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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
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<TABLE>
<S> <C>
/X/ ANNUAL REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-19975
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BIOCIRCUITS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3088884
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
incorporation or
organization)
</TABLE>
1324 CHESAPEAKE TERRACE, SUNNYVALE, CALIFORNIA, 94089
(Address of principal executive offices, including zip code)
(408) 745-1961
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001
PAR VALUE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
The approximate aggregate market value of the Common Stock held by
non-affiliates of the Registrant, based upon the last sale price of the Common
Stock reported on the National Association of Securities Dealers Automated
Quotation National Market System was $4,500,600 as of April 16, 1997.
The Number of shares of Common Stock outstanding was 10,281,321 as of April
16, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
None
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* Excludes approximately 5,480,680 shares of Common Stock held by directors,
officers and stockholders whose beneficial ownership exceeds five percent of
the shares outstanding at April 16, 1997. Exclusion of shares held by any
person should not be construed to indicate that such person possesses the
power, direct or indirect, to direct or cause the direction of the
management or policies of the Registrant, or that such person is controlled
by or under common control with the Registrant.
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PART I
ITEM 1: BUSINESS
IN ADDITION TO THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE THOSE DISCUSSED IN THIS SECTION AND IN ITEM 7.
Biocircuits-TM- was founded in 1989 to develop new immunodiagnostic testing
systems. Immunodiagnostic tests, or "assays," are performed on samples of bodily
fluids to diagnose a variety of infectious diseases and other conditions, such
as endocrine dysfunctions, and to conduct therapeutic drug monitoring.
Immunodiagnostic tests utilize biological reagents, such as antibodies, and an
instrument to detect the presence of a substance of interest, or "analyte," such
as a virus or hormone.
The Company's IOS-TM- point-of-care immunodiagnostic testing system consists
of a compact, inexpensive instrument and disposable test cartridges that can be
operated by a user with no special skills or training. The system enables users
to perform tests at many locations, including physicians' offices, ambulatory
clinics and small clinical laboratories. In the first quarter of 1996, the
Company began marketing its IOS system with cartridges capable of performing T4
and T Uptake tests, two tests for assessing thyroid function. In September 1996,
the Company announced clearance from the United States Food and Drug
Administration ("FDA") to market a qualitative serum pregnancy assay, a test
designed to allow physicians to perform this common pregnancy test in their
offices during the patient visit where they can provide more immediate pre-natal
care to patients. In December 1996, the Company announced FDA clearance to
market a quantitative hCG assay, a test to track the progress of early
pregnancies. During 1996, the Company developed an improved second generation
cartridge for its new assays as well as existing assays. Also in December 1996,
the Company launched its Thyroid Stimulating Hormone ("TSH") assay on the second
generation cartridge. The TSH assay is a test to assess thyroid function. In
March 1997, the Company began shipping the T4 and T Uptake tests on the second
generation cartridge. The second generation cartridge will be required for the
market launch of all future assays.
INDUSTRY BACKGROUND
IN VITRO diagnostic testing is the process of analyzing constituents of
blood, urine and other bodily fluids outside of the body. The two largest
categories of IN VITRO diagnostic tests performed today are clinical chemistry
and immunodiagnostic testing. Clinical chemistry testing utilizes relatively
simple chemical reactions to measure certain molecules found in relatively high
concentrations in certain bodily fluids (usually blood). The most commonly
performed clinical chemistry tests include measurements of glucose, cholesterol,
and triglyceride levels. In contrast, immunodiagnostic tests involve complex
biological reactions and test for molecules which are found in very low
concentrations.
Immunodiagnostic tests utilize the function of natural human protein
molecules called antibodies. Antibodies have the ability to recognize and bind
to specific analytes such as bacteria and viruses. Antibodies currently are
produced in large commercial scale for use as reagents to detect the presence of
specific analytes in a clinical specimen. Existing immunodiagnostic testing
typically involves sophisticated instrumentation and multi-step protocols
including sample dilution, variable incubation times and wash steps.
Substantially all immunodiagnostic tests today are performed in centralized
laboratories on complex instruments operated by skilled technicians.
There are seven major categories of immunodiagnostic tests, and a small
number of tests performed in each of the seven categories account for a
significant portion of the total sales volume in each category.
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The following chart sets forth the primary immunodiagnostic tests the
Company believes are most likely to be performed at the point of care:
POINT-OF-CARE IMMUNODIAGNOSTIC TESTS
<TABLE>
<CAPTION>
TESTING CATEGORY PRIMARY TESTS
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INFECTIOUS DISEASES
Detecting sexually transmitted diseases which can cause infertility Chlamydia
in females, endanger the health of newborns or result in death. Gonorrhea
Herpes
Detecting nonsexually transmitted diseases. Strep A
Group B Strep
Rubella
Candida/Trichomonas
ENDOCRINOLOGY
Measuring various hormones of the endocrine system to determine T4, T Uptake
conditions such as thyroid dysfunction, infertility and TSH, Free T4
pregnancy. hCG, LH, FSH
THERAPEUTIC DRUGS
Monitoring drugs with a narrow therapeutic range to ensure that Theophylline
adequate serum levels are maintained without toxicity. Digoxin
Phenytoin
DRUGS OF ABUSE
Testing for suspected drug abuse and monitoring patients in Cannabinoids
substance abuse therapy. Cocaine, Opiates
IMMUNOLOGY AND ALLERGY
Determining the overall immune status.
TUMOR MARKERS
Measuring various antigens associated with cancers to assist in PSA
diagnosing and monitoring patients following therapy or surgery. CEA
AFP
METABOLIC
Determining nutritional status using certain metabolic markers. Ferritin
B12, Folate
OTHER HbA1c
Cardiac markers
</TABLE>
Since its introduction in the 1970's, the fundamental immunodiagnostic
testing process has changed very little and remains very procedure-intensive.
Current immunodiagnostic systems involve variable multi-step protocols. The
protocol and incubation periods vary by assay, and the majority of systems
utilize liquid reagents and complex instruments to complete the test process and
measure the results. Measurement technologies within instruments include the use
of radioisotopes, enzymes, fluorescence polarization, fluorescent labels and
chemiluminescent labels. The specific characteristics of some of these detection
technologies can limit their use to specific assays. Instrument manufacturers
have relied primarily on improvements in electronics and fluid handling systems
to automate many of the steps in the testing process. However, these
improvements have also increased instrument complexity, and today a typical
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immunodiagnostic instrument involves a large and expensive grouping of pipetting
systems, tubes, pumps, reagent containers, optics and electronics.
As a result of this complexity, the market for immunodiagnostic testing
contrasts sharply with the market for clinical chemistry testing, where the
basic technology and related equipment have become much simpler. The
introduction of easy-to-use, automated systems has substantially reduced the
cost of clinical chemistry testing, as reflected in reimbursement rates. For
example, an independent laboratory may process 600 clinical chemistry tests per
hour on one piece of equipment at a reimbursement rate of approximately $12 per
12-test panel (i.e., $1 per test). By contrast, the same laboratory may process
only 125 immunodiagnostic tests per day on one piece of equipment at a
reimbursement rate of approximately $12 to $30 for each single high-volume test.
As a result of the introduction of the inexpensive, easy-to-use systems,
point-of-care clinical chemistry testing has become widespread. The Company
estimates that approximately 41,000 physician office practices and free-standing
alternate site laboratories in the United States currently perform diagnostic
testing of some kind, primarily clinical chemistry and hematology, in their
offices. Similar advances have not been made in immunodiagnostic testing.
The Company believes that the complexity of current immunodiagnostic systems
results in two fundamental economic problems:
- ADDITIONAL PHYSICIAN/PATIENT COSTS DUE TO LENGTHY TURNAROUND TIME FOR TEST
RESULTS. Due to the expensive machinery and the inherent complexity of
the test process, essentially all immunodiagnostic testing is performed in
large centralized laboratories. After a patient specimen is collected in
the physician's office, it usually must be physically delivered to the
laboratory in order for the test to be performed. In addition to the costs
of expedited delivery, this centralized testing means that information can
seldom be returned to the physician in less than 24 hours; and a follow-up
conference with the patient is typically required prior to the
commencement of the next step in treatment or diagnosis, involving either
an additional office visit or a telephone consultation. If test results
were available to the physician within approximately 30 minutes, a
decision regarding the appropriate next step in treatment or diagnosis
could generally be made while the patient was still in the physician's
office, thereby eliminating the cost and inconvenience of a second
conference or repeat office visit. Faster test results may also reduce the
number of unnecessary hospital admissions and reduce the hospital stay for
some patients.
- HIGH COSTS PER REPORTABLE RESULT. The complexity of existing
immunodiagnostic systems requires the attention of highly skilled
technicians to perform daily and weekly maintenance, perform periodic
calibrations to develop standard curves for each analyte, perform daily
quality control for each analyte, as well as prepare reagents, load
reagents into instruments, complete instrument calibration, load samples,
process data and report results, making this one of the higher cost
sections of a clinical laboratory, based on costs per reportable result.
The Company believes that labor costs account for approximately 40% to 60%
of the cost of each such test, and that the current technology of
immunodiagnostic systems inherently limits the ability of the laboratories
to reduce these costs.
In addition, in recent years cost containment has become a critical issue
for health care providers of all kinds, and clinical laboratories have been no
exception. As health care costs have consumed an increasing portion of the gross
domestic product in the United States and many other countries, payors (such as
insurance companies) have sought to limit costs through a variety of mechanisms.
These cost containment efforts have included reductions in reimbursement
schedules, concentration of work with the most efficient providers, and
increased reliance on payment of a fixed fee for treatment of a patient
regardless of the procedures performed (e.g., as in health maintenance
organizations). In response to these cost containment pressures, all health care
providers, including physicians and clinical laboratories, have come under
increasing pressure to reduce their cost structures.
In view of these factors, the Company believes that demand exists for a
method of conducting immunodiagnostic tests which will significantly reduce the
costs and turnaround time associated with
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current testing practices. The Company believes that this demand exists both in
clinical laboratories, where the essential requirement is for a lower cost per
reportable result, and in physicians' offices and other points of patient care,
where the essential demand is for simple systems offering quick, cost effective
and accurate results.
THE BIOCIRCUITS' SOLUTION
Immunodiagnostic tests currently require numerous steps and multiple
reagents, which is time consuming and expensive. The timing of each step and the
amount of each reagent must be well controlled, thereby resulting in instruments
with complex pipetting systems, tubes, pumps and optical systems. A wash step is
often needed, which serves to separate reagents bound to either an antibody or
antigen from excess reagents free in the solution. In order to develop an
immunodiagnostic test that is one step to the user, the system (such as an
instrument and cartridge) must carry out these steps with no intervention by the
user. The cartridge must be able to perform two fluidic functions: form a
homogeneous solution from dry reagents and control when fluids flow into
specific chambers within the cartridge.
Biocircuits believes that it has developed a proprietary cartridge design
for the IOS point-of-care system which allows a simpler and less expensive
instrument format than exists today in immunodiagnostics. The Company has filed
patents on certain features of the cartridge and instrument designs. See
"Business--Patents and Proprietary Information." The Company believes that its
IOS system is the first low-cost, commercially available product which permits a
physician to perform immunodiagnostic tests at the point of patient care.
The IOS point-of-care system contains certain valuable product features that
should make immunodiagnostic testing economical at the point of care while
ensuring the quality of the test results, including:
- The instrument price to the end user is $7,000 versus the $25,000-$50,000
price of existing immunodiagnostic systems, used primarily in the clinical
laboratory.
- Annual service costs, typically based on instrument price, are expected to
be proportionately smaller than the larger instruments.
- Factory calibration of IOS cartridges eliminates the need for the end user
to establish standard curves by periodically running multiple calibrators
for each analyte tested on the system, as is done on other
immunodiagnostic systems.
- Liquid controls are run weekly on the IOS point-of-care system rather than
daily, as is done on other immunodiagnostic systems.
- The IOS cartridge contains a reference zone to monitor the stability of
reagents prior to performing each assay.
- The IOS instrument has on-board systems for checking the instrument optics
prior to performing each assay.
- A quality control IOS cartridge is supplied with each IOS instrument to
check instrument optics daily.
The Company's IOS point-of-care system consists of a compact, inexpensive
instrument and disposable test cartridges that can be operated by a user with no
special skills or training. The system will enable users to perform tests at
many locations, including physicians' offices, ambulatory clinics and small
clinical laboratories. The instrument is a small bench-top analyzer weighing
less than twenty pounds with outside dimensions of approximately 16 inches wide,
10 inches high and 13 inches deep. The instrument is expected to have a
throughput of 4-6 tests per hour and is operated with an eighteen button keypad.
The only liquid reagent in the instrument is a universal buffer, found in a
disposable container. The buffer is used for rehydrating and washing dry
biological reagents within the cartridge. The volume of buffer in the container
is sufficient to last approximately thirty days for the average user and should
take less than five minutes to replace.
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Disposable test cartridges are sold separately. This cartridge price to the
end user varies by test and is approximately one-third of the Medicare
reimbursement rate for such test. The cartridge has dimensions of approximately
2.5 inches wide, 3.5 inches long and 1/8 inch thick. It contains one or two
tests, depending upon the clinical condition to be diagnosed. Each cartridge
includes molded plastic parts and incorporates in a dry form all biological
reagents required for a test as well as a bar code containing relevant assay
information such as type of test and data necessary for the instrument to
interpret test results. The cartridge's capillary design provides for short
diffusion distances which allow for rapid test results. The design of the
cartridge enables it to test for both large and small molecular weight analytes
as well as perform either rate or endpoint assays.
To perform a test, the operator inserts the test cartridge into the IOS
instrument, which then reads the relevant assay information contained on the
cartridge's bar code. The cartridge is then partially released from the
instrument, enabling the operator to place the specimen (blood, urine or other
samples) into one or two wells in the cartridge, depending on the test. The
sample automatically flows to the test zone, where it produces a signal that the
instrument uses to determine the test results. The IOS instrument provides a
liquid crystal display and a printed output in approximately 20 to 35 minutes,
with the time varying by test. Receiving results within this time frame enables
the doctor to make a treatment decision before the patient leaves the office,
facilitating earlier treatment and obviating the need for an additional visit or
telephone call.
The Company believes that the IOS point-of-care system will provide the
following advantages to the end user:
- SIMPLE, ONE-STEP PROCESS. The system can be easily operated, requiring no
special skills.
- FASTER RESULTS. Results will be available in approximately 20-35 minutes,
rather than the 24 hours typically required for tests sent to clinical
laboratories.
- LABORATORY PRECISION AND ACCURACY. The system will perform with the same
level of precision and accuracy as clinical laboratory tests.
- INTEGRITY OF SPECIMEN. Tests will be performed at the point of care,
eliminating the need for transport, special packaging and handling of the
specimen, ensuring its biological integrity.
The Company has established its initial manufacturing capability for the
single-use cartridges in its IOS point-of-care system and has entered into an
agreement with KMC Systems, Inc. ("Kollsman") to be the exclusive North American
supplier of the IOS instrument. The IOS instrument and certain materials for the
cartridges are available from only single sources. In addition to the Company's
reliance on Nalge Nunc International, Inc. ("Nunc"), a sole source supplier, for
resin and treatment of the plastic cartridges, Kollsman relies on sole source
suppliers for certain components of the IOS instrument and is the Company's sole
manufacturer of the IOS instrument. Failure of Kollsman's suppliers or Nunc to
deliver the required quantities of such materials on a timely basis and at
commercially reasonable prices, or Kollsman's failure to deliver the IOS
instruments to the Company on a timely basis could materially adversely affect
the Company. See "Business--Manufacturing," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview." There also
can be no guarantee that the Company will be successful in developing additional
tests for the IOS point-of-care system. The development process is complex and
involves many steps, such as: selection and optimization of biological reagents
in order that product specifications for precision, accuracy and range are met,
systems integration, stability testing, preclinical trials, manufacturing of
clinical lots under the FDA's Good Manufacturing Practices ("GMP"), internal
clinical trials, external clinical trials and a 510(k) filing with the FDA. See
"Business--Government Regulation," and "Business--Additional Risk
Factors--Development Stage Company; Products Under Development." There also can
be no guarantee that the Company will be successful in selling its products. See
"Business--Sales and Marketing," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview" and
"Business--Additional Risk Factors--Uncertain Market Acceptance of Point-of-Care
Product."
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BUSINESS STRATEGY
The Company's IOS point-of-care system is intended to reduce the costs
associated with immunodiagnostic testing by making it economical for the most
common tests to occur at the point of care, thereby providing test results more
rapidly than current testing procedures.
The key elements of the Company's strategy have been as follows:
- LAUNCH IOS POINT-OF-CARE SYSTEM. Introduce Biocircuits' system to the
point-of-care market with an introductory test menu of T4 and T Uptake
assays.
- EXPAND TEST MENU. Expand the menu of tests for Biocircuits' IOS
point-of-care system to include some of the tests most commonly used at
the point of patient care.
- DEVELOP NEW APPLICATIONS OF THE COMPANY'S TECHNOLOGIES. Develop other
potential medical and non-medical applications for its IOS cartridge and
lipid/polymer biomaterial technologies, explore opportunities for
collaborations with strategic partners.
In the first quarter of 1996, the Company began marketing its IOS system
with cartridges capable of performing T4 and T Uptake tests, two tests for
assessing thyroid function. In September 1996, the Company announced clearance
from the FDA to market a qualitative serum pregnancy assay, a test designed to
allow physicians to perform this common pregnancy test in their offices during
the patient visit where they can provide more immediate pre-natal care to
patients. In December 1996, the Company announced FDA clearance to market a
quantitative hCG assay, a test to track the progress of early pregnancies.
During 1996, the Company developed an improved second generation cartridge for
its new assays as well as existing assays. Also in December 1996, the Company
launched its TSH assay on the second generation cartridge. The TSH assay is a
test to assess thyroid function. In March 1997, the Company began shipping the
T4 and T Uptake tests with the second generation cartridge. The second
generation cartridge will be required for the market launch of all future
assays.
The Company has experienced significant delays in the scheduled completion
of its IOS point-of-care system and there can be no assurance that further
product development delays will not occur. There also can be no assurance that
the Company will be able to obtain regulatory clearance for any future assays or
products, that any such products can be manufactured in sufficient quantity, at
acceptable costs and with appropriate quality, or that any such products, if and
when approved, can be successfully marketed.
MANUFACTURING
Biocircuits has developed a proprietary manufacturing process for producing
the test cartridges for its IOS point-of-care system. The Company has
established its initial manufacturing capability for the single-use cartridges.
Various plastic components and other materials for the cartridges are and will
be obtained from contract manufacturers. The Company has experienced cartridge
backlogs at various times since the March 1996 launch of the IOS point-of-care
system. There can be no assurance that the Company will be able to meet customer
demand for cartridges in the future, or that any order backlog will not
materially adversely affect the Company's sales and marketing efforts. The
Company's cartridge manufacturing milestones include improving manufacturing
efficiencies, expanding mold and cartridge manufacturing capacity as both the
test menu and test manufacturing volume expand, increasing the level of
automation and manufacturing the cartridge at the Company's targeted cost. There
can be no assurance that the Company will be successful in achieving these
milestones or that these milestones will be achieved on a timely basis. The
cartridge manufacturing scale-up process will require the Company to develop
advanced manufacturing techniques and rigorous process controls. The automation
efforts will be critical to meeting the Company's longer-term cartridge
manufacturing demands and cost targets. There can be no assurance that the
Company will be successful in these efforts or that such efforts will result in
the Company meeting expected cartridge demand or achieving the Company's
longer-term cartridge manufacturing cost targets.
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The Company has registered its manufacturing facility with the FDA and with
the Department of Health Services of the State of California, and will be
subject to state and federal inspections confirming the Company's compliance
with GMP guidelines. Prior to the first sale and shipment of its IOS point-of-
care system in March 1996, the Company believes it completed setting up this
initial manufacturing capability in compliance with GMP requirements. No
assurance can be given as to the ability of the Company to produce commercial
quantities of cartridges in compliance with applicable regulations at an
acceptable cost.
In August and December 1995, the Company entered into agreements with Nunc
to manufacture the plastic components of its disposable test cartridges. Under
the terms of the agreement, Nunc has the exclusive right to supply the plastic
components for the test cartridges for all sales in North America. The Company
will be entirely dependent on Nunc as the sole source for the plastic components
and the treatment thereof. There can be no assurance that Nunc will be able to
deliver the required quantities of test cartridge components on schedule or at
costs acceptable to the Company.
In December 1992, the Company entered into an agreement with Kollsman
pursuant to which Kollsman was appointed the exclusive North American supplier
of the IOS instrument. The agreement with Kollsman contained certain minimum
purchase requirements and expired three years from the date of first commercial
production, subject to certain rights of earlier termination. In April 1996, the
Company and Kollsman executed a letter agreement to amend the 1992 agreement
(the "Letter Agreement"), pursuant to which Kollsman will be the exclusive
supplier of the IOS instrument through 1997, the minimum purchase requirements
were eliminated and the Company and Kollsman agreed to an acceptable fixed
transfer price to be paid through 1997, the revised term of the agreement. Also
pursuant to the Letter Agreement, the Company agreed to issue Kollsman a warrant
to purchase 250,000 shares of Common Stock at an exercise price of $7.00 per
share, subject to an increase of 50,000 shares under certain circumstances. The
warrant was to expire at year end 1997, subject to certain extension rights. In
November 1996, the Company and Kollsman amended the Letter Agreement to extend
the expiration date of the warrant to June 1998, subject to certain extension
rights. In order to secure an adequate supply of IOS instruments, the Company
established a standby letter of credit for the benefit of Kollsman. On March 28,
1997, the Company and Kollsman entered into a confidential letter of
understanding wherein Kollsman agreed to reduce the amount of the standby letter
of credit by $249,000 in exchange for the Company's agreement to reduce the
exercise price of the warrant to purchase Common Stock from $7.00 to $2.00 per
share. Pursuant to the confidential letter of understanding, the Company also
agreed to issue Kollsman a warrant to purchase 50,000 shares of Common Stock
with an exercise price of $0.01 per share, such warrant to expire June 30, 1998,
in exchange for a one month shutdown of instrument production. The Company and
Kollsman are currently in discussions to extend further the shutdown of
instrument production for the purpose of working down instrument inventory. If
the Company can reach agreement on an extended shutdown with Kollsman, the
Company believes it is possible for the standby letter of credit to be reduced
below its current level of $700,000. There can be no assurance that the Company
will reach an agreement with Kollsman about a further extension of the shutdown,
or that the standby letter of credit will be reduced prior to year end 1997. The
Company is entirely dependent on Kollsman as the sole source of production of
its IOS instruments. Kollsman, in turn, relies upon sole-source suppliers for
certain components. Failure of Kollsman's suppliers to deliver the required
quantities on a timely basis and at commercially reasonable prices, or
Kollsman's failure to deliver the IOS instruments to the Company on a timely
basis or at commercially reasonable costs could materially adversely affect the
Company.
SALES AND MARKETING
The Company is targeting the estimated 41,000 physician practices and
alternate site laboratories that are licensed under the Clinical Laboratories
Improvement Act of 1967 and Amendments of 1988 ("CLIA") for high or moderate
complexity testing, most of which currently do not have an immunodiagnostic
testing capability. The Company markets its IOS point-of-care system to
physicians' offices and alternative site laboratories through distributors
supported by its own sales force in the United States. The Company has
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entered into agreements with medical supply distributors with distribution sites
throughout the United States and sales representatives with expertise in selling
testing and other medical equipment to the physicians' office laboratory market.
Although the Company's first sale and shipment of its IOS system occurred in
March 1996, there can be no assurance that the Company will be successful in
marketing its products, directly or through distributors. See
"Business--Additional Risk Factors--Uncertain Market Acceptance of Point-of-Care
Product." In addition, since the Company first established relationships with
its distributors, some of the distributors of the Company's products have
consolidated with companies or have been purchased by companies that do not
market the Company's products. There can be no assurance that such consolidation
will not continue, and if it does continue, that such consolidation will not
have an adverse impact on the Company's operations.
In addition to its relationships with distributors, the Company must
maintain its marketing and customer service programs and its sales force in
order to penetrate successfully the point-of-care market for immunodiagnostic
testing. In order to compete successfully, the Company will be required to
provide prompt service to its customers. However, there can be no assurance that
the Company will be able to establish the necessary programs or that such
programs and service will be consistently reliable.
The Company also is exploring opportunities to license its technologies to
marketing partners for use in areas of interest other than the point-of-care
immunodiagnostic market being pursued by Biocircuits. The Company expects that
such agreements could include technology licenses, research funding, milestone
payments, collaborative product development, royalties and/or equity investments
in Biocircuits. There can be no assurance, however, that the Company will be
successful in entering into any such agreements or collaborative relationships.
LIPID/POLYMER BIOMATERIAL TECHNOLOGY
In addition to its IOS system technology, Biocircuits has developed and
patented a new class of biomaterials that combines proteins, lipids and
polymers. Proteins can be a capture molecule, e.g., antibodies that endow the
biomaterial with the ability to bind to and detect specific analyte molecules.
Other proteins, such as enzymes, can be incorporated into the biomaterial to
give the biomaterial certain biological functions. Lipids are naturally
comparable with biological fluids such as blood, urine and saliva. Biological
compatibility makes them more resistant to unwanted biological interference
which can cause false test results. Polymers serve as an optical or electrical
transducer to convert the analyte binding event to measurable test results.
Polymers also should provide a high degree of stability and prolonged shelf
life.
Biocircuits has developed significant knowledge about lipid/polymer
biomaterials in the past eight years that the Company believes could be useful
in other diagnostic system applications. In August 1995, Biocircuits entered
into an agreement with Beckman Instruments, Inc. ("Beckman") and received
$3,500,000 in the form of convertible debt (the "Note") in exchange for granting
Beckman options for licensing and marketing rights to certain testing
applications using the Company's lipid/polymer technology. Pursuant to the terms
of the agreement, Biocircuits completed a feasibility study in August 1996.
Because Beckman subsequently elected not to exercise its development license
option, Biocircuits regained full rights to the lipid/polymer technology in
December 1996, including all improvements made during the feasibility study. In
connection with the decision, Beckman also elected to convert the Note into the
Company's Common Stock and a warrant (the "Beckman Warrant") to purchase the
Company's Common Stock.
Based on the Company's work under the Beckman agreement, the Company
believes the lipid/ polymer technology may have various applications which the
Company could pursue either independently or with licensing partners, including
a next generation IOS system. Biocircuits is currently not engaged in any
lipid/polymer research or development and if such activities are initiated,
there can be no assurance that the Company will be able to enter into any
licensing partnerships, that any such relationships would be successful, or that
the lipid/polymer technology can be successfully developed for use in future
products.
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RESEARCH AND DEVELOPMENT
As of December 31, 1996, the Company's research and development staff
numbered 35 individuals, seven of whom had Ph.D. degrees. The Company's research
and development expenditures totaled approximately $6.1 million, $5.7 million
and $7.1 million in the years ended December 31, 1994, 1995 and 1996,
respectively. As a result of the Company's reduction in force which occurred on
April 3, 1997, the Company ceased its existing research programs, which at the
time of such reduction in force, consisted of three full-time scientific
employees. The Company currently employs fourteen employees in its IOS product
development activities, which currently consists of the development of new
assays, the support of existing products already in the marketplace and software
development for instrument operation. See "Business--Employees" "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PATENTS AND PROPRIETARY INFORMATION
The Company has aggressively pursued the development of a patent portfolio
to protect its technologies.
IOS SYSTEM TECHNOLOGY
Two IOS cartridge patents have issued in the United States and a third
patent is allowed. The Company has three patent applications pending in the
United States and two foreign patent applications pending in Europe, Canada and
Japan on its cartridge technology. One patent application is also pending in the
United States on the IOS instrument.
LIPID/POLYMER BIOMATERIAL TECHNOLOGY
Nine biomaterial patents have been issued and two patents have been allowed
in the United States. These issued patents include claims covering the
composition of a class of biomaterials and methods for its use. The Company also
has three patent applications pending in the United States on its lipid/polymer
biomaterial technology. In addition, Biocircuits has two patent applications
pending in Canada and Japan. One application is pending in Canada and Japan and
has been issued in Europe. One additional patent application is pending in Japan
and has been issued in Europe and Canada.
The Company has aggressively pursued the development of a patent portfolio
to protect its technology. However, the patent positions of any medical device
manufacturer, including Biocircuits, are uncertain and involve complex legal and
factual questions for which important legal principles are largely unresolved.
In addition, the coverage claimed in a patent application can be significantly
reduced before a patent is issued. Consequently, there can be no assurance that
any patent applications will result in the issuance of patents or, with respect
to issued patents, whether they will provide significant proprietary protection
or will be circumvented or invalidated. Since patent applicants in the United
States are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature often lag behind actual
discoveries, the Company cannot be certain that it or any licensor was the first
to file a patent application for such invention. Moreover, the Company might
have to participate in interference proceedings declared by the United States
Patent and Trademark Office to eventually determine priority of invention, which
could result in substantial costs to the Company, even if the patents, if
issued, would be held valid by a court or if a competitor's technology or
product would be found to infringe such patents.
The Company also relies upon trade secret protection for its confidential
and proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or disclose
such technology, or that the Company can meaningfully protect its trade secrets.
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Biocircuits requires its employees, consultants and advisors to execute
confidentiality agreements upon the commencement of an employment or consulting
relationship with the Company. Each agreement provides that all confidential
information developed or made known to the individual during the course of the
relationship will be kept confidential and not disclosed to third parties except
in specified circumstances. In the case of employees, the agreements provide
that all inventions conceived by an individual shall be the exclusive property
of the Company, other than inventions unrelated to the Company's business and
developed entirely on the employee's own time. There can be no assurance,
however, that these agreements will provide meaningful protection or adequate
remedies for the Company's trade secrets in the event of unauthorized use or
disclosure of such information.
COMPETITION
Human immunodiagnostics is an intensely competitive field in which there are
a number of well established companies. Many of these competitors have
substantially greater financial resources and larger, more established sales,
marketing, and service organizations. The primary bases of competition in the
immunodiagnostic testing market are throughput, ease of use, price, breadth of
test menu, quality of results and service. There can be no assurance that the
Company will be able to compete successfully on any of these bases.
The Company believes that its principal competitors will be large companies
with a diagnostic division such as Abbott Laboratories; Becton, Dickinson and
Company; Boehringer Mannheim, GmbH; Chiron/ Ciba-Corning Diagnostics
Corporation; Diagnostic Products Corporation and Johnson & Johnson. Each of
these companies has an established position in the clinical laboratory test
market with systems based on traditional immunoassay technology. No assurance
can be given that the Company's products will compete successfully with existing
or future products of such competitors or that new competitors will not enter
the market with competing technologies. The Company expects that in the future,
one or more of these companies or others will develop and introduce new systems
for the point-of-care market. If any such company is able to develop or acquire
rights to a better immunodiagnostic testing system, the Company's business would
be materially adversely affected.
GOVERNMENT REGULATION
The Biocircuits IOS point-of-care system is regulated in the United States
as a medical device by the FDA and as such, requires regulatory clearance or
approval prior to commercialization. Pursuant to the Federal Food, Drug and
Cosmetic Act (the "FDC Act"), and the regulations promulgated thereunder, the
FDA regulates, among other things, the clinical testing, manufacture, labeling,
promotion, distribution, sale and use of medical devices in the United States.
Failure of the Company to comply with applicable regulatory requirements can
result in, among other things, warning letters, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, the government's refusal to grant premarket clearance or premarket
approval of devices, withdrawal of marketing approvals, and criminal
prosecution.
In the United States, medical devices are classified into one of three
classes, Class I, II or III, based on the controls necessary to reasonably
ensure their safety and effectiveness. Class I devices are those devices whose
safety and effectiveness can reasonably be ensured through general controls,
such as adequate labeling, pre-market notification, and adherence to GMP
regulations. Class II devices are those devices whose safety and effectiveness
can reasonably be ensured through the use of general special controls, such as
performance standards, post-market surveillance, patient registries, and FDA
guidelines. Class III devices are devices which must receive pre-market approval
by the FDA to ensure their safety and effectiveness. Generally, Class III
devices are life-sustaining, life-supporting or implantable devices, or new
devices which have been found not to be substantially equivalent to legally
marketed devices.
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Before a new medical device may be introduced into the market in the United
States, the manufacturer or distributor generally must obtain either FDA
clearance of a section 510(k) premarket notification or FDA approval of a
premarket approval ("PMA") application.
If the manufacturer or distributor can establish that the device is
"substantially equivalent" to a legally marketed Class I or Class II medical
device or to a Class III medical device for which the FDA has not required a PMA
(the "predicated device"), the manufacturer or distributor may seek FDA
marketing clearance for the device by filing a 510(k) notification. In a 510(k)
filing, the manufacturer or distributor is required to demonstrate that the
device has the same intended use and the same technological characteristics as
the predicate device or has different technological characteristics that do not
raise different questions of safety and efficacy than the predicate device. A
510(k) notification must contain information to support the claim of substantial
equivalence, which may include laboratory test results or the results of
clinical studies. Following submission of a 510(k) notification, the
manufacturer or distributor may not place the device into commercial
distribution until an order of substantial equivalence is issued by the FDA. The
Company understands that the FDA has been requiring a more rigorous
demonstration of substantial equivalence in connection with 510(k)
notifications. Although it generally takes from four to twelve months from the
date of submission to obtain a 510(k) clearance, it may take longer. FDA
regulations do not specify the time in which it must respond to a 510(k)
submission. The FDA may determine that the proposed device is not substantially
equivalent to a legally marketed device, or may require further information,
such as additional test data, before the FDA is able to make a substantial
equivalence determination. Such determination or request for additional
information could delay the Company's market introduction of its future products
and could have a materially adverse effect on the Company's continued
operations. Further, for any of the Company's devices cleared through the 510(k)
process, modifications or enhancements that could significantly change safety or
effectiveness or constitute a major change in the intended use of the device
will require a new 510(k) submission. The Company's IOS point-of-care instrument
tests currently are regulated as Class II medical devices. The Company has
received 510(k) clearances for the instrument and the T4 and T Uptake tests, the
T4-only test, the qualitative serum pregnancy test, the TSH test and the
quantitative hCG test in 1995 and 1996.
If a manufacturer or distributor cannot establish that a proposed device is
substantially equivalent to another legally marketed predicate device, the
manufacturer or distributor must seek pre-market approval of the proposed device
through submission of a PMA application. A PMA application must be supported by
extensive data, including pre-clinical and clinical trial data to prove the
safety and efficacy of the device, as well as extensive manufacturing
information. If human clinical trials are required and the device presents "a
significant risk," the sponsor of the trial (usually the manufacturer or
distributor) is required to file an investigational device exemption ("IDE")
application with the FDA before commencing human clinical trials. The IDE
application must be supported by data, typically including the results of
laboratory and animal testing. If the IDE application is approved by the FDA and
one or more appropriate institutional review boards ("IRBs"), human clinical
trials may begin at a specific number of investigational sites with a specific
number of subjects, as approved by FDA. If the device presents a "nonsignificant
risk" to subjects, a sponsor may begin the clinical trial after obtaining
approval of one or more appropriate IRBs without the need for FDA approval. An
IDE supplement must be submitted to and approved by the FDA before a sponsor or
investigator may make a change to the investigational plan that may affect its
scientific soundness or the rights, safety or welfare of human subjects. A PMA
application must contain the results of clinical trials, the results of any
relevant bench tests, laboratory and animal studies, a complete description of
the device and its components, and a detailed description of the methods,
facilities and controls used to manufacture the device. The submission also must
include the proposed labeling, advertising and training methods, if required.
Upon receipt, the FDA conducts a preliminary review of the PMA application to
determine whether the submission is sufficiently complete to permit a
substantive review. If sufficiently complete, the submission is declared
fileable by the FDA. By statute, the FDA has 180 days to review a PMA
application, although the review time often is extended significantly by the FDA
asking for more information or clarification of information already provided in
the submission. While the
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FDA has responded to PMA applications within the allotted time period, PMA
reviews more often occur over a significantly protracted time period and
generally take approximately 12 to 24 months or more from the date of filing to
approval. The FDA also will inspect the manufacturing facilities to ensure
compliance with the FDA's GMP requirements prior to approval of a PMA. This is a
lengthy and expensive process, and there can be no assurance that such approval
will be obtained for any future product the Company may develop which may be
determined to be subject to such requirements. A number of devices for which PMA
marketing clearance has been sought by others have never been cleared for
marketing. Modifications to a device that is the subject of an approved PMA, its
labeling or manufacturing process may require FDA approval of new PMAs or PMA
supplements, which often require submission of the same type of information
required for the initial PMA. There can be no assurance that any of the
Company's future products will ever obtain the necessary FDA regulatory
clearance for commercial distribution.
Any products distributed by Biocircuits pursuant to the above described
clearances are subject to pervasive and continuing regulation by the FDA. The
Company also will be required to manufacture its products in registered
establishments and in accordance with GMP regulations. There can be no assurance
that the Company or its OEM suppliers' facilities will meet GMP requirements.
Failure to meet such requirements could result in certain actions by the FDA,
including the possible shutdown of the Company's manufacturing facilities. In
addition, the FDA has enacted changes to the GMP regulations that may increase
the cost of compliance with GMPs. The Company's facility will be subject to
periodic inspections by the FDA for compliance with GMP and other applicable
requirements. Labeling and promotional activities are subject to scrutiny by the
FDA and, in certain instances, by the Federal Trade Commission. Current FDA
enforcement policy strictly prohibits marketing of medical devices for
unapproved uses. The export of medical devices also is subject to regulation in
certain instances. In addition, the use of the Company's products may be
regulated by various state agencies. For example, the Company was required to
obtain a license from the State of California to manufacture its proposed
products. There can be no assurance that the Company's proposed products will be
able to comply successfully with any such requirements or regulations.
The potential market for the Company's products may be affected by CLIA.
CLIA establishes requirements for any facility that performs laboratory testing
on human specimens for the purpose of providing information for diagnosis or
treatment of human beings. CLIA covers such testing in virtually all settings,
including physicians' offices. Regulations implementing CLIA establish
requirements for laboratories in such areas as administration, participation in
proficiency testing, patient test management, quality control, personnel,
quality assurance and inspection. Under these regulations, the specific
requirements that a laboratory must meet depend upon the complexity of the tests
performed by the laboratory. Laboratory tests are categorized as either waived
tests, tests of moderate complexity or tests of high complexity. Laboratories
that perform either moderate or high complexity tests must meet standards in all
areas, with the major difference in requirements between moderate and high
complexity testing concerning quality control and personnel standards. Quality
control standards for moderate complexity testing are being implemented in
stages. Laboratories performing high complexity testing must meet all the
quality control requirements by the effective date of the regulations. Personnel
standards for high complexity testing are more rigorous than those for moderate
complexity testing. In general, personnel conducting high complexity testing
will need more education and experience than those doing moderate complexity
testing. Under the CLIA regulations, all laboratories performing moderately
complex or highly complex tests will be required to obtain either a registration
certificate or certification of accreditation from the Health Care Financing
Administration ("HCFA").
The Company's IOS system has been classified as moderately complex, and thus
any laboratory using such products would have to meet the regulatory
requirements for testing of moderate complexity testing.
The Company understands that laboratories, including physician office
laboratories, will be evaluating the requirements of CLIA in determining whether
to perform certain types of moderate and high complexity diagnostic tests. The
Company believes that the sale of its proposed products will not be
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adversely affected by CLIA. However, no assurances can be given that the statute
and its implementing regulations will not have a materially adverse impact on
the Company and its ability to market and sell its IOS system or any future
products that the Company may develop.
Although Biocircuits believes that it will be able to comply with all
applicable regulations regarding the manufacture and sale of diagnostic devices,
such regulations are always subject to change and depend heavily upon
administrative interpretations. There can be no assurance that future changes in
regulations or interpretations made by the U.S. Department of Health and Human
Services, FDA, HCFA or other regulatory bodies, with possible retroactive
effect, will not adversely affect the Company. In addition to the foregoing,
Biocircuits is subject to numerous federal, state and local laws and regulations
relating to such matters as safe working conditions, laboratory and
manufacturing practices, environmental, fire hazard control, and disposal of
hazardous or potentially hazardous substances. To date, compliance with these
laws and regulations has not had a material effect on the Company's financial
results, capital requirements or competitive position, and the Company has no
plans for material capital expenditures relating to such matters. However, there
can be no assurance that it will not be required to incur significant costs to
comply with such laws and regulations in the future, or that such laws or
regulations will not have a materially adverse effect upon the Company's ability
to do business.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain registrations or approvals required by foreign countries may
be longer or shorter than that required for FDA clearance or approval, and
requirements for licensing may differ significantly from FDA requirements. Some
countries historically have permitted human studies earlier in the product
development cycle than regulations in the United States permit. Other countries
have requirements similar to those of the United States. This disparity in the
regulation of medical devices may result in slower product clearance in certain
countries than in others. Furthermore, the introduction of the Company's IOS
system or any future products in foreign markets might require obtaining foreign
regulatory clearances. There can be no assurance that the Company will be able
to obtain regulatory clearances for its current or any future products in the
United States or in foreign markets.
REIMBURSEMENT
Political, economic and regulatory influences are subjecting the healthcare
industry in the United States to fundamental change. Although Congress has
failed to pass comprehensive health care reform legislation to date, the Company
anticipates that Congress, state legislatures and the private sector will
continue to review and assess alternative benefits, controls on health care
spending through limitations on the growth of private health insurance premiums
and Medicare and Medicaid spending, the creation of large insurance purchasing
groups, price controls on pharmaceuticals and other fundamental changes to the
health care delivery system. Any such proposed or actual changes could cause any
potential partners of the Company to limit or eliminate spending on
collaborative development projects. Legislative debate is expected to continue
in the future, market forces are expected to demand reduced costs and
Biocircuits cannot predict what impact the adoption of any federal or state
health care reform measures or future private sector reforms may have on its
business.
In both domestic and foreign markets, sales of the Company's IOS
point-of-care system and other potential products, if any, will depend in part
on the availability of reimbursement from third-party payors such as government
health administration authorities, private health insurers and other
organizations. Third-party payors are increasingly challenging the price and
cost effectiveness of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products.
There can be no assurance that the Company's products will be considered cost
effective or that adequate third-party reimbursement will be available to enable
Biocircuits to maintain price levels sufficient to realize an appropriate return
on its investment in product development. Legislation and regulations affecting
the pricing of health care services may change, which could affect the Company's
products and could further limit reimbursement for medical products and
services.
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EMPLOYEES
As of December 31, 1996, Biocircuits employed 103 individuals. On April 3,
1997, in response to lower than expected sales and in efforts to reduce the rate
of cash consumption, the Company reduced its work force from 92 to 54 employees.
Of the existing workforce, 14 employees are engaged in development activities,
21 are engaged in manufacturing, and 19 are devoted to sales, marketing and
administrative activities, including 9 sales representatives.
ADDITIONAL RISK FACTORS
Biocircuits' business is subject to the following risks and uncertainties in
addition to those described above.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING; MAINTENANCE OF
NASDAQ LISTING
Obtaining additional funds will be critical to the Company's ability to
maintain operations during 1997. The Company will therefore continue to seek
funding from various equity financing sources. Raising additional funds from
public or private sources will result in significant dilution to then existing
shareholders. If adequate funding is not available on a timely basis, the
Company will be required to curtail its operations significantly or to cease
operations. There can be no assurance that the Company will be successful in
obtaining additional financing during 1997.
On April 15, 1997, the Company closed a private placement which consisted of
the sale of its common stock in three tranches and the issuance of warrants to
purchase common stock (defined hereinafter as the "April 1997 Financings"). The
first tranche resulted in gross proceeds of approximately $1.7 million to the
Company. With these funds, the Company believes its cash resources will be
adequate to satisfy its requirements until the end of the second quarter of
1997. The second tranche could result in gross proceeds to the Company of
approximately $5.5 million in July 1997, and is conditional upon the achievement
by the Company of certain milestones for the second quarter of 1997. If the
Company receives funding from the second tranche, the Company believes its cash
resources will be adequate to satisfy its requirements into the second quarter
of 1998. The third tranche could result in gross proceeds to the Company of
approximately $0.8 million in January 1998, and is conditional upon the
achievement by the Company of certain milestones by year end 1997. If the
Company receives funding from the third tranche, the Company believes its cash
resources will be adequate to satisfy its requirements into the third quarter of
1998. There can be no assurance that the Company will achieve the milestones
necessary to receive funding from either the second or third tranches.
The Company believes that maintaining its listing on the Nasdaq National
Market System ("Nasdaq") is central to its ability to raise additional funds as
well as to provide liquidity to investors. The conversion of the Beckman Note
resulted in the Company meeting Nasdaq listing requirements at year end 1996.
The Company failed temporarily to meet Nasdaq listing requirements at the end of
the first quarter of 1997. However, the proceeds from the first tranche of the
April 1997 Financings will allow the Company to meet Nasdaq listing
requirements, on a proforma basis, for the first quarter of 1997. The Company
also expects not to be in compliance with Nasdaq listing requirements at the end
of the second quarter of 1997. However, if the Company receives proceeds from
the second tranche of the April 1997 Financings in July 1997, the Company
believes it would meet Nasdaq listing requirements, on a proforma basis, for the
second quarter of 1997. In addition, the Company believes the receipt of
proceeds from the second tranche of the April 1997 Financings would result in it
meeting Nasdaq listing requirements through year end 1997. If the Company
receives proceeds from the third tranche of the April 1997 Financings, the
Company believes it will meet Nasdaq listing requirements through the first
quarter of 1998. Thereafter, the Company will be required to generate sufficient
revenue or raise additional capital to maintain Nasdaq listing requirements.
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The Company believes its cash requirements may increase in future periods
due to higher expenses. The Company expects to incur substantial additional
costs, including costs related to ongoing research and development activities,
either alone or in collaboration with strategic partners, clinical trials,
expansion of manufacturing, research and development and administrative
facilities, development of manufacturing capabilities, obtaining regulatory
approvals and establishing sales, marketing and distribution capabilities. The
Company's long-term capital requirements will depend on numerous factors,
including the progress of the Company's research and product development, the
timing and cost of obtaining regulatory approvals, the costs associated with
patents and other intellectual property rights, the levels of resources devoted
to the development of manufacturing and marketing capabilities and potential
collaborative partnerships. The Company may also seek additional funding through
collaborative relationships and the acquisition of capital equipment, including
lease financing, if available on attractive terms. The Company also may attempt
to obtain funds through arrangements with strategic partners or others that may
require the Company to relinquish rights to certain of its technologies,
products or marketing territories in exchange for funding. If adequate funds are
not available from these sources, the Company may be required to curtail its
operations significantly. No assurance can be given that any additional
financing will be available, or, if available, that it will be available on
acceptable terms.
NEED TO RETAIN AND ATTRACT KEY EMPLOYEES
The Company is highly dependent upon the principal members of its management
and scientific staff and key individuals in all areas of the Company. Although
the Company believes it has retained sufficient employees to achieve its
near-term business objectives after its reduction in force on April 3, 1997,
there can be no assurance that the loss of services of such employees might not
impede the achievement of the Company's business objectives. Furthermore, there
can be no assurance that the reduction in force will not adversely affect the
Company's ability to retain its remaining employees. The Company has implemented
certain programs which it believes will help in retaining key employees. The
Company faces competition for qualified individuals from numerous manufacturers
of medical products and other high technology products, as well as universities
and academic institutions. There can be no assurance that the Company will be
able to attract new qualified personnel on acceptable terms.
DEVELOPMENT STAGE COMPANY; PRODUCTS UNDER DEVELOPMENT
Biocircuits was founded in 1989 and is a development stage company. To
achieve profitable operations, the Company, alone or with others, must, among
other things, successfully develop, obtain regulatory approval for, manufacture,
introduce and market its current and potential products. The time frame
necessary to develop the Company's products is uncertain. The Company has
experienced delays in the scheduled completion of its IOS point-of-care
instrument and test cartridges, and there can be no assurance that further
product development delays will not occur in the future.
The Company's first sale and shipment of its IOS system, with cartridges
capable of performing T4 and T Uptake tests, occurred in March 1996. Certain
design changes to the IOS instrument were required since the first sale and
shipment of the IOS system. In April 1996, problems in some of the instrument
circuitry and software required certain parts and software modifications.
Further product shipments were suspended at that time while the problems were
diagnosed and corrected. All changes were validated and documented, and
shipments to distributors were resumed in the middle of June. In addition, all
instruments previously shipped to customers were retrofitted. In September 1996,
the Company received FDA clearance to market a qualitative serum pregnancy
assay. The Company received clearances from the FDA for a TSH assay in November
1996 and a quantitative hCG assay in December 1996. During 1996, the Company
developed an improved second generation cartridge for its new assays as well as
existing assays. In December 1996, the Company launched its TSH assay on the
second generation cartridge. In March 1997, the Company began shipping the T4
and T Uptake tests on the second generation cartridge. The second generation
cartridge will be required for the market launch of all future assays.
Biocircuits is
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currently developing three additional assays: a prostate specific antigen
("PSA") test for management of prostate cancer patients, a Digoxin test for
monitoring the therapeutic usage of this drug in the treatment of heart disease
and a Free T4 test for diagnosing true clinical thyroid status. The Company does
not expect to realize any significant revenue until at least 1998.
There can be no assurance that the IOS point-of-care system and tests will
perform reliably and in accordance with the Company's specifications, that
additional design changes may not be required in the future, that the Company
will be able to develop successfully or obtain regulatory clearance for
additional tests or any other future products, that the reduction in assay
development employees will not result in further delays in developing those
tests, that the second generation cartridge will perform as planned, that any of
the Company's products can be manufactured in sufficient quantity, at acceptable
cost and with appropriate quality, or that any products, if and when approved,
can be successfully marketed. Failure to meet one or more of these challenges
could have a material adverse effect on the Company.
UNCERTAIN MARKET ACCEPTANCE OF POINT-OF-CARE PRODUCT
Substantially all immunodiagnostic testing currently is performed at large
clinical laboratories rather than point-of-care sites. There can be no assurance
that the Company will be successful in developing and penetrating the
point-of-care market for immunodiagnostic testing. The Company currently employs
nine sales representatives to develop its relationships with distributors which
supply a substantial portion of medical and test products. The Company believes
it must expand its sales force to between 12 and 20 sales representatives and
further develop its relationships with distributors which currently supply a
substantial portion of medical and test products to physicians. Due to its
limited cash resources, the Company is uncertain when or if it will be able to
attain a sales force of at least 12 sales representatives. The selling process
typically requires the Company's sales force to work closely with distributors,
generate qualified physician leads and perform demonstrations for the IOS system
in physicians' offices. The selling process can be time-consuming and there can
be no assurance that the Company will be successful in marketing the IOS system,
that the rate of sales growth will meet expectations or that the marketing
programs of the Company will achieve the desired results. To date, the number of
instrument sales to distributors and placements in physicians' offices have
been, and continue to be, significantly less than the Company's expectations.
The Company believes that if instrument sales continue to be below expectations,
the Company's revenue and financial performance will be materially adversely
affected. Certain design changes to the IOS instrument were required since the
first sale and shipment of the IOS system. In April 1996, problems in some of
the instrument circuitry and software required certain parts and software
modifications. Further product shipments were suspended at that time while the
problems were diagnosed and corrected. All changes were validated and
documented, and shipments to distributors were resumed in the middle of June
1996. In addition, all instruments previously shipped to customers were
retrofitted. The requirements to make certain design changes to the instrument
and the suspension of product shipments had an adverse impact on 1996 revenue
and overall financial performance. There can be no assurance that additional
design changes may not be required in the future or that the system performance
will be reliable over time.
In general, market acceptance of the Company's initial point-of-care system
will depend upon the Company's ability to demonstrate the accuracy and value of
its system and to persuade physicians to perform the Company's initial tests in
their own facilities rather than send those tests to clinical laboratories. More
specifically, in order for the Company to have success in penetrating the
point-of-care immunodiagnostic market and to achieve significant sales of IOS
systems and test cartridges, the Company believes it will need to expand its
menu of tests. The Company believes that TSH, along with the Company's
additional products in development, are test key elements in penetrating the
physicians' office market. There can be no assurance that the TSH test will have
the desired impact in increasing the market acceptance of the Company's IOS
system.
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HISTORY OF LOSSES; EXPECTATION OF FUTURE LOSSES
At December 31, 1996, the Company's accumulated deficit was approximately
$51.5 million. Biocircuits expects to incur additional losses over the next
several years. The Company expects that currently available funds will be used
primarily for sales and marketing programs for its IOS point-of-care system and
development of additional tests for the IOS point-of-care system. The losses may
vary from period to period, including from quarter to quarter, and may increase,
due to the uncertainty of whether the sales and marketing programs of the
Company will achieve the desired results. Accordingly, the Company believes that
quarter-to-quarter results are not a useful indicator of the Company's
performance. There can be no assurance that any products will be manufactured or
marketed successfully, or that profitability will ever be achieved.
RISK OF PRODUCT LIABILITY; POSSIBLE UNAVAILABILITY OF INSURANCE
Testing, manufacturing and marketing of the Company's potential products
will entail risk of product liability. The Company currently has product
liability insurance. However, there can be no assurance that the Company will be
able to maintain such insurance at a reasonable cost or in sufficient amounts to
protect the Company against losses due to product liability. An inability to
maintain insurance at an acceptable cost or to otherwise protect against
potential product liability could prevent or inhibit the commercialization of
the Company's products. In addition, a product liability claim or recall could
have a material adverse effect on the business or financial condition of
Biocircuits.
HAZARDOUS MATERIALS
The Company's research and development involves the controlled use of
hazardous materials and chemicals. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result and any such liability could exceed the resources of the Company.
The Company may incur substantial costs to comply with environmental
regulations.
ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Board of Directors has authority to issue up to 10,000,000 shares of
Preferred Stock, in addition to the 30,000,000 designated shares of Series A
Preferred Stock, of which 12,455,137 were outstanding on December 31, 1996, and
to fix the rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the stockholders.
The rights of the holders of the Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of the outstanding Series A
Preferred Stock and any other Preferred Stock that may be issued in the future.
The outstanding Series A Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. Furthermore, certain provisions of the Company's Amended
and Restated Certificate of Incorporation, such as a classified Board of
Directors, its Amended and Restated Bylaws and of Delaware law could delay or
make more difficult a merger, tender offer or proxy contest involving the
Company.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock, like that of the common
stock of many other medical device and other high technology companies, has been
highly volatile. Factors such as delays in obtaining FDA approval for the IOS
point-of-care system, fluctuations in the Company's actual or anticipated
operating results, announcements of technological innovations or new commercial
products by the Company or its competitors, governmental regulation, changes in
the current structure of the health care financing and payment systems in the
United States, developments in or disputes regarding patent or
17
<PAGE>
other proprietary rights, economic and other external factors and general market
conditions may have a significant effect on the market price of the Common
Stock.
CONCENTRATION OF SHARE OWNERSHIP
Based upon the shares owned and outstanding as of April 16, 1997, the
Company's officers, directors and 5% stockholders of the Company as a group
beneficially owned approximately 67% of the Company's outstanding Common Stock,
on an as converted basis. As a result, these stockholders will be able to
exercise significant influence over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions.
ITEM 2: PROPERTIES
The Company's principal administrative offices, research laboratories and
manufacturing area are located at 1324 Chesapeake Terrace, Sunnyvale,
California, where the Company leases and occupies approximately 36,600 square
feet. The Company relocated to this facility in May 1993. The Company's monthly
rental cost is approximately $44,000. The Company also established a deposit
related to the initiation of a $732,000 letter of credit, which decreased to
$478,000 in 1996, as security for certain tenant improvements. The lease expires
on April 30, 2000.
ITEM 3: LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings as of the date
of this report.
18
<PAGE>
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was first traded on May 14, 1992 on the Nasdaq
National Market System under the symbol "BIOC." The following table sets forth,
for the periods indicated, the high and low sales prices per share for the
Common Stock as reported on the Nasdaq National Market System:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 HIGH LOW
- -------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter......................................................................... $ 4.00 $ 2.50
Second Quarter........................................................................ 5.72 1.00
Third Quarter......................................................................... 10.00 3.76
Fourth Quarter........................................................................ 10.00 5.50
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 HIGH LOW
- -------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter......................................................................... $ 8.63 $ 6.38
Second Quarter........................................................................ 7.75 5.63
Third Quarter......................................................................... 6.00 3.75
Fourth Quarter........................................................................ 3.75 2.38
</TABLE>
The Company had approximately 238 holders of record of its Common Stock as
of April 15, 1997.
The Company has never paid any cash dividends and does not anticipate paying
cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On January 29, 1996, the Company amended outstanding warrants to purchase
2,666,514 shares of the Company's Series A Preferred Stock, one half of which
became exercisable for an exercise price of $1.46 per share, and the other half
of which became exercisable for an exercise price equal to 70% of the stock's
fair market value. Such amended warrants were issued to individual and
institutional accredited and non-accredited investors in reliance on Section
3(a)(9) of the Securities Act of 1933, as amended (the "Securities Act"). Also
on January 29, 1996, the Company closed a private placement pursuant to which
the Company issued new warrants to purchase 1,426,499 shares of Series A
Preferred Stock at an exercise price of $1.46 per share and new warrants to
purchase 1,426,499 shares of Series A Preferred Stock at an exercise price equal
to 70% of the fair market value of such stock. The new warrants (collectively
with the amended warrants, the "1996 Series A Warrants") were issued to
individual and institutional accredited and non-accredited investors in reliance
on Rule 506 ("Rule 506") under the Securities Act. In consideration for the
issuance of the 1996 Series A Warrants, the Company received the right to
require the exercise of one half of the 1996 Series A Warrants upon the
occurrence of corporate certain milestones.
The Company's Series A Preferred Stock is convertible, at the option of the
holder, into the Company's Common Stock at a rate of one share of Common Stock
for every four shares of Series A Preferred Stock. During the twelve month
period ended December 31, 1996, the Company issued 1,848,965 shares of Common
Stock upon the conversion of 7,395,927 shares of its Series A Preferred Stock to
persons who were holders of the Company's Series A Preferred Stock in reliance
on Section 3(a)(9) of the Securities Act.
Pursuant to an April 1996 manufacturing agreement entered into between the
Company and Kollsman, the Company issued Kollsman a warrant to purchase up to
250,000 shares of Common Stock at an exercise price of $7.00 per share in
reliance on Section 4(2) of the Securities Act.
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<PAGE>
In March 1996 and June 1996, the Company issued warrants to purchase up to
7,628 shares of Common Stock at an exercise price of 70% of the fair market
value of such stock to Venture Lending in connection with a standby letter of
credit and a line of credit agreement entered into between the Company and
Venture Lending. The issuance of the Warrants was made in reliance on Section
4(2) of the Securities Act.
On October 21, 1996, the Company sold an aggregate of 1,930,462 shares of
Common Stock and warrants to purchase an additional 965,231 shares of Common
Stock at an exercise price of $3.43 per share to individual and institutional
accredited investors, in reliance on Rule 506. The aggregate offering price of
such shares of Common Stock and warrants was $5,791,386, including the placement
agent's fee of $474,894.
In November 1996, the Company amended warrants to purchase up to 3,513,213
shares of Series A Preferred Stock to extend the term of such warrants from
December 18, 1996 to February 14, 1997, in reliance on Section 3(a)(9) of the
Act.
In December 1996, the Company issued 1,111,727 shares of Common Stock and a
warrant to purchase up to 222,345 shares of Common Stock at an exercise price of
$3.45 to Beckman upon the conversion of a secured promissory note in principal
amount of $3,500,000, plus accrued interest of $332,000, issued in connection
with a feasibility study and option agreement entered into between the Company
and Beckman. The Common Stock and the Warrants were issued in reliance on
Section 4(2) of the Securities Act.
During the twelve month period ended December 31, 1996, the Company received
an aggregate of approximately $7,856,000 from the exercise of warrants to
purchase a total of 6,852,064 shares of the Company's Series A Preferred Stock
by individual and institutional accredited and non-accredited investors. The
shares of Series A Preferred Stock were issued in reliance on Rule 506 and
Section 4(2) of the Securities Act.
20
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
The following selected financial data is derived from audited financial
statements as of and for the years ended December 31, 1992, 1993, 1994, 1995 and
1996 and for the period from March 7, 1989 (inception) to December 31, 1996. The
data set forth below should be read in conjunction with the financial statements
and related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," both appearing elsewhere herein.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 7,
1989
(INCEPTION)
TO
YEAR ENDED DECEMBER 31, DECEMBER
----------------------------------------------------- 31,
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Product sales.................. $ -- $ -- $ -- $ -- $ 421 $ 421
OPERATING COSTS AND EXPENSES:
Cost of sales.................. -- -- -- -- 2,310 2,310
Research and development....... 4,513 6,545 6,086 5,669 7,081 34,357
Sales, general and
administrative............... 1,577 2,801 2,239 2,686 5,416 16,278
--------- --------- --------- --------- --------- -----------
Total operating costs and
expenses......................... 6,090 9,346 8,325 8,355 14,807 52,945
Loss from operations............... (6,090) (9,346) (8,325) (8,355) (14,386) (52,524)
Net interest and other income...... 88 256 117 118 38 976
--------- --------- --------- --------- --------- -----------
Net loss........................... $ (6,002) $ (9,090) $ (8,208) $ (8,237) $ (14,348) $ (51,548)
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
Net loss per share................. $ (4.06) $ (3.76) $ (3.30) $ (2.89) $ (2.71)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in computing net loss
per share........................ 1,480 2,420 2,489 2,849 5,299
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................................... $ 11,379 $ 9,371 $ 1,925 $ 6,191 $ 5,355
Total assets.......................................... 14,042 13,964 5,552 9,267 8,726
Long-term obligations................................. 761 948 505 3,707 72
Deficit accumulated during the development stage...... (11,665) (20,755) (28,963) (37,200) (51,548)
Total stockholders' equity............................ 11,818 11,560 3,474 4,063 7,078
</TABLE>
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
IN ADDITION TO THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION, AS WELL AS IN
ITEM 1.
OVERVIEW
Since its inception in 1989, the Company has been engaged in research and
development and marketing of medical diagnostic applications of its
technologies.
The Company has incurred a loss in each period since its inception. At
December 31, 1996, the Company's accumulated deficit was $51.5 million.
Biocircuits expects to incur additional losses over the next several years. The
Company expects that currently available funds will be used primarily for sales
and marketing programs for its IOS point-of-care system and development of
additional assays for the IOS point-of-care system. The losses may vary from
period to period, including from quarter to quarter, and may increase, due to
the uncertainty of whether the sales and marketing programs of the Company will
achieve the desired results. Accordingly, the Company believes that
quarter-to-quarter results are not a useful indicator of the Company's
performance.
The Company's first sale and shipment of its IOS system occurred in March
1996, with cartridges capable of performing the T4 and T Uptake tests. The
selling process typically requires the Company's sales force to work closely
with distributors, generate qualified physician leads and perform demonstrations
of the IOS system in physicians' offices. The selling process can be
time-consuming and there can be no assurance that the Company will be successful
in marketing the IOS system, that the rate of sales growth will meet
expectations or that the marketing programs of the Company will achieve the
desired results.
Certain design changes to the IOS instrument were required since the first
sale and shipment of the IOS system. In April 1996, problems in some of the
instrument circuitry and software required certain parts and software
modifications. Further product shipments were suspended at that time while the
problems were diagnosed and corrected. All changes were validated and
documented, and shipments to distributors were resumed in the middle of June
1996. In addition, all instruments previously shipped to customers were
retrofitted. The requirements to make certain design changes to the instrument
and the suspension of product shipments had an adverse impact on 1996 revenue
and overall financial performance. There can be no assurance that additional
design changes may not be required in the future or that the system performance
will be reliable over time.
To date, the number of instrument sales to distributors and placements in
physicians' offices have been, and continues to be, significantly less than the
Company's expectations. As a result, the Company has incurred significant
losses. The Company believes that if instrument sales continue to be below
expectations, the Company's revenue and financial performance will be materially
adversely affected.
On April 3, 1997, in order to reduce its losses and conserve cash, the
Company reduced its work force from 92 employees to 54 employees.
In order for the Company to have success in penetrating the point-of-care
immunodiagnostic market and to achieve significant sales of IOS systems and test
cartridges, the Company believes it will need to continue to expand its menu of
tests. In September 1996, the Company received FDA clearance to market a
qualitative serum pregnancy assay. The Company also received clearances from the
FDA for a TSH assay in November 1996 and a quantitative hCG assay in December
1996. During 1996, the Company developed an improved second generation cartridge
for its new assays as well as existing assays. In December 1996, the Company
launched its TSH assay on the second generation cartridge. In March 1997, the
Company began shipping the T4 and T Uptake tests on the second generation
cartridge. The second generation
22
<PAGE>
cartridge will be required for the market launch of all new assays. There can be
no assurance that the conversion of assays to the new second generation
cartridge will occur according to schedule or that the second generation
cartridge will perform as planned. In addition, existing assays will be
converted to the new cartridge in the near future. Biocircuits is currently
developing three additional assays: a PSA test for management of prostate cancer
patients, a Digoxin test for monitoring the therapeutic usage of this drug in
the treatment of heart disease and a Free T4 test for diagnosing true clinical
thyroid status. In the past, the Company has experienced delays in completing
the development of new tests. Furthermore, the April 1997 reduction in force
reduced the number of employees responsible for developing the three additional
assays. There can be no assurance that the reduction in assay development
employees will not result in further delays in completing the development of
these new tests. There can be no assurance that the Company will be successful
in expanding its menu of tests and according to schedule, as well as obtaining
regulatory approvals for such tests.
Biocircuits has developed a proprietary manufacturing process for producing
the test cartridges for its IOS point-of-care system. The Company has
established its initial manufacturing capability for the single-use cartridges.
Various plastic components and other materials for the cartridges are and will
be obtained from contract manufacturers. The Company has experienced cartridge
backlogs at various times since the March 1996 launch of the IOS point-of-care
system. There can be no assurance that the Company will be able to meet customer
demand for cartridges in the future, or that any order backlog will not
materially adversely affect the Company's sales and marketing efforts. The
Company's cartridge manufacturing milestones include improving manufacturing
efficiencies, expanding mold and cartridge manufacturing capacity as both the
test menu and test manufacturing volume expand, initiating manufacturing
automation efforts and manufacturing the cartridge at the Company's targeted
cost. There can be no assurance that the Company will be successful in achieving
these milestones or that these milestones will be achieved on a timely basis.
The cartridge manufacturing scale-up process will require the Company to develop
advanced manufacturing techniques and rigorous process controls. The automation
effort will be critical to meeting the Company's longer-term cartridge
manufacturing demands and cost targets. There can be no assurance that the
Company will be successful in these efforts or that such efforts will result in
the Company meeting expected cartridge demand or achieving the Company's
longer-term cartridge manufacturing cost targets.
In August and December 1995, the Company entered into agreements with Nunc
to manufacture the plastic components of its disposable test cartridges. Under
the terms of the agreement, Nunc has the exclusive right to supply the plastic
components for the test cartridges for all sales in North America. The Company
will be entirely dependent on Nunc as the sole source for the plastic components
and treatment thereof. There can be no assurance that Nunc will be able to
deliver the required quantities of test cartridge components on schedule or at
costs acceptable to the Company.
In December 1992, the Company entered into an agreement with Kollsman
pursuant to which Kollsman was appointed the exclusive North American supplier
of the IOS instrument. The agreement with Kollsman contained certain minimum
purchase requirements and expired three years from the date of first commercial
production, subject to certain rights of earlier termination. In April 1996, the
Company and Kollsman executed a letter agreement to amend the 1992 agreement
(the "Letter Agreement"), pursuant to which Kollsman will be the exclusive
supplier of the IOS instrument through 1997, the minimum purchase requirements
were eliminated and the Company and Kollsman agreed to an acceptable fixed
transfer price to be paid through 1997, the revised term of the agreement. Also
pursuant to the Letter Agreement, the Company agreed to issue Kollsman a warrant
to purchase 250,000 shares of Common Stock at an exercise price of $7.00 per
share, subject to an increase of 50,000 shares under certain circumstances. The
warrant expires at year end 1997, subject to certain extension rights. In
November 1996, the Company and Kollsman amended the Letter Agreement to extend
the expiration date of the warrant to June 1998, subject to certain extension
rights. In order to secure an adequate supply of IOS instruments, the Company
established a standby letter of credit for the benefit of Kollsman. In late
March
23
<PAGE>
1997, the Company and Kollsman agreed to reduce the amount of the standby letter
of credit by $249,000 in exchange for reducing the exercise price of the warrant
to $2.00 per share. Also in late March 1997, the Company and Kollsman agreed to
issue Kollsman a warrant to purchase 50,000 shares of Common Stock in exchange
for a one month shutdown of instrument production. The Company and Kollsman are
currently in discussions to extend further the shutdown of instrument production
for the purpose of working down instrument inventory. If the companies can reach
agreement on an extended shutdown, the Company believes it is possible for the
standby letter of credit to be reduced below its current level of $700,000.
There can be no assurance that the Company will reach an agreement with Kollsman
about the further extension of the shutdown, or that the standby letter of
credit will be reduced prior to year end 1997. The Company is entirely dependent
on Kollsman as the sole source of production of its IOS instruments. Kollsman,
in turn, relies upon sole-source suppliers for certain components. Failure of
Kollsman's suppliers to deliver the required quantities on a timely basis and at
commercially reasonable prices, or Kollsman's failure to deliver the IOS
instruments to the Company on a timely basis or at commercially reasonable costs
could materially adversely affect the Company.
In June 1995, the Company closed a private placement of 17,399,000 units
consisting of convertible Preferred Stock and Warrants at $0.50 per unit.
Proceeds to the Company were approximately $8.5 million, net of issuance costs.
Each unit consisted of one share of Series A Preferred Stock and one warrant to
purchase approximately .60 shares of Series A Preferred Stock at $0.60 per share
(Common Stock equivalent price of $2.40 per share and the "1995 Warrants").
Series A Preferred Stock converts to .25 shares of Common Stock.
In January 1996, the Company amended outstanding 1995 Warrants to purchase
2,666,514 shares of Series A Preferred Stock and closed a private placement
pursuant to which the Company issued new warrants (the "1996 Warrants") to
purchase 2,852,998 shares of Series A Preferred Stock. One half of the amended
1995 Warrants and one half of the 1996 Warrants were exercisable at a purchase
price of 70% of the current market price upon exercise and expired on May 31,
1996. Ninety-six percent of the warrants expiring on May 31, 1996 were exercised
at an average purchase price of $1.18 per share (Common Stock equivalent price
of $4.72 per share). Proceeds to the Company were approximately $3.0 million,
net of issuance costs. The remaining one half of the amended 1995 Warrants and
1996 Warrants were exercised pursuant to automatic exercise provisions at a
purchase price of $1.46 per share (Common Stock equivalent price of $5.84 per
share) upon the Company's shipment of the first ten IOS instruments and
accompanying cartridges, which occurred in March 1996. Proceeds to the Company
were approximately $3.9 million, net of issuance costs.
On October 21, 1996, the Company closed a private placement which consisted
of the sale of 965,231 units at $6.00 per unit. Proceeds to the Company were
approximately $5.2 million, net of issuance costs. A unit consisted of two
shares of Common Stock and a Financing Warrant expiring October 20, 1997, to
purchase one share of Common Stock at $3.43 per share. The Financing Warrants
contain an automatic exercise provision which occurs, upon notice from the
Company, at any time beginning six months prior to the expiration date when the
average market value for the Company's Common Stock equals or exceeds $5.25 per
share for 10 consecutive trading days. If the Financing Warrants are exercised,
the Company will receive gross proceeds of up to an additional $3.3 million.
On April 15, 1997, the Company closed a private placement which consisted of
the sale of 2,500,000 shares of its common stock (the "April 1997 Common Stock
Financing") to be issued in three tranches. The first tranche resulted in gross
proceeds of approximately $530,000 to the Company, the second tranche,
conditional upon the Company's satisfaction of certain milestones for the second
quarter of 1997 and stockholder approval of the issuance of the shares, will
result in gross proceeds of approximately $1,190,000 to the Company and the
third tranche, conditional upon the Company's satisfaction of certain milestones
by the end of fiscal 1997 and stockholder approval of the issuance of the
shares, will result in gross proceeds to the Company of approximately $780,000.
In addition, on April 15, 1997, the Company closed a private placement which
consisted of the sale of 5,447,000 units, consisting of one share of
24
<PAGE>
common stock and one warrant to purchase one share of common stock to be issued
in two tranches (the "April 1997 Unit Financing"). The first tranche resulted in
gross proceeds to the Company of approximately $1,160,000, and the second
tranche, conditional upon the Company's satisfaction of certain milestones for
the second quarter 1997 and stockholder approval of the issuance of the shares,
will result in gross proceeds of approximately $4,290,000 to the Company. The
warrants in the April 1997 Unit Financing (the "April 1997 Warrants"), which
expire eighteen months after they become exerciseable, have an exercise price of
$0.75 per share and cannot be exercised until after stockholder approval which
will not occur before the Company's 1997 Annual Meeting to be held on May 22,
1997. At the Company's option, the Company may shorten the exercise period of
the April 1997 Warrants in which case the Warrants may become redeemable by the
Company at $0.01 per share, if the closing price for the Company's common stock
is greater than or equal to $2.00 per share for ten days. The April 1997 Common
Stock Financing and the April 1997 Unit Financing are referred to herein
collectively as the "April 1997 Financings."
In August 1995, Biocircuits entered into an agreement with Beckman and
received $3,500,000 in the form of a Note in exchange for granting Beckman
options for licensing and marketing rights to certain testing applications using
the Company's lipid/polymer technology. Pursuant to the terms of the agreement,
Biocircuits completed a feasibility study in August 1996. Because Beckman
subsequently elected not to exercise its development license option, Biocircuits
regained full rights to the lipid/polymer technology in December 1996, including
all improvements made during the feasibility study. In connection with their
decision, Beckman also elected to convert the Note into the Company's Common
Stock and a warrant to purchase the Company's Common Stock.
RESULTS OF OPERATIONS
Following the Company's March 1996 launch of the IOS system, the Company
recorded revenue of $421,000 in 1996.
The Company's total operating costs and expenses increased from $8.33
million in 1994 to $8.36 million in 1995 and increased to $14.81 million in
1996. In early 1994, the Company announced a decision to reformulate the test
method in the proprietary assay cartridge used in its IOS system. As a result,
the Company recorded a one-time charge of $992,000 as a research and development
expense in 1994 for equipment ($720,000) and purchase commitments ($272,000)
related to this reformulation. Excluding this non-recurring charge, operating
costs and expenses increased from an adjusted $7.33 million in 1994 to $8.36
million in 1995, followed by an increase to $14.8 million in 1996.
The Company recorded $2.31 million of cost of sales in 1996. These costs, in
connection with the launch of the IOS system, consisted primarily of
manufacturing overhead and startup costs associated with the production of
revenue generating product.
The Company's research and development expenses decreased from $6.09 million
in 1994 to $5.67 million in 1995, and increased to $7.08 million in 1996.
Research and development expenses were 73%, 68% and 48% of total operating costs
and expenses in 1994, 1995 and 1996, respectively. The 1994 expense includes the
non-recurring reformulation charge of $992,000 as discussed above. Excluding the
non-recurring charge, research and development expenses decreased to an adjusted
$5.09 million or 69% of total adjusted operating costs and expenses in 1994. The
increase from an adjusted 1994 to 1995 was primarily the result of increased
staffing and outside services while the increase from 1995 to 1996 was due
primarily to increased outside services.
Sales, general and administrative expenses were $2.24 million in 1994, $2.69
million in 1995 and $5.42 million in 1996. The increase in sales, general and
administrative expenses each year was due primarily to expanded sales and
marketing expenses resulting from the preparation for and launch of the IOS
point-of-care system and general operating expenses.
Interest income increased from $283,000 in 1994 to $317,000 in 1995 and to
$345,000 in 1996. These changes are primarily attributable to fluctuations in
cash and cash equivalents and investment balances
25
<PAGE>
resulting from sales of common and preferred stock and from collaboration funds,
offset by operating losses, purchases of property and equipment and payments on
long-term obligations.
Interest and other expense was $166,000 in 1994, $199,000 in 1995 and
$307,000 in 1996. The increase in interest and other expense was due primarily
to interest on the $3.5 million note to Beckman.
The Company incurred net losses of $8.21 million in 1994, $8.24 million in
1995 and $14.35 million in 1996. The losses per share were $3.30, $2.89 and
$2.71 in 1994, 1995 and 1996, respectively. The 1994 results include the
non-recurring charge of $992,000, or $0.40 per share.
As of December 31, 1996, the Company had net operating loss carryforwards of
approximately $36.5 million and research and development credit carryforwards of
approximately $1 million for federal income tax purposes. Upon the closing of
the Company's June 1995 private placement, the Company experienced a "change in
ownership" as defined by Section 382 of the Internal Revenue Code. As a result,
the utilization of the Company's pre-change net operating loss and certain
credit carryforwards will be subject to an annual limitation based upon the
Company's pre-change values and may expire prior to utilization.
The Company has determined that a valuation allowance for deferred tax
assets of $21.1 million is required to reduce the deferred tax assets to the
amount realizable, currently estimated to be zero at December 31, 1996 based
upon the Company's history of losses.
The Company believes that inflation has not had a material impact on its
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations primarily through sales
of common and preferred stock, interest income on the cash balances available
after such financings, long term debt and capital asset lease financings. Since
its inception through December 31, 1996, the Company raised a total of
approximately $54.2 million in the sale of common and preferred stock.
The Company's cash and cash equivalents and short-term investments were
$4.94 million as of December 31, 1996, compared to $6.63 million at the end of
1995. The decrease was due primarily to operating losses in 1996 offset by the
completion of various financings.
The Company's bank informed it in late March 1997 that the Company was no
longer in compliance with the bank's terms for the Kollsman standby letter of
credit. As a result, the bank collateralized the full amount of the standby
letter of credit, resulting in a $949,000 reduction in available cash to the
Company. Subsequently, also in late March 1997, the Company and Kollsman reached
an agreement to reduce the current amount of the standby letter of credit to
$700,000, resulting in an increase of available cash of $249,000. The Company
believes the standby letter of credit will remain fully cash collateralized for
the near term and, possibly, until year end 1997. The collateralization of the
standby letter of credit meant that the Company's remaining available cash would
satisfy its requirements until only mid-April 1997.
On April 15, 1997, the Company closed the April 1997 Financings which
consisted of the sale of common stock in three tranches. With the receipt of
funds from the first tranche of the April 1997 Financings, the Company believes
its cash resources will be adequate to satisfy its requirements until the end of
the second quarter 1997. If the Company receives funding from the second tranche
of the April 1997 Financings, the Company believes its cash resources will be
adequate to satisfy its requirements into the second quarter of 1998. If the
Company receives funding from the third tranche of the April 1997 Financings,
the Company believes its cash resources will be adequate to satisfy its
requirements into the third quarter of 1998.
Obtaining additional funds will be critical to the Company's ability to
maintain operations during 1997. The Company will therefore continue to seek
funding from various equity financing sources. Raising additional funds from
public or private sources will result in significant dilution to then existing
shareholders. If adequate funding is not available on a timely basis, the
Company will be required to curtail its
26
<PAGE>
operations significantly or to cease operations. There can be no assurance that
the Company will be successful in obtaining additional financing during 1997.
The Company believes that maintaining its listing on Nasdaq is central to
its ability to raise additional funds as well as to provide liquidity to
investors. The conversion of the Beckman Note resulted in the Company meeting
Nasdaq listing requirements at year end 1996. The Company failed temporarily to
meet Nasdaq listing requirements at the end of the first quarter of 1997.
However, the proceeds from the first tranche of the April 1997 Financings will
allow the Company to meet Nasdaq listing requirements, on a proforma basis, for
the first quarter of 1997. The Company also expects not to be in compliance with
Nasdaq listing requirements at the end of the second quarter of 1997. However,
if the Company receives proceeds from the second tranche of the April 1997
Financings in July 1997, the Company believes it would meet Nasdaq listing
requirements, on a proforma basis, for the second quarter in 1997. In addition,
the Company believes the receipt of proceeds from the second tranche of the
April 1997 Financings would result in it meeting Nasdaq listing requirements
through year end 1997. If the Company receives proceeds from the third tranche
of the April 1997 Financings, the Company believes it will meet Nasdaq listing
requirements through the first quarter of 1998. Thereafter, the Company will be
required to generate sufficient revenue or raise additional capital to maintain
Nasdaq listing requirements.
The Company believes its cash requirements may increase in future periods
due to higher expenses. The Company expects to incur substantial additional
costs, including costs related to ongoing research and development activities,
either alone or in collaboration with strategic partners, clinical trials,
expansion of manufacturing, research and development and administrative
facilities, development of manufacturing capabilities, obtaining regulatory
approvals and establishing sales, marketing and distribution capabilities. The
Company's long-term capital requirements will depend on numerous factors,
including the progress of the Company's research and product development, the
timing and cost of obtaining regulatory approvals, the costs associated with
patents and other intellectual property rights, the levels of resources devoted
to the development of manufacturing and marketing capabilities and potential
collaborative partnerships. The Company intends to seek additional funding
through collaborative relationships and public or private financings. Other
methods of financing the acquisition of capital equipment, including lease
financing, may be utilized if available on attractive terms. Raising additional
funds from public or private financings may result in further dilution to
then-existing shareholders. The Company also may attempt to obtain funds through
arrangements with strategic partners or others that may require the Company to
relinquish rights to certain of its technologies, products or marketing
territories in exchange for funding. If adequate funds are not available from
these sources, the Company will be required to curtail its operations
significantly. No assurance can be given that any additional financing will be
available, or, if available, that it will be available on acceptable terms.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Company required by
this item are included herein and are listed under Item 14(a)(1) and (2).
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
Set forth below is biographical information for each person nominated and
each person whose term of office as a director will continue after the 1997
Annual Meeting of Stockholders.
27
<PAGE>
NOMINEES FOR ELECTION FOR A THREE-YEAR TERM EXPIRING AT THE 2000 ANNUAL MEETING
OF STOCKHOLDERS
CLASS I DIRECTORS
ROBERT CURRY, PH.D.
Robert Curry, Ph.D., age 51, has served as a Director of the Company since
May 1991. He has been a General Partner of the Sprout Group, a submanager of
various Merrill Lynch venture capital funds, since May 1991, and is currently
Vice President of DLJ Capital Corp., the management company for the Sprout
Group. From August 1984 to May 1991, Dr. Curry was employed at ML Venture
Capital, Inc., and ML R&D Management Inc., each a venture capital management
company, most recently as President of both companies. Dr. Curry is a Director
of Connective Therapeutics, Inc., Diatide, Inc. and Photon Technology
International, Inc. Dr. Curry holds a Ph.D. and an M.S. in Analytical Chemistry
from Purdue University and a B.S. in Physics from the University of Illinois.
DAVID RUBINFIEN
David Rubinfien, age 75, has served as a Director of the Company since
December 1990. From January 1989 to January 1991, Mr. Rubinfien was employed by
Systemix, Inc., a biotechnology company, most recently as President, Chief
Executive Officer and Chairman of the Board. From September 1985 to March 1989,
he was Chairman and Chief Executive Officer of Microgenics Corporation, a
biotechnology company. Mr. Rubinfien serves as a Director of Molecular
Biosystems, Inc., ChemTrak Incorporated, and Matritech Inc. He holds an M.S. in
Mathematics and Physics from the Illinois Institute of Technology and an M.B.A.
from the University of Chicago.
NOMINEE FOR ELECTION FOR A TWO-YEAR TERM EXPIRING AT THE 1999 ANNUAL MEETING OF
STOCKHOLDERS
CLASS III DIRECTOR
JOHN KAISER
John Kaiser, age 60, has served as President and Chief Executive Officer of
the Company since April 1990 and as a Director since June 1990. In March 1992,
he was appointed Chairman of the Board. In April 1997, Mr. Kaiser was
temporarily appointed Acting Secretary of the Company. From 1981 to 1990, Mr.
Kaiser was employed by Boehringer Mannheim, GmbH, a multinational medical
products corporation, where he most recently served as President of the
Physician Laboratory Products Division. From 1970 to 1981, Mr. Kaiser was
employed by Abbott Laboratories, a multinational medical products company, where
he served in various positions including Business Unit Manager, Small
Instruments Group and Marketing Manager, Noninfectious Diseases, of the
diagnostics division. Mr. Kaiser has been a Director of Instrumentation Metrics,
Inc. since December 1994. Mr. Kaiser holds a B.S. in Economics from the
University of Wisconsin.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 1998 ANNUAL MEETING OF STOCKHOLDERS
CLASS II DIRECTORS
PATRICK LATTERELL
Patrick Latterell, age 39, has served as a Director of the Company since
September 1989. Mr. Latterell is a General Partner of Venrock Associates, a
venture capital investment group, which he joined in April 1989. Prior to
joining Venrock Associates, Mr. Latterell was a Senior Vice President at
Rothschild Ventures, Inc., a venture capital investment group, and a general
partner of several affiliated venture capital partnerships. Mr. Latterell is a
Director of Vical Inc., Pharmacyclics, Inc. and Geron Corporation. Mr. Latterell
holds an M.B.A. from Stanford University and S.B. degrees in Biological Sciences
and Economics from the Massachusetts Institute of Technology.
28
<PAGE>
JOHN KAISER
If Mr. Kaiser is not elected at the 1997 Annual Meeting to serve as a Class
III director, he will continue to serve as a Class II director. Mr. Kaiser's
biography appears above.
EXECUTIVE OFFICERS
The names of the executive officers of the Company and certain biographical
information about them is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
John Kaiser 60 President, Chief Executive Officer and Acting Secretary
Lawrence J. Blecka, Ph.D. 52 Vice President, Research and Development
R. Jeffrey Green 54 Vice President, Quality Assurance and Regulatory Affairs
Donald B. Hawthorne 41 Vice President and Chief Financial Officer
Robert D. Testorff 51 Vice President, Human Resources
William M. Wright, III 49 Vice President, Operations
</TABLE>
LAWRENCE J. BLECKA, PH.D., age 52, has served as Vice President, Research
and Development of Biocircuits since July 1996. From December 1994 to July 1996,
Dr. Blecka served as Vice President of Product Development of Biocircuits. From
1992 to 1994, Dr. Blecka was Vice President, Research and Development for Sigma
Diagnostics, a division of the Sigma Chemical Co. unit of Sigma-Aldrich Corp., a
chemical company. From 1979 to 1991, Dr. Blecka held various positions with
Abbott Laboratories, Inc. From 1989 to 1991, he started and directed Abbott's
Nucleic Acid Probes Diagnostics business venture and from 1986 to 1988 Dr.
Blecka was general manager of Abbott's Cancer Business Unit. Other positions
held by Dr. Blecka at Abbott included Director of Research and Development,
Manager of TDx Reagent Development and Manager of Regulatory Affairs. Dr. Blecka
received his Ph.D. in Microbiology/Zoology from Southern Illinois University and
has held academic posts at the University of Illinois College of Medicine.
R. JEFFREY GREEN, age 54, joined Biocircuits as Vice President, Quality
Assurance and Regulatory Affairs in January 1996. From 1993 to 1995, Mr. Green
was Department Head and Director of Quality Assurance and Regulatory Affairs for
Sigma Diagnostics, a division of the Sigma Chemical Co. unit of Sigma-Aldrich
Corp., a chemical company. From 1992 to 1993, Mr. Green was Vice President,
Quality Assurance/Regulatory Affairs for the Dade Division of Baxter
Diagnostics, Inc., a manufacturer of IN VITRO diagnostic reagents and analytical
instrumentation; and from 1988 to 1992 he was Director, Quality and Regulatory
Affairs for Smith & Nephew Inc./Dyonics, a manufacturer of medical products. Mr.
Green received a B.S in Chemistry and Biology from the University of South
Carolina.
DONALD B. HAWTHORNE, age 41, has served as Vice President and Chief
Financial Officer of the Company since January 1991. Mr. Hawthorne served as
Secretary of the Company from March 1992 to April 1997. Mr. Hawthorne recently
relocated to the northeastern United States where he intends to pursue other
employment opportunities. See "Employment Agreements." In 1990 Mr. Hawthorne
served as Vice President, Finance and Administration and Chief Financial Officer
of Oclassen Pharmaceuticals, Inc., a pharmaceutical company. From 1985 to 1990,
he was employed by Genelabs Incorporated, a biotechnology company, most recently
as Chief Financial Officer. From 1983 to 1985, Mr. Hawthorne was employed by
Syntex Corporation, a pharmaceutical company, most recently as Financial
Planning Manager and Controller of the Ophthalmics Division. Mr. Hawthorne holds
an M.B.A. from Stanford University and a B.S. in Mathematics from Harvey Mudd
College.
29
<PAGE>
ROBERT D. TESTORFF, age 51, was appointed Vice President, Human Resources in
November 1996. Mr. Testorff had served as Director, Human Resources since
joining Biocircuits in February 1993. From 1990 to 1993, Mr. Testorff was
employed as an organizational development consultant for Howard Consulting,
serving clients in aerospace, biotechnology and software industries. From 1989
to 1990, he served as Director, Human Resources of Print Technology, a retail
start-up. From 1985 to 1989, he worked for Bernard Hodes, an Ominicom Group
Company, as a human resources management consultant for a variety of high
technology clients in the Bay area and Los Angeles basin. From 1973 to 1985, Mr.
Testorff was employed by Rockwell International where his last position was
Director, Human Resources, Telecommunications Group. Other employment included
Fairchild Industries. Mr. Testorff received a Juris Doctorate degree from
Southern Methodist University School of Law and a B.S. in History/Political
Science from Wichita State University.
WILLIAM M. WRIGHT III, age 49, joined Biocircuits as Vice President,
Operations in November 1995. From 1984 to 1995, Mr. Wright was Vice President of
Site Operations with Dade International Inc., a medical products manufacturing
company. Mr. Wright received a B.S. in Industrial Technology from California
State University at Long Beach.
A brief description of the educational background and business experience of
Mr. Kaiser appears above.
There are no family relationships between any of the directors, nominees or
executive officers of the Company.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
ten percent stockholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely upon a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1996, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with, except for the
following:
During fiscal 1996, Mr. Hewett, who at that time was an executive officer of
the Company, timely reported a transaction but reported an incorrect number of
shares owned at the end of the reporting month. This error was corrected on a
Form 4 report and by amending a previous Form 4 report.
During fiscal 1996, Dr. Ribi timely reported a transaction but inadvertently
understated the number of shares disposed of during the reporting month. This
error was corrected on a Form 4 and by amending a previous Form 4 report.
During fiscal 1996, Mr. Wright inadvertently failed to timely report one
transaction. This error was corrected on a Form 4 report.
ITEM 11: EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Directors of the Company currently receive no cash compensation for serving
on the Board or on Board committees. The members of the Board of Directors are
eligible for reimbursement for their
30
<PAGE>
expenses incurred in connection with attendance at Board meetings and committee
meetings in accordance with Company policy. Current directors of the Company
have each been granted options under the Company's Dual Option Plan or the
Restated 1992 Non-Employee Directors' Plan (the "Directors' Plan").
Each non-employee director of the Company receives stock option grants under
the Directors' Plan. Only non-employee directors of the Company or any affiliate
of the Company who is not otherwise an employee of the Company or any affiliate
are eligible to receive options under the Directors' Plan. Options granted under
the Directors' Plan are not intended by the Company to qualify as incentive
stock options under the Internal Revenue Code (the "Code").
Option grants under the Directors' Plan are non-discretionary. Upon initial
adoption of the Directors' Plan, each non-employee director was granted an
option to purchase 1,250 shares of Common Stock of the Company. Each person who,
in the future, becomes a non-employee directors of the Company shall, upon the
date of initial election to be a non-employee director, be granted an option to
purchase 3,750 shares of Common Stock of the Company. On November 1 of each
year, each non-employee director who has been a non-employee director for at
least one year is automatically granted an option to purchase 5,000 shares of
Common Stock of the Company. The exercise price of options granted under the
Directors' Plan is equal to 85% of the fair market value of the Common Stock
subject to such options on the date such option is granted. Options vest in
three equal annual installments, beginning on the date one year after the date
of the option grant, provided that the non-employee director has, during the
entire period prior to the date of such vesting installment, continuously served
as a non-employee director or as an employee of or consultant to the Company or
its affiliate. The term of options granted is ten years. In the event of the
dissolution or liquidation of the Company, merger or consolidation in which the
Company is not the surviving corporation, a reverse merger in which the Company
is the surviving corporation but the shares of the Company's Common Stock
outstanding immediately preceding the merger are converted by virtue of the
merger into other property, or any capital reorganization in which more than 50%
of the shares of the Company entitled to vote are exchanged, the vesting of any
outstanding options under the Directors' Plan shall accelerate and such options
shall terminate if unexercised prior to the consummation of the transaction.
During the last fiscal year, the Company granted options covering 5,000
shares to each non-employee director of the Company, at an exercise price per
share of $2.44. The fair market value of the such Common stock on the date of
the grant was $2.875 per share (based on the closing bid price reported in the
Nasdaq National Market for the date of the grant). As of April 16, 1997, no
options had been exercised under the Director's Plan.
31
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY OF COMPENSATION
The following table shows for the fiscal years ending December 1996, 1995
and 1994, compensation awarded or paid to, or earned by the Company's Chief
Executive Officer and its four other executive officers whose total annual
salary and bonuses exceeded $100,000 at December 31, 1996 (the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL -------------
COMPENSATION SECURITIES ALL OTHER
------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) OPTIONS (#) ($)
- -------------------------------------------------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
John Kaiser ...................................... 1996 200,000 0 22,157(1)
President and Chief Executive Officer 1995 186,408 202,550 19,989(1)
1994 161,700 11,250(2) 19,914(1)
Donald B. Hawthorne(3) ........................... 1996 155,000 0 0
Vice President and Chief Financial Officer 1995 146,693 72,400 0
1994 122,249 13,125(2) 0
Byron Hewett(4) .................................. 1996 150,000 0 0
Vice President, Sales and Marketing 1995 144,496 45,000 34,695(5)
1994 130,000 13,750(2) 25,600(5)
Lawrence J. Blecka ............................... 1996 175,000 0 7,384(5)
Vice President, Product Development 1995 157,000 67,000 16,620(5)
1994 11,976(6) 18,750 0
William Wright III ............................... 1996 137,040 0 41,858(5)
Vice President, Operations 1995 18,711(7) 0 0
1994 0 0 0
</TABLE>
- ------------------------
(1) Reflects forgiveness of the principal of and interest on an outstanding loan
made by the Company to Mr. Kaiser in connection with relocation expenses.
See "Certain Transactions."
(2) Options granted in 1993 were canceled and regranted in 1994 at the then fair
market value.
(3) Recently relocated to the northeastern United States. See "Employment
Agreements."
(4) Resigned from the Company in April 1997.
(5) Relocation expenses associated with commencement of employment.
(6) Employment commenced in December 1994.
(7) Employment commenced in November 1995.
32
<PAGE>
STOCK OPTION GRANTS AND EXERCISES
The Company grants options to its executive officers under the Dual Option
Plan. As of March 15, 1997, options to purchase a total of 1,038,985 shares were
outstanding under the Dual Option Plan, and options to purchase 529,114 shares
remained available for grant thereunder. Option grants under the Dual Option
Plan typically have an exercise price equal to the fair market value of the
Company's Common Stock on the date of the grant, vest 20% after one year and 5%
every three months thereafter, and expire after ten years.
The following table sets forth information with respect to the number and
value of vested and unvested options held at December 31, 1996 for each of the
Named Executive Officers. No options were granted to or exercised by the Named
Executive Officers in the fiscal year ended December 31, 1996.
FISCAL YEAR 1996
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1996 AT DECEMBER 31, 1996
NAME EXERCISABLE/UNEXERCISABLE(#) EXERCISABLE/UNEXERCISABLE($)(1)
- ---------------------------------------- ------------------------------ ------------------------------
<S> <C> <C>
John Kaiser............................. 73,263/143,035 5,275/0
Donald B. Hawthorne..................... 38,126/53,024 11,869/0
Byron Hewett............................ 23,312/35,438 0/0
Lawrence J. Blecka...................... 26,350/59,400 0/0
William Wright III...................... 9,000/47,250 0/0
</TABLE>
- ------------------------
(1) Based on the fair market value of $2.91 per share, the closing price on the
Nasdaq National Market on December 31, 1996, minus the exercise price,
multiplied by the number of shares underlying the options.
EMPLOYMENT AGREEMENTS
In January 1997, the Company and Mr. Hawthorne entered into an employment
agreement whereby the Company will employ Mr. Hawthorne as Vice President and
Chief Financial Officer of the Company until the earlier of September 30, 1997
or the termination, either voluntary or for cause, of Mr. Hawthorne's
employment, (the "Employment Term"). During the Employment Term, Mr. Hawthorne
is permitted to devote a reasonable amount of time to pursue other employment,
if consistent with Mr. Hawthorne's responsibilities to the Company. Pursuant to
the employment agreement, Mr. Hawthorne's compensation during the Employment
Term will be his base salary in effect prior to entering into the employment
agreement until July 1, 1997, and 50% of his base salary thereafter. Following
the Employment Term, Mr. Hawthorne will serve as a consultant to the Company for
two years with no compensation except for the continued vesting of stock
options.
In April 1997, the Company granted employee retention packages to certain
Company employees, including Mr. Kaiser, Mr. Hawthorne, Mr. Wright and Mr.
Blecka. The retention packages for officers provide for a lump sum payment to be
made to each officer, equal to twelve months salary, if the officer is employed
on the closing date of a merger or sale of the Company occurring before March
20, 1998.
33
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION (1)
COMPENSATION PROGRAM
The Compensation Committee of the Board of Directors (the "Compensation
Committee") consists of Dr. Curry (Chairman) and Mr. Rubinfien, each currently
an outside Director of the Company. Mr. Kaiser, the President and Chief
Executive Officer of the company, serves the Compensation Committee solely in an
advisory capacity and takes no part in the deliberation or determination of his
own compensation. The Board of Directors has delegated to the Compensation
Committee the authority to make recommendations to the Board concerning the
salaries and incentive compensation for employees and consultants who are not
also directors of the Company. In addition, the Company's Disinterested Director
Compensation Committee, which in 1996 consisted of Drs. Curry and Hixson and
Messrs. Latterell and Rubinfien, all outside Directors at that time, administers
the Company's Dual Stock Option Plan with respect to employees and consultants
who are also Directors of the Company. Together, the two Committees are referred
to herein as the "Committees."
The Company's executive compensation programs are designed to attract and
retain executives capable of leading the Company to meet its business objectives
and to motivate them to enhance long term stockholder value. Annual compensation
of the officers can consist of a mix of base salary, a cash bonus and stock
option grants. In determining the total compensation and the mix of the various
elements, the Committees consider a variety of factors, both personal and
corporate. These factors include the compensation paid by comparable companies
to individuals in comparable positions, the contributions of each officer to the
progress of the Company and the progress of the Company toward its short term
and long term objectives.
For purposes of establishing competitive executive compensation, the
Compensation Committee annually reviews the results of the "Biotechnology
Compensation and Benefits Study" conducted by Radford Associates/Alexander &
Alexander Consulting Group (the "Radford Study"), which provides information on
the compensation of management at biotechnology and other health care companies
nationwide. The data available in the Radford Study is broken down by company
size, and also separately provides data for companies located in the San
Francisco Bay Area. The Compensation Committee uses a mix of data from companies
with fewer than 100 employees from the national study and data from the San
Francisco Bay Area study. It is the goal of the Compensation Committee to set
competitive compensation levels generally in the middle range of competitive
companies of comparative size in similar industries.
Annual performance reviews for executive officers are conducted by the
Committees, comparing actual Company progress against detailed annual plans.
Elements of the plan such as progress on product development, financial matters,
including attracting capital and expense control, strategic planning, including
attracting capital and expense control. Strategic planning, including corporate
collaborations, and organization development are considered, with product
development, financing and sales of products being the most important factors.
The Committees then develop recommendations for each executive officer that are
presented to the full Board for review and approval. Following a complete and
thorough review of the Company's progress in 1995, including the filing and
approval of several 510(k) applications, in January of 1996 the Committee
recommended and the Board approved a merit increase for all officers that ranged
from 6.2% to 11.5%. In addition, Dr. Ribi, who was at that time Senior Vice
President and Chief Scientific Officer of the Company, was given a one time
adjustment of 8.5% to bring his salary more into line with competitive salaries
as represented by the Radford study data. Following a company wide performance
review by the Compensation committee and the Committee's particular
consideration to the
- ------------------------
(1) The material in this report is not "soliciting material," is not deemed
filed with the SEC, and is not to be incorporated by reference into any
filing of the Company under the Securities Act of 1933 or the Exchange Act,
whether made before or after the date hereof and irrespective of any general
incorporation language contained in any filing.
34
<PAGE>
need to retain employees and remain competitive, a merit increase was also
implemented in January 1996 for all non officer employees.
LIMITATION ON DEDUCTION OF COMPENSATION PAID TO CERTAIN EXECUTIVE OFFICERS
Section 162(m) of the Internal Revenue Code (the "Code") limits the Company
to a deduction for federal income tax purposes of no more than $1 million of
compensation paid to certain Named Executive Officers in a taxable year.
Compensation above $1 million may be deducted if it is "performance-based
compensation" within the meaning of the Code. The Committees believe that at the
present time it is quite unlikely that the compensation paid to any Named
Executive Officer in a taxable year which is subject to the deduction limit will
exceed $1 million. Therefore, the Committees have not yet established a policy
of determining which forms of incentive compensation awarded to its Named
Executive Officers shall be designed to qualify as "performance-based
compensation." The Committees intend to continue to evaluate the effects of the
statute and any Treasury regulations and to comply in the future with Code
Section 162(m) to the extent consistent with the best interests of the Company.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER IN 1996
Mr. Kaiser is evaluated by the Disinterested Director Compensation Committee
based on the criteria outlined above for all other executive officers of the
Company, including his contributions for the prior year, his success in managing
and motivating the Company's employees, and the challenges to be faced in the
year ahead, as well as the desire to offer a competitive salary. The
Disinterested Director Compensation Committee have set Mr. Kaiser's total annual
compensation, including salary and option grants, at a level they believe is
competitive with that of other Chief Executive Officers at other companies in
the biotechnology industry, although in the middle of the range. In addition,
Mr. Kaiser's salary and option grants were set at a level the Disinterested
Director Compensation Committee believe will properly motivate and retain Mr.
Kaiser as the Chief Executive Officer of the Company.
Mr. Kaiser earned $200,000 in 1996 as his annual base salary, a 7.3%
increase over 1995. Mr. Kaiser received no other compensation, bonuses or
options during 1996.
David Rubinfien
Robert Curry, Ph.D.
Patrick Latterell
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
During 1996, Dr. Curry and Mr. Rubinfien served as members of the
Compensation Committee. The members of the Disinterested Directors Compensation
Committee during 1996 were Drs. Curry and Hixson and Messrs. Latterell and
Rubinfien. None of these individuals has ever served as an officer or employee
of the Company. In June 1995, the Company issued Series A Preferred Stock and
warrants to purchase Series A Preferred Stock in a private placement. In January
1996, the Company amended the warrants issued in June 1995. The Sprout Group and
Venrock Associates participated in these financings on the same terms and
conditions as the other purchasers. Dr. Curry is a general partner of the Sprout
Group and Mr. Latterell is a General Partner of Venrock Associates. In January
1996, the Company issued additional warrants to purchase Series A Preferred
Stock in a private placement. Venrock Associates and Dr. Rubinfien participated
in this financing on the same terms and conditions as the other purchasers. In
November 1996, February 1997 and March 1997, the Company amended the outstanding
1995 Warrants (the "Extended Warrants"). The Sprout Group and Venrock
Associates, of which Dr. Curry and Mr. Latterell are General Partners,
respectively, held Extended Warrants. In April 1997, the Company issued Common
Stock in a private placement. The Sprout Group participated in this financing on
the same
35
<PAGE>
terms and conditions as the other purchasers. See Item 13: Certain Relationships
and Related Transactions.
PERFORMANCE MEASUREMENT COMPARISON (1)
The following chart shows total stockholder return of the H&Q Health Care
Sector Index, the Wilshire 5000 Index and the Company since May 29, 1992: (2)
BIOCIRCUITS CORPORATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
May 29, 1992 Dec '92 Dec '93 Dec '94 Dec '95 Dec '96
<S> <C> <C> <C> <C> <C> <C> <C>
Biocircuits 100.00 135.00 85.00 15.00 40.00 14.53
H&Q Heatlhcare Sector 100.00 108.62 84.41 85.14 143.08 147.69
Wilshire 5000 Total
Return 100.00 108.30 120.54 120.45 164.29 199.18
Prices
Biocircuits 20.00 27.00 17.00 3.00 8.00 2.91
H&Q Healthcare Sector 358.16 389.04 302.34 304.92 512.44 528.96
Wilshire 5000 Total
Return 11.20 12.13 13.50 13.49 18.40 22.31
</TABLE>
- ------------------------
(1) The material in this section is not "soliciting material," is not deemed
filed with the SEC, and is not to be incorporated by reference into any
filing of the Company under the Securities Act of 1933 or the Exchange Act,
whether made before or after the date hereof and irrespective of any general
incorporation language contained in any filing.
(2) The total return on investment (change in year end stock price plus
reinvested dividends) for the Company, the H&Q Health Care Sector Stock
Index and the Wilshire 5000 Stock Index, based on May 29, 1992 equals 100.
The performance of the Company's stock over the period shown is not
necessarily indicative of future performance. May 29, 1992 was the last
trading day of the month of the Company's Initial Public Offering on May 14,
1992.
36
<PAGE>
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock and Series A Convertible Preferred Stock
("Series A Stock") as of April 16, 1997, by: (i) each stockholder who is known
by the Company to own beneficially more than 5% of the Common Stock or Series A
Stock; (ii) each executive officer of the Company named in the Summary
Compensation Table; (iii) each director of the Company; and (iv) all directors
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES OF
OF COMMON STOCK SERIES A CONVERTIBLE
BENEFICIALLY PERCENT BENEFICIALLY PREFERRED STOCK PERCENT BENEFICIALLY
BENEFICIAL OWNER OWNED(1) OWNED(1) BENEFICIALLY OWNED(2) OWNED(2)
- ----------------------------------- ----------------- ---------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Robert Curry, Ph.D. (3) 2,559,233 20.83% 8,000,000 64.27%
c/o Biocircuits Corporation
1324 Chesapeake Terrace
Sunnyvale, CA 94089
Entities Affiliated with The Sprout 2,559,233 20.83% 8,000,000 64.27%
Group (3)
World Financial Center
North Tower, 27th Floor
New York, NY 10281
Beckman Instruments, Inc. (4) 1,334,072 12.70% -- --
2500 Harbor Boulevard
Fullerton, CA 92834-3100
Entities affiliated with Weiss, 1,300,120 12.40% 811,900 6.52%
Peck & Greer Venture Associates
II, L.P. (5)
555 California Street, Suite 4760
San Francisco, CA 94104
Entities affiliated with Special 1,288,334 11.92% -- --
Situations Fund III, L.P. (6)
153 East 53rd Street
51st Floor
New York, NY 10022-4611
H&Q Biocircuits Investors, L.P. (7) 932,192 8.88% -- --
Patrick Latterell (8) 907,174 8.22% 2,992,622 24.04%
c/o Venrock Associates
755 Page Mill Road, Suite A230
Palo Alto, CA 94304
Entities affiliated with Venrock 900,570 8.17% 2,992,622 24.04%
Associates (9)
30 Rockefeller Plaza, Room 5508
New York, NY 10112
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES OF
OF COMMON STOCK SERIES A CONVERTIBLE
BENEFICIALLY PERCENT BENEFICIALLY PREFERRED STOCK PERCENT BENEFICIALLY
BENEFICIAL OWNER OWNED(1) OWNED(1) BENEFICIALLY OWNED(2) OWNED(2)
- ----------------------------------- ----------------- ---------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Entities affiliated with Sanderling 896,408 8.61% -- --
(10)
2730 Sand Hill Road, Suite 200
Menlo Park, CA 94025
John Kaiser (11) 222,144 2.14% 70,000 *
c/o Biocircuits Corporation
1324 Chesapeake Terrace
Sunnyvale, CA94089
Hans O. Ribi, Ph.D. (12) 109,173 1.06% -- --
c/o Biocircuits Corporation
1324 Chesapeake Terrace
Sunnyvale, CA 94089
Lawrence J. Blecka (13) 91,121 * -- --
Byron Hewett (14) 68,385 * 103,794 *
Donald B. Hawthorne (15) 59,251 * -- --
William M. Wright, III (16) 29,881 * 37,900 *
David Rubinfien (17) 25,416 * 35,000 *
R. Jeffrey Green (18) 10,937 * -- --
Robert D. Testorff (19) 7,484 * -- --
All executive officers and 4,090,199 30.64% 11,239,316 90.30%
directors as a group (11 persons)
(See footnotes 1-19)
</TABLE>
- ------------------------
* Less than 1%.
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G, if any, filed with the
Securities Exchange Commission (the "SEC"). Common Stock amounts include
Common Stock issuable upon conversion of outstanding Series A Stock. Unless
otherwise indicated in the footnotes to this table and subject to community
property laws where applicable, each of the stockholders named in this table
has sole voting and investment power with respect to the shares indicated as
beneficially owned. Applicable percentages are based on 10,281,321 shares of
Common Stock outstanding on April 16, 1997, adjusted as required by rules
promulgated by the SEC. Includes shares which certain executive officers,
directors and principal stockholders of the Company have the right to
acquire within 60 days after the date of this table pursuant to outstanding
options ("vested options") and warrants.
(2) Numbers based upon information supplied by officers, directors and principal
stockholders and Schedules 13D and 13G, if any, filed with the SEC. Unless
otherwise indicated in the footnotes to this table and subject to community
property laws where applicable, each of the stockholders named in this table
has sole voting and investment power with respect to the shares indicated as
beneficially owned. Numbers are based on 12,446,103 shares of Series A Stock
outstanding on April 16, 1997, adjusted as required by rules promulgated by
the SEC. The Series A Stock is convertible into Common Stock at a ratio of
four shares of Series A Stock for one share of Common Stock.
38
<PAGE>
(3) Includes 16,492 shares of Common Stock held of record by DLJ Capital
Corporation ("DLJ"), 310,440 shares of Series A Stock held of record by DLJ,
198,116 shares of Common Stock held of record by Sprout Capital VII, L.P.
("SCVII"), 3,729,240 shares of Series A Stock held of record by SCVII,
104,142 shares of Common Stock held of record by Sprout Capital VI, L.P.
("SCVI"), 1,960,320 shares of Series A Stock held of record by SCVI, 235,067
shares of Common Stock held of record by ML Venture Partners II, L.P., ("ML
Venture"), 2,000,000 shares of Series A Stock held of record by ML Venture,
all of which Robert Curry, Ph.D., a director of the Company and a general
partner of the Sprout Group (the submanager of ML Venture), disclaims
beneficial ownership of, except to the extent of any partnership interest
therein, and 5,416 shares subject to stock options held by Dr. Curry,
exercisable within 60 days of the date of this table, all of which options
are assigned to ML Venture upon exercise.
(4) Includes 222,345 shares of Common Stock issuable upon the exercise of
currently exercisable warrants held of record by Beckman Instruments.
(5) Includes 80,093 shares of Common Stock held of record by WPG Enterprise
Fund, L.P. ("WPGEF"), 433,766 shares of Series A Stock held of record by
WPGEF, 57,887 shares of Common Stock held of record by Weiss, Peck & Greer
Venture Associates II, L.P. ("WPGAII"), 310,160 shares of Series A Stock
held of record by WPGVAII, 12,685 shares of Common Stock held of record by
Weiss, Peck & Greer Venture Associates II (Overseas) L.P. ("WPGVAII
Overseas"), 67,974 shares of Series A Stock held of record by WPGVAII
Overseas, 97,750 shares of Common Stock held of record by WPG Life Sciences
Fund, L.P., 15,250 shares of Common Stock held of record by WPG
Institutional Life Sciences, L.P., and 833,480 shares of Common Stock held
of record by Weiss, Peck & Greer, L.L.C.
(6) Includes 135,834 shares of Common Stock held of record by Special Situations
Cayman Fund, L.P. ("SSCF"), 63,750 shares of Common Stock issuable upon the
exercise of warrants held of record by SSCF subject to Stockholder approval
of Proposal 2, 403,750 shares of Common Stock held of record by Special
Situations Fund III, L.P. ("SSFIII"), 255,000 shares of Common Stock
issuable upon the exercise of warrants held of record by SSFIII subject to
Stockholder approval of Proposal 2, 212,500 shares of Common Stock held of
record by Special Situations Private Equity Fund, L.P. ("SSPEF"), 212,500
shares of Common Stock issuable upon the exercise of warrants held of record
by SSPEF subject to Stockholder approval of Proposal 2.
(7) Includes 212,500 shares of Common Stock issuable upon the exercise of
warrants held of record by H&Q Biocircuits Investors, L.P. subject to
Stockholder approval of Proposal 2.
(8) Includes 152,415 shares of Common Stock held of record by Venrock Associates
("Venrock"), 2,423,282 shares of Series A Stock held of record by Venrock,
569,340 shares of Series A Stock held of record by Venrock Associates II,
L.P. ("Venrock II"), of which Mr. Latterell, a general partner of Venrock
and Venrock II, disclaims beneficial ownership except to the extent of his
partnership interests therein, 1,188 shares of Common Stock held directly by
Mr. Latterell, and 5,416 shares of Common Stock subject to stock options
granted to Mr. Latterell exercisable within 60 days of the date of this
table.
(9) Includes 152,415 shares of Common Stock held of record by Venrock, 2,423,282
shares of Series A Stock held of record by Venrock, 569,340 shares of Series
A Stock held of record by Venrock II, of which Mr. Latterell, a general
partner of Venrock and Venrock II, disclaims beneficial ownership except to
the extent of his partnership interests therein.
(10) Includes 439,631 shares of Common Stock held of record by Sanderling
Venture Partners III, L.P. ("SVPIII"), 74,464 shares of Common Stock
issuable upon the exercise of warrants held of record by SVPIII subject to
Stockholder approval of Proposal 2, 227,733 shares of Common Stock held of
record by Sanderling III Limited Partnership ("SIIILP"), 38,573 shares of
Common Stock issuable upon the exercise of warrants held of record by SIIILP
subject to Stockholder approval of Proposal 2,
39
<PAGE>
75,766 shares of Common Stock held of record by Sanderling III Biomedical,
L.P. ("SIIIB"), 12,833 shares of Common Stock issuable upon the exercise of
warrants held of record by SIIIB subject to Stockholder approval of Proposal
2, 25,778 shares of Common Stock held of record by Sanderling Ventures
Management ("SVM"), 1,630 shares of Common Stock issuable upon the exercise
of warrants held of record by SVM subject to Stockholder approval of
Proposal 2.
(11) Includes 99,502 shares of Common Stock and 70,000 shares of Series A Stock
held of record by the Kaiser Living Trust under a Trust dated March 7, 1991
(the "Kaiser Trust"), 21,250 shares of Common Stock issuable upon the
exercise of warrants held of record by the Kaiser Trust subject to
Stockholder approval of Proposal 2, and 83,892 shares of Common Stock
subject to stock options held by Mr. Kaiser exercisable within 60 days of
the date of this table.
(12) Includes 2,500 of Common Stock shares subject to stock options held by Dr.
Ribi's wife, Mary Anne Ribi, respectively, exercisable within 60 days of the
date of this table.
(13) Includes 30,575 shares of Common Stock subject to stock options held by Dr.
Blecka exercisable within 60 days of the date of this table.
(14) Includes 26,687 shares of Common Stock subject to stock options held by Mr.
Hewett exercisable within 60 days of the date of this table.
(15) Includes 16,568 shares of Common Stock beneficially owned by Donald
Hawthorne and Dianne Ritter Hawthorne and 42,683 shares of Common Stock
subject to stock options held by Mr. Hawthorne exercisable within 60 days of
the date of this table.
(16) Includes 37,900 shares of Series A Stock held of record by Mr. Wright and
14,906 shares of Common Stock subject to stock options held by Mr. Wright
exercisable within 60 days of the date of this table.
(17) Includes 7,916 shares of Common Stock subject to stock options held by Mr.
Rubinfien exercisable within 60 days of the date of this table.
(18) Includes 10,937 shares of Common Stock subject to stock options held by Mr.
Green exercisable within 60 days of the date of this table.
(19) Includes 7,484 shares of Common Stock subject to stock options held by Mr.
Testorff exercisable within 60 days of the date of this table.
40
<PAGE>
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND 5% STOCKHOLDERS
In January 1996, the Company amended warrants issued in 1995 (the "1995
Warrants") to purchase 2,666,514 shares of Series A Preferred Stock and closed a
private placement (the "January 1996 Private Placement") pursuant to which the
Company issued new warrants to purchase 2,852,998 shares of Series A Preferred
Stock. Mr. Kaiser, Mr. Hewett, Dr. Blecka, and Mr. Hawthorne, officers and in
some cases, directors of the Company, each received amended 1995 Warrants on the
same terms and conditions as the other participants. In addition, Dr. Ribi, a
director of the Company, and Venrock Associates, of which Mr. Latterell, a
director of the Company is a General Partner, also received amended 1995
Warrants on the same terms and conditions as the other participants. Mr. Kaiser
and Mr. Wright, officers of the Company, and Mr. Rubinfien, a director of the
Company, and Venrock Associates each received warrants in the January 1996
Private Placement on the same terms and conditions as the other purchasers.
In November 1996, February 1997, and March 1997, the Company extended the
term of outstanding 1995 Warrants to purchase an aggregate of 3,513,213 shares
of Series A Preferred Stock (the "Extended Warrants"). As a result of these
extensions, the Extended Warrants were exercisable until April 15, 1997, at
which time they expired. Mr. Hawthorne, an officer of the Company, and Dr. Ribi
and Mr. Rubinfien, directors of the Company, all held 1995 Warrants that became
Extended Warrants, except that Extended Warrants that were held by Dr. Ribi were
not extended in March 1997. In addition, Venrock Associates and the Sprout
Group, of which Mr. Latterell and Dr. Curry, both of whom are directors of the
Company, are General Partners, respectively, held 1995 Warrants that became
Extended Warrants.
In April 1997, the Company closed the first tranche of a private placement
of the Company's Common Stock which consisted of the sale of up to 2,500,000
shares of its Common Stock at $1 per share, to be issued in three tranches, with
the second and third tranches subject to the Company's satisfaction of certain
milestones during the second quarter of fiscal year 1997 and during the second
half of fiscal year 1997 (the "Common Stock Financing"). Also on April 15, 1997,
the Company closed the first tranche of a private placement of the Company's
securities which consisted of the sale of up to 5,447,000 units ("Units") at $1
per Unit, each consisting of one share of Common Stock and one warrant
("Warrant") to purchase one share of Common Stock at an exercise price of $0.75
per share, to be issued in two tranches, with the second tranche subject to the
Company's satisfaction of certain milestones during the second quarter of fiscal
year 1997 (the "Units Financing"). Affiliates of the Sprout Group, a greater
than 5% holder of the Company's Common Stock of which Robert Curry, a director
of the Company, is a general partner, purchased 425,000 shares of Common Stock
in the Common Stock Financing, and agreed to purchase 950,000 and 625,000
additional shares in the second and third tranches of the Common Stock
Financing, respectively. John Kaiser, the Company's Chairman, President, Chief
Executive Officer, and Acting Secretary purchased 21,250 Units in the first
tranche of the Units Financing, and has agreed to purchase an additional 78,750
Units in the second tranche of the Units Financing. In addition, the following
holders of 5% or more of the Company's Common Stock also participated in the
Units offering: entities affiliated with Special Situations: 531,250 Units in
the first tranche, 1,968,750 Units in the second tranche; entities affiliated
with Sanderling: 127,500 Units in the first tranche, 472,500 Units in the second
tranche; and entities affiliated with H&Q Biocircuits Investors L.P.: 212,500
Units in the first tranche, 787,500 Units in the second tranche.
41
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) INDEX TO FINANCIAL STATEMENTS
The financial statements required by this item are submitted in a separate
section beginning on page 45 of this report.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................................................... 44
Balance Sheets at December 31, 1995 and 1996............................................................... 45
Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and for the period March 7,
1989 (inception) through December 31, 1996............................................................... 46
Statement of Stockholders' Equity for the period from March 7, 1989 (inception) through December 31,
1996..................................................................................................... 47
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and for the period March 7,
1989 (inception) through December 31, 1996............................................................... 49
Notes to Financial Statements.............................................................................. 50
</TABLE>
(a)(2) INDEX TO FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedule II--Valuation and Qualifying Accounts is
included on page 63 of this report.
All other financial statement schedules are omitted because they are not
applicable, or the information is included in the financial statements or notes
thereto.
(a)(3) EXHIBITS
See Index to Exhibits beginning on page 64.
(b) REPORTS ON FORM 8-K
None
42
<PAGE>
BIOCIRCUITS CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report on Form 10-K/A to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Sunnyvale, County of Santa Clara, State of California, on the 30th day of April,
1997.
BIOCIRCUITS CORPORATION
By: /s/ JOHN KAISER
-----------------------------------------
John Kaiser
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K/A has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board,
President and Chief
/s/ JOHN KAISER Executive Officer
- ------------------------------ (Principal Executive April 30, 1997
John Kaiser Officer) and Acting
Secretary
Vice President, Chief
/s/ DONALD HAWTHORNE Financial Officer
- ------------------------------ (Principal Financial and April 30, 1997
Donald Hawthorne Accounting Officer)
/s/ ROBERT CURRY*
- ------------------------------ Director April 30, 1997
Robert Curry
/s/ PATRICK LATTERELL*
- ------------------------------ Director April 30, 1997
Patrick Latterell
/s/ DAVID RUBINFIEN*
- ------------------------------ Director April 30, 1997
David Rubinfien
*By: /s/ JOHN KAISER
-------------------------
John Kaiser,
ATTORNEY-IN-FACT
43
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Biocircuits Corporation
We have audited the accompanying balance sheets of Biocircuits Corporation
(a development stage company) as of December 31, 1995 and 1996, the related
statements of operations and cash flows for each of the three years in the
period ended December 31, 1996 and for the period from March 7, 1989 (inception)
through December 31, 1996, and the statement of stockholders' equity for the
period from March 7, 1989 (inception) through December 31, 1996. 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 Biocircuits Corporation (a
development stage company) at December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, and for the period from March 7, 1989 (inception) through
December 31, 1996 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Biocircuits Corporation will continue as a going concern. As more fully
described in Note 1, the Company has incurred recurring losses from operations
and has not generated significant revenues from product sales. This raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans as to these matters are also described in Note 1. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability or classification of assets or the amounts
and classification of liabilities that might result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Palo Alto, California
January 13, 1997
44
<PAGE>
BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 6,028 $ 4,944
Short-term investments.................................................................. 605 --
Accounts receivable (net of allowance for doubtful accounts of $43 in 1996)............. -- 201
Inventory............................................................................... -- 928
Prepaid inventory....................................................................... 418 375
Prepaid expenses and other current assets............................................... 544 381
Restricted cash......................................................................... 93 102
---------- ----------
Total current assets...................................................................... 7,688 6,931
Property and equipment, net of accumulated depreciation and amortization of $1,671 ($1,298
in 1995)................................................................................ 975 1,375
Restricted cash........................................................................... 479 376
Other assets.............................................................................. 125 44
---------- ----------
$ 9,267 $ 8,726
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 547 $ 1,108
Accrued liabilities..................................................................... 205 208
Accrued compensation and related expenses............................................... 198 142
Current portion of capital lease obligations............................................ 547 118
---------- ----------
Total current liabilities................................................................. 1,497 1,576
Long-term portion of capital lease obligations............................................ 114 72
Long-term convertible debt................................................................ 3,593 --
Commitments and contingencies.............................................................
Stockholders' equity:
Preferred stock, $0.001 par value, 40,000,000 shares authorized, issuable in series:
Series A convertible, 30,000,000 shares designated, 12,455,137 issued and outstanding
(12,999,000 shares issued and outstanding at December 31, 1995), aggregate liquidation
preference of $6,850,325.............................................................. 6,320 9,903
Common stock, $0.001 par value, 70,000,000 shares authorized, 8,589,930 shares issued
and (3,673,390 shares issued and outstanding at December 31, 1995).................... 35,172 48,784
Deficit accumulated during the development stage........................................ (37,200) (51,548)
Notes receivable secured by common stock................................................ (99) (15)
Deferred compensation and other......................................................... (130) (46)
---------- ----------
Total stockholders' equity................................................................ 4,063 7,078
---------- ----------
$ 9,267 $ 8,726
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
45
<PAGE>
BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM MARCH
7, 1989
YEAR ENDED DECEMBER 31, (INCEPTION)
-------------------------------- THROUGH DECEMBER
1994 1995 1996 31, 1996
--------- --------- ---------- ------------------
<S> <C> <C> <C> <C>
REVENUES:
Product sales............................................. $ -- $ -- $ 421 $ 421
OPERATING COSTS AND EXPENSES:
Cost of sales............................................. -- -- 2,310 2,310
Research and development.................................. 6,086 5,669 7,081 34,357
Sales, general and administrative......................... 2,239 2,686 5,416 16,278
--------- --------- ---------- --------
8,325 8,355 14,807 52,945
Loss from operations........................................ (8,325) (8,355) (14,386) (52,524)
Interest income............................................. 283 317 345 2,348
Interest and other expense.................................. (166) (199) (307) (1,372)
--------- --------- ---------- --------
Net loss.................................................... $ (8,208) $ (8,237) $ (14,348) $ (51,548)
--------- --------- ---------- --------
--------- --------- ---------- --------
Net loss per share.......................................... $ (3.30) $ (2.89) $ (2.71)
--------- --------- ----------
--------- --------- ----------
Shares used in computing net loss per share................. 2,489 2,849 5,299
--------- --------- ----------
--------- --------- ----------
</TABLE>
See accompanying notes.
46
<PAGE>
BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE PERIOD MARCH 7, 1989 (INCEPTION) THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NOTES
CONVERTIBLE DURING THE RECEIVABLE DEFERRED
PREFERRED COMMON DEVELOPMENT SECURED BY COMPENSATION
STOCK STOCK STAGE COMMON STOCK AND OTHER
----------- ----------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
Issuance of 1,887,500 shares of Series A convertible
preferred stock at $2.00 per share for cash or in
exchange for convertible promissory notes and accrued
interest, net of issuance costs of $99.................. $ 3,676 $ -- $ $ -- $ --
Issuance of 2,616,514 shares of Series B convertible
preferred stock at $2.60 per share for cash, net of
issuance costs of $33................................... 6,770 -- -- -- --
Issuance of 1,126,003 shares of common stock for
conversion of Series A and B convertible preferred
stock................................................... (10,446) 10,446 -- -- --
Issuance of 535,817 shares of common stock at $20.00 per
share for cash, net of issuance costs of $1,411......... -- 9,305 -- -- --
Issuance of 437,500 shares of common stock at $22.00 per
share for cash, net of issuance costs of $984........... -- 8,641 -- -- --
Issuance of 163,650 shares of common stock at $22.40 per
share for cash, net of issuance costs of $100........... -- 3,566 -- -- --
Issuance of 176,500 shares of common stock at $.48 to $.80
per share for cash and notes secured by common stock.... -- 101 -- (99) --
Issuance of options to purchase 1,354 shares of common
stock for services rendered............................. -- 11 -- -- --
Issuance of warrants to purchase 17,125 shares of common
stock................................................... -- 74 -- -- --
Issuance of 28,883 shares of common stock upon exercise of
stock options at $.48 to $25.60 per share for cash...... -- 53 -- -- --
Issuance of 6,219 shares of common stock through the
Employee Stock Purchase Plan at $14.44 to $18.72 per
share for cash.......................................... -- 92 -- -- --
Deferred compensation resulting from grant of options
through May 14, 1992.................................... -- 177 -- -- (177)
Amortization of deferred compensation..................... -- -- -- -- 125
Net loss.................................................. -- -- (20,755) -- --
----------- ----------- ------------ ----- -----
Balances, December 31, 1993............................... -- 32,466 (20,755) (99) (52)
Issuance of 11,178 shares of common stock primarily upon
exercise of stock options at $.48 to $25.60 per share
for cash................................................ -- 12 -- -- --
Issuance of 7,856 shares of common stock through the
Employee Stock Purchase Plan at $2.12 to $14.44 per
share for cash.......................................... -- 60 -- -- --
Amortization of deferred compensation and unrealized loss
on available-for-sale investments....................... -- -- -- -- 50
Net loss.................................................. -- -- (8,208) -- --
----------- ----------- ------------ ----- -----
Balances, December 31, 1994............................... $ -- $ 32,538 $ (28,963) $ (99) $ (2)
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Issuance of 1,887,500 shares of Series A convertible
preferred stock at $2.00 per share for cash or in
exchange for convertible promissory notes and accrued
interest, net of issuance costs of $99.................. $ 3,676
Issuance of 2,616,514 shares of Series B convertible
preferred stock at $2.60 per share for cash, net of
issuance costs of $33................................... 6,770
Issuance of 1,126,003 shares of common stock for
conversion of Series A and B convertible preferred
stock................................................... --
Issuance of 535,817 shares of common stock at $20.00 per
share for cash, net of issuance costs of $1,411......... 9,305
Issuance of 437,500 shares of common stock at $22.00 per
share for cash, net of issuance costs of $984........... 8,641
Issuance of 163,650 shares of common stock at $22.40 per
share for cash, net of issuance costs of $100........... 3,566
Issuance of 176,500 shares of common stock at $.48 to $.80
per share for cash and notes secured by common stock.... 2
Issuance of options to purchase 1,354 shares of common
stock for services rendered............................. 11
Issuance of warrants to purchase 17,125 shares of common
stock................................................... 74
Issuance of 28,883 shares of common stock upon exercise of
stock options at $.48 to $25.60 per share for cash...... 53
Issuance of 6,219 shares of common stock through the
Employee Stock Purchase Plan at $14.44 to $18.72 per
share for cash.......................................... 92
Deferred compensation resulting from grant of options
through May 14, 1992.................................... --
Amortization of deferred compensation..................... 125
Net loss.................................................. (20,755)
-------------
Balances, December 31, 1993............................... 11,560
Issuance of 11,178 shares of common stock primarily upon
exercise of stock options at $.48 to $25.60 per share
for cash................................................ 12
Issuance of 7,856 shares of common stock through the
Employee Stock Purchase Plan at $2.12 to $14.44 per
share for cash.......................................... 60
Amortization of deferred compensation and unrealized loss
on available-for-sale investments....................... 50
Net loss.................................................. (8,208)
-------------
Balances, December 31, 1994............................... $ 3,474
</TABLE>
47
<PAGE>
BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE PERIOD MARCH 7, 1989 (INCEPTION) THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NOTES
CONVERTIBLE DURING THE RECEIVABLE DEFERRED
PREFERRED COMMON DEVELOPMENT SECURED BY COMPENSATION
STOCK STOCK STAGE COMMON STOCK AND OTHER
----------- ----------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance forward........................................... $ -- $ 32,538 $ (28,963) $ (99) $ (2)
Issuance of 7,647 shares of common stock uon exercise of
stock options at $.48 to $3.50 per share for cash....... -- 11 -- -- --
Issuance of 10,625 shares of common stock through the
Employee Stock Purchase Plan at $2.56 per share for
cash.................................................... -- 27 -- -- --
Issuance of warrants to purchase 12,242 shares of common
stock................................................... -- 18 -- -- --
Issuance of 6,729 shares of common stock for services
rendered................................................ -- 24 -- -- --
Issuance of 17,399,000 shares of Series A convertible
preferred stock and 10,500,836 warrants to purchase
Series A convertible preferred stock at $.50 per unit,
net of issuance costs of $179........................... 8,520 -- -- -- --
Issuance of 213,840 shares of Series A convertible
preferred stock upon exercise of warrants at $.60 per
share................................................... 128 -- -- -- --
Issuance of 1,153,429 shares of common stock upon the
conversion of 4,613,840 shares of Series A convertible
preferred stock......................................... (2,328) 2,328 -- -- --
Deferred compensation resulting from vesting of
conditional stock options and grant of below market
stock options........................................... -- 226 -- -- (226)
Amortization of deferred compensation and unrealized gains
on available-for-sale investments....................... -- -- -- -- 98
Net loss.................................................. -- -- (8,237) -- --
----------- ----------- ------------ ----- -----
Balances, December 31, 1995............................... 6,320 35,172 (37,200) (99) (130)
Issuance of 6,721 shares of common stock upon exercise of
stock options at $3.00 to $3.50 per share for cash...... -- 22 -- -- --
Issuance of 18,665 shares of common stock through the
Employee Stock Purchase Plan at $2.55 to $4.89 per share
for cash................................................ -- 48 -- -- --
Issuance of warrants to purchase 257,628 shares of common
stock................................................... -- 288 -- -- --
Issuance of 1,930,462 shares of common stock and warrants
to purchase 965,231 shares of common stock at $6.00 per
unit for cash, net of issuance costs of $612............ -- 5,180 -- -- --
Issuance of 1,111,727 shares of common stock and a warrant
to purchase 222,345 shares of common stock upon
conversion of convertible debt at $3.45 per share, net
of issuance costs of $40................................ -- 3,792 -- -- --
Issuance of 6,852,064 shares of Series A convertible
preferred stock upon exercise of warrants at $.60 to
$1.46 per share......................................... 7,856 -- -- -- --
Issuance of 1,848,965 shares of common stock upon the
conversion of 7,395,927 shares of Series A convertible
preferred stock......................................... (4,273) 4,273 -- -- --
Deferred compensation resulting from the grant of below
market stock options.................................... -- 9 -- -- (9)
Payment of note secured by common stock................... -- -- -- 84 --
Amortization of deferred compensation and unrealized gains
on available-for-sale investments....................... -- -- -- -- 93
Net loss.................................................. -- -- (14,348) -- --
----------- ----------- ------------ ----- -----
Balances, December 31, 1996............................... $ 9,903 $ 48,784 $ (51,548) $ (15) $ (46)
----------- ----------- ------------ ----- -----
----------- ----------- ------------ ----- -----
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance forward........................................... $ 3,474
Issuance of 7,647 shares of common stock uon exercise of
stock options at $.48 to $3.50 per share for cash....... 11
Issuance of 10,625 shares of common stock through the
Employee Stock Purchase Plan at $2.56 per share for
cash.................................................... 27
Issuance of warrants to purchase 12,242 shares of common
stock................................................... 18
Issuance of 6,729 shares of common stock for services
rendered................................................ 24
Issuance of 17,399,000 shares of Series A convertible
preferred stock and 10,500,836 warrants to purchase
Series A convertible preferred stock at $.50 per unit,
net of issuance costs of $179........................... 8,520
Issuance of 213,840 shares of Series A convertible
preferred stock upon exercise of warrants at $.60 per
share................................................... 128
Issuance of 1,153,429 shares of common stock upon the
conversion of 4,613,840 shares of Series A convertible
preferred stock......................................... --
Deferred compensation resulting from vesting of
conditional stock options and grant of below market
stock options........................................... --
Amortization of deferred compensation and unrealized gains
on available-for-sale investments....................... 98
Net loss.................................................. (8,237)
-------------
Balances, December 31, 1995............................... 4,063
Issuance of 6,721 shares of common stock upon exercise of
stock options at $3.00 to $3.50 per share for cash...... 22
Issuance of 18,665 shares of common stock through the
Employee Stock Purchase Plan at $2.55 to $4.89 per share
for cash................................................ 48
Issuance of warrants to purchase 257,628 shares of common
stock................................................... 288
Issuance of 1,930,462 shares of common stock and warrants
to purchase 965,231 shares of common stock at $6.00 per
unit for cash, net of issuance costs of $612............ 5,180
Issuance of 1,111,727 shares of common stock and a warrant
to purchase 222,345 shares of common stock upon
conversion of convertible debt at $3.45 per share, net
of issuance costs of $40................................ 3,792
Issuance of 6,852,064 shares of Series A convertible
preferred stock upon exercise of warrants at $.60 to
$1.46 per share......................................... 7,856
Issuance of 1,848,965 shares of common stock upon the
conversion of 7,395,927 shares of Series A convertible
preferred stock......................................... --
Deferred compensation resulting from the grant of below
market stock options.................................... --
Payment of note secured by common stock................... 84
Amortization of deferred compensation and unrealized gains
on available-for-sale investments....................... 93
Net loss.................................................. (14,348)
-------------
Balances, December 31, 1996............................... $ 7,078
-------------
-------------
</TABLE>
See accompanying notes.
48
<PAGE>
BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 7, 1989
YEAR ENDED DECEMBER 31, (INCEPTION)
------------------------------- THROUGH
1994 1995 1996 DECEMBER 31, 1996
--------- --------- --------- ------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................... $ (8,208) $ (8,237) $ (14,348) $ (51,548)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................ 1,109 454 475 3,531
Other........................................................ -- 42 288 366
Changes in:
Accounts receivable........................................ -- -- (201) 201
Other current assets....................................... 154 (366) 163 (451)
Prepaid inventory.......................................... -- (418) 43 (375)
Inventory.................................................. -- -- (928) (928)
Other assets............................................... -- 298 81 12
Other current liabilities.................................. 156 (167) 508 1,456
--------- --------- --------- --------
Net cash used in operating activities.................... (6,789) (8,394) (13,919) (48,138)
--------- --------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................. (128) (46) (676) (1,928)
Short-term investments purchased............................... -- (3,595) -- (30,337)
Short-term investments sold/redeemed........................... 3,060 4,000 596 30,337
Restricted cash................................................ (467) 594 94 (511)
--------- --------- --------- --------
Net cash provided by (used in) investing activities.......... 2,465 953 14 (2,439)
--------- --------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of preferred stock, net of issuance costs............. -- 8,648 7,856 26,933
Issuance of common stock, net of issuance costs................ 72 38 5,532 27,301
Issuance of long-term debt, net of accrued interest............ -- 3,594 -- 4,949
Payments on long-term obligations.............................. (489) (412) (567) (3,662)
--------- --------- --------- --------
Net cash provided by (used in) financing activities.......... (417) 11,868 12,821 55,521
--------- --------- --------- --------
Net increase (decrease) in cash and cash equivalents............. (4,741) 4,427 (1,084) 4,944
Cash and cash equivalents, beginning of period................... 6,342 1,601 6,028 --
--------- --------- --------- --------
Cash and cash equivalents, end of period......................... $ 1,601 $ 6,028 $ 4,944 $ 4,944
--------- --------- --------- --------
--------- --------- --------- --------
SUPPLEMENTAL DISCLOSURES:
Property and equipment acquired through capital lease.......... $ -- $ 110 $ 96 $ 2,494
--------- --------- --------- --------
--------- --------- --------- --------
Conversion of preferred shares for common stock................ $ -- $ 2,328 $ 4,273 $ 17,047
--------- --------- --------- --------
--------- --------- --------- --------
Conversion of convertible debt for common stock................ $ -- $ -- $ 3,792 $ 3,792
--------- --------- --------- --------
--------- --------- --------- --------
Issuance of note receivable for common stock................... $ -- $ -- $ -- $ 99
--------- --------- --------- --------
--------- --------- --------- --------
Issuance of common stock warrants.............................. $ -- $ 18 $ 288 $ 380
--------- --------- --------- --------
--------- --------- --------- --------
Issuance of common stock for services rendered................. $ -- $ 27 $ -- $ 35
--------- --------- --------- --------
--------- --------- --------- --------
Cash paid for interest......................................... $ 217 $ 87 $ 63 $ 898
--------- --------- --------- --------
--------- --------- --------- --------
</TABLE>
See accompanying notes
49
<PAGE>
BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND FINANCING
Biocircuits Corporation (a development stage company) (the "Company") was
incorporated in Delaware on March 7, 1989. The Company is engaged in developing
and commercializing new immunodiagnostic testing systems.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company's first sale and shipment
of its IOS system with cartridges capable of performing T4 and T Uptake tests
occurred in March 1996. The Company has incurred a loss in each period since its
inception. The Company's accumulated deficit was $51,548,000 at December 31,
1996. Biocircuits expects to incur additional losses over the next several
years.
Obtaining additional funds will be critical to the Company's ability to
maintain operations during 1997. The Company will continue to seek funding from
various equity financing sources. Raising additional funds from public or
private sources will result in significant dilution to then existing
shareholders. If adequate funding is not available on a timely basis, the
Company will be required to curtail its operations significantly or to cease
operations. See "Subsequent Events (Unaudited)" below.
SUBSEQUENT EVENTS (UNAUDITED)
Biocircuits' bank informed the Company in late March 1997 that the Company
was no longer in compliance with the bank's terms for the Kollsman standby
letter of credit. As a result, the bank collateralized the full amount of the
standby letter of credit, resulting in a $949,000 reduction in available cash
and an increase in restricted cash for the Company. Subsequently, also in late
March 1997, the Company and Kollsman reached an agreement to reduce the current
amount of the standby letter of credit to $700,000, resulting in an increase of
available cash of $249,000. The Company believes the standby letter of credit
will remain fully cash collateralized for the near term and, possibly, until
year end 1997. The collateralization of the standby letter of credit meant that
the Company's remaining available cash would satisfy its requirements until only
mid-April 1997.
On April 3, 1997, in order to reduce its losses and conserve cash, the
Company reduced its work force from 92 to 54 employees.
On April 15, 1997, the Company closed a private placement which consisted of
the sale of its Common Stock in three tranches and warrants to purchase Common
Stock. (defined hereinafter as the "April 1997 Financings"). The first tranche
resulted in gross proceeds of approximately $1.7 million to the Company. With
these funds, the Company believes its cash resources will be adequate to satisfy
its requirements until the end of the second quarter of 1997. The second tranche
could result in gross proceeds to the Company of approximately $5.7 million in
July 1997, and is conditional upon the achievement by the Company of certain
milestones for the second quarter of 1997. If the Company receives funding from
the second tranche, the Company believes its cash resources will be adequate to
satisfy its requirements into the second quarter of 1998. The third tranche
could result in gross proceeds to the Company of approximately $0.7 million in
January 1998 and is conditional upon the achievement by the Company of certain
milestones by year end 1997. If the Company receives funding from the third
tranche, the Company believes its cash resources will be adequate to satisfy its
requirements into the third quarter of 1998. There
50
<PAGE>
BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
can be no assurance that the Company will achieve the milestones necessary to
receive either the second tranche or third tranche.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents include demand deposits held in US banks, interest
bearing money market funds, commercial paper, state agency notes and commercial
bonds with original maturities of less than three months. Short-term investments
consist of corporate bonds with original maturities of less than one year. The
Company has not experienced any losses on its investments.
ACCOUNTS RECEIVABLE
The Company performs ongoing credit evaluations of its customers, all of
whom are in the U.S. and generally does not require collateral. The Company
maintains reserves for potential credit losses and has experienced minimal
losses to date.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation and
amortization. Depreciation of property and equipment is provided over the
estimated useful lives of the respective assets, estimated to be five years, on
a straight-line method. Amortization of leasehold improvements is provided over
the estimated useful lives of leased assets or the term of the lease, whichever
is shorter.
RESEARCH AND DEVELOPMENT
Research and development costs include personnel costs, materials consumed
in research and development activities, manufacturing start-up, depreciation on
equipment, outside services and the cost of the facilities used for research and
development activities.
INVENTORIES
Inventories are stated at the lower of cost (first in, first out basis) or
market (estimated net realizable value).
REVENUE RECOGNITION
Except in certain cases where distributors have a right of return, net
revenues are recorded upon shipment. The Company records revenue, net of
discounts and amounts it estimates may be returned by distributors which have a
right of return. During 1996, sales to two distributors accounted for 55% of
revenue. The percentages of the two distributors are 34% and 21%.
51
<PAGE>
BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs
totaled $-, $50,000 and $214,000 for the years ended December 31, 1994, 1995 and
1996, respectively.
STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. The
Company generally grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. Under APB 25, for employee stock options with an exercise price equal to
the market price of the underlying stock on the date of grant, no compensation
expense is recorded. The Company recognizes compensation expense for those stock
options granted with an exercise price less than fair value.
PER SHARE INFORMATION
Net loss per share is computed on the basis of the weighted average number
of common shares outstanding. Common equivalent shares are excluded from the
computation as their effect is antidilutive.
Following is supplemental pro forma earnings per share, calculated giving
effect to the conversion of the outstanding convertible preferred stock on an if
converted basis. Such shares are excluded from earnings per share as reported,
as they are antidilutive (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
Net loss as reported......................................... $ (8,208) $ (8,237) $ (14,348)
--------- --------- ----------
--------- --------- ----------
Shares used in computing net loss per share as reported...... 2,489 2,849 5,299
Adjustment to include outstanding convertible preferred
stock...................................................... -- 1,982 3,321
--------- --------- ----------
Shares used in computing pro forma net loss per share........ 2,489 4,831 8,620
--------- --------- ----------
--------- --------- ----------
Pro forma net loss per share................................. $ (3.30) $ (1.71) $ (1.66)
--------- --------- ----------
--------- --------- ----------
</TABLE>
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies. The carrying amounts approximate fair values of the
Company's financial instruments at December 31, 1996. The following methods and
assumptions were used in estimating its fair value disclosures for financial
instruments:
52
<PAGE>
BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
2. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
CASH AND CASH EQUIVALENTS: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
INVESTMENT SECURITIES: The fair values for marketable debt securities are
based on quoted market prices.
ACCOUNTS RECEIVABLE AND PAYABLE: The carrying amount reported in the
balance sheet for accounts payable approximates its fair value.
3. ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES
The Company determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. All such securities have been classified as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses reported in stockholders' equity. The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
to maturity. Such amortization is included in interest income. There have been
no realized gains and losses or declines in value judged to be other than
temporary on available-for-sale securities.
As of December 31, 1996, the Company has no available-for-sale-securities.
The following is a summary of available-for-sale securities as of December 31,
1995 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
ADJUSTED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Corporate debt securities...................... $ 5,060 $ 8 $ -- $ 5,068
State and subdivision securities............... 1,100 -- -- 1,100
----------- --- --- -----------
$ 6,160 $ 8 $ -- $ 6,168
----------- --- --- -----------
----------- --- --- -----------
</TABLE>
Net unrealized losses and gains on available-for-sale securities are
included in stockholders' equity, recorded as "Other," and totaled a gain of
$8,000 at December 31, 1995. All debt securities had original maturities of less
than one year. At December 31, 1995, there were $5,563,000 available-for-sale
securities with original maturities of less than three months which were
classified as cash equivalents and $605,000 classified as short-term
investments. During the years ended December 31, 1995 and 1996 there were no
sales of available-for-sale securities prior to maturity date and no realized
gains or losses. The net adjustment to unrealized holding gains and losses on
available-for-sale securities included as a separate component of stockholders'
equity was a loss of $8,000 in 1996 ($10,000 gain in 1995).
53
<PAGE>
BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, including property and equipment under
capital leases ($1,824,000 in 1995, $781,000 in 1996), consists of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Furniture and equipment.................................................. $ 1,679 $ 2,451
Leasehold improvements................................................... 594 595
--------- ---------
2,273 3,046
Less accumulated depreciation and amortization........................... (1,298) (1,671)
--------- ---------
$ 975 $ 1,375
--------- ---------
--------- ---------
</TABLE>
Depreciation expense was $214,000, $360,000 and $373,000 in 1994, 1995 and
1996, respectively.
5. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Raw materials............................................................ $ -- $ 528
Work in Process.......................................................... -- 18
Finished Goods........................................................... -- 382
--------- ---------
$ -- $ 928
--------- ---------
--------- ---------
</TABLE>
6. LEASE COMMITMENTS
The Company leases its facilities under a noncancelable operating lease
which expires on April 30, 2000. Under the terms of this lease, the Company was
required to establish a $732,000 letter of credit, which decreased according to
its terms to $478,000 in 1996, as security for certain tenant improvements in
the facility. The related cash is presented as restricted cash in the
accompanying balance sheet. Rent expense for 1994, 1995 and 1996 was
approximately $497,000, $504,000 and $525,000, respectively. The Company leases
certain property and equipment under capital leases. Cash security deposits are
required under certain capital lease financings which are recorded in "Prepaid
expenses and other current assets" and "Other assets." During 1995, in
connection with capital leases, the Company issued warrants, which expire in
March and June 1997, allowing lessors to purchase up to 8,938 fully paid and
nonassessable shares of the Company's common stock at $4.00 per share. The
Company estimated the value of these warrants at $12,000.
54
<PAGE>
BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
6. LEASE COMMITMENTS (CONTINUED)
At December 31, 1996, future minimum payments under the noncancelable
operating and capital leases are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
----------- -----------
<S> <C> <C>
Years ending December 31:
1997................................................................... $ 524 $ 131
1998................................................................... 546 54
1999................................................................... 553 23
2000................................................................... 138 --
2001................................................................... -- --
Thereafter............................................................. -- --
----------- -----
Total minimum lease payments............................................. $ 1,761 208
-----------
-----------
Amount representing interest............................................. (18)
-----
Present value of future minimum lease payments........................... 190
Current portion.......................................................... (118)
-----
Long-term capital lease obligations...................................... $ 72
-----
-----
</TABLE>
7. LONG-TERM DEBT
In April 1991, the Company and Technology Funding Secured Investors II
("TFI") entered into an agreement whereby TFI loaned $800,000 to the Company.
All principal and interest payments have been made. In addition, the Company
granted TFI warrants, which expired in January 1996, to purchase 10,000 shares
of common stock at $8.00 per share. The estimated value of the warrants,
$42,000, was recorded as a discount to the note payable.
On August 16, 1995, the Company entered into a collaborative relationship
with Beckman Instruments, Inc. ("Beckman") and received $3,500,000 in the form
of convertible debt in exchange for granting Beckman certain options for
licensing and marketing rights to testing applications using Biocircuits'
proprietary lipid/polymer technology. On December 13, 1996, Beckman exercised
its option to convert its debt and accrued interest at 7.125% per annum of
$332,000 into common stock at $3.45 per share. Under the terms of the
convertible debt arrangement, in connection with the Beckman conversion, the
Company issued a warrant, expiring August 2000, to purchase 222,345 shares of
Common Stock at $3.45 per share. At December 31, 1995, $93,000 of accrued
interest was included as a component of long-term convertible debt.
8. STOCKHOLDERS' EQUITY
AUTHORIZED SHARES AND REVERSE STOCK SPLIT
In April 1995, the Board of Directors authorized an amendment to the
Company's Restated Certificate of Incorporation to increase the authorized
number of shares of Common Stock from 20,000,000 shares to 70,000,000 shares and
increase the authorized number of shares of Preferred Stock
55
<PAGE>
BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
8. STOCKHOLDERS' EQUITY (CONTINUED)
from 10,000,000 shares to 40,000,000 shares. The Board of Directors also
approved an amendment to the Company's Restated Certificate of Incorporation to
effect a one-for-four reverse stock split of the Common Stock. These amendments
were subsequently approved at the Annual Meeting of Stockholders held on June
15, 1995 and the one for four reverse split of the Common Stock became effective
on December 31, 1995. All share and per share amounts have been retroactively
restated.
PRIVATE PLACEMENTS
The Company closed a private placement on June 19, 1995 which consisted of
the sale of 17,399,000 units at $0.50 per unit. Proceeds to the Company were
approximately $8,520,000, net of issuance costs. A unit consisted of one share
of Series A Preferred Stock and one warrant to purchase approximately .60 shares
of Series A Preferred Stock at $0.60 per share (the "1995 Warrants"). The 1995
Warrants, expiring December 18, 1996, contained a provision which allowed the
Company, at its discretion, to reduce the number of shares of preferred stock
issuable upon exercise of the 1995 Warrants, in the event the Company receives,
prior to December 1, 1995, additional funds from corporate partnering
transactions. In November 1995, the Company exercised the provision to reduce
the number of shares of preferred stock issuable upon exercise of the 1995
Warrants by 5,333,334 shares of Series A Convertible Preferred Stock (proceeds
of $3,200,000) due to the corporate partnering proceeds received from Beckman
Instruments, Inc. On November 14, 1996, the Board of Directors extended the
expiration date for the remaining 1995 Warrants two additional months to
February 14, 1997. At December 31, 1996, the Company had 1995 Warrants, expiring
February 14, 1997, to purchase 3,513,213 shares (4,953,663 at December 31, 1995)
of Series A Preferred Stock outstanding at $.60 per share.
On January 29, 1996, as a result of the Beckman transaction, the Company
amended outstanding 1995 Warrants to purchase 2,666,514 shares of Series A
Preferred Stock (the "Amended 1995 Warrants") and closed a private placement
pursuant to which the company issued new warrants (the "1996 Warrants") to
purchase 2,852,998 shares of Series A Preferred Stock. One half of the amended
1995 Warrants and one half of the 1996 Warrants were exercisable at a purchase
price of 70% of the current market price upon exercise and expired on May 31,
1996. Prior to their expiration on May 31, 1996, warrants to purchase 2,651,847
shares of Series A Preferred stock were exercised at an average price of $1.18
per share. The remaining one half of the amended 1995 Warrants and 1996 Warrants
were subject to automatic exercise at a purchase price of $1.46 per share upon
the Company's shipment of the first ten IOS-TM- instruments and accompanying
cartridges. These latter warrants were called by the Company and the funds were
received by the Company in March 1996.
On October 21, 1996, the Company closed a private placement which consisted
of the sale of 965,231 units at $6.00 per unit (the "October 1996 Financing").
Proceeds to the Company were approximately $5,200,000, net of issuance costs. A
unit consisted of two shares of Common Stock and one warrant (the "Financing
Warrants"), expiring October 20, 1997, to purchase one share of Common Stock at
$3.43 per share. The Financing Warrants contain an automatic exercise provision
which occurs, upon notice from the Company, at any time beginning six months
prior to the expiration date when the average market value for the Company's
Common Stock equals or exceeds $5.25 per share for 10 consecutive trading days.
At December 31, 1996, the Company had October 1996 Warrants, to purchase 965,231
of common stock outstanding.
56
<PAGE>
BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
8. STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
In May 1992, the Company issued 535,817 shares of common stock in its
initial public offering followed by public offerings of 163,650 and 437,500
shares of registered common stock in December 1992 and February 1993,
respectively.
In 1989, 125,000 shares of common stock were issued to the founder of the
Company for $1,000 and a $59,000 note secured by the common stock. The note and
accrued interest at 8.2% per annum was paid on July 23, 1996. In April 1990,
options to purchase 50,000 shares of common stock were granted to an officer and
subsequently exercised for $400 in cash and a $39,600 note secured by the common
stock. The note, including accrued interest at 7.98% per annum, was due in April
1996. Such note was extended one additional year and partially paid. Common
shares issued to the founder and officer were subject to certain repurchase
rights by the Company in the event of termination of employment, death or
disability.
In January 1993, the Company issued warrants, which expired in May 1995, to
purchase 500 shares of common stock at a price of $20.00 per share to a supplier
of manufacturing equipment. In 1995, the Company issued warrants, expiring in
July 1997, to purchase 625 and 2,680 shares of the Company's common stock at
$3.00 and $4.00, respectively. In March 1996 and June 1996 the company issued
additional warrants, expiring in April 2006 and September 2006, to purchase
2,500 and 5,128 shares, respectively, of common stock at a purchase price of 70%
of the current market price upon exercise. At December 31, 1996, 1,507,447
shares, of the Company's common stock were reserved for issuance upon exercise
of all warrants to purchase common stock.
PREFERRED STOCK
Thirty million shares of the Company's authorized preferred stock are
designated as Series A Convertible Preferred Stock. Each share of Series A
Convertible Preferred Stock votes with the Company's common stock on an
as-converted basis and has a liquidation preference of $0.55 per share plus any
declared and unpaid dividends.
At any time, at the option of the stockholder, each outstanding share of
Series A Convertible Preferred Stock currently converts into .25 shares of
common stock. Conversion is automatic upon the earlier of (i) the closing of an
underwritten public offering of common stock on a Form S-1 Registration
Statement at a per share price of not less than $8.00 and gross proceeds of not
less than $10,000,000, (ii) the vote or written consent of holders of at least
66 2/3% of the then outstanding shares of Series A Convertible Preferred Stock,
or (iii) the date after June 19, 1997 at which the market value of the Company's
common stock, as reported by The Nasdaq National Market System, has been at
least $2.00 per share for 20 consecutive trading days. The conversion rate of
the preferred stock is subject to adjustment in the event of stock splits, stock
dividends, recapitalizations and the like.
Series A Convertible Preferred stockholders are entitled to receive
non-cumulative annual dividends at a per share rate equal to the dividends
declared, if any, by the Company's Board of Directors for stockholders of the
Company's common stock.
At December 31, 1996 the Company had reserved 3,992,087 shares of Common
Stock for issuance upon conversion of the Series A Preferred Stock.
57
<PAGE>
BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
9. INCOME TAXES
As of December 31, 1996, the Company had net operating loss carryforwards of
approximately $36.5 million and research and development credit carryforwards of
approximately $1,138,000 for federal income tax purposes, both expiring in the
years 2004 through 2011. Upon the closing of its private placement on June 19,
1995, the Company experienced a "change in ownership" as defined by Section 382
of the Internal Revenue Code. As a result, the utilization of the Company's
pre-change net operating loss and certain credit carryforwards will be subject
to an annual limitation based upon the Company's pre-change value and may expire
prior to utilization.
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Net operating loss carryforwards......................................... $ 8,178 $ 13,463
Research credits......................................................... 1,360 1,666
Research expenses capitalized for tax purposes........................... 5,237 5,528
Other.................................................................... 470 411
--------- ---------
Total deferred tax assets................................................ 15,245 21,068
Valuation allowance for deferred tax assets.............................. (15,245) (21,068)
--------- ---------
Total deferred tax assets................................................ $ -- $ --
--------- ---------
--------- ---------
</TABLE>
During 1996, the valuation allowance increased by $5,823,000 ($2,737,000 in
1995).
10. STOCK PLANS
DUAL STOCK OPTION PLAN
On May 1, 1989, the Company adopted a Dual Stock Option Plan (the "Plan").
Under the Plan, 1,375,000 shares of common stock were reserved for issuance to
employees, including officers, directors and consultants at December 31, 1995.
The Plan is comprised of an employee plan and a non-employee plan. Options
granted under the Plan expire ten years from date of grant and become
exercisable at such times and under such conditions as determined by the
Company's Board of Directors. The options for most participants become
exercisable over five years at the rate of 20% after one year and an additional
5% every three months thereafter. The aggregate fair market value of the stock
with respect to which incentive stock options are first exercisable by an
individual in any calendar year may not exceed $100,000. In June 1994, the Board
of Directors offered all option holders the right to amend the terms of their
outstanding options to lower the exercise price to the fair market value on the
date of the Board's decision with the condition that the amended options could
not be exercised for a period of twelve months after the amendment date. Such
amended options are reported as cancellations and re-grants in 1994. On March
26, 1996, the Board of Directors approved an amendment to increase the shares
reserved under the Plan to 1,675,000 shares of common stock, a 300,000 share
increase. Such amendment was approved by Shareholders at the Shareholders'
meeting held in May 1996.
58
<PAGE>
BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10. STOCK PLANS (CONTINUED)
The Company has recorded deferred compensation expense for the difference
between the grant price and the deemed fair value of the Company's common stock
for options at time of grant and for the vesting of conditional stock options.
Such amount is amortized over the vesting period (a total deferred compensation
of $412,000, of which $366,000 is amortized at December 31, 1996).
The following summarizes activity in the Dual Stock Option Plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF OPTION EXERCISE
OPTIONS PRICE PRICE
----------- ----------------- -------------
<S> <C> <C> <C>
Balances at December 31, 1993................... 161,032 $ .48 - $28.00 $ 12.95
Granted......................................... 127,824 2.96 - 18.00 3.26
Exercised....................................... (10,803) .48 - 25.60 .95
Canceled........................................ (104,586) .48 - 28.00 19.21
----------- ----------------- ------
Balances at December 31, 1994................... 173,467 $ .48 - $ 4.00 $ 2.68
Granted......................................... 780,282 2.50 - 7.50 4.80
Exercised....................................... (7,647) .48 - 3.50 1.56
Canceled........................................ (17,763) .80 - 4.50 3.34
----------- ----------------- ------
Balances at December 31, 1995................... 928,339 $ .48 - $ 7.50 $ 4.46
Granted......................................... 180,900 2.88 - 7.38 6.12
Exercised....................................... (6,721) 3.00 - 3.50 3.06
Canceled........................................ (160,672) 3.00 - 7.38 5.08
----------- ----------------- ------
Balances at December 31, 1996................... 941,846 $ .48 - $ 7.50 $ 4.68
----------- ----------------- ------
----------- ----------------- ------
</TABLE>
At December 31, 1996, options for a total of 294,614 shares were exercisable
at a weighted average exercise price of $3.95 per share. At December 31, 1995,
options for a total of 80,005 shares were exercisable at a weighted average
exercise price of $2.32.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING EXERCISABLE OPTIONS
-------------------------- WEIGHTED AVERAGE --------------------------
WEIGHTED REMAINING WEIGHTED
EXERCISE PRICE AVERAGE CONTRACTUAL LIFE AVERAGE
RANGE NUMBER EXERCISE PRICE (IN YEARS) NUMBER EXERCISE PRICE
- -------------- --------- --------------- ------------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
$0.48 - $0.48 688 $ 0.48 2.8 688 $ 0.48
0.80 - 1.04 27,679 0.85 4.1 27,679 0.85
2.50 - 3.50 117,548 3.11 8.0 70,308 3.07
4.00 - 6.00 629,231 4.56 8.6 177,732 4.50
6.13 - 8.25 166,700 6.91 9.0 18,207 6.93
--------- ----- --- --------- -----
941,846 $ 4.68 8.4 294,614 $ 3.95
--------- ----- --- --------- -----
--------- ----- --- --------- -----
</TABLE>
59
<PAGE>
BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10. STOCK PLANS (CONTINUED)
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In March 1992, the Company adopted the 1992 Restated Non-Employee Directors'
Stock Option Plan (the "Directors' Plan"). The Directors' Plan provides for the
automatic grant of options to purchase shares of common stock to non-employee
directors of the Company.
Upon its adoption, the Directors' Plan provided for an automatic issuance of
options to purchase an aggregate of 3,750 shares of common stock to three
non-employee directors at an exercise price of $4.00. The Directors' plan
further provides that each future non-employee director of the Company would
automatically be granted an option to purchase 3,750 shares of common stock at
an exercise price equal to 85% of the fair market value of the stock on the date
of grant. Options granted under the plan expire ten years from date of grant and
vest over a period of three years from the date of the grant. As a result of a
series of amendments, the number of shares authorized for issuance under the
plan was 63,750 shares as of December 31, 1995. Such amendments were approved by
the Board and stockholders of the Company. In October 1995, the Board of
Directors adopted an amendment to the Directors' Plan to change the periodic
grants of additional options under the Directors' Plan to authorize annual
grants of options to purchase 5,000 shares of common stock on November 1 of each
year to non-employee directors of the Company. On March 26, 1996, the Board of
Directors adopted an amendment to increase the shares authorized for issuance
under the plan to 113,750 shares, a 50,000 share increase. Such amendments were
approved by shareholders at the Shareholders' meeting in May 1996.
Options to purchase 20,000 shares were granted to non-employee directors at
$2.44 per share on November 1, 1996 and options to purchase 20,000 shares were
granted at an exercise price of $6.38 on November 1, 1995. At December 31, 1996,
options to purchase 58,750 shares were outstanding at prices ranging from $2.44
to $6.38 with a weighted-average purchase price of $4.01 and a weighted-average
remaining contractual life of 8.7 years. At December 31, 1995, options to
purchase 38,750 shares were outstanding at prices ranging from $2.98 to $6.38
with a weighted-average purchase price of $4.83.
At December 31, 1996, options for a total of 20,414 shares were exercisable
at a weighted average exercise price of $4.27 per share. At December 31, 1995,
options for a total of 8,750 shares were exercisable at a weighted average
exercise price of $3.41.
Unless terminated earlier by the Board of Directors, the Directors' Plan
will terminate in February 2002.
EMPLOYEE STOCK PURCHASE PLAN
In March 1992, the Company's Board of Directors adopted the 1992 Employee
Stock Purchase Plan (the "Purchase Plan") which provided for the issuance of up
to 31,250 shares of common stock to employees of the Company. The Purchase Plan
was subsequently amended to increase the number of authorized shares to 75,000
shares in 1995. Under the Purchase Plan, all eligible employees are entitled to
purchase shares of common stock from Board authorized share offerings through
payroll deductions of up to 15% of an employees' earnings, as defined by the
Purchase Plan. The price per share at which shares are sold in an offering is
the lesser of 85% of the fair market value of the stock on the date of the
purchase or on the date of the offering. Unless terminated earlier by the Board
of Directors, the Purchase Plan will terminate in February 2002.
60
<PAGE>
BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10. STOCK PLANS (CONTINUED)
As of December 31, 1996, the Board had authorized four offerings for the
issuance of 52,500 shares of common stock, of which 43,365 shares of common
stock have been issued, with 22,500 shares available for future offerings under
the Purchase Plan.
STOCK-BASED COMPENSATION
As permitted under FASB Statement No. 123, "Accounting for Stock-Based
Compensation" (FASB 123), the company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) in accounting for stock-based awards to employees. Under APB 25, the company
generally recognizes no compensation expense with respect to such awards.
Pro forma information regarding net loss and net loss per share is required
by FASB 123 for awards granted after December 31, 1994 as if the Company had
accounted for its stock-based awards to employees under the fair value method of
FASB 123. The fair value of the Company's stock-based awards to employees was
estimated using a Black-Scholes option pricing model. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
option which have no vesting restrictions and are fully transferable. In
addition, the Black-Scholes model requires the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
stock-based awards to employees have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards to employees. The fair value
of the Company's stock-based awards to employees was estimated assuming no
expected dividends and the following weighted-average assumptions:
<TABLE>
<CAPTION>
OPTIONS ESPP
-------------------- --------------------
1995 1996 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Expected life (years).............................. 6.0 6.0 0.5 0.5
Expected volatility................................ 0.744 0.744 0.744 0.744
Risk-free interest rate............................ 5.86% 6.02% 5.86% 6.02%
</TABLE>
For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting period
(for options) and the six-month purchase period (for stock purchases under the
ESPP). The Company's pro forma information follows (in thousands except for
earnings (loss) per share information):
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C> <C>
Net loss As reported $ (8,237) $ (14,348)
Pro forma $ (8,481) $ (14,920)
Primary loss per share As reported $ (2.89) $ (2.71)
Pro forma $ (2.98) $ (2.82)
</TABLE>
Because FASB 123 is applicable only to awards granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until approximately
1999.
61
<PAGE>
BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10. STOCK PLANS (CONTINUED)
The weighted-average fair value of options granted at market value during
1995 and 1996 was $3.35 and $4.29 per share, respectively, and options granted
below market value was $5.28 and $2.08, respectively. The weighted-average fair
value of employee stock purchase rights during 1995 and 1996 was $1.28 and $2.25
per share, respectively.
11. COMMITMENTS
In December 1992, the Company entered into an exclusive manufacturing
agreement with a third party for IOS-TM- instruments. Under the terms of the
agreement, the Company has and will reimburse the manufacturer for certain costs
for the transition from prototyping to production phases. In 1994, the Company
established a letter of credit as security for inventory purchased under the
manufacturing agreement. As of December 31, 1996 the letter of credit had been
exercised and the related amount is presented in the accompanying balance sheet
as a prepayment for future deliveries of inventory. In April 1996, the Company
executed a letter agreement to amend the 1992 agreement (the "Letter
Agreement"), pursuant to which the manufacturer will be the exclusive supplier
of the IOS instrument through 1997, the minimum purchase requirements were
eliminated and the Company and manufacturer agreed to an acceptable transfer
price to be paid through 1997, the revised term of the agreement. Under the
terms of the Letter Agreement the Company agreed to establish a $949,000 standby
letter of credit as security for raw materials purchased under the manufacturing
agreement. Also pursuant to the Letter Agreement, the Company issued the
manufacturer a warrant to purchase 250,000 shares of Common Stock at $7.00 per
share which expire on June 30, 1998 and are subject to an increase of 50,000
shares or an extension of the expiration date under certain circumstances.
In April 1996, the Company entered into a $2,500,000 revolving line of
credit to be secured by accounts receivable. Under terms of this agreement, the
Company may draw in advance and convert up to $1,000,000 of the line of credit
to a one year term loan. Such right of conversion is used as security for the
letter of credit entered into in the above mentioned Letter Agreement. As of
December 31, 1996, the Company has not drawn on the line of credit. Also see
"Subsequent Events (Unaudited)" in footnote 1.
In December 1995, the Company entered into an exclusive manufacturing
agreement with a third party for cartridges. Management believes that other
suppliers could provide similar services on comparable terms, however, a change
in suppliers could cause a delay in manufacturing and a possible loss of sales,
which would adversely affect future operating results.
The Company has entered into a license agreement for the patent rights to
develop, manufacture and distribute a future potential product. Under the terms
of the agreement, the Company is required to pay a license fee and, upon
commercialization, royalties.
12. ONE-TIME CHARGE
In the first quarter of 1994, the Company announced a decision to
reformulate the test method in its proprietary assay cartridge used in
conjunction with its diagnostic testing system. As a result, the Company
recorded a one-time charge of $992,000 as a research and development expense in
the first quarter of 1994 for equipment ($720,000) and purchase commitments
($272,000) related to this reformulation.
62
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO CHARGED
ALLOWANCE FOR BEGINNING COSTS AND TO OTHER BALANCE AT
DOUBTFUL ACCOUNTS OF YEAR EXPENSES ACCOUNTS WRITE-OFFS END OF YEAR
- ----------------------------------------------------- ------------- --------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
1996................................................. $ -- $ 43 $ -- $ -- $ 43
1995................................................. -- -- -- -- --
1994................................................. -- -- -- -- --
</TABLE>
63
<PAGE>
INDEX TO EXHIBITS
ITEM 14(A)(3). EXHIBITS
<TABLE>
<CAPTION>
MANNER OF
NUMBER DESCRIPTION FILING
- --------- ------------------------------------------------------------------------------------------- -------------
<C> <S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Registrant. (10)
3.2 Amended and Restated By-laws of the Registrant. (1)
4.1 Specimen warrant. (9)
4.3 Specimen Series A Convertible Preferred Stock Certificate. (8)
4.4 Form of Series A Convertible Preferred Stock Warrant. (8)
4.5 Form of Common Stock Warrant. (8)
4.6 Form of Series A Convertible Preferred Amended Warrant. (8)
4.7 Form of Series A Convertible Preferred Stock Warrant. (8)
4.8 Form of Warrant Issued pursuant to Common Stock and Warrant Purchase Agreement (16)
4.9 Form of Warrant Issued to KMC Systems, Inc. (16)
10.4 Early Exercise Stock Purchase Agreement between Mr. Kaiser and the Registrant, dated May
23, 1991. (1)
10.9 Co-Sale Agreement between Mr. Kaiser and the Registrant, dated May 24, 1991. (1)
10.15 Master Lease Agreement between Phoenix Leasing Incorporated and the Registrant, dated
November 1, 1992. (3)
10.16 Form of Confidential Nondisclosure Agreement entered into between the Registrant and its
consultants. (3)
10.17 Form of Mutual Confidential Nondisclosure Agreement entered into between the Registrant and
potential business partners. (3)
10.18 Form of Proprietary Information Agreement entered into between the Registrant and
employees. (3)
10.19 Form of Contractor Agreement entered into between the Registrant and independent
contractors. (3)
*10.21 Restated 1992 Non-Employee Directors Stock Option Plan. (5)
*10.22 Restated Dual Stock Option Plan. (11)
10.23 Restated Promissory Note and Agreement in the principal amount of $59,000, between the
Registrant and Dr. Ribi, dated April 19, 1992. (1)
10.24 Full Recourse Promissory Note in the principal amount of $39,600, between the Registrant
and John Kaiser, dated May 23, 1991, as amended. (2)
++10.25 Manufacturing Agreement, dated December 30, 1992, between the Registrant and Kollsman
Manufacturing Company, Inc. (2)
10.26 Lease Agreement, dated January 21, 1993, by and between the Registrant and South
Bay/Caribbean. (2)
10.28 Irrevocable Letter of Credit dated March 17, 1993 between the Registrant and South
Bay/Caribbean. (3)
10.29 Promissory Note dated April 7, 1993 issued by John Kaiser to the Registrant in the
principal amount of $53,700. (3)
++10.30 License Agreement dated July 28, 1993 between the Registrant and Research Corporation
Technologies Incorporated. (4)
++10.31 Feasibility Study and Option Agreement between the Registrant and Beckman Instruments,
Inc., dated August 15, 1995. (7)
++10.32 Patent Security Agreement between the Registrant and Beckman Instruments, Inc. dated August
15, 1995. (7)
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
MANNER OF
NUMBER DESCRIPTION FILING
- --------- ------------------------------------------------------------------------------------------- -------------
<C> <S> <C>
++10.33 Convertible Secured Promissory Note issued by the Registrant to Beckman Instruments, Inc.,
dated August 15, 1995. (7)
10.34 Investor Rights Agreement between the Registrant and Beckman Instruments, Inc., dated
August 15, 1995. (7)
10.35 Convertible Note Purchase Agreement between the Registrant and Beckman Instruments, Inc.,
dated August 15, 1995. (7)
++10.36 Letter Agreement between the Registrant and Nunc, Inc., dated August 10, 1995. (7)
10.37 Form of Non-Exclusive Distribution Agreement between the Registrant and the entities listed
on Exhibit A thereto. (9)
++10.38 Supply Agreement between Nalge Nunc International, Inc. and the Registrant, dated December
20, 1995. (9)
++10.39 Confidential letter of understanding dated April 18, 1996 between the Registrant and KMC
Systems, Inc. (12)
10.40 Warrant Amendment Agreement dated January 4, 1996 by and among the Registrant and the
Warrant Holders named therein. (8)
10.41 Warrant Purchase Agreement dated January 4, 1996 by and among the Registrant and the
Purchasers named therein. (8)
10.42 Form of Common Stock and Warrant Purchase Agreement by and among the Registrant and the
purchasers named therein. (13)
10.43 Form of Warrant issued to Beckman Instruments. (14)
10.44 Form of Warrant issued to Kollsman Manufacturing Company. (14)
10.45 Form of Warrant issued to Venture Lending. (14)
++++10.46 Confidential letter of understanding dated November 1, 1996 between the Registrant and KMC
Systems, Inc. (15)
10.47 Employment Agreement between the Registrant and Mr. Hawthorne, dated January 27, 1997. (15)
10.48 Confidential letter of understanding dated March 28, 1997 between the Registrant and KMC
Systems, Inc. (15)
10.49 Form of Warrant issued to KMC Systems, Inc. (15)
10.50 Form of Retention Letter to Employees from the Company dated April 3, 1997. (15)
10.51 Common Stock Purchase Agreement, dated April 15, 1997, among the Registrant and the
Purchasers named therein. (16)
10.52 Common Stock and Warrant Purchase Agreement, dated April 15, 1997, among the Registrant and
the Purchasers named therein. (16)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. (15)
27.1 Financial Data Schedule (15)
</TABLE>
- ------------------------
* Indicates management contracts or compensatory plans or arrangements filed
pursuant to Item 601(b)(10).
++ Confidential treatment has previously been granted for portions of this
Exhibit.
++++ Registrant has applied for confidential treatment with respect to portions
of this Exhibit.
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 33-46587), as amended, which became
effective May 13, 1992.
(2) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 33-56836), as amended, which became
effective February 10, 1993.
65
<PAGE>
(3) Incorporated by reference to identically numbered exhibits filed with the
Registrant's Annual Report on Form-10K for the fiscal year ended December
31, 1993.
(4) Incorporated by reference to identically numbered exhibits filed with the
Registrant's Quarterly Report on Form-10Q for the fiscal quarter ended June
30, 1994.
(5) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (No. 33-89006) which became effective
January 31, 1995.
(6) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-3 (No. 33-93736), as amended, which became
effective August 8, 1995.
(7) Incorporated by reference to identically-numbered exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1995.
(8) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-3 (No. 333-00284) which became effective
January 29, 1996.
(9) Incorporated by reference to identically-numbered exhibits filed with the
Registrant's Registration Statement on Form S-1 (No. 333-1434), filed with
the Commission on February 20, 1996.
(10) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-3 (33-93736), which became effective August
5, 1995.
(11)Incorporated by reference to identically numbered exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the fiscal period ended March
31, 1996.
(12)Incorporated by reference to identically numbered exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the fiscal period ended June
30, 1996.
(13)Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-3 (No. 333-13673) which became effective
October 21, 1996.
(14) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-3 (No. 333-19797) filed with the Commission
on January 15, 1997.
(15) Incorporated by reference to identically numbered exhibits filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
(16) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-3 (333-26079) filed with the Commission on
April 29, 1997.
66
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Our audits included the financial statement schedule of Biocircuits
Corporation listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 33-48296, No. 33-50642, No. 33-64066, No. 33-89006, No.
333-07447 and No. 333-21257) pertaining to the Employee's Stock Purchase Plan,
the Non-Employee Directors' Stock Option Plan, the Dual Stock Option Plan and
the Written Compensation Contract of Biocircuits Corporation and in the
Registration Statements (Form S-3 No. 333-13673, No. 333-19797 and No.
333-26079) and the related Prospectuses of our report dated January 13, 1997
with respect to the financial statements of Biocircuits Corporation included in
the Annual Report (Form 10-K/A) for the year ended December 31, 1996, and our
report included in the preceding paragraph with respect to the financial
statement schedule included in this Annual Report (Form 10-K/A) of Biocircuits
Corporation.
/s/ Ernst & Young LLP
Palo Alto, California
April 28, 1997
