<PAGE> 1
As filed with the Securities and Exchange Commission on April 26, 2000
Registration No. 333-
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
IMMUNE RESPONSE, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Colorado 421450 84-0950197
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
---------------------
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
Immune Response, 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. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE> 2
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------
Title of Each Class of
Securities to be Proposed Amount to Maximum Offering Proposed maximum Amount of
Registered be Registered Price Per Share(*) Offering Price(*) Registration Fee(*)
<S> <C> <C> <C> <C>
Common stock issued
upon conversion of
preferred stock (1) 4,615,385 $1.8125 $8,365,386 $2,209
Common stock issued in
payment of dividends on
preferred stock (2) 540,000 $1.8125 $978,750 $259
Common stock issuable
upon exercise of warrants (3) 300,000 $1.8125 $543,750 $144
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(*) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), based on the average closing bid and asked price
on April 20, 2000.
(1) Estimated based on a market value of $1.00 per share of common stock at the
time of conversion. The preferred stock is convertible at a rate of 65% of
the market value at the time of conversion.
(2) Estimated based on a market value of $1.00 per share of common stock at the
time of issuance. Each share of preferred stock is entitled to dividends at
a rate of six (6%) per annum of the stated value thereof. The aggregated
stated value of the preferred stock is $3,000,000. The preferred stock has
a mandatory conversion after three years.
(3) Each warrant is exercisable for one share of common stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
2
<PAGE> 3
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION - DATED APRIL 26, 2000
IMMUNE RESPONSE, INC.
7001 Post Road
Dublin, Ohio 43016
(614) 336-2000
5,455,385 SHARES OF COMMON STOCK
($.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 "IMUN." On April 20,
2000, the closing sale price of the common stock was $2.125 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 _________, 2000.
<PAGE> 4
TABLE OF CONTENTS
PAGE
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
----------------------------
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.
2
<PAGE> 5
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 IMMUNE RESPONSE, INC., A COLORADO CORPORATION,
TOGETHER WITH OUR SUBSIDIARIES AND THEIR RESPECTIVE PREDECESSORS, UNLESS
OTHERWISE INDICATED. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS AND
INFORMATION RELATING TO IMMUNE RESPONSE, INC. SEE "FORWARD-LOOKING STATEMENTS
MAY PROVE TO BE INACCURATE" ON PAGE 11.
OUR BUSINESS
We were 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., and Opticon Acquisition Corporation, our wholly-owned subsidiary, we
acquired the stock 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. As a result of the
merger, 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.
To date, Opticon Medical has had no sales and generated no revenues. We
intend to apply working capital toward more fully establishing its directly
employed infrastructure, completing clinical trials for short-term use of the
OPTICON(TM), further progressing its product development projects, and
establishing initial market channels.
Because we were inactive prior to our merger with Opticon Medical, and
because as a result of the merger the former stockholders of Opticon Medical now
hold a majority of our outstanding common stock, under generally accepted
accounting principles as interpreted by the Securities and Exchange Commission,
the merger is treated as a "reverse merger" with the financial statements of
Opticon Medical Inc. becoming our financial statements. Consequently, discussion
of our business, financial condition and results of operations herein will
relate primarily to Opticon Medical Inc., unless otherwise indicated.
We are located at 7001 Post Road, Dublin, Ohio 43016, telephone: (614)
336-2000.
3
<PAGE> 6
THE OFFERING
Common stock offered by the selling stockholders 5,455,385 shares (1)
Common stock outstanding as of April 20, 2000 7,524,560 shares (2)
Use of Proceeds We will not receive any
proceeds from the sale
of the common stock.
Over the Counter Bulletin Board Symbol IMUN
(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 April 20, 2000.
- 1,418,196 shares of common stock issuable upon exercise of stock options
outstanding as of April 20, 2000.
4
<PAGE> 7
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 FDA 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
entails longer and more complicated regulatory review, often taking 6 to 12
months or longer from the time of filing.
5
<PAGE> 8
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
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.
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.
6
<PAGE> 9
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 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
7
<PAGE> 10
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 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
8
<PAGE> 11
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 or 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 Act
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 ANTICIPATE 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
the prevailing market price as of the date of this prospectus, the conversion
would result in the issuance of approximately 2,171,946 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 stockholders before the merger. Additional warrants
9
<PAGE> 12
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.
10
<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." 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
(through April 20, 2000)
The bid price quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
On April 20, 2000, the last reported sale price of our common stock was
$2.125 per share. On April 20, 2000, there were 645 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.
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
11
<PAGE> 14
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."
12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
The debenture/preferred stock financing completed in February 2000,
produced net proceeds to us of just over $2.5 million, which are expected to
fund our planned operations for a period of 12-15 months, after which we will
require additional funds for further business development. We intend to apply
our current cash resources to executing the next 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, until the completion of the financing, operated as a "virtual
company," leveraging the efforts of a small number of direct employees with
those of a host of consulting contractors. We intend now to commence the hiring
of key employees with the requisite financial, engineering and management
skills. We have engaged a local consultant for internal finance and accounting
services and the Board of Directors has elected him as our Chief Financial
Officer. We are recruiting management and operating personnel in the areas of
product development/engineering and clinical and regulatory affairs, although we
will still use outside contractors to some extent in these areas. We will
continue to contract manufacturing and assembly to outside sources, however, we
will recruit a quality assurance supervisor to internally develop and maintain
quality standards as well as serving our requirements for documentation. We will
add marketing and business development management to the organization later in
the cycle as the product approaches market readiness. We currently expect to
directly employ a total of 8-10 associates by the end of 2000.
The focus of our product development activities will center on
finalizing the specifications of the first-generation female device and on
progressing the male device from prototype stage to pilot production. In
addition, we will specify and source a final packaging design. The development,
construction and validation of a test fixture (already specified and sourced)
will be a high priority, as we will use this equipment in qualifying
manufactured devices to meeting certain performance criteria and also to serve
ongoing second-generation development plans. The extent to which we can make
progress in other developmental areas such as the suprapubic configuration and
the artificial sphincter will be limited by resource constraints and the
prioritization of first-generation market entry.
Conducting the clinical trials to support a 510(k) submission for
short-term urinary management will be our primary objective in regulatory
affairs. We have drafted a trial protocol and we will bring it 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. We believe that we can study a statistically valid sampling of patients
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
same timeframe, it is our goal to have essentially completed the process
necessary to apply for the European CE marking - the regulatory requirement for
entering the markets abroad.
Finally, we will specify and construct tooling to equip our contract
manufacturers for producing product components in scale quantities. This will
enable a marketing-level manufacturing capacity and provide for meeting our
initial unit cost forecasts. Such tooling is significant in cost, however, and
we are currently exploring means to leverage its capitalization through debt or
lease in order to mitigate some of the impact on cash flow. Lead times for
tooling construction are estimated to run 6-8 months from the point of order.
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.
13
<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. Our stockholders approved the sale
at a Special Meeting of Stockholders held on June 3, 1991. 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,
providing for the merger of Opticon Medical with and into Opticon Acquisition.
We approved the Agreement and Plan of Reorganization, acting as sole
stockholder of Opticon Acquisition. The stockholders of Opticon Medical 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, when Opticon
Acquisition filed Articles of Merger with the office of the Iowa Secretary of
State and a Certificate of Merger with the office of the Delaware Secretary of
State. Through the Certificate of Merger, Opticon Acquisition changed its name
to Opticon Medical, Inc.
At the effective date of the merger, each outstanding share of Opticon
Medical's common stock, no par value, Series A Preferred Stock, no par value,
and Series B Preferred Stock, no par value, totaling 4,482,906 shares and held
by approximately 88 stockholders, was converted into the right to receive 1.23
shares of our common stock, $.0001 par value, so that, in the aggregate, the
holders of Opticon Medical stock would, on the effective date, hold 80% of our
outstanding common stock, on a fully diluted basis, and our then current
stockholders would hold, in the aggregate, 20% of our outstanding common stock
on a fully diluted basis. No fractional shares were issued. All fractional
shares of our common stock to which a holder of Opticon Medical's 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 Agreement and Plan of Reorganization were issued
pursuant to exemptions from registration under the Securities Act of 1933, as
amended.
We provided no other consideration in connection with the merger. We
did, however, loan $100,000 to Opticon Medical pending the merger. See "RELATED
PARTY TRANSACTIONS." The merger consideration was
14
<PAGE> 17
determined based upon arms-length negotiations between us and Opticon Medical.
The Agreement and Plan of Reorganization provided that we assume
Opticon Medical's rights and obligations under all of Opticon Medical'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 our 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
Medical 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 Medical options and warrants.
In connection with the merger, on January 20, 2000, our stockholders
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, we had a total of 1,983,526
shares of common stock issued and outstanding. In the merger, we issued
5,513,974 shares of our common stock in exchange for the outstanding shares of
Opticon Medical stock, causing us to have a total of 7,497,500 shares of our
common stock issued and outstanding. If all of the holders of Opticon Medical
options and warrants were to exercise all of their options and warrants, we
would issue approximately another 2,421,276 shares of our common stock.
Pursuant to the Agreement and Plan of Reorganization, our directors in
place prior to the closing of the merger tendered their resignations from the
Board of Directors on the effective date and appointed such persons to the Board
of Directors as were designated by Opticon Medical. As a result, the officers
and directors of Opticon Medical in place prior to the effective date replaced
our officers and directors. See "Management."
Immediately 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 our 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
shares of preferred stock are convertible from time to time at the option of the
selling stockholders 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 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 a
registration statement under the Securities Act of 1933, of which this
prospectus is a part, for the resale by the selling stockholders of shares of
common stock issuable upon conversion of the preferred stock, issuable as
payment for dividends on the preferred stock, or upon 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 $2.5 million.
Because we were inactive prior to our merger with Opticon Medical, and
because as a result of the merger the former stockholders of Opticon Medical now
hold a majority of our outstanding common stock, under generally accepted
accounting principles as interpreted by the Securities and Exchange Commission,
the merger is treated as a "reverse merger" with the financial statements of
Opticon Medical becoming our financial statements. Consequently, discussion of
our business, financial condition and results of operations herein will relate
primarily to Opticon Medical.
OPTICON MEDICAL
Background
Opticon Medical, Inc. (now our wholly-owned subsidiary) 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
15
<PAGE> 18
quality of life. Opticon Medical's 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 form the
basis of Opticon Medical's business. Opticon Medical has recently relocated to
Dublin, Ohio, and is preparing to enter into the commercialization phase of
business development.
Opticon Medical's initial product is the OPTICON(TM), a disposable,
silicone, indwelling valved catheter designed to manage urinary incontinence in
females. Opticon Medical has 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, Opticon Medical intends to market the OPTICON(TM)
Direct on an opportunistic basis and only after the OPTICON(TM) has been
introduced commercially. Opticon Medical has 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 Opticon Medical's 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.
To date, Opticon Medical has had no sales, generated no revenues, and,
until the completion of the financing, has 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 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
16
<PAGE> 19
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.
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
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 April 20, 2000, we employed 4 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
17
<PAGE> 20
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.
18
<PAGE> 21
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME TITLE AGE
---- ----- ---
<S> <C> <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 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
19
<PAGE> 22
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 relationships among our directors and executive
officers.
20
<PAGE> 23
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 $100,000 for services
rendered during any of the years indicated below. The individual listed below in
this table is referred to elsewhere in this prospectus as the "named executive
officer."
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------- --------------
AWARDS
--------------
SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING COMPENSATION
($) ($) OPTIONS ($)
(#)
-------------------------------------- -------- -------------- --------------- -------------- ---------------
<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) $30,000 was deferred with interest at a rate of 10% per annum. The
deferral was paid in March 2000.
OPTIONS GRANTED IN LATEST FISCAL YEAR
No stock options were granted during 1999 to the named executive
officer.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth the number and value of stock options
held by the named executive officer at December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)(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 $0
</TABLE>
(1) Represents the total gain which would be realized if all in-the-money
options held at year end were exercised, determined by multiplying the
number of shares underlying the options by the difference between the per
share option exercise price and the per share fair market value at year end
($.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.
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
21
<PAGE> 24
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.
22
<PAGE> 25
PRINCIPAL STOCKHOLDERS
The following table provides information regarding the beneficial
ownership of our common stock as of April 20, 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 April 20, 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.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ---------------------------------------------------- --------------------- -----------
<S> <C> <C>
Ronald E. Eibensteiner(1) 1,308,090 16.6%
John LaMarche(2) 175,275 2.3%
David J. Lundquist(3) 492,431 6.3%
William J. Post(4) 634,680 7.9%
Fouad A. Salama, M.D.(5) 1,151,514 14.9%
Walter L. Sembrowich, Ph.D.(6) 386,847 5.0%
Iowa Seed Capital Corporation(7) 519,372 6.9%
Wayne Mills(8) 595,647 7.8%
Henry Fong(9) 525,167 6.9%
The Shaar Fund, Ltd.(10) 2,457,692 25.00%
Augustine Fund, L.P(11) 1,638,462 17.88%
Zakeni, Ltd.(12) 409,615 5.16%
All directors and executive officers as a group
(6 persons)(13) 4,148,837 45.0%
</TABLE>
- ----------------------------
(1) Includes 270,600 shares which may be purchased under stock options and
warrants exercisable within 60 days of April 20, 2000 held by Mr.
Eibensteiner, and 975,990 shares (including 88,245 options and warrants
exercisable within 60 days of April 20, 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 April 20, 2000.
(3) Includes 249,290 shares which may be purchased under stock options and
warrants exercisable within 60 days of April 20, 2000.
(4) Includes 492,000 shares which may be purchased under stock options and
warrants exercisable within 60 days of April 20, 2000.
(5) Includes 206,757 shares which may be purchased under stock options and
warrants exercisable within 60 days of April 20, 2000.
(6) Includes 236,474 shares which may be purchased under stock options and
warrants exercisable within 60 days of April 20, 2000.
(7) Includes 44,436 shares which may be purchased under stock options and
warrants exercisable within 60 days of April 20, 2000.
(8) Includes 98,400 shares which may be purchased under stock options and
warrants exercisable within 60 days of April 20, 2000.
(9) Includes 49,200 shares which may be purchased under stock options and
warrants exercisable within 60 days of April 20, 2000.
23
<PAGE> 26
(10) Includes 2,547,692 shares which may be purchased upon conversion of the
preferred stock and exercise of the warrants.
(11) Includes 1,638,462 shares which may be purchased upon conversion of the
preferred stock and exercise of the warrants.
(12) Includes 409,615 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 April 20, 2000.
24
<PAGE> 27
RELATED PARTY TRANSACTIONS
On November 29, 1999, Opticon Medical, now our wholly-owned subsidiary,
issued a Promissory Note to us for the sum of $100,000. The loan was made for
the purpose of covering Opticon Medical'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 Amended
and Restated Articles of Incorporation and Bylaws does not purport to be
complete and is subject in all respects to the provisions of the Articles 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 7,524,560 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 Articles
or Bylaws. Our Articles eliminate the right of stockholders 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 Articles authorize 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.
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
25
<PAGE> 28
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 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 Colorado Business Corporation Act,
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
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.
26
<PAGE> 29
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 Colorado 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 Articles 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.
27
<PAGE> 30
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 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.
28
<PAGE> 31
Information regarding beneficial ownership of our common stock by the
selling stockholders as of April 20, 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 2,457,692.31 25.00% 2,457,692.31
Augustine Fund, L.P.(3)
141 W. Jackson Blvd., Ste. 2182
Chicago, Illinois 60604 1,638,461.54 17.88% 1,638,461.54
Zakeni, Ltd.(4)
c/o Sheldon Salzman
620 Wilson Avenue #501
Toronto, Ontario
Canada M3K 1Z3 409,615.39 5.16% 409,615.39
Levana Fund, N.V.(5)
Attn: Mr. Maxo Benalal
Riviera Palace
6 Rue de Genets
MC-98000 Monaco 163,846.15 2.13% 163,846.15
Barry Seidman(6)
P.O. Box 9813
Rancho Santa Fe, CA 92067 213,000 2.75% 213,000
Dale N. Steen DDS IRA(7)
c/o Dale N. Steen, DDS
1656 30th Street
Boulder, CO 80301 32,769.23 0.43% 32,769.23
</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 fair
market value of $1.00, and upon exercise of the warrants. The selling
stockholders currently beneficially own approximately 4,915,384.62 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 2,307,692.31 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.
(3) Includes 1,538,461.54 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.
(4) Includes 384,615.39 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 153,846.15 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 200,000 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.
29
<PAGE> 32
(7) Includes 30,769.23 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.
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
30
<PAGE> 33
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 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 of 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:
"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.
31
<PAGE> 34
There were no reportable conditions, in each case, during either of our
two most recent fiscal years or any subsequent interim period.
32
<PAGE> 35
FINANCIAL STATEMENTS
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
</TABLE>
F-1
<PAGE> 36
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> 37
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> 38
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> 39
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> 40
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> 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 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> 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 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> 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>
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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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> 63
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> 64
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> 65
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> 66
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> 67
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> 68
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> 69
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> 70
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> 71
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> 72
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> 73
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> 74
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.
IMMUNE RESPONSE, INC.
5,455,385 SHARES OF COMMON STOCK
PROSPECTUS
__________, 2000
33
<PAGE> 75
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles limit 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
7-108-403 of the Colorado Business Corporation Act; or (iv) for any transaction
from which the director derived an improper personal benefit.
Our Articles and Bylaws provide for the indemnification of our
directors and officers to the maximum extent permitted by law, including Section
7-109-102 of the Colorado Business Corporation Act, 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 7-109-102 of the Colorado Business
Corporation Act 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 April
20, 2000:
Item Amount
---- ------
Securities and Exchange Commission
Registration Fee $2,612
Legal Fees and Expenses **
Accounting Fees and Expenses **
Miscellaneous Expenses **
Total **
** to be provided by amendment
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
<PAGE> 76
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 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.
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 * Amended and Restated Articles of Incorporation of
the Registrant.
3.2 Bylaws of the Registrant (Previously filed with
the Registrant's Registration Statement on Form
S-18, Commission file no. 33-17922-C, and
incorporated herein by reference.)
4 Articles V, VI, VII, and VIII of the Registrant's
Amended and Restated Articles of Incorporation and
Articles II, IX, XI, and XIV of the Registrant's
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> 77
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.
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 5.1).
24 Powers of Attorney
27 Financial Data Schedule
* 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.
** to be provided by amendment
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
II-3
<PAGE> 78
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.
II-4
<PAGE> 79
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 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 April 26, 2000.
IMMUNE RESPONSE, INC.
By: /s/ WILLIAM J. POST
-------------------
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C> <C> <C>
/s/ WILLIAM J. POST President, Director ) April 26, 2000
-------------------- (Principal Executive Officer) )
William J. Post )
)
)
*DAVID B. BITTNER Chief Financial Officer, ) April 26, 2000
----------------- Treasurer (Principal Financial and )
David B. Bittner Accounting Officer) )
)
)
*WALTER L. SEMBROWICH, PH.D. Director ) April 26, 2000
---------------------------- )
Walter L. Sembrowich, Ph.D. )
)
*RONALD E. EIBENSTEINER Director ) April 26, 2000
------------------------ )
Ronald E. Eibensteiner )
)
*DAVID LUNDQUIST Director ) April 26, 2000
---------------- )
David Lundquist )
)
*FOUAD A. SALAMA Director ) April 26, 2000
---------------- )
Fouad A. Salama )
)
)
</TABLE>
*By: /s/ WILLIAM J. POST
-------------------
William J. Post
Attorney-in-fact for each of the persons indicated
II-5
<PAGE> 1
EXHIBIT 4
ARTICLE V
CAPITAL STOCK
-------------
SECTION 1. CAPITAL STOCK. The aggregate number of shares and the amount
of total authorized capital of the Company shall consist of 26,000,000 shares,
of which 25,000,000 will be $.0001 par value common stock and 1,000,000 will be
$.0001 par value preferred stock.
SECTION 2. PREFERRED STOCK. The Corporation, by resolution of its Board
of Directors, may divide and issue the Preferred Stock in series. Preferred
Stock of each series when issued shall be designated to distinguish them from
the shares of all other series. The Board of Directors is hereby expressly
vested with the authority to divide the class of Preferred Stock into series and
to fix and determine the relative rights and preferences of the shares of any
such series so established to the full extent permitted by these Articles of
Incorporation and the Colorado Business Corporation Act in respect to the
following:
1. The number of shares to constitute such series, and the distinctive
designations thereof;
(a) The rate and preference of dividends, if any, the time of
payment of dividends, whether dividends are cumulative and the
date from which any dividend shall accrue;
(b) Whether shares may be redeemed and, if so, the redemption
price and the terms and conditions of redemption;
(c) The amount payable upon shares in event of involuntary
liquidation;
(d) The amount payable upon shares in event of voluntary
liquidation;
(e) Sinking fund or other provisions, if any, for the redemption
or purchase of shares;
(f) The terms and conditions on which shares may be converted, if
the shares of any series are issued with the privilege of
conversion;
(g) Voting powers, if any; and
(h) Any other relative rights and preferences of shares such series,
including, without limitation, any restriction on an increase in the
number of shares of any series theretofore authorized and any
limitation or restriction of rights or powers to which shares of any
future series shall be subject.
As of the date upon which these Amended Articles of Incorporation
become effective, each three shares of authorized $.0001 par common stock,
whether or not issued and outstanding,
<PAGE> 2
shall be converted into one share of $.0001 par common stock. Fractional shares
resulting from the Reverse Stock Split will be rounded to the closest whole
share of Common Stock. Following this reverse stock split the number of shares
of $.0001 par common stock which the Company shall be authorized to issue shall
be 25,000,000.
The holders of Common Stock shall have and possess all rights as
shareholders of the corporation.
The capital stock, after the amount of the subscription price has been
paid in, shall not be subject to assessment or any other liability to pay the
debts of the corporation.
Any stock of the corporation may be issued for money, property,
services rendered, labor done, cash advances for the corporation, for any other
assets of value in accordance with the action of the Board of Directors, or
other consideration permitted under the Colorado Business Corporation Act. The
judgment of the Board of Directors as to value received in return for the
issuance of shares shall be conclusive and said shares, when issued, shall be
fully paid and nonassessable.
SECTION 3. SERIES A PREFERRED STOCK. The Board has designated 3,000
shares of Preferred Stock as Series A 6% Convertible Preferred Stock (the
"SERIES A PREFERRED"), which shall have the following designations, rights and
preferences:
ARTICLE 1
DEFINITIONS
SECTION 1.1 DEFINITIONS. The terms defined in this Article whenever
used in this Certificate of Designation have the following respective meanings:
(a) "ADDITIONAL CAPITAL SHARES" has the meaning set forth in
Section 6.1(e).
(b) "AFFILIATE" has the meaning ascribed to such term in Rule
12b-2 under the Securities Exchange Act of 1934, as amended.
(c) "BUSINESS DAY" means a day other than Saturday, Sunday or
any day on which banks located in the State of New York are authorized or
obligated to close.
(d) "CAPITAL SHARES" means the Common Shares and any other
shares of any other class or series of common stock, whether now or hereafter
authorized and however designated, which have the right to participate in the
distribution of earnings and assets (upon dissolution, liquidation or
winding-up) of the Corporation.
(e) "COMMON SHARES" or "COMMON STOCK" means shares of common
stock, $.0001 par value, of the Corporation.
(f) "COMMON STOCK ISSUED AT CONVERSION" when used with reference
to the securities issuable upon conversion of the Series A Preferred Stock,
means all Common Shares
<PAGE> 3
now or hereafter Outstanding and securities of any other class or series into
which the Series A Preferred Stock hereafter shall have been changed or
substituted, whether now or hereafter created and however designated.
(g) "CONVERSION DATE" means any day on which all or any
portion of shares of the Series A Preferred Stock is converted in accordance
with the provisions hereof.
(h) "CONVERSION NOTICE" has the meaning set forth in Section
6.2.
(i) "CONVERSION PRICE" means on any date of determination the
applicable price for the conversion of shares of Series A Preferred Stock into
Common Shares on such day as set forth in Section 6.1.
(j) "CONVERSION RATIO" means on any date of determination the
applicable percentage of the Market Price for conversion of shares of Series A
Preferred Stock into Common Shares on such day as set forth in Section 6.1.
(k) "CORPORATION" means Immune Response, Inc., a Colorado
corporation, and any successor or resulting corporation by way of merger,
consolidation, sale or exchange of all or substantially all of the Corporation's
assets, or otherwise.
(l1) "CURRENT MARKET PRICE" means on any date of determination
the closing bid price of a Common Share on such day as reported by The National
Association of Securities Dealers electronic bulletin board ("OTC/BB").
(m) "DIVIDEND PAYMENT DUE DATE" has the meaning set forth in
Section 4(a)(ii).
(n) "HOLDER" means The Shaar Fund Ltd., any successor thereto,
or any Person to whom the Series A Preferred Stock is subsequently transferred
in accordance with the provisions hereof.
(o) "LIQUIDATION PREFERENCE" has the meaning set forth in
Section 5(c).
(p) "MARKET DISRUPTION EVENT" means any event that results in a
material suspension or limitation of trading of Common Shares on OTC/BB.
(q) "MARKET PRICE" per Common Share means the average of the
closing bid prices of the Common Shares as reported by the OTC/BB for the
Valuation Period.
(r) "OUTSTANDING" when used with reference to Common Shares or
Capital Shares (collectively, "Shares"), means, on any date of determination,
all issued and outstanding Shares, and includes all such Shares issuable in
respect of outstanding scrip or any certificates representing fractional
interests in such Shares; PROVIDED, HOWEVER, that any such Shares directly or
indirectly owned or held by or for the account of the Corporation or any
Subsidiary of the Corporation shall not be deemed "Outstanding" for purposes
hereof.
<PAGE> 4
(s) "PERSON" means an individual, a corporation, partnership,
an association, a limited liability company, unincorporated business
organization, a trust or other entity or organization, and any government or
political subdivision or any agency or instrumentality thereof.
(t) "REGISTRATION RIGHTS AGREEMENT" means that certain
Registration Rights Agreement dated a date even herewith between the Corporation
and The Shaar Fund Ltd.
(u) "SEC" means the United States Securities and Exchange
Commission.
(v) "SECURITIES ACT" means the Securities Act of 1933, as
amended, and the rules and regulations of the SEC thereunder, all as in effect
at the time.
(w) "SECURITIES PURCHASE AGREEMENT" means that certain
Securities Purchase Agreement dated a date even herewith between the Corporation
and The Shaar Fund Ltd.
(x) "SERIES A PREFERRED STOCK" means the Series A 6% Convertible
Preferred Stock of the Corporation, or such other convertible Preferred Stock
exchanged therefor, as provided in Section 2.1.
(y) "STATED VALUE" has the meaning set forth in Article 2.
(z) "SUBSIDIARY" means any entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions are owned
directly or indirectly by the Corporation.
(aa) "TRADING DAY" means any day on which purchases and sales of
securities authorized for quotation on the OTC/BB are reported thereon and on
which no Market Disruption Event has occurred.
(bb) "VALUATION EVENT" has the meaning set forth in Section 6.1.
(cc) "VALUATION PERIOD" means the five (5) consecutive Trading
Day period immediately preceding the Conversion Date.
All references to "cash" or "$" herein means currency of the United
States of America.
<PAGE> 5
ARTICLE 2
DESIGNATION AND AMOUNT
SECTION 2.1
The designation of this series, which consists of 3,000 shares of
Preferred Stock, is Series A 6% Convertible Preferred Stock (the "SERIES A
PREFERRED STOCK") and the stated value shall be One Thousand Dollars ($1,000)
per share (the "STATED VALUE").
ARTICLE 3
RANK
SECTION 3.1
The Series A Preferred Stock shall rank (i) prior to the Common Stock;
(ii) prior to any class or series of capital stock of the Corporation hereafter
created other than "PARI PASSU SECURITIES" (collectively, with the Common Stock,
"JUNIOR SECURITIES"); and (iii) pari passu with any class or series of capital
stock of the Corporation hereafter created specifically ranking on parity with
the Series A Preferred Stock ("PARI PASSU SECURITIES").
ARTICLE 4
DIVIDENDS
SECTION 4.1
(a) (i) The Holder shall be entitled to receive, and the Board
of Directors shall be required to declare, out of funds legally available for
the payment of dividends, dividends at the rate of 6% per annum (computed on the
basis of a 360-day year) (the "DIVIDEND RATE") on the Stated Value of each share
of Series A Preferred Stock on and as of the Dividend Payment Due Date.
Dividends on the Series A Preferred Stock shall be cumulative from the date of
issue, whether or not declared for any reason, including if such declaration is
prohibited under any outstanding indebtedness or borrowings of the Corporation
or any of its Subsidiaries, or any other contractual provision binding on the
Corporation or any of its Subsidiaries, and whether or not there shall be funds
legally available for the payment thereof.
(ii) Each dividend shall be payable at the Corporation's 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 is outstanding (each, a "DIVIDEND PAYMENT DUE DATE"), commencing June
30, 2000, to holders of record of shares of the Series A Preferred as they
appear on the stock records of the Corporation not more than 60 nor less than 10
days preceding the payment dates thereof, as shall be fixed by the Board of
Directors. For purposes hereof, "Dividend Period" means the quarterly period
commencing on and including the day after the immediately preceding Dividend
Payment Due Date and ending on and including the immediately subsequent Dividend
Payment Due Date. Accrued and unpaid dividends for any past Dividend Period may
be declared and paid at any time, without reference to any Dividend Payment Due
Date, to holders of record on such date, not more than 15 days preceding the
payment date thereof, as may be fixed by the Board of Directors.
<PAGE> 6
(iii) At the option of the Corporation, the dividend shall be
paid in cash or through the issuance of duly and validly authorized and issued,
fully paid and nonassessable, freely tradeable shares of the Common Stock valued
at the Market Price. The Common Stock to be issued in lieu of cash payments
shall be registered for resale in the Registration Statement (as defined in the
Registration Rights Agreement) to be filed by the Corporation to register the
Common Stock issuable upon conversion of the shares of Series A Preferred Stock
and exercise of the Warrants as set forth in the Registration Rights Agreement.
(b) The Holder shall not be entitled to any dividends in excess
of the cumulative dividends, as herein provided, on the Series A Preferred
Stock. Except as provided in this Article 4, no interest, or sum of money in
lieu of interest, shall be payable in respect of any dividend payment or
payments on the Series A Preferred Stock that may be in arrears.
(c) So long as any shares of the Series A Preferred Stock are
outstanding, no dividends, except as described in the next succeeding sentence,
shall be declared or paid or set apart for payment on Pari Passu Securities for
any period unless full cumulative dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for such payment on the Series A Preferred Stock for all Dividend Periods
terminating on or prior to the date of payment of the dividend on such class or
series of Pari Passu Securities. When dividends are not paid in full or a sum
sufficient for such payment is not set apart, as aforesaid, all dividends
declared upon shares of the Series A Preferred Stock and all dividends declared
upon any other class or series of Pari Passu Securities shall be declared
ratably in proportion to the respective amounts of dividends accumulated and
unpaid on the Series A Preferred Stock and accumulated and unpaid on such Pari
Passu Securities.
(d) So long as any shares of the Series A Preferred Stock are
outstanding, no dividends shall be declared or paid or set apart for payment or
other distribution declared or made upon Junior Securities, nor shall any Junior
Securities be redeemed, purchased or otherwise acquired (other than a
redemption, purchase or other acquisition of shares of Common Stock made for
purposes of an employee incentive or benefit plan (including a stock option
plan) of the Corporation or any subsidiary, (all such dividends, distributions,
redemptions or purchases being hereinafter referred to as a "JUNIOR SECURITIES
DISTRIBUTION") for any consideration (or any moneys be paid to or made available
for a sinking fund for the redemption of any shares of any such stock) by the
Corporation, directly or indirectly, unless in each case (i) the full cumulative
dividends required to be paid on all outstanding shares of the Series A
Preferred Stock and any other Pari Passu Securities shall have been paid or set
apart for payment for all past Dividend Periods with respect to the Series A
Preferred Stock and all past dividend periods with respect to such Pari Passu
Securities, and (ii) sufficient funds shall have been paid or set apart for the
payment of the dividend for the current Dividend Period with respect to the
Series A Preferred and the current dividend period with respect to the Pari
Passu Securities.
<PAGE> 7
ARTICLE 5
LIQUIDATION PREFERENCE
SECTION 5.1
(a) If the Corporation shall commence a voluntary case under the
Federal bankruptcy laws or any other applicable Federal or State bankruptcy,
insolvency or similar law, or consent to the entry of an order for relief in an
involuntary case under any law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or make an assignment
for the benefit of its creditors, or admit in writing its inability to pay its
debts generally as they become due, or if a decree or order for relief in
respect of the Corporation shall be entered by a court having jurisdiction in
the premises in an involuntary case under the Federal bankruptcy laws or any
other applicable Federal or state bankruptcy, insolvency or similar law
resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of thirty (30) consecutive days and, on account of any such event, the
Corporation shall liquidate, dissolve or wind up, or if the Corporation shall
otherwise liquidate, dissolve or wind up (each such event being considered a
"LIQUIDATION EVENT"), no distribution shall be made to the holders of any shares
of capital stock of the Corporation upon liquidation, dissolution or winding up
unless prior thereto, the holders of shares of Series A Preferred Stock, subject
to Article 5, shall have received the Liquidation Preference with respect to
each share. If upon the occurrence of a Liquidation Event, the assets and funds
available for distribution among the holders of the Series A Preferred Stock and
holders of Pari Passu Securities shall be insufficient to permit the payment to
such holders of the preferential amounts payable thereon, then the entire assets
and funds of the Corporation legally available for distribution to the Series A
Preferred Stock and the Pari Passu Securities shall be distributed ratably among
such shares in proportion to the ratio that the Liquidation Preference payable
on each such share bears to the aggregate Liquidation Preference payable on all
such shares.
(b) At the option of each Holder, the sale, conveyance or
disposition of all or substantially all of the assets of the Corporation, the
effectuation by the Corporation of a transaction or series of related
transactions (or excluding circumstances pursuant to the Securities Purchase
Agreement or transfers to a subsidiary controlled by the Corporation) in which
more than 50% of the voting power of the Corporation is disposed of, or the
consolidation, merger or other business combination of the Corporation with or
into any other Person or Persons where the Corporation is not the survivor shall
either: (i) be deemed to be a liquidation, dissolution or winding up of the
Corporation pursuant to which the Corporation shall be required to distribute,
upon consummation of and as a condition to, such transaction an amount equal to
one hundred percent (100%) of the Liquidation Preference with respect to each
outstanding share of Series A Preferred Stock in accordance with and subject to
the terms of this Article 5 or (ii) be treated pursuant to Article 5(c)(iii)
hereof; PROVIDED, that all holders of Series A Preferred Stock shall be deemed
to elect the option set forth in clause (i) hereof if at least a majority in
interest of such holders elect such option.
<PAGE> 8
(c) For purposes hereof, the "LIQUIDATION PREFERENCE" with
respect to a share of the Series A Preferred Stock shall mean an amount equal to
the sum of (i) the Stated Value thereof, plus (ii) the aggregate of all accrued
and unpaid dividends on such share of Series A Preferred Stock until the
Dividend Payment Due Date; PROVIDED that, in the event of an actual liquidation,
dissolution or winding up of the Corporation, the amount referred to in clause
(iii) above shall be calculated by including accrued and unpaid dividends to the
actual date of such liquidation, dissolution or winding up, rather than the
Dividend Payment Due Date referred to above.
ARTICLE 6
CONVERSION OF PREFERRED STOCK
SECTION 6.1 CONVERSION; CONVERSION PRICE. At the option of the Holder,
the shares of Preferred Stock may be converted, either in whole or in part, into
Common Shares (calculated as to each such conversion to the nearest 1/100th of a
share), 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;
provided, however, that:
(a) notwithstanding anything herein to the contrary, the Holder
shall not have the right, and the Company shall not have the obligation, to
convert all or any portion of the Series A Preferred Stock (and the Company
shall not have the right to pay dividends on the Series A Preferred Stock in
shares of common stock) if and to the extent that the issuance to the Holder of
shares of common stock upon such conversion (or payment of dividends) would
result in the Holder being deemed the "beneficial owner" of 5% or more of the
then outstanding shares of Common Stock within the meaning of Section 13(d) of
the Securities Exchange Act of 1934, as amended, and the rules promulgated
thereunder; and
(b) unless the Corporation shall have obtained the approval of
its voting stockholders to such issuance in accordance with the rules of the
OTC/BB or such other stock market with which the Corporation shall be required
to comply, or unless such rules do not require shareholder approval, the
Corporation shall not issue shares of Common Stock (i) upon conversion of any
shares of Series A Preferred Stock or (ii) as a dividend on the Series A
Preferred Stock, if such issuance of Common Stock, when added to the number of
shares of Common Stock previously issued by the Corporation (i) upon conversion
of shares of the Series A Preferred Stock, (ii) upon exercise of the Warrants
issued pursuant to the terms of the Securities Purchase Agreement and (iii) in
payment of dividends on the Series A Preferred Stock, would be in excess of
19.99% of the number of shares of the Corporation's Common Stock which were
issued and outstanding on the Conversion Date (the "MAXIMUM ISSUANCE AMOUNT").
In the event that a properly executed Conversion Notice is received by the
Corporation which would require the Corporation to issue shares of Common Stock
equal to or in excess of the Maximum Issuance Amount, the Corporation shall
honor such conversion request by (i) converting the number of shares of Series A
Preferred Stock stated in the Conversion Notice not in excess of the Maximum
Issuance Amount and (ii) at the Company's option (A) redeeming the number of
shares of Series A Preferred Stock stated in the Conversion Notice equal to or
in excess of the Maximum Issuance Amount in cash at a price equal to one hundred
and twenty percent (120%) of the Stated Value of the shares of Series A
Preferred Stock
<PAGE> 9
to be so redeemed, together with the fair market value of all accrued and unpaid
dividends thereon, or (B) obtaining such stockholder approval within 45 days of
the relevant Conversion Notice. If such stockholder approval is not so obtained
within such 45 day period, the Company shall redeem the number of shares named
in the relevant Conversion Notice in excess of the Maximum Issuance Amount as
described in clause (ii)(A) above. In the event that the Corporation shall elect
to pay a dividend in shares of Common Stock which would require the Corporation
to issue shares of Common Stock equal to or in excess of the Maximum Issuance
Amount, the Corporation shall pay (i) a dividend in shares of Common Stock equal
to one less than an amount which would result in the Corporation issuing shares
equal to the Maximum Issuance Amount and (ii) the balance of the dividend in
cash.
(c) The number of shares of Common Stock due upon conversion of
Series A Preferred Stock shall be (i) the number of shares of Series A Preferred
Stock to be converted, multiplied by (ii) the Stated Value and divided by (iii)
the applicable Conversion Price.
(d) Within two (2) Business Days of the occurrence of a
Valuation Event, the Corporation shall send notice (the "VALUATION EVENT
NOTICE") of such occurrence to the Holder. Notwithstanding anything to the
contrary contained herein, if a Valuation Event occurs during any Valuation
Period, a new Valuation Period shall begin on the Trading Day immediately
following the occurrence of such Valuation Event and end on the Conversion Date;
PROVIDED that, if a Valuation Event occurs on the fifth day of any Valuation
Period, then the Conversion Price shall be the Current Market Price of the
Common Shares on such day; and PROVIDED, FURTHER, that the Holder may, in its
discretion, postpone such Conversion Date to a Trading Day which is no more than
five (5) Trading Days after the occurrence of the latest Valuation Event by
delivering a notification to the Corporation within two (2) Business Days of the
receipt of the Valuation Event Notice. In the event that the Holder deems the
Valuation Period to be other than the five (5) Trading Days immediately prior to
the Conversion Date, the Holder shall give written notice of such fact to the
Corporation in the related Conversion Notice at the time of conversion.
(e) For purposes of this Section 6.1, a "VALUATION EVENT" shall
mean an event in which the Corporation at any time during a Valuation Period
takes any of the following actions:
(i) subdivides or combines its Capital Shares;
(ii) makes any distribution of its Capital Shares;
(iii) issues any additional Capital Shares (the "ADDITIONAL
CAPITAL SHARES"), otherwise than as provided in the foregoing Sections 6.1(a)
and 6.1(b) above, at a price per share less, or for other consideration lower,
than the Current Market Price in effect immediately prior to such issuances, or
without consideration, except for issuances under employee benefit plans
consistent with those presently in effect and issuances under presently
outstanding warrants, options or convertible securities;
<PAGE> 10
(iv) issues any warrants, options or other rights to subscribe
for or purchase any Additional Capital Shares and the price per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant to
such warrants, options or other rights shall be less than the Current Market
Price in effect immediately prior to such issuance;
(v) issues any securities convertible into or exchangeable or
exercisable for Capital Shares and the consideration per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant to the
terms of such convertible, exchangeable or exercisable securities shall be less
than the Current Market Price in effect immediately prior to such issuance;
(vi) makes a distribution of its assets or evidences of
indebtedness to the holders of its Capital Shares as a dividend in liquidation
or by way of return of capital or other than as a dividend payable out of
earnings or surplus legally available for the payment of dividends under
applicable law or any distribution to such holders made in respect of the sale
of all or substantially all of the Corporation's assets (other than under the
circumstances provided for in the foregoing Sections 6.1(e)(i) through
6.1(e)(v)); or
(vii) takes any action affecting the number of Outstanding
Capital Shares, other than an action described in any of the foregoing Sections
6.1(a) through 6.1(f) hereof, inclusive, which in the opinion of the
Corporation's Board of Directors, determined in good faith, would have a
material adverse effect upon the rights of the Holder at the time of a
conversion of the Preferred Stock.
SECTION 6.2 EXERCISE OF CONVERSION PRIVILEGE. (a) Conversion of the
Series A Preferred Stock may be exercised, in whole or in part, by the Holder by
telecopying an executed and completed notice of conversion in the form annexed
hereto as Annex I (the "CONVERSION NOTICE") to the Corporation. Each date on
which a Conversion Notice is telecopied to and received by the Corporation in
accordance with the provisions of this Section 6.2 shall constitute a Conversion
Date. The Corporation shall convert the Series A Preferred Stock and issue the
Common Stock Issued at Conversion effective as of the Conversion Date. The
Conversion Notice also shall state the name or names (with addresses) of the
persons who are to become the holders of the Common Stock issued at Conversion
in connection with such conversion. The Holder shall deliver the shares of
Series A Preferred Stock to the Corporation by express courier within 30 days
following the date on which the telecopied Conversion Notice has been
transmitted to the Corporation. Upon surrender for conversion, the Series A
Preferred Stock shall be accompanied by a proper assignment thereof to the
Corporation or be endorsed in blank. As promptly as practicable after the
receipt of the Conversion Notice as aforesaid, but in any event not more than
five Business Days after the Corporation's receipt of such Conversion Notice,
the Corporation shall (i) issue the Common Stock issued at Conversion in
accordance with the provisions of this Article 6, and (ii) cause to be mailed
for delivery by overnight courier to the Holder (X) a certificate or
certificate(s) representing the number of Common Shares to which the Holder is
entitled by virtue of such conversion, (Y) cash, as provided in Section 6.3, in
respect of any fraction of a Share issuable upon such conversion and (Z) cash or
shares in the amount of accrued and unpaid related dividends as of the
Conversion Date. Such conversion shall be deemed to have been effected at the
time at which the Conversion Notice indicates so long as the
<PAGE> 11
Series A Preferred Stock shall have been surrendered as aforesaid at such time,
and at such time the rights of the Holder of the Series A Preferred Stock, as
such, shall cease and the Person and Persons in whose name or names the Common
Stock Issued at Conversion shall be issuable shall be deemed to have become the
holder or holders of record of the Common Shares represented thereby. The
Conversion Notice shall constitute a contract between the Holder and the
Corporation, whereby the Holder shall be deemed to subscribe for the number of
Common Shares which it will be entitled to receive upon such conversion and, in
payment and satisfaction of such subscription (and for any cash adjustment to
which it is entitled pursuant to Section 6.4), to surrender the Series A
Preferred Stock and to release the Corporation from all liability thereon. No
cash payment aggregating less than $1.00 shall be required to be given unless
specifically requested by the Holder.
(b) Subject to Sections 6.1(a) and (b) if, at any time (i) the
Corporation challenges, disputes or denies the right of the Holder hereof to
effect the conversion of the Preferred Stock into Common Shares or otherwise
dishonors or rejects any Conversion Notice delivered in accordance with this
Section 6.2 or (ii) any third party who is not and has never been an Affiliate
of the Holder commences any lawsuit or proceeding or otherwise asserts any claim
before any court or public or governmental authority which seeks to challenge,
deny, enjoin, limit, modify, delay or dispute the right of the Holder hereof to
effect the conversion of the Preferred Stock into Common Shares, then the Holder
shall have the right, by written notice to the Corporation, to require the
Corporation to promptly redeem the Series A Preferred Stock for cash at a
redemption price equal to one hundred twenty percent (120%) of the Stated Value
thereof together with all accrued and unpaid dividends thereon (the "MANDATORY
PURCHASE AMOUNT"). Under any of the circumstances set forth above, the
Corporation shall be responsible for the payment of all reasonable costs and
expenses of the Holder, including reasonable legal fees and expenses, as and
when incurred in disputing any such action or pursuing its rights hereunder (in
addition to any other rights of the Holder).
SECTION 6.3 FRACTIONAL SHARES. No fractional Common Shares or scrip
representing fractional Common Shares shall be issued upon conversion of the
Series A Preferred Stock. Instead of any fractional Common Shares which
otherwise would be issuable upon conversion of the Series A Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fraction in an amount
equal to the same fraction. No cash payment of less than $1.00 shall be required
to be given unless specifically requested by the Holder.
SECTION 6.4 RECLASSIFICATION, CONSOLIDATION, MERGER OR MANDATORY SHARE
EXCHANGE. At any time while the Series A Preferred Stock remains outstanding and
any shares thereof have not been converted, in case of any reclassification or
change of Outstanding Common Shares issuable upon conversion of the Series A
Preferred Stock (other than a change in par value, or from par value to no par
value per share, or from no par value per share to par value or as a result of a
subdivision or combination of outstanding securities issuable upon conversion of
the Series A Preferred Stock) or in case of any consolidation, merger or
mandatory share exchange of the Corporation with or into another corporation
(other than a merger or mandatory share exchange with another corporation in
which the Corporation is a continuing corporation and which does not result in
any reclassification or change, other than a change in par value, or from par
value to no par value per share, or from no par value per share to par value, or
as a result of a subdivision
<PAGE> 12
or combination of Outstanding Common Shares upon conversion of the Series A
Preferred Stock), or in the case of any sale or transfer to another corporation
of the property of the Corporation as an entirety or substantially as an
entirety, the Corporation, or such successor, resulting or purchasing
corporation, as the case may be, shall, without payment of any additional
consideration therefor, execute a new Series A Preferred Stock providing that
the Holder shall have the right to convert such new Series A Preferred Stock
(upon terms and conditions not less favorable to the Holder than those in effect
pursuant to the Series A Preferred Stock) and to receive upon such exercise, in
lieu of each Common Share theretofore issuable upon conversion of the Series A
Preferred Stock, the kind and amount of shares of stock, other securities, money
or property receivable upon such reclassification, change, consolidation,
merger, mandatory share exchange, sale or transfer by the holder of one Common
Share issuable upon conversion of the Series A Preferred Stock had the Series A
Preferred Stock been converted immediately prior to such reclassification,
change, consolidation, merger, mandatory share exchange or sale or transfer. The
provisions of this Section 6.4 shall similarly apply to successive
reclassifications, changes, consolidations, mergers, mandatory share exchanges
and sales and transfers.
SECTION 6.5 ADJUSTMENTS TO CONVERSION RATIO. For so long as any shares
of the Series A Preferred Stock are outstanding, if the Corporation (i) issues
and sells pursuant to an exemption from registration under the Securities Act
(A) Common Shares at a purchase price on the date of issuance thereof that is
lower than the Conversion Price, (B) warrants or options with an exercise price
representing a percentage of the Current Market Price with an exercise price on
the date of issuance of the warrants or options that is lower than the
Conversion Price, except for employee stock option agreements or stock incentive
agreements of the Corporation, or (C) convertible, exchangeable or exercisable
securities with a right to exchange at lower than the Current Market Price on
the date of issuance or conversion, as applicable, of such convertible,
exchangeable or exercisable securities, except for stock option agreements or
stock incentive agreements; and (ii) grants the right to the purchaser(s)
thereof to demand that the Corporation register under the Securities Act such
Common Shares issued or the Common Shares for which such warrants or options may
be exercised or such convertible, exchangeable or exercisable securities may be
converted, exercised or exchanged, then the Conversion Ratio shall be reduced to
equal the lowest of any such lower rates.
SECTION 6.6 MANDATORY CONVERSION. On the third anniversary of the
filing of this Certificate of Designation (the "MANDATORY CONVERSION DATE"), the
Corporation shall convert all Series A Preferred Stock outstanding at the
Conversion Price. Notwithstanding the previous sentence, in no event shall the
Corporation convert that portion of the Series A Preferred Stock to the extent
that the issuance of Common Shares upon conversion of such Series A Preferred
Stock, when combined with shares of Common Shares received upon other
conversions of Series A Preferred Stock by such Holder and any other holders of
Series A Preferred Stock and Warrants, would exceed 19.99% of the Common Stock
outstanding on the Mandatory Conversion Date, unless the Corporation's
shareholders approve the issuance of an amount of the Corporation's Common Stock
in excess of the 19.99% threshold. Within ten (10) Business Days after the
Mandatory Conversion Date, the Corporation shall redeem all remaining
outstanding shares of Series A Preferred Stock in excess of the 19.99% threshold
at one hundred and twenty percent (120%) of the Stated Value thereof, together
with all accrued and unpaid dividends thereon, in cash, to the date of
redemption.
<PAGE> 13
ARTICLE 7
VOTING RIGHTS
The holders of the Series A Preferred Stock have no voting power,
except as otherwise provided by the Colorado Business Corporation Act ("CBCA"),
in this Article 7, and in Article 8 below.
Notwithstanding the above, the Corporation shall provide each holder of
Series A Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed liquidation, dissolution or
winding up of the Corporation, the Corporation shall mail a notice to each
holder, at least thirty (30) days prior to the consummation of the transaction
or event, whichever is earlier), of the date on which any such acting is to be
taken for the purpose of such dividend, distribution, right or other event, and
a brief statement regarding the amount and character of such dividend,
distribution, right or other event to the extent known at such time.
To the extent that under the CBCA the vote of the holders of the Series
A Preferred Stock, voting separately as a class or series as applicable, is
required to authorize a given action of the Corporation, the affirmative vote or
consent of the holders of at least a majority of the shares of the Series A
Preferred Stock represented at a duly held meeting at which a quorum is present
or by written consent of a majority of the shares of Series A Preferred Stock
(except as otherwise may be required under the CBCA) shall constitute the
approval of such action by the class. To the extent that under the CBCA holders
of the Series A Preferred Stock are entitled to vote on a matter with holders of
Common Stock, voting together as one class, each share of Series A Preferred
Stock shall be entitled to a number of votes equal to the number of shares of
Common Stock into which it is then convertible using the record date for the
taking of such vote of shareholders as the date as of which the Conversion Price
is calculated. Holders of the Series A Preferred Stock shall be entitled to
notice of all shareholder meetings or written consents (and copies of proxy
materials and other information sent to shareholders) with respect to which they
would be entitled tonight, which notice would be provided pursuant to the
Corporation's bylaws and the CBCA.
ARTICLE 8
PROTECTIVE PROVISIONS
SECTION 8.1 RESTRICTIONS. So long as shares of Series A Preferred Stock
are outstanding, the Corporation shall not, without first obtaining the approval
(by vote or written consent, as provided by the CBCA) of the holders of at least
a majority of the then outstanding shares of Series A Preferred Stock:
<PAGE> 14
(a) alter or change the rights, preferences or privileges of the
Series A Preferred Stock;
(b) create any new class or series of capital stock having a
preference over the Series A Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation ("Senior Securities")
or alter or change the rights, preferences or privileges of any Senior
Securities so as to affect adversely the Series A Preferred Stock;
(c) increase the authorized number of shares of Series A
Preferred Stock;
(d) issue or sell to any Person other than the Holder shares of
Series A Preferred Stock; or
(e) do any act or thing not authorized or contemplated by this
Certificate of Designation which would result in taxation of the holders of
shares of the Series A Preferred Stock under Section 305 of the Internal Revenue
Code of 1986, as amended (or any comparable provision of the Internal Revenue
Code as hereafter from time to time amended).
SECTION 8.2 DISSENTING HOLDER'S CONVERSION RIGHTS. In the event holders
of at least a majority of the then outstanding shares of Series A Preferred
Stock agree to allow the Corporation to alter or change the rights, preferences
or privileges of the shares of Series A Preferred Stock, pursuant to Section
8.1(a) above, so as to affect the Series A Preferred Stock, then the Corporation
will deliver notice of such approved change to the holders of the Series A
Preferred Stock that did not agree to such alteration or change (the "DISSENTING
HOLDERS") and Dissenting Holders shall have the right for a period of thirty
(30) days to convert pursuant to the terms of this Certificate of Designation as
they exist prior to such alteration or change or continue to hold their shares
of Series A Preferred Stock.
ARTICLE 9
MISCELLANEOUS
SECTION 9.1 LOSS, THEFT, DESTRUCTION OF PREFERRED STOCK. Upon receipt
of evidence satisfactory to the Corporation of the loss, theft, destruction or
mutilation of shares of Series A Preferred Stock and, in the case of any such
loss, theft or destruction, upon receipt of indemnity or security reasonably
satisfactory to the Corporation, or, in the case of any such mutilation, upon
surrender and cancellation of the Series A Preferred Stock, the Corporation
shall make, issue and deliver, in lieu of such lost, stolen, destroyed or
mutilated shares of Series A Preferred Stock, new shares of Series A Preferred
Stock of like tenor. The Series A Preferred Stock shall be held and owned upon
the express condition that the provisions of this Section 9.1 are exclusive with
respect to the replacement of mutilated, destroyed, lost or stolen shares of
Series A Preferred Stock and shall preclude any and all other rights and
remedies notwithstanding any law or statute existing or hereafter enacted to the
contrary with respect to the replacement of negotiable instruments or other
securities without the surrender thereof.
SECTION 9.2 WHO DEEMED ABSOLUTE OWNER. The Corporation may deem the
Person in whose name the Series A Preferred Stock shall be registered upon the
registry books of the
<PAGE> 15
Corporation to be, and may treat it as, the absolute owner of the Series A
Preferred Stock for the purpose of receiving payment of dividends on the Series
A Preferred Stock, for the conversion of the Series A Preferred Stock and for
all other purposes, and the Corporation shall not be affected by any notice to
the contrary. All such payments and such conversion shall be valid and effectual
to satisfy and discharge the liability upon the Series A Preferred Stock to the
extent of the sum or sums so paid or the conversion so made.
SECTION 9.3 NOTICE OF CERTAIN EVENTS. In the case of the occurrence of
any event described in Sections 6.1, 6.6 or 6.7 of this Certificate of
Designation, the Corporation shall cause to be mailed to the Holder of the
Series A Preferred Stock at its last address as it appears in the Corporation's
security registry, at least twenty (20) days prior to the applicable record,
effective or expiration date hereinafter specified (or, if such twenty (20) days
notice is not possible, at the earliest possible date prior to any such record,
effective or expiration date), a notice stating (x) the date on which a record
is to be taken for the purpose of such dividend, distribution, issuance or
granting of rights, options or warrants, or if a record is not to be taken, the
date as of which the holders of record of Series A Preferred Stock to be
entitled to such dividend, distribution, issuance or granting of rights, options
or warrants are to be determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is
expected to become effective, and the date as of which it is expected that
holders of record of Series A Preferred Stock will be entitled to exchange their
shares for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale transfer, dissolution, liquidation
or winding-up.
SECTION 9.4 REGISTER. The Corporation shall keep at its principal
office a register in which the Corporation shall provide for the registration of
the Series A Preferred Stock. Upon any transfer of the Series A Preferred Stock
in accordance with the provisions hereof, the Corporation shall register such
transfer on the Series A Preferred Stock register.
The Corporation may deem the person in whose name the Series A
Preferred Stock shall be registered upon the registry books of the Corporation
to be, and may treat it as, the absolute owner of the Series A Preferred Stock
for the purpose of receiving payment of dividends on the Series A Preferred
Stock, for the conversion of the Series A Preferred Stock and for all other
purposes, and the Corporation shall not be affected by any notice to the
contrary. All such payments and such conversions shall be valid and effective to
satisfy and discharge the liability upon the Series A Preferred Stock to the
extent of the sum or sums so paid or the conversion or conversions so made.
SECTION 9.5 WITHHOLDING. To the extent required by applicable law, the
Corporation may withhold amounts for or on account of any taxes imposed or
levied by or on behalf of any taxing authority in the United States having
jurisdiction over the Corporation from any payments made pursuant to the Series
A Preferred Stock.
SECTION 9.6 HEADINGS. The headings of the Articles and Sections of this
Certificate of Designation are inserted for convenience only and do not
constitute a part of this Certificate of Designation."
<PAGE> 16
ARTICLE VI
CUMULATIVE VOTING
-----------------
The Shareholders shall not be entitled to cumulative voting.
ARTICLE VII
PREEMPTIVE RIGHTS
-----------------
No holder of any stock of the Corporation shall be entitled, as a
matter of right, to purchase, subscribe for or otherwise acquire any new or
additional shares of stock of the Corporation of any class, or any options or
warrants to purchase, subscribe for or otherwise acquire any such new or
additional shares, or any shares, bonds, notes, debentures or other securities
convertible into or carrying options or warrants to purchase, subscribe for or
otherwise acquire any such new or additional shares.
ARTICLE VIII
SHARE TRANSFER RESTRICTIONS
---------------------------
This Corporation shall have the right to impose restrictions upon the
transfer of any of its authorized shares or any interest therein. The Board of
Directors is hereby authorized on behalf of this Corporation to exercise this
Corporation's right to so impose such restrictions.
<PAGE> 17
ARTICLE II
SHAREHOLDERS
Section 2.1. ANNUAL MEETING. The annual meeting of the shareholders
shall be held on such day as shall be fixed by the Board of Directors,
commencing with the year 1986, at a time to be fixed by the Board of Directors,
for the purpose of electing directors and for the transaction of such other
business as may come before the meeting. If the day fixed for the annual meeting
shall be a legal holiday in the State of Colorado such meeting shall be held on
the next succeeding business day. If the election of directors shall not be held
on the day designated herein for any annual meeting of the shareholders, or at
any adjournment thereof, the Board of Directors shall cause the election to be
held at a special meeting of the shareholders as soon thereafter as may be
convenient.
Section 2.2. SPECIAL MEETINGS. Special meetings of the shareholders,
for any purpose or purposes, unless otherwise proscribed by statute, may be
called by the President or by the Board of Directors, and shall be called by the
President at the request of the holders of not less than one-tenth of all
outstanding shares of the corporation entitled to vote at the meeting.
Section 2.3. PLACE OF MEETINGS. The Board of Directors may designate
any place, either within or without the State of Colorado, as the place of
meeting for any annual meeting or for any special meeting called by the Board of
Directors or the President. If no designation is made, or if a special meeting
is otherwise called, the place of meeting first shall be the principal office of
the corporation in the State of Colorado, if any, and second, the principal
office of the Corporation.
Section 2.4. NOTICE OF MEETING. Written notice stating the place, day
and hour of the meeting of shareholders and, in case of a special meeting, the
purpose or purposes for which the meeting is called, shall, unless otherwise
prescribed by statute, be delivered not less than ten nor more than fifty days
before the date of the meeting, either personally or by mail, by or at the
direction of the President, the Secretary, or the office or person calling the
meeting, to each shareholder of record entitled to vote at such meeting;
provided, however, that if the authorized shares of the corporation are to be
increased, at least thirty days' notice shall be given, and if sale of all or
substantially all assets are to be voted upon, at least twenty days' notice
shall be given to each shareholder of record. If mailed, such notice shall be
deemed to be delivered when deposited in the United States mail, addressed to
the shareholder at his address as it appears on the stock transfer books of the
corporation, with postage thereon prepaid.
Section 2.5. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. For
the purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders or any adjournment thereof, or shareholders entitled to
receive payment of any dividend, or in order to make a determination of
shareholders for any other purpose, the Board of Directors of the corporation
may provide that the stock transfer books shall be closed for a stated period
but not to exceed, in any case, fifty days. If the stock transfer books shall be
closed for the purpose of determining shareholders entitled to notice of or to
vote at a meeting of shareholders, such books shall be closed for at least ten
days immediately preceding such
<PAGE> 18
meeting. In lieu of closing the stock transfer books, the Board of Directors may
fix in advance a date as the record date for any such determination of
shareholders, such date in any case to be not more than fifty days and, in case
of a meeting of shareholders, not less than ten days prior to the date on which
the particular action, requiring such determination of shareholders, is to be
taken. If the stock transfer books are not closed and no record date is fixed
for the determination of shareholders entitled to notice of or to vote at a
meeting of shareholders, or shareholders entitled to receive payment of a
dividend, the date on which notice of the meeting is mailed or the date on which
the resolution of the Board of Directors declaring such dividend is adopted, as
the case may be, shall be the record date for such determination of
shareholders. When a determination of shareholders entitled to vote at any
meeting of shareholders has been made as provided in this section, such
determination shall apply to any adjournment thereof.
Section 2.6. VOTING RECORD. The officer or agent having charge of the
stock transfer books for shares of the corporation shall make, at least ten days
before each meeting of shareholders, a complete record of the shareholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of, and the number of shares held by, each.
The record, for a period of ten days before such meeting, shall be kept on file
at the principal office of the corporation, whether within or without the State
of Colorado, and shall be subject to inspection by any shareholder for any
purpose germane to the meeting at any time during usual business hours. Such
record shall also be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any shareholder during the whole time
of the meeting for any purpose germane to the meeting. The original stock
transfer books shall be the prima facie evidence as to who are the shareholders
entitled to examine such record or transfer books or to vote at any meeting of
shareholders.
Section 2.7 QUORUM. One-third of the outstanding shares of the
corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at any meeting of shareholders. If a quorum is not
represented at any meeting of the shareholders, a majority of the shares so
represented may adjourn the meeting from time to time for a period not to exceed
sixty days without further notice. At such adjourned meeting at which a quorum
is present or represented, any business may be transacted which might have been
transacted at the meeting as originally noticed. The shareholders present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum.
Section 2.8. MANNER OF ACTING. If a quorum is present, the affirmative
vote of the majority of the shares represented at the meeting and entitled to
vote on the subject matter shall be the act of the shareholders, unless the vote
of a greater proportion or number or voting by classes is otherwise required by
the Colorado Corporation Code or the Articles of Incorporation.
Section 2.9. PROXIES. At all meetings of shareholders a shareholder may
vote either in person or by proxy executed in writing by the shareholder or by
his duly authorized attorney-in-fact. Such proxy shall be filed with the
Secretary of the corporation before or at the time of the meeting. No proxy
shall be valid after eleven months from the date of its execution unless
otherwise provided in the proxy.
2
<PAGE> 19
Section 2.10. VOTING OF SHARES. Unless otherwise provided in the
Articles of Incorporation, each outstanding share, regardless of class, is
entitled to one vote on each matter submitted to a vote at a meeting of the
shareholders, and each fractional share is entitled to a corresponding
fractional vote on each such matter.
Section 2.11. VOTING OF SHARES BY CERTAIN SHAREHOLDERS. Shares standing
in the name of another corporation, domestic or foreign, may be voted by such
officer, agent or proxy as the bylaws of such corporation may prescribe, or, in
the absence of such provision, as the board of directors of such other
corporation may determine.
Shares held by an administrator, executor, guardian or conservator, may
be voted by him, either in person or by proxy, without a transfer of such shares
into his name. Shares standing in the name of a trustee may be voted by him,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him without a transfer of such shares into his name.
Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into his name if authority to do so
is contain in an appropriate order of the court by which such receiver was
appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares nor shares held by another corporation if the
majority of the shares entitled to vote for the election of directors of such
other corporation is held by this corporation shall be voted, directly or
indirectly, at any meeting or counted in determining the total number of
outstanding shares at any given time.
Redeemable shares which have been called for redemption shall not be
entitled to vote on any matter and shall not be deemed outstanding shares on and
after the date on which written notice of redemption has been mailed to
shareholders and a sum sufficient to redeem such shares has been deposited with
a bank or trust company with irrevocable instruction and authority to pay the
redemption price to the holders of the shares upon surrender of certificates
therefor.
Section 2.12. ACTION BY SHAREHOLDERS. Any action required or permitted
to be taken at a meeting of the shareholders may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all of
the shareholders entitled to vote with respect to the subject matter thereof.
Section 2.13. VOTING BY BALLOT. Voting on any question or in any
election may be by voice vote unless the presiding officer shall order or any
shareholder shall demand that voting be by ballot.
3
<PAGE> 20
Section 2.14. VOTING FOR DIRECTORS. At each election for directors
every shareholder entitled to vote at such election has the right to vote, in
person or by proxy, the number of shares owned by him for as many persons as
there are directors to be elected and for whose election he has the right to
vote.
Section 2.15. NO CUMULATIVE VOTING. No shareholder shall be permitted
to cumulate his votes by giving one candidate as many votes as the number of
such directors multiplied by the number of his shares equals, or by distributing
such votes on the same principal among any number of candidates.
ARTICLE IX
SHARES, CERTIFICATES FOR SHARES AND TRANSFER OF SHARES
Section 9.1. REGULATION. The Board of Directors may make such rules and
regulations as it ma deem appropriate concerning the issuance, transfer and
registration of certificates for shares of the corporation, including the
appointment of transfer agents and registrars.
Section 9.2. CERTIFICATES FOR SHARES. Certificates representing shares
of the corporation shall be numbered serially for each class of shares, or
series thereof, as they are issued, shall be impressed with the corporate seal
or a facsimile thereof, and shall be signed by the Chairman or Vice Chairman of
the Board of Directors or by the President or a Vice President and by the
Treasurer or an Assistant Treasurer or by the Secretary or an Assistant
Secretary. Any or all of the signatures upon a certificate may be facsimiles if
the certificate is countersigned by a transfer agent, or registered by a
registrar other than the corporation itself or an employee of the corporation.
Each certificate representing shares shall state upon the face thereof:
the name of the corporation; that the corporation is organized under the laws of
the State of Colorado; the name of the person to whom issued; the date of issue;
the number and class of shares and the designation of series, if any, which such
certificate represents; and the par value of each share represented by such
certificate, or a statement that the shares are without par value.
Each certificate representing shares issued by the corporation shall
set forth upon the face or back of the certificate or shall state that the
corporation will furnish to any shareholder upon request and without charge a
full statement of the designations, preferences, limitations, and relative
rights of the shares of each class authorized to be issued and the variations in
the relative rights and preferences between the shares of each series of
preferred or special class of shares, so far as the same have been fixed and
determined, and the authority of the Board of Directors to fix and determine the
relative rights and preferences of subsequent series.
Each certificate shall be otherwise in such form as may be prescribed
by the Board of Directors and as shall conform to the rules of any stock
exchange on which the shares may be listed.
4
<PAGE> 21
No certificate shall be issued for any shares until such share is fully
paid.
The corporation may issue fractions of a share, arrange for the
disposition of fractional interests by those entitled thereto, pay in cash the
fair value of fractions of a share as of the time when those entitled to receive
such fractions are determined, or issue scrip in registered or bearer form which
shall entitle the holder to receive a certificate for a full share upon the
surrender of such scrip aggregating a full share. A certificate for a fractional
share shall, but scrip shall not unless otherwise provided therein, entitle the
holder to exercise voting rights, to receive dividends thereon, and to
participate in any of the assets of the corporation in the event of liquidation.
The Board of Directors may cause such scrip to be issued subject to the
condition that it shall become void if not exchanged for certificates
representing full shares before a specified date, or subject to the condition
that the shares for which such scrip is exchangeable may be sold by the
corporation and the proceeds thereof distributed to the holders of such scrip,
or subject to any other conditions which the Board of Directors may deem
advisable.
Section 9.3. CANCELLATION OF CERTIFICATES. All certificates surrendered
to the corporation for transfer shall be cancelled and no new certificates shall
be issued in lieu thereof until the former certificate for a like number of
shares shall have been surrendered and cancelled, except as herein provided with
respect to lost, stolen or destroyed certificates.
Section 9.4. LOST, STOLEN OR DESTROYED CERTIFICATES. Any shareholder
claiming that his certificate for shares is lost, stolen or destroyed may make
an affidavit or affirmation of that fact and lodge the same with the Secretary
of the corporation, accompanied by a signed application for a new certificate.
Thereupon, and upon the giving of a satisfactory bond of indemnity to the
corporation not exceeding an amount double the value of the shares as
represented by such certificate (the necessity for such bond and the amount
required to be determined by the President and Treasurer of the corporation), a
new certificate may be issued of the same tenor and representing the same
number, class and series of shares as were represented by the certificate
alleged to be lost, stolen or destroyed.
Section 9.5. TRANSFER OF SHARES. Subject to the terms of any
shareholder agreement relating to the transfer of shares or other transfer
restrictions contained in the Articles of Incorporation or authorized therein,
shares of the corporation shall be transferable on the books of the corporation
by the holder thereof in person or by his duly authorized attorney, upon the
surrender and cancellation of a certificate or certificates for a like number of
shares. Upon presentation and surrender of a certificate for shares properly
endorsed and payment of all taxes therefor, the transferee shall be entitled to
a new certificate or certificates in lieu thereof. As against the corporation, a
transfer of shares can be made only on the books of the corporation and in the
manner herein above provided, and the corporation shall be entitled to treat the
holder of record of any share as the owner thereof and shall not be bound to
recognize any equitable or other claim to or interest in such share on the part
of any other person, whether or not it shall have express or other notice
thereof, save as expressly provided by the statutes of the State of Colorado.
5
<PAGE> 22
ARTICLE XI
DIVIDENDS
The Board of Directors may from time to time declare, and the
corporation may pay, dividends on its outstanding shares in the manner and upon
the terms and conditions provided by law and its Articles of Incorporation.
ARTICLE XIV
AMENDMENTS
Subject to repeal or change by action of the shareholders, these Bylaws
may be altered, amended or repealed and new Bylaws may be adopted by a majority
of the directors present at any meeting of the Board of Directors of the
corporation at which a quorum is present.
6
<PAGE> 1
EXHIBIT 5
April 26, 2000
Immune Response, Inc.
7001 Post Road, Suite 100
Dublin, Ohio 43016
Ladies and Gentlemen:
With respect to the Registration Statement on Form SB-2 (the
"Registration Statement") being filed by Immune Response, Inc. (the "Company")
under the Securities Act of 1933, as amended, relating to the registration of
5,455,385 common shares of the Company, $0.0001 par value (the "Shares"), we
advise you as follows:
We are counsel for the Company and have participated in the preparation
of the Registration Statement. We have reviewed the Company's Amended and
Restated Articles of Incorporation, as amended to date, the corporate action
taken to date in connection with the Registration Statement and the issuance and
sale of the Shares, and such other documents and authorities as we deem relevant
for the purpose of this opinion. Based upon the foregoing, we are of the opinion
that, upon compliance with the Securities Act of 1933, as amended, and with the
securities or "Blue Sky" laws of the states in which the Shares are to be
offered for sale, the Shares will be validly issued, fully paid and
nonassessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Experts" in the prospectus included in the Registration Statement.
Very truly yours,
/s/ Porter, Wright, Morris & Arthur LLP
Porter, Wright, Morris & Arthur LLP
<PAGE> 1
EXHIBIT 10.16
THIS COMMON STOCK PURCHASE WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR
THE PROVISIONS OF THIS COMMON STOCK PURCHASE WARRANT.
Number of Shares of Common Stock: ______
COMMON STOCK PURCHASE WARRANT
To Purchase Common Stock of
Immune Response, Inc.
THIS IS TO CERTIFY THAT _________, or its registered assigns,
is entitled, at any time from the Funding Date (as hereinafter defined) to the
Expiration Date (as hereinafter defined), to purchase from IMMUNE RESPONSE, INC.
, a Colorado corporation (the "COMPANY"), ________ shares of Common Stock (as
hereinafter defined and subject to adjustment as provided herein), in whole or
in part, including fractional parts, at a purchase price equal to $6.60 per
share, all on the terms and conditions and pursuant to the provisions
hereinafter set forth.
1. DEFINITIONS
-----------
As used in this Common Stock Purchase Warrant (this
"WARRANT"), the following terms have the respective meanings set forth below:
"ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of
Common Stock issued by the Company after the Funding Date, other than Warrant
Shares.
"BUSINESS DAY" shall mean any day that is not a Saturday or
Sunday or a day on which banks are required or permitted to be closed in the
State of New York.
"CERTIFICATE OF DESIGNATION" shall mean those articles of
amendment indicating the designations, rights and preferences of the Company's
Series A 6% Convertible Preferred Stock, as filed with the Secretary of State of
the State of Colorado on February 23, 2000.
"COMMISSION" shall mean the Securities and Exchange Commission
or any other federal agency then administering the Securities Act and other
federal securities laws.
"COMMON STOCK" shall mean (except where the context otherwise
indicates) the Common Stock, par value $0.0001, of the Company as constituted on
the Funding Date, and any capital stock into which such Common Stock may
thereafter be changed, and shall also include
<PAGE> 2
(i) capital stock of the Company of any other class (regardless of how
denominated) issued to the holders of shares of Common Stock upon any
reclassification thereof which is also not preferred as to dividends or assets
over any other class of stock of the Company and which is not subject to
redemption and (ii) shares of common stock of any successor or acquiring
corporation received by or distributed to the holders of Common Stock of the
Company in the circumstances contemplated by Section 4.4.
"CONVERTIBLE SECURITIES" shall mean evidences of indebtedness,
shares of stock or other securities which are convertible into or exchangeable,
with or without payment of additional consideration in cash or property, for
shares of Common Stock, either immediately or upon the occurrence of a specified
date or a specified event.
"CURRENT WARRANT PRICE" shall mean, in respect of a share of
Common Stock at any date herein specified, the price at which a share of Common
Stock may be purchased pursuant to this Warrant on such date.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended, or any successor federal statute, and the rules and regulations of
the Commission thereunder, all as the same shall be in effect from time to time.
"EXERCISE PERIOD" shall mean the period during which this
Warrant is exercisable pursuant to Section 2.1.
"EXPIRATION DATE" shall mean February 28, 2005.
"FUNDING DATE" means the date and time of the issuance and
sale of the Preferred Shares and the Warrants (each as defined in the Securities
Purchase Agreement).
"HOLDER" shall mean the Person in whose name the Warrant or
Warrant Shares set forth herein is registered on the books of the Company
maintained for such purpose.
"MARKET PRICE" shall have the meaning set forth in the
Certificate of Designation.
"OTHER PROPERTY" shall have the meaning set forth in Section
4.4.
"OUTSTANDING" shall mean, when used with reference to Common
Stock, at any date as of which the number of shares thereof is to be determined,
all issued shares of Common Stock, except shares then owned or held by or for
the account of the Company or any subsidiary thereof, and shall include all
shares issuable in respect of outstanding scrip or any certificates representing
fractional interests in shares of Common Stock.
"PERSON" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, incorporated organization, association,
corporation, institution, public benefit corporation, entity or government
(whether federal, state, county, city, municipal or otherwise, including,
without limitation, any instrumentality, division, agency, body or department
thereof).
-2-
<PAGE> 3
"REGISTRATION RIGHTS AGREEMENT" shall mean the Registration
Rights Agreement dated a date even herewith by and between the Company and
__________., as it may be amended from time to time.
"RESTRICTED COMMON STOCK" shall mean shares of Common Stock
which are, or which upon their issuance on the exercise of this Warrant would
be, evidenced by a certificate bearing the restrictive legend set forth in
Section 9.1(a).
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, or any successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"SECURITIES PURCHASE AGREEMENT" shall mean the Securities
Purchase Agreement dated as of a date even herewith by and between the Company
and _________ as it may be amended from time to time.
"TRANSFER" shall mean any disposition of any Warrant or
Warrant Shares or of any interest in either thereof, which would constitute a
sale thereof within the meaning of the Securities Act.
"TRANSFER NOTICE" shall have the meaning set forth in Section
9.2.
"WARRANTS" shall mean this Warrant and all warrants issued
upon transfer, division or combination of, or in substitution for, any thereof.
All Warrants shall at all times be identical as to terms and conditions and
date, except as to the number of shares of Common Stock for which they may be
exercised.
"WARRANT PRICE" shall mean an amount equal to (i) the number
of shares of Common Stock being purchased upon exercise of this Warrant pursuant
to Section 2.1, multiplied by (ii) the Current Warrant Price as of the date of
such exercise.
"WARRANT SHARES" shall mean the shares of Common Stock
purchased by the holders of the Warrants upon the exercise thereof.
2. EXERCISE OF WARRANT
-------------------
2.1 MANNER OF EXERCISE. From and after the Funding Date and until 5:00
P.M., New York City time, on the Expiration Date, Holder may exercise this
Warrant, on any Business Day, for all or any part of the number of shares of
Common Stock purchasable hereunder.
In order to exercise this Warrant, in whole or in part, Holder
shall deliver to the Company at its principal office at 7315 E. Peakview Avenue,
Englewood, Colorado 80111, or at the office or agency designated by the Company
pursuant to Section 12, (i) a written notice of Holder's election to exercise
this Warrant, which notice shall specify the number of shares of Common Stock to
be purchased, (ii) payment of the Warrant Price in cash or by wire transfer or
cashier's check drawn on a United States bank and (iii) this Warrant. Such
notice shall be substantially in the form of the subscription form appearing at
the end of this Warrant as Exhibit
-3-
<PAGE> 4
A, duly executed by Holder or its agent or attorney. Upon receipt of the items
referred to in clauses (i), (ii) and (iii) above, the Company shall, as promptly
as practicable, and in any event within five (5) Business Days thereafter,
execute or cause to be executed and deliver or cause to be delivered to Holder a
certificate or certificates representing the aggregate number of full shares of
Common Stock issuable upon such exercise, together with cash in lieu of any
fraction of a share, as hereinafter provided. The stock certificate or
certificates so delivered shall be, to the extent possible, in such denomination
or denominations as Holder shall request in the notice and shall be registered
in the name of Holder or, subject to Section 9, such other name as shall be
designated in the notice. This Warrant shall be deemed to have been exercised
and such certificate or certificates shall be deemed to have been issued, and
Holder or any other Person so designated to be named therein shall be deemed to
have become a holder of record of such shares for all purposes, as of the date
the notice, together with the cash or check or checks and this Warrant, is
received by the Company as described above and all taxes required to be paid by
Holder, if any, pursuant to Section 2.2 prior to the issuance of such shares
have been paid. If this Warrant shall have been exercised in part, the Company
shall, at the time of delivery of the certificate or certificates representing
Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder
to purchase the unpurchased shares of Common Stock called for by this Warrant,
which new Warrant shall in all other respects be identical with this Warrant,
or, at the request of Holder, appropriate notation may be made on this Warrant
and the same returned to Holder. Notwithstanding any provision herein to the
contrary, the Company shall not be required to register shares in the name of
any Person who acquired this Warrant (or part hereof) or any Warrant Shares
otherwise than in accordance with this Warrant.
2.2 PAYMENT OF TAXES AND CHARGES. All shares of Common Stock issuable
upon the exercise of this Warrant pursuant to the terms hereof shall be validly
issued, fully paid and nonassessable and without any preemptive rights. The
Company shall pay all expenses in connection with, and all taxes and other
governmental charges that may be imposed with respect to, the issue or delivery
thereof, unless such tax or charge is imposed by law upon Holder, in which case
such taxes or charges shall be paid by Holder. The Company shall not be
required, however, to pay any tax or other charge imposed in connection with any
transfer involved in the issue of any certificate for shares of Common Stock
issuable upon exercise of this Warrant in any name other than that of Holder,
and in such case the Company shall not be required to issue or deliver any stock
certificate until such tax or other charge has been paid or it has been
established to the satisfaction of the Company that no such tax or other charge
is due.
2.3 FRACTIONAL SHARES. The Company shall not be required to issue a
fractional share of Common Stock upon exercise of any Warrant. As to any
fraction of a share which Holder would otherwise be entitled to purchase upon
such exercise, the Company shall pay a cash adjustment in respect of such final
fraction in an amount equal to the same fraction of the Market Price per share
of Common Stock as of the Initial Funding Date.
2.4 CONTINUED VALIDITY. A holder of shares of Common Stock issued upon
the exercise of this Warrant, in whole or in part (other than a holder who
acquires such shares after the same have been publicly sold pursuant to a
Registration Statement under the Securities Act or sold pursuant to Rule 144
thereunder), shall continue to be entitled with respect to such shares to all
rights to which it would have been entitled as Holder under Sections 9, 10 and
14 of this Warrant. The Company will, at the time of exercise of this Warrant,
in whole or in part, upon the
-4-
<PAGE> 5
request of Holder, acknowledge in writing, in form reasonably satisfactory to
Holder, its continuing obligation to afford Holder all such rights; provided,
however, that if Holder shall fail to make any such request, such failure shall
not affect the continuing obligation of the Company to afford to Holder all such
rights.
3. TRANSFER, DIVISION AND COMBINATION
----------------------------------
3.1 TRANSFER. Subject to compliance with the Securities Purchase
Agreement and Section 3.1 and Section 9 herein, transfer of this Warrant and all
rights hereunder, in whole or in part, shall be registered on the books of the
Company to be maintained for such purpose, upon surrender of this Warrant at the
principal office of the Company referred to in Section 2.1 or the office or
agency designated by the Company pursuant to Section 12, together with a written
assignment of this Warrant substantially in the form of Exhibit B hereto duly
executed by Holder or its agent or attorney and funds sufficient to pay any
transfer taxes payable upon the making of such transfer. Upon such surrender
and, if required, such payment, the Company shall, subject to Section 9, execute
and deliver a new Warrant or Warrants in the name of the assignee or assignees
and in the denomination specified in such instrument of assignment, and shall
issue to the assignor a new Warrant evidencing the portion of this Warrant not
so assigned, and this Warrant shall promptly be cancelled. A Warrant, if
properly assigned in compliance with Section 9, may be exercised by a new Holder
for the purchase of shares of Common Stock without having a new warrant issued.
3.2 DIVISION AND COMBINATION. Subject to Section 3.1 and 9, this
Warrant may be divided or combined with other Warrants upon presentation hereof
at the aforesaid office or agency of the Company, together with a written notice
specifying the names and denominations in which new Warrants are to be issued,
signed by Holder or its agent or attorney. Subject to compliance with Section
3.1 and with Section 9, as to any transfer which may be involved in such
division or combination, the Company shall execute and deliver a new Warrant or
Warrants in exchange for the Warrant or Warrants to be divided or combined in
accordance with such notice.
3.3 EXPENSES. The Company shall prepare, issue and deliver at its own
expense (other than transfer taxes) the new Warrant or Warrants under this
Section 3.
3.4 MAINTENANCE OF BOOKS. The Company agrees to maintain, at its
aforesaid office or agency, books for the registration and the registration of
transfer of the Warrants.
4. ADJUSTMENTS
-----------
The number of shares of Common Stock for which this Warrant is
exercisable, or the price at which such shares may be purchased upon exercise of
this Warrant, shall be subject to adjustment from time to time as set forth in
this Section 4. The Company shall give Holder notice of any event described
below which requires an adjustment pursuant to this Section 4 at the time of
such event.
4.1 STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. If at any time
the Company shall:
-5-
<PAGE> 6
(a) take a record of the holders of its Common Stock for the
purpose of entitling them to receive a dividend payable in, or other
distribution of, Additional Shares of Common Stock,
(b) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock, or
(c) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock,
then (i) the number of shares of Common Stock for which this Warrant is
exercisable immediately after the occurrence of any such event shall be adjusted
to equal the number of shares of Common Stock which a record holder of the same
number of shares of Common Stock for which this Warrant is exercisable
immediately prior to the occurrence of such event would own or be entitled to
receive after the happening of such event, and (ii) the Current Warrant Price
shall be adjusted to equal (A) the Current Warrant Price multiplied by the
number of shares of Common Stock for which this Warrant is exercisable
immediately prior to the adjustment divided by (B) the number of shares for
which this Warrant is exercisable immediately after such adjustment.
4.2 CERTAIN OTHER DISTRIBUTIONS. If at any time the Company shall
take a record of the holders of its Common Stock for the purpose of entitling
them to receive any dividend or other distribution of:
(a) cash,
(b) any evidences of its indebtedness, any shares of its stock
or any other securities or property of any nature whatsoever (other
than cash, Convertible Securities or Additional Shares of Common
Stock), or
(c) any warrants or other rights to subscribe for or purchase
any evidences of its indebtedness, any shares of its stock or any other
securities or property of any nature whatsoever (other than cash,
Convertible Securities or Additional Shares of Common Stock),
then Holder shall be entitled to receive such dividend or distribution as if
Holder had exercised this Warrant. A reclassification of the Common Stock (other
than a change in par value, or from par value to no par value or from no par
value to par value) into shares of Common Stock and shares of any other class of
stock shall be deemed a distribution by the Company to the holders of its Common
Stock of such shares of such other class of stock within the meaning of this
Section 4.2 and, if the outstanding shares of Common Stock shall be changed into
a larger or smaller number of shares of Common Stock as a part of such
reclassification, such change shall be deemed a subdivision or combination, as
the case may be, of the outstanding shares of Common Stock within the meaning of
Section 4.1.
-6-
<PAGE> 7
4.3 OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS SECTION. The
following provisions shall be applicable to the making of adjustments of the
number of shares of Common Stock for which this Warrant is exercisable and the
Current Warrant Price provided for in this Section 4:
(a) WHEN ADJUSTMENTS TO BE MADE. The adjustments required by
this Section 4 shall be made whenever and as often as any specified
event requiring an adjustment shall occur. For the purpose of any
adjustment, any specified event shall be deemed to have occurred at the
close of business on the date of its occurrence.
(b) FRACTIONAL INTERESTS. In computing adjustments under this
Section 4, fractional interests in Common Stock shall be taken into
account to the nearest 1/10th of a share.
(c) WHEN ADJUSTMENT NOT REQUIRED. If the Company shall take a
record of the holders of its Common Stock for the purpose of entitling
them to receive a dividend or distribution or subscription or purchase
rights and shall, thereafter and before the distribution to
stockholders thereof, legally abandon its plan to pay or deliver such
dividend, distribution, subscription or purchase rights, then
thereafter no adjustment shall be required by reason of the taking of
such record and any such adjustment previously made in respect thereof
shall be rescinded and annulled.
(d) CHALLENGE TO GOOD FAITH DETERMINATION. Whenever the Board
of Directors of the Company shall be required to make a determination
in good faith of the fair value of any item under this Section 4, such
determination may be challenged in good faith by the Holder, and any
dispute shall be resolved by an investment banking firm of recognized
national standing selected by the Company and acceptable to the Holder.
4.4 REORGANIZATION, RECLASSIFICATION, MERGER, CONSOLIDATION OR
DISPOSITION OF ASSETS. If the Company shall reorganize its capital, reclassify
its capital stock, consolidate or merge with or into another corporation (where
the Company is not the surviving corporation or where there is a change in or
distribution with respect to the Common Stock of the Company), or sell, transfer
or otherwise dispose of all or substantially all its property, assets or
business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or any
cash, shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) in addition to or
in lieu of common stock of the successor or acquiring corporation ("OTHER
PROPERTY"), are to be received by or distributed to the holders of Common Stock
of the Company, then Holder shall have the right thereafter to receive, upon
exercise of the Warrant, the number of shares of common stock of the successor
or acquiring corporation or of the Company, if it is the surviving corporation,
and Other Property receivable upon or as a result of such reorganization,
reclassification, merger, consolidation or disposition of assets by a holder of
the number of shares of Common Stock for which this Warrant is exercisable
immediately prior to such event. In the case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be
-7-
<PAGE> 8
performed and observed by the Company and all the obligations and liabilities
hereunder, subject to such modifications as may be deemed appropriate (as
determined by resolution of the Board of Directors of the Company) in order to
provide for adjustments of shares of Common Stock for which this Warrant is
exercisable which shall be as nearly equivalent as practicable to the
adjustments provided for in this Section 4. For purposes of this Section 4.4,
"common stock of the successor or acquiring corporation" shall include stock of
such corporation of any class which is not preferred as to dividends or assets
over any other class of stock of such corporation and which is not subject to
redemption and shall also include any evidences of indebtedness, shares of stock
or other securities which are convertible into or exchangeable for any such
stock, either immediately or upon the arrival of a specified date or the
happening of a specified event and any warrants or other rights to subscribe for
or purchase any such stock. The foregoing provisions of this Section 4.4 shall
similarly apply to successive reorganizations, reclassifications, mergers,
consolidations or disposition of assets.
4.5 OTHER ACTION AFFECTING COMMON STOCK. If at any time or from time to
time the Company shall take any action in respect of its Common Stock, other
than any action described in this Section 4, which would have a materially
adverse effect upon the rights of the Holder, the number of shares of Common
Stock and/or the purchase price thereof shall be adjusted in such manner as may
be equitable in the circumstances, as determined in good faith by the Board of
Directors of the Company.
4.6 CERTAIN LIMITATIONS. Notwithstanding anything herein to the
contrary, the Company agrees not to enter into any transaction which, by reason
of any adjustment hereunder, would cause the Current Warrant Price to be less
than the par value per share of Common Stock.
5. NOTICES TO HOLDER
-----------------
5.1 NOTICE OF ADJUSTMENTS. Whenever the number of shares of Common
Stock for which this Warrant is exercisable, or whenever the price at which a
share of such Common Stock may be purchased upon exercise of the Warrants, shall
be adjusted pursuant to Section 4, the Company shall forthwith prepare a
certificate to be executed by the chief financial officer of the Company setting
forth, in reasonable detail, the event requiring the adjustment and the method
by which such adjustment was calculated (including a description of the basis on
which the Board of Directors of the Company determined the fair value of any
evidences of indebtedness, shares of stock, other securities or property or
warrants or other subscription or purchase rights referred to in Section 4.2),
specifying the number of shares of Common Stock for which this Warrant is
exercisable and (if such adjustment was made pursuant to Section 4.4 or 4.5)
describing the number and kind of any other shares of stock or Other Property
for which this warrant is exercisable, and any change in the purchase price or
prices thereof, after giving effect to such adjustment or change. The Company
shall promptly cause a signed copy of such certificate to be delivered to the
Holder in accordance with Section 14.2. The Company shall keep at its office or
agency designated pursuant to Section 12 copies of all such certificates and
cause the same to be available for inspection at said office during normal
business hours by the Holder or any prospective purchaser of a Warrant
designated by the Holder.
5.2 NOTICE OF CORPORATE ACTION. If at any time
-8-
<PAGE> 9
(a) the Company shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive a dividend or
other distribution, or any right to subscribe for or purchase any
evidences of its indebtedness, any shares of stock of any class or any
other securities or property, or to receive any other right, or
(b) there shall be any capital reorganization of the Company,
any reclassification or recapitalization of the capital stock of the
Company or any consolidation or merger of the Company with, or any
sale, transfer or other disposition of all or substantially all the
property, assets or business of the Company to, another corporation, or
(c) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder (i) at
least 30 days' prior written notice of the date on which a record date shall be
selected for such dividend, distribution or right or for determining rights to
vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up, and (ii) in the case of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up, at least 30 days' prior written notice of the date when the same shall take
place. Such notice in accordance with the foregoing clause also shall specify
(i) the date on which any such record is to be taken for the purpose of such
dividend, distribution or right, the date on which the holders of Common Stock
shall be entitled to any such dividend, distribution or right, and the amount
and character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up. Each such written notice shall be sufficiently given if addressed to Holder
at the last address of Holder appearing on the books of the Company and
delivered in accordance with Section 14.2.
-9-
<PAGE> 10
6. NO IMPAIRMENT
-------------
(a) The Company shall not by any action, including, without limitation,
amending its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such actions as may be necessary or appropriate to protect the rights of Holder
against impairment. Without limiting the generality of the foregoing, the
Company will (i) not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the amount payable therefor
upon such exercise immediately prior to such increase in par value, (ii) take
all such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the exercise of this warrant, and (iii) use its best efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to perform
its obligations under this Warrant.
(b) Upon the request of Holder, the Company will at any time during the
period this Warrant is outstanding acknowledge in writing, in form satisfactory
to Holder, the continuing validity of this Warrant and the obligations of the
Company hereunder.
7. RESERVATION AND AUTHORIZATION OF COMMON STOCK
---------------------------------------------
(a) From and after the Funding Date, the Company shall at all times
reserve and keep available for issue upon the exercise of Warrants such number
of its authorized but unissued shares of Common Stock as will be sufficient to
permit the exercise in full of all outstanding Warrants. All shares of Common
Stock which shall be so issuable, when issued upon exercise of any Warrant and
payment therefor in accordance with the terms of such Warrant, shall be duly and
validly issued and fully paid and nonassessable, and not subject to preemptive
rights.
(b) Before taking any action which would cause an adjustment reducing
the Current Warrant Price below the then par value, if any, of the shares of
Common Stock issuable upon exercise of the Warrants, the Company shall take any
corporate action which may be necessary in order that the Company may validly
and legally issue fully paid and non-assessable shares of such Common Stock at
such adjusted Current Warrant Price.
(c) Before taking any action which would result in an adjustment in the
number of shares of Common Stock for which this Warrant is exercisable or in the
Current Warrant Price, the Company shall obtain all such authorizations or
exemptions thereof, or consents thereto, as may be necessary from any public
regulatory body or bodies having jurisdiction thereof.
8. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS
--------------------------------------------------
In the case of all dividends or other distributions by the Company to
the holders of its Common Stock with respect to which any provision of Section 4
refers to the taking of a record of such holders, the Company will in each such
case take such a record and will take such record as of the close of business on
a Business Day. The Company will not at any time, except upon
-10-
<PAGE> 11
dissolution, liquidation or winding up of the Company, close its stock transfer
books or Warrant transfer books so as to result in preventing or delaying the
exercise or transfer of any Warrant.
9. RESTRICTIONS ON TRANSFERABILITY
-------------------------------
The Warrants and the Warrant Shares shall not be transferred,
hypothecated or assigned before satisfaction of the conditions specified in this
Section 9, which conditions are intended to ensure compliance with the
provisions of the Securities Act with respect to the Transfer of any Warrant or
any Warrant Shares. Holder, by acceptance of this Warrant, agrees to be bound by
the provisions of this Section 9.
9.1 RESTRICTIVE LEGEND. (a) The Holder by accepting this Warrant and
any Warrant Shares agrees that unless registered under the Securities Act of
1933, as amended (the "SECURITIES ACT"), subsequent to the Funding Date and
prior to the exercise hereof, this Warrant and the Warrant Shares issuable upon
exercise hereof may not be assigned or otherwise transferred unless and until
(i) the Company has received an opinion of counsel for the Holder that such
securities may be sold pursuant to an exemption from registration under the
Securities Act or (ii) a registration statement relating to such securities has
been filed by the Company and declared effective by the Commission.
(b) Each certificate for Warrant Shares issuable hereunder
shall bear a legend as follows unless such securities have been sold pursuant to
an effective registration statement under the Securities Act:
"These securities have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or
the securities laws of any state, and are being offered and
sold pursuant to an exemption from the registration
requirements of the Securities Act and such laws. These
securities may not be sold or transferred except pursuant to
an effective registration statement under the Securities Act
or pursuant to an available exemption from the registration
requirements of the Securities Act or such other laws."
(c) Except as otherwise provided in this Section 9, the
Warrant shall be stamped or otherwise imprinted with a legend in substantially
the following form:
"THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES
AND REGULATIONS THEREUNDER OR THE PROVISIONS OF THIS WARRANT."
9.2 NOTICE OF PROPOSED TRANSFERS. Prior to any Transfer or attempted
Transfer of any Warrants or any shares of Restricted Common Stock, the Holder
shall give ten days, prior written notice (a "TRANSFER NOTICE") to the Company
and its counsel of Holder's intention to effect such Transfer, describing the
manner and circumstances of the proposed Transfer, and
-11-
<PAGE> 12
obtain from counsel to Holder who shall be reasonably satisfactory to the
Company, an opinion that the proposed Transfer of such Warrants or such
Restricted Common Stock may be effected without registration under the
Securities Act. After receipt of the Transfer Notice and opinion, the Company
shall, within five (5) business days thereof, notify the Holder as to whether
such opinion is reasonably satisfactory and, if so, such holder shall thereupon
be entitled to Transfer such Warrants or such Restricted Common Stock, in
accordance with the terms of the Transfer Notice. Each certificate, if any,
evidencing such shares of Restricted Common Stock issued upon such Transfer
shall bear the restrictive legend set forth in Section 9.1(b), and the Warrant
issued upon such Transfer shall bear the restrictive legend set forth in Section
9.1(c), unless in the opinion of such counsel such legend is not required in
order to ensure compliance with the Securities Act. The Holder shall not be
entitled to Transfer such Warrants or such Restricted Common Stock until receipt
of notice from the Company under this Section 9.2 that such opinion is
reasonably satisfactory.
9.3 REQUIRED REGISTRATION. Pursuant to the terms and conditions set
forth in the Registration Rights Agreement, the Company shall prepare and file
with the Commission not later than the sixtieth (60th) day after the Funding
Date, a Registration Statement relating to the offer and sale of the Common
Stock issuable upon exercise of the Warrants and shall use its best efforts to
cause the Commission to declare such Registration Statement effective under the
Securities Act as promptly as practicable but no later than one hundred and
eighty (180) days after the Funding Date.
9.4 TERMINATION OF RESTRICTIONS. Notwithstanding the foregoing
provisions of Section 9, the restrictions imposed by this Section upon the
transferability of the Warrants, the Warrant Shares and the Restricted Common
Stock (or Common Stock issuable upon the exercise of the Warrants) and the
legend requirements of Section 9.1 shall terminate as to any particular Warrant
or share of Warrant Shares or Restricted Common Stock (or Common Stock issuable
upon the exercise of the warrants) (i) when and so long as such security shall
have been effectively registered under the Securities Act and disposed of
pursuant thereto or (ii) when the Company shall have received an opinion of
counsel reasonably satisfactory to it and its counsel that such shares may be
transferred without registration thereof under the Securities Act. Whenever the
restrictions imposed by Section 9 shall terminate as to this Warrant, as
hereinabove provided, the Holder hereof shall be entitled to receive from the
Company upon written request of the Holder, at the expense of the Company, a new
Warrant bearing the following legend in place of the restrictive legend set
forth hereon:
"THE RESTRICTIONS ON TRANSFERABILITY OF THE WITHIN WARRANT
CONTAINED IN SECTION 9 HEREOF TERMINATED ON _________________,
_____, AND ARE OF NO FURTHER FORCE AND EFFECT."
All Warrants issued upon registration of transfer, division or combination of,
or in substitution for, any Warrant or Warrants entitled to bear such legend
shall have a similar legend endorsed thereon. Whenever the restrictions imposed
by this Section shall terminate as to any share of Restricted Common Stock, as
hereinabove provided, the holder thereof shall be entitled to receive from the
Company, at the Company's expense, a new certificate representing such Common
Stock not bearing the restrictive legend set forth in Section 9.1(b).
-12-
<PAGE> 13
9.5 LISTING ON SECURITIES EXCHANGE. If the Company shall list any
shares of Common Stock on any securities exchange, it will, at its expense, list
thereon, maintain and, when necessary, increase such listing of, all shares of
Common Stock issued or, to the extent permissible under the applicable
securities exchange rules, issuable upon the exercise of this Warrant so long as
any shares of Common Stock shall be so listed during any such Exercise Period.
10. SUPPLYING INFORMATION
---------------------
The Company shall cooperate with Holder in supplying such information
as may be reasonably necessary for Holder to complete and file any information
reporting forms presently or hereafter required by the Commission as a condition
to the availability of an exemption from the Securities Act for the sale of any
Warrant or Restricted Common Stock.
11. LOSS OR MUTILATION
------------------
Upon receipt by the Company from Holder of evidence reasonably
satisfactory to it of the ownership of and the loss, theft, destruction or
mutilation of this Warrant and indemnity reasonably satisfactory to it (it being
understood that the written agreement of the Holder shall be sufficient
indemnity), and in case of mutilation upon surrender and cancellation hereof,
the Company will execute and deliver in lieu hereof a new Warrant of like tenor
to Holder; PROVIDED, in the case of mutilation, no indemnity shall be required
if this Warrant in identifiable form is surrendered to the Company for
cancellation.
12. OFFICE OF THE COMPANY
---------------------
As long as any of the Warrants remain outstanding, the Company shall
maintain an office or agency (which may be the principal executive offices of
the Company) where the Warrants may be presented for exercise, registration of
transfer, division or combination as provided in this Warrant.
13. LIMITATION OF LIABILITY
-----------------------
No provision hereof, in the absence of affirmative action by Holder to
purchase shares of Common Stock, and no enumeration herein of the rights or
privileges of Holder hereof, shall give rise to any liability of Holder for the
purchase price of any Common Stock or as a stockholder of the Company, whether
such liability is asserted by the Company or by creditors of the Company.
-13-
<PAGE> 14
14. MISCELLANEOUS
-------------
14.1 NONWAIVER AND EXPENSES. No course of dealing or any delay or
failure to exercise any right hereunder on the part of Holder shall operate as a
waiver of such right or otherwise prejudice Holder's rights, powers or remedies.
If the Company fails to make, when due, any payments provided for hereunder, or
fails to comply with any other provision of this Warrant, the Company shall pay
to Holder such amounts as shall be sufficient to cover any costs and expenses
including, but not limited to, reasonable attorneys' fees, including those of
appellate proceedings, incurred by Holder in collecting any amounts due pursuant
hereto or in otherwise enforcing any of its rights, powers or remedies
hereunder.
14.2 NOTICE GENERALLY. Except as may be otherwise provided herein, any
notice or other communication or delivery required or permitted hereunder shall
be in writing and shall be sent by facsimile with a copy delivered personally or
sent by a nationally recognized overnight courier service, and shall be deemed
given when so delivered personally or by overnight courier service, as follows:
(1) if to the Company, to:
IMMUNE RESPONSE, INC.
7315 E. Peakview Avenue
Englewood, Colorado 80111
Attention: Joseph W. Hovorka
President
Telephone: (303) 796-8940
Facsimile: (303) 796-9762
With a copy to:
PORTER WRIGHT MORRIS & ARTHUR LLP
41 South High Street
Columbus, Ohio 43215
Attention: William J. Kelly, Esq.
Telephone: (614) 227-2136
Facsimile: (614) 227-4498
(2) if to the Holder, to
with a copy to:
-14-
<PAGE> 15
The Company or the Holder may change the foregoing address by notice given
pursuant to this Section 14.2.
14.3 INDEMNIFICATION. The Company agrees to indemnify and hold harmless
Holder from and against any liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses
and disbursements of any kind which may be imposed upon, incurred by or asserted
against Holder in any manner relating to or arising out of any failure by the
Company to perform or observe in any material respect any of its covenants,
agreements, undertakings or obligations set forth in this Warrant; PROVIDED,
HOWEVER, that the Company will not be liable hereunder to the extent that any
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, attorneys' fees, expenses or disbursements are found in a final
non-appealable judgment by a court to have resulted from Holder's gross
negligence, bad faith or willful misconduct in its capacity as a stockholder or
warrantholder of the Company.
14.4 REMEDIES. Holder in addition to being entitled to exercise all
rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under Section 9 of this Warrant. The Company
agrees that monetary damages would not be adequate compensation for any loss
incurred by reason of a breach by it of the provisions of Section 9 of this
Warrant and hereby agrees to waive the defense in any action for specific
performance that a remedy at law would be adequate.
14.5 SUCCESSORS AND ASSIGNS. Subject to the provisions of Sections 3.1
and 9, this Warrant and the rights evidenced hereby shall inure to the benefit
of and be binding upon the successors of the Company and the successors and
assigns of Holder. The provisions of this Warrant are intended to be for the
benefit of all Holders from time to time of this Warrant and, with respect to
Section 9 hereof, holders of Warrant Shares, and shall be enforceable by any
such Holder or holder of Warrant Shares.
14.6 AMENDMENT. This Warrant and all other Warrants may be modified or
amended or the provisions hereof waived with the written consent of the Company
and the Holder.
-15-
<PAGE> 16
14.7 SEVERABILITY. Wherever possible, each provision of this Warrant
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Warrant.
14.8 HEADINGS. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
14.9 GOVERNING LAW. This Warrant shall be governed by the laws of the
State of New York, without regard to the provisions thereof relating to conflict
of laws.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
-16-
<PAGE> 17
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed and
its corporate seal to be impressed hereon and attested by its Secretary or an
Assistant Secretary.
Dated: February ____, 2000
THE COMPANY:
-----------
IMMUNE RESPONSE, INC.
By:________________________
Joseph W. Hovorka
President
Attest:
By:_____________________________
Name:
Title:
[SEAL]
-17-
<PAGE> 18
EXHIBIT A
SUBSCRIPTION FORM
[To be executed only upon exercise of Warrant]
The undersigned registered owner of this Warrant irrevocably
exercises this warrant for the purchase of ______ Shares of Common Stock of
Immune Response, Inc. and herewith makes payment therefor, all at the price and
on the terms and conditions specified in this Warrant and requests that
certificates for the shares of Common Stock hereby purchased (and any securities
or other property issuable upon such exercise) be issued in the name of and
delivered to ______ whose address is ______ and, if such shares of Common Stock
shall not include all of the shares of Common Stock issuable as provided in this
Warrant, that a new Warrant of like tenor and date for the balance of the shares
of Common Stock issuable hereunder be delivered to the undersigned.
______________________________
(Name of Registered owner)
______________________________
(Signature of Registered Owner)
______________________________
(Street Address)
______________________________
(city) (State) (Zip Code)
NOTICE: The signature on this subscription must correspond with the
name as written upon the face of the within Warrant in every
particular, without alteration or enlargement or any change
whatsoever.
-18-
<PAGE> 19
EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this
Warrant hereby sells, assigns and transfers unto the Assignee named below all of
the rights of the undersigned under this Warrant, with respect to the number of
shares of Common Stock set forth below:
NAME AND ADDRESS OF ASSIGNEE NO. OF SHARES of
COMMON STOCK
and does hereby irrevocably constitute and appoint __________________
attorney-in-fact to register such transfer on the books of __________________
maintained for the purpose, with full power of substitution in the premises.
Dated: Print Name:
--------------------------- ---------------------
Signature:
---------------------
Witness:
---------------------
NOTICE: The signature on this assignment must correspond with the name
as written upon the face of the within Warrant in every
particular, without alteration or enlargement or any change
whatsoever.
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
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.
Columbus, Ohio
April 25, 2000
<PAGE> 2
The Board of Directors
Opticon Medical Inc.:
We consent to the inclusion of our report dated March 24, 2000, with respect to
the 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 the year ended December 31, 1999 and for
the period from July 28, 1994 (inception) to December 31, 1999, which report
appears in the Form SB-2 of Immune Response, Inc. dated April 25, 2000. The
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 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 July 28, 1994 through December 31, 1998, is based solely
on the report of the other auditors.
Our report dated March 24, 2000, contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations and has a net
capital deficiency, which raise 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.
Columbus, Ohio
April 25, 2000
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in this registration statement on Form SB-2
of Immune Response, Inc. of our report dated March 23, 1999, relating to the
statements of changes in stockholders' equity, operations and cash flows of
Immune Response, Inc. for the year ended December 31, 1998, and for the period
from inception (May 14, 1984) to December 31, 1998.
/s/ Davis & Co., CPA's, P.C.
Davis & Co., CPAs, P.C
Englewood, Colorado
April 24, 2000
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
Each of the undersigned officers and/or directors of Immune Response,
Inc., a Colorado corporation (the "Company"), hereby appoints William J. Post or
William J. Kelly, Jr. as the undersigned's attorneys or any one of them
individually as the undersigned's attorney, in his name and on his behalf, and
in any and all capacities stated below, to sign and to cause to be filed with
the Securities and Exchange Commission the Company's registration statement on
Form SB-2 (the "Registration Statement") to register under the Securities Act of
1933, as amended, the sale by certain shareholders of the Company of up to
5,455,385 shares of common stock, $.0001 par value, of the Company and any and
all amendments, including post-effective amendments, to the Registration
Statement, hereby granting unto such attorney-in-fact, full power and authority
to do and perform in the name and on behalf of the undersigned, in any and all
such capacities, every act and thing whatsoever necessary to be done in and
about the premises as fully as the undersigned could or might do in person,
hereby granting to such attorney-in-fact full power of substitution and
revocation, and hereby ratifying all that any such attorney-in-fact or his
substitute may do by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on this 25th day of April, 2000, by the
following persons in the capacities indicated.
SIGNATURE TITLE
/S/ WILLIAM J. POST President, Chief Executive Officer and Director
- -------------------------------
William J. Post
/S/ DAVID B. BITTNER Treasurer and Chief Financial Officer
- -------------------------------
David B. Bittner
/S/ WALTER L. SEMBROWICH Chairman of the Board
- -------------------------------
Walter L. Sembrowich, Ph.D.
/S/ RONALD E. EIBENSTEINER Director
- -------------------------------
Ronald E. Eibensteiner
/S/ DAVID LUNDQUIST Director
- -------------------------------
David Lundquist
/S/ F. A. SALAMA Director
- -------------------------------
Fouad A. Salama, M.D.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 90,366
<SECURITIES> 18,093
<RECEIVABLES> 100,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 228,222
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 228,222
<CURRENT-LIABILITIES> 48,544
<BONDS> 0
0
0
<COMMON> 204
<OTHER-SE> 179,474
<TOTAL-LIABILITY-AND-EQUITY> 228,222
<SALES> 0
<TOTAL-REVENUES> 21,748
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 42,205
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (20,457)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20,457)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,457)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
