the
registrant will, unless in the opinion of 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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<PAGE> 88
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Post-effective Amendment No. 1 to Form
SB-2 and has duly caused this Registration Statement to be signed on our behalf
by the undersigned, thereunto duly authorized, in the City of Dublin, State of
Ohio, on August 22, 2000.
OPTICON MEDICAL, INC.
By: /s/ William J. Post
-------------------
Pursuant to the requirements of the Securities Act of 1933, this
amended registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ William J. Post President, Director ) August 22, 2000
--- ------- -- ---- (Principal Executive Officer) )
William J. Post )
)
)
*David B. Bittner Chief Financial Officer, ) August 22, 2000
------ -- ------- Treasurer (Principal Financial and )
David B. Bittner Accounting Officer) )
)
)
*Walter L. Sembrowich, Ph.D. Director ) August 22, 2000
------- -- ----------- ----- )
Walter L. Sembrowich, Ph.D. )
)
*Ronald E. Eibensteiner Director ) August 22, 2000
------- -- ------------ )
Ronald E. Eibensteiner )
)
)
*David Lundquist Director ) August 22, 2000
------ --------- )
David Lundquist )
)
*Fouad A. Salama Director ) August 22, 2000
------ -- ------ )
Fouad A. Salama )
)
)
</TABLE>
*By: /s/William J. Post
---------- -- ----
William J. Post
Attorney-in-fact for each of the persons indicated
II-5
