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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the Fiscal Year ended SEPTEMBER 30, 1996.
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[ ] Transition Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from ______ to _______.
Commission File No. 0-19241
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INVITRO INTERNATIONAL
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(Name of small business issuer in its charter)
California 33-0149560
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16632 Millikan Avenue, Irvine, California 92606
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (714) 851-8356
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, without par value
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-
KSB or any amendment to this Form 10-KSB. YES [X] NO [ ]
State issuer's revenues for its most recent fiscal year: $1,063,000 for the
Fiscal Year ended September 30, 1996.
The aggregate market value of 12,920,684 shares of registrant's voting common
stock held by non-affiliates of the Registrant was $7,268,000 as of September
30, 1996, based upon the closing sale price of $0.5625 per share for the
Common Stock in The Nasdaq SmallCap Market on such date.
Number of shares of common stock outstanding as of December 17, 1996:
14,028,300 shares of common stock.
Documents Incorporated By Reference: Registrant's proxy statement for its
1997 Annual Meeting of Shareholders is incorporated by reference for Items 9,
10, 11 and 12 of this Report.
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INVITRO INTERNATIONAL
FORM 10-KSB ANNUAL REPORT
Table of Contents
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Item No. Page
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PART I:
1. Description of Business ......................................... 1
2. Description of Property ......................................... 15
3. Legal Proceedings ............................................... 16
4. Submission of Matters to a Vote of Security Holders ............. 16
PART II:
5. Market for Common Equity and Related Stockholder Matters ........ 16
6. Management's Discussion and Analysis or Plan of Operation ....... 17
7. Financial Statements ............................................ 21
8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ..................................... 35
PART III:
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act ............ 35
10. Executive Compensation .......................................... 35
11. Security Ownership of Certain Beneficial Owners and Management .. 35
12. Certain Relationships and Related Transactions .................. 35
PART IV:
13. Exhibits and Reports on Form 8-K ................................ 35
SIGNATURE PAGE ........................................................ 40
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Report under the caption "Management's
Discussion and Analysis or Plan of Operation" and elsewhere constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results or performance of the Company to be materially different from future
results or performance expressed or implied by such forward-looking
statements. Such factors, include, among others: market acceptance of new
products, economic, competitive, governmental and technological factors
affecting the Company's operations, markets, services and prices, and other
factors described in this Report and in prior filings with the Securities and
Exchange Commission. The Company's actual results could differ materially
from those suggested or implied by any forward-looking statements as a result
of such risks.
CAUTIONARY STATEMENTS
In connection with the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995, the Company is hereby filing
cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those projected in
forward-looking statements made by, or on behalf of, the Company. Reference
is made to Exhibit 99.1 filed with this Report.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
InVitro International (the "Company" or "InVitro") is engaged in the
manufacture and sale of proprietary and preventive products and services
directed to human and environmental safety. The Company distributes child
safety and identification products and manufactures and markets proprietary in
vitro assay kits and systems to detect, rank and predict the potential level
of irritancy, toxicity or corrosivity of substances on human eye and/or skin
tissue. An "in vitro" assay is a test or other means of measuring a substance
of clinical interest without the use of live animals or animal tissue. The
results may be either qualitative, as in "yes/no", or quantitative, as in
determining the amount of a particular substance in a tested sample.
Since late June 1996, the Company has marketed the Guardian DNA* child
safety system through hospitals and other institutional markets. In October
1996 InVitro entered into an agreement providing for the distribution of
Guardian DNA literature and discount coupons in hospital gift packs to
approximately 3.7 million new mothers in the United States from January
through December 1997.
Proprietary testing systems produced and sold by the Company are an
alternative to "in vivo" (live) animal testing methods. In vitro tests sold
by the Company principally include its IRRITECTION Assay System to evaluate
potential for dermal and ocular irritation and CORROSITEX assays to determine
Packing Group corrosivity level classifications within regulatory guidelines
applicable to the transport and storage of chemicals, formulations and
hazardous waste. These unique and patented assays are principally used by
manufacturers and others to verify product safety of consumer, household and
industrial products, enable compliance with transportation and environmental
regulations and assist in evaluation of workplace safety.
InVitro International was incorporated in California on September 19,
1985, and maintains its principal offices at 16632 Millikan Avenue, Irvine,
California 92606, telephone number (714) 851-8356. The Company maintains a
World Wide Web site at URL address http://www.invitrointl.com on the Internet.
PRODUCTS AND SERVICES -- INTRODUCTION
The Company was founded in 1985 to develop, manufacture and sell
reliable and cost-effective laboratory tests for evaluating substances that
are potentially toxic or irritating to humans and the environment. To date,
the Company's proprietary in vitro testing systems have been primarily used by
third party manufacturers to evaluate potential irritation responses in new
product formulation and the workplace environment, and by generators of
potentially hazardous waste to determine regulated Packing Group
classifications in the storage and transport of corrosive substances.
A corporate strategy was adopted in early 1996 of seeking distribution
rights to other preventive products and services that contribute to the safety
and protection of humans and the environment. This strategy is intended to
increase revenues without adding significant fixed overhead, thus leveraging
the Company's investment in an experienced internal marketing and sales staff.
As a first step in implementing this strategy, the Company acquired exclusive
institutional distribution rights in March 1996 to the Guardian DNA system, a
long-term child identification system which overcomes limitations inherent in
traditional fingerprint and photograph identification methods relative to
child safety and identification.
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* Guardian DNA(TM) is a trademark of Miragen Inc. All other trademarks
referenced in this Report, including IRRITECTION(R), CORROSITEX(R),
EYTEX(R) and SKINTEX(TM), are trademarks of InVitro International.
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GUARDIAN DNA CHILD IDENTIFICATION AND SAFETY
The Company entered into a Distributorship Agreement on March 11, 1996
to market the Guardian-DNA identification system developed and supplied by
Miragen Inc. ("Miragen"), of Irvine, California. Under this agreement, the
Company has exclusive rights to market and distribute Guardian DNA products
through birthing centers, hospitals and other related obstetric markets such
as pediatricians and obstetricians. The Company believes that Guardian DNA is
an effective and complete child safety system that provides parents with
materials for education, documentation and identification of their children
and overcomes limitations inherent in conventional identification methods.
Child Safety and Identification:
The U.S. Department of Justice reported that over one million children
were involved in some form of disappearance in 1990, whether caused by
abduction, accident, injury or run-aways. To address this problem, the
parents of approximately 2.5 million children per year in the U.S. are
involved in some form of child identification program. These conventional
programs typically require annual or other periodic updating action to remain
effective over time. Changes in a child's appearance severely limit the long
term efficacy of identification programs based on photographs. Fingerprint
programs are ineffective for children under age six and are often unreliable
in older children.
The Guardian DNA product and service, by comparison, is a unique system
that provides a reliable means of permitting the positive identification of a
child at birth and for many years after the child's DNA sample was originally
collected. Guardian DNA therefore addresses the requirements of parents who
desire a means of positive long-term identification. Guardian DNA also
provides educational tools for parents to protect their children in today's
society.
The Guardian DNA kit consists of a DNA sample acquisition kit, a
precoded sample tube accompanied by prepaid mailer, an infant/child "passport"
that may be regularly updated with current photos and other pertinent
information and a child safety educational video. A saliva sample which
carries the child's DNA is obtained from the inside of a child's cheek with a
sterile cotton swab and placed in the pre-coded tube. This procedure may be
performed at home, does not require a blood sample, and is quick, painless,
non-invasive, easy and safe. The precoded sample tube containing the child's
DNA sample is then sent to Miragen's secure storage facility in a prepaid
return mailer.
The tube with the DNA sample is stored in a preservative solution for at
least 18 years after receipt on an anonymous basis. Anonymity of the sample
is ensured because no names or social security numbers are used; the only
information provided is a bar code and PIN number known exclusively by the
child's parent(s). The child's parent(s) retain a copy of the information
which will match the code numbers of a stored sample. If there is a subsequent
need for an identification due to abduction, accident or other disappearance,
Miragen will provide the DNA sample to the appropriate authorities after
notification from a law enforcement agency. Standard DNA profile tests may be
performed on both the stored sample and a current sample from the child in
question to determine if there is a positive identification. Upon request,
Miragen also will perform a DNA test to assist in confirming a positive
identification.
The Company has been advised by its supplier that the swab acquisition
devices used in the Guardian DNA system are obtained from the same source that
provides buccal swab acquisition products to the U.S. Armed Forces Institute
of Pathology, thus ensuring adherence to established Armed Forces protocols
for the collection of such samples.
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Guardian DNA Sales and Marketing:
The Company commenced test marketing of Guardian DNA in selected U.S.
beta site hospitals during June and July 1996, followed by a full marketing
launch in major metropolitan area hospitals. There are approximately 4
million births annually in the United States. The most immediate market
targeted by the Company included institutions and professionals servicing
pregnant women.
Marketing and promotional activities included two initial mailings to
4,500 executive officers at birthing centers and hospitals across the U.S., a
mailing to approximately 900 neonatologists and 9,000 pediatricians,
distribution of a video news release package to radio and television stations,
dissemination of press releases to selected parenting publications and
Internet sites, participation in trade shows and conventions and the
development of brochures and advertising materials for hospitals, doctors and
patients and for media and trade publications. The Company also plans to
extend marketing activities to child birth educators and lactation
consultants.
Due to a slow initial response from institutional purchasers, in October
1996 InVitro entered into an agreement providing for the distribution of
Guardian DNA literature and discount coupons in hospital gift packs to
approximately 3.7 million new mothers from January through December 1997.
Subject to acceptance by participating hospitals of Guardian DNA as an item to
be advertised in New Mother GiftPaxs, the agreement with GiftPax/American
Sampling Incorporated anticipates the delivery of approximately 3,773,000
promotional pieces at a rate of approximately 314,000 units per month to U.S.
hospitals participating in the New Mother GiftPax distribution program.
GiftPax/American Sampling Incorporated estimates that its New Mother GiftPaxs
are delivered to approximately 93% of new mothers in the U.S. Costs to the
Company include the cost of Company advertising and promotional materials
distributed plus $5.00 per order received by the Company as a fee payable to
GiftPax/American Sampling Incorporated. Management of the Company projects
that a 1% sales response to this program would increase the Company's revenues
by approximately $150,000 per month. Orders generated by this program will be
processed by a professional fullfilment organization under contract with the
Company and require payment by check or credit card before Guardian DNA
products are shipped.
Distribution Agreement with Supplier:
The Company holds exclusive distribution rights for marketing Guardian
DNA products through institutional markets in the U.S. and abroad for an
initial three year term, renewable annually thereafter. These distribution
rights include marketing and sales to hospitals, health care professionals and
other institutional markets and the dissemination of advertising materials and
sales to consumers by use of facilities and channels of distribution available
through institutional markets. To maintain exclusive marketing rights under
the Distributorship Agreement, the Company is required to attain minimum
purchase quotas of at least 20,000 units in the first year of the agreement
and at least 36,000 units in the second year of the agreement. Minimum
purchase quotas for the third year of the agreement will be determined by
mutual agreement approximately 120 days before that period commences. The
failure to attain minimum purchase quotas for two consecutive months or in any
three months during a period of twelve consecutive months will provide Miragen
with rights of either terminating the Distributorship Agreement or converting
InVitro's marketing rights to a non-exclusive basis unless the Company could
negotiate reductions in minimum purchase quotas, as to which there is no
assurance.
The pricing of Guardian DNA kits supplied to the Company is fixed for
the first year of the Distributorship Agreement and adjusted annually
thereafter to account for the supplier's cost increases. The Guardian DNA
trademark is owned by Miragen and licensed by the Company for the term of the
Distributorship Agreement. Miragen is obligated to maintain and preserve in a
secure storage facility all DNA samples mailed or otherwise delivered to
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Miragen resulting from Guardian DNA Products sold by the Company for a period
of at least 18 years after the date each such sample was first received by
Miragen.
Two of the Company's officers, directors and shareholders, Messrs.
Irwin J. Gruverman and William M. Curtis, are also officers, directors and
shareholders of Miragen Inc., which was founded in March 1993. Messrs.
Gruverman and Curtis both abstained from participating in the negotiation of
the Company's Distributorship Agreement with Miragen Inc., and the
Distributorship Agreement was approved by all disinterested members of the
Company's Board of Directors.
IN VITRO ASSAYS TO EVALUATE IRRITANCY, TOXICITY OR CORROSIVITY
Background and Technology:
Many companies that produce consumer, household or industrial products
test these substances to determine whether they have a harmful or toxic effect
on humans or on the environment. Concerns as to environmental impact and/or
increased governmental regulation have extended testing to an evaluation of
raw materials and chemicals used in the manufacturing process, testing liquid
and solid waste, and classification of hazardous substances prior to transport
or in the course of remediation of physical facilities. The importance of
evaluating the irritation or toxicity of chemicals and compounds, and labeling
and packaging them accordingly, is stimulated by concerns as to product
liability, consumer protection, environmental contamination, occupational
hazards and human safety.
Toxicity testing has traditionally required the use of live animals or
living animal tissue as a means of predicting the effect of various substances
on human tissue. More recently developed "in vitro" laboratory or field tests
are performed outside the body, in contrast to conventional "in vivo" methods
using live animal tissues. Due to interest in reducing testing costs and
improving performance, as well as certain industry and public interest groups
which seek to reduce or eliminate animal testing, the Company believes
industry will become increasingly receptive to the use of in vitro methods as
a supplement or alternative to in vivo toxicity testing.
The Company's proprietary technology for irritancy testing is based upon
the formulation of protein reagents that are used in conjunction with a porous
membrane disc delivery system. This delivery system allows test substances to
gradually diffuse and come into contact with the reagent. When exposed to
potentially toxic or irritating compounds, the protein reagents become opaque
and, accordingly, mimic the biochemical reactions of proteins found in human
cells that are injured by irritant substances. Results are objectively
measured and quantified using specially adapted instruments and proprietary
software developed by the Company.
InVitro's proprietary technology for corrosivity testing is based upon a
biobarrier membrane system and a chemical detection system. When exposed to a
corrosive substance, the biobarrier membrane is permeated in approximately the
same amount of time that it takes for tissue injury to occur during a standard
corrosivity in vivo test using live animals. When the corrosive substance
permeates the biobarrier membrane, it causes a color change in the chemical
detection system, thereby enabling the membrane "breakthrough" time to be
determined.
As contrasted to conventional animal testing, the Company's assay
systems require significantly less time, produce quantitative results which
are consistently reproducible, are cost effective, and are more humane. As a
result of the introduction and use of the Company's products, InVitro has
accumulated a database of over 10,000 chemicals and formulations tested with
the Company's in vitro testing products to validate the efficacy of the
Company's proprietary methodology.
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IRRITECTION Ocular and Dermal Assay System
InVitro originally introduced its EYTEX test kits in 1989 to assess
ocular (eye) irritation and its SKINTEX test kits in 1990 to evaluate dermal
(skin) irritation. The products were enhanced significantly and introduced to
the market in July 1995 as the IRRITECTION Assay System.
The Company's IRRITECTION Assay System is a rapid, accurate, objective,
reproducible and relatively inexpensive procedure for determining ocular and
dermal irritancy potential. Advantages of the IRRITECTION Assay System over
in vivo animal testing include the following:
RAPID ON-SITE ANALYSIS: The Company's tests require from five to no
more than 24 hours to complete and results can be calculated by
technicians at a customer's own facility.
COST EFFECTIVE: Costs and time are significantly less than conventional
animal testing methods.
REPRODUCIBLE: Interlaboratory variations for testing the same sample
have been confirmed at less than 10%, compared to much greater
variations for animal tests.
QUANTITATIVE RESULTS: Results measured by a computer-based instrument,
instead of subjective visual observation, are objectively compared to a
standard curve using proprietary software developed by the Company.
The Company produces various IRRITECTION test kits which are directed to
different applications and characteristics of products to be tested.
Different tests are dedicated to clear, water soluble products; insoluble,
colored or opaque products; products with low surface tension; and alkaline
products. The Company's system is based upon principles of measuring reagent
changes and factors relating to membrane damage. The dermal version of the
test system incorporates a barrier membrane similar to human skin and a
reagent sensitive to perturbation by chemical irritants. The sample to be
tested is applied to the membrane, which is in contact with the reagent, and
is incubated for up to 24 hours. If the sample affects the dermal barrier
membrane, a red dye is released. The development of an opaque or cloudy
appearance in the reagent indicates a substance with the potential for
irritancy.
The IRRITECTION Assay System, as enhanced, is an application-driven
irritation testing system. Designed to upgrade and enhance EYTEX and SKINTEX
test kits, IRRITECTION assays are available in four basic variations, with a
single unifying testing system directed to several specific markets. Targeted
markets include industrial chemicals; industrial cleaners; petrochemicals;
cosmetics; surfactants; and workplace health and safety, particularly for
textile and dye manufacturing. The IRRITECTION Assay System enhances test
accuracy by removing sources of technician error and meets customer
requirements for more rapid and efficient test results. The system can
significantly reduce new product development time and costs, rank irritancy
levels of multiple formulations, and may be applied in the workplace safety
arena offering potential savings in workers' compensation costs.
In addition to its assay test kits, InVitro offers a laboratory system
which includes an automated microplate reader and other supplies and
components necessary for a customer to perform the IRRITECTION Assay System
tests. The laboratory equipment-based system represents a one-time cost to
the new account. The computer-driven microplate reader introduced in 1995
reduces total assay processing time and provides a user-friendly testing
protocol. InVitro also sells a proprietary computer software program that is
used in conjunction with the IRRITECTION Assay System for data analysis and
quality control.
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The Company currently offers IRRITECTION test kits for 16 different
applications, each kit containing components to test from five to 10 samples.
IRRITECTION test kits are sold to customers at prices generally ranging from
$375 to $425 depending upon the size and type of test kit and quantity
ordered.
CORROSITEX Packing Group Classification:
The Company introduced CORROSITEX during 1993 for Packing Group
classification of corrosive chemicals, formulations and hazardous waste in
response to United Nations guidelines and U.S. Department of Transportation
("DOT") regulations originally implemented in October 1993.
DOT REGULATIONS FOR PACKING GROUP CLASSIFICATION: Prior to October
1993, labeling, packaging and transportation requirements for chemicals,
formulations and hazardous waste generally required only that these materials
be determined to be either corrosive or noncorrosive. Recognizing the
deficiencies of such limited labeling, and in order to ensure appropriate
packaging and labeling of corrosives for international shipment, the United
Nations Committee of Experts on Transportation of Dangerous Goods established
guidelines to classify corrosives into three Packing Groups (Groups I, II or
III) or as noncorrosive. These guidelines were adopted in the United States
by the DOT. Industry compliance with the new DOT regulations were first
mandated in October 1993; however, shippers with reusable packaging at October
1, 1993 had until October 1, 1996 to comply. Effective October 1996, shippers
also will be required to certify the proper Packing Group classification of
their materials to their packaging supplier and must utilize packaging and
markings that comply with U.N. regulations.
The commercial significance of determining appropriate classifications
is that packaging, labeling and transportation requirements are more stringent
and expensive for substances classified as Packing Group I or II than for
Packing Group III or noncorrosive materials. Additionally, classification is
required to comply with DOT regulations for the purpose of avoiding potential
exposure to regulatory fines and/or civil liability in the event of an
accident or spill of hazardous materials while in transit. Proper Packing
Group classification also permits safer clean-up in the event of a spill.
Under the original United Nations guidelines and DOT regulations, the
only specified method for classification of chemicals into Packing Groups was
a test method using live rabbits. See "Competition" below. If full depth
skin tissue destruction occurs within three minutes of exposure on the
rabbits' skin, the substance is classified Packing Group I (highly corrosive);
if destruction occurs after three minutes but within one hour, the substance
is classified Packing Group II (moderately corrosive); if destruction occurs
after one hour but within four hours, the substance is classified Packing
Group III (mildly corrosive); if destruction does not occur within four hours,
the substance is considered noncorrosive.
CORROSITEX is a cost-effective, rapid in vitro alternative to measure
the corrosivity level of chemicals, formulations and hazardous waste for
Packing Group classification. The CORROSITEX system includes a modification
of the Company's patented dermal biobarrier (membranes with materials that
mimic human skin) and a chemical detection system in a chamber beneath the
biobarrier. The test sample is applied to the dermal biobarrier. When it
permeates through the biobarrier, the test sample enters the chemical
detection system. The test sample then interacts with the chemical detection
reagent and a color change occurs which can be noted by visual observation or
measured with instrumentation. The length of time required for the color
change to occur after placing the test sample in the system determines Packing
Group classification. Depending upon their specific requirements, customers
can assign the proper Packing Group classification for DOT compliance, or use
the data as a ranking tool or to substantiate marketing claims.
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CORROSITEX requires no special equipment other than InVitro's test kit.
In most cases, the only training necessary for use is in preparation of the
biobarrier and a knowledge of hazardous material handling procedures.
Advantages of CORROSITEX include ease of use, minimal training, low cost,
rapid determination of Packing Group classification, objective relative
indexing of corrosivity, and humane considerations as an alternative to animal
testing. CORROSITEX requires four hours or less to complete and obtain
results, and is priced as low as $237 per chemical sample. CORROSITEX test
kits are configured to analyze either two or four samples.
InVitro originally obtained an exemption from the requirement of live
animal tests under DOT Packing Group classification regulations in March 1993.
The original exemption applicable to CORROSITEX required negative results
(i.e., the tested substance was determined by CORROSITEX to be noncorrosive)
to be confirmed by conventional animal testing. The requirement of a
confirming test for noncorrosive results was eliminated by the DOT during
1995. The DOT exemption permits the use of CORROSITEX for testing a wide
variety of chemicals and compounds, including organic and inorganic acids and
acid derivatives, acyl halides, alkylamines and polyalklamines, organic and
inorganic bases, chlorosilanes, and metal halides and oxyhalides.
CERTAIN LIMITING FACTORS: Sales of CORROSITEX test kits first
occurred during the latter half of 1993 as the DOT regulations for Packing
Group classification first became effective. Due to various factors, sales
levels of CORROSITEX subsequently declined in 1994 and 1995. Management
believes these factors included: (i) lack of enforcement of the new DOT
regulations due to limited DOT staff, resulting in a condition where many
companies estimated corrosive classifications without performing tests to
confirm the estimates; (ii) certain companies relied on the measurement of
pH for classification of corrosives, even though the pH test may not detect
certain corrosive materials and, in any event, is not approved by the DOT for
the determination of Packing Group classification; (iii) an improper
assumption by many producers of hazardous substances that their waste hauler
would assume responsibility for Packing Group classification, labeling and
compliance when this duty in fact remains an obligation of the producer; (iv)
before the Company's exemption was expanded in March 1995, the reluctance of
potential customers to use in vitro assays if animal testing were still
required to confirm a noncorrosive result; and (v) for certain low acid and
low alkaline substances, the use of standard cutoff times prescribed in the
original DOT exemption for CORROSITEX tended to overestimate the degree of
corrosivity compared to results obtained from in vivo tests.
The DOT regulations have been modified to address the latter two
limiting factors. Animal testing is no longer required if CORROSITEX testing
indicates that a substance is noncorrosive, and the CORROSITEX protocol for
certain low acid and low alkaline substances has been modified to include
shortened standard cutoff times to more closely approximate results obtained
from in vivo animal tests.
Since late 1995, the Company has promoted CORROSITEX as being more
accurate and more cost-effective in characterizing the corrosivity of aqueous
waste streams than the commonly used pH test method, based upon a study of 442
chemicals of known pH. This study demonstrated the pH measure is a relatively
inadequate means of establishing the corrosivity of chemical compounds and is
not suitable for assigning Packing Group classifications to corrosives. It
has been determined that pH tends to overestimate corrosivity, thus
unnecessarily increasing packing, shipping and insurance costs in certain
instances. Further, pH measurements can only be conducted on aqueous
solutions, while CORROSITEX can be used to determine the corrosivity of either
liquids or solids.
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Future growth in revenues from CORROSITEX will be dependent upon a
variety of factors, such as the degree to which DOT Packing Group regulations
are enforced by regulatory agencies and/or observed by industry, notoriety
given to noncompliance, development of similar regulatory requirements in
foreign countries, and the rate at which industry recognizes that overall
costs can be reduced through a program of proper testing and determination of
Packing Group classifications for packaging corrosive substances.
CUSTOMIZED TECHNOLOGY SERVICES
InVitro's Customized Technology Services (CTS) Division works directly
with prospects and customers to develop application-specific product
enhancements. Designated personnel from research and development, quality
assurance and manufacturing departments all function as part of the CTS
Division. This enables InVitro to integrate customer needs from the point of
initial sales contact, through product research and development, manufacturing
and product delivery, thereby ensuring that its in vitro testing system is
customized to the specific requirements of the user's application.
GOVERNMENTAL AGENCIES
InVitro actively works with a variety of U.S. and foreign government
departments and agencies, having responsibility for monitoring hazardous
materials, to solicit their support in promoting the use of in vitro irritancy
and corrosivity testing. In addition to the DOT, in the U.S. these include
the Department of Defense, which provides directives for remediation of
military installations, the Environmental Protection Agency ("EPA"), and the
Food and Drug Administration ("FDA").
As a result of these efforts, in July 1995 the EPA published proposed
additions to its manual of solid waste test methods which listed CORROSITEX as
a method of characterizing dermal corrosivity, EPA Publication SW-846, Method
1120. To date, the EPA has not finalized these proposed additions to its
manual of solid waste test methods. However, the Company's management
anticipates that Method 1120 will be reviewed for approval at the end of 1996.
The Interagency Coordinating Committee for the Validation of Alternative
Methods ("ICCVAM") Corrosivity Working Group is in the process of conducting
an interagency peer review of CORROSITEX. ICCVAM represents several U.S.
regulatory agencies including DOT, EPA, FDA, the Occupational Safety and
Health Administration ("OSHA") and the Consumer Product Safety Commission.
Management believes the revenue potential of CORROSITEX would be enhanced if
it were approved for corrosivity testing on an interagency basis.
During 1996, CORROSITEX received an exemption from Transport Canada
confirming that CORROSITEX may be employed as an alternative to tests
specified in paragraph 3.25(1)(b) of the Canadian Transportation of Dangerous
Goods Regulations. These regulations implemented by the Safety and Security
Section, Transportation of Dangerous Goods Directorate, specifically provide
an exemption from testing regulations to members of the Canadian Chemical
Producers Association if they utilize CORROSITEX to determine Packing Group
classification.
SALES AND MARKETING
The Company's sales and marketing activities includes an internal staff
of five employees strategically located throughout the United States plus one
sales and technical representative dedicated exclusively to InVitro's products
in each of Europe and Japan. None of these employees or representatives has
less than three years experience in the sale and marketing of human health
care products and most have at least six years of experience. In addition,
InVitro's channels of distribution for in vitro assay systems utilize five
distributors in Europe, two distributors and one contract laboratory in Asia
and six independent regional testing laboratories in the United States.
- 8 -
<PAGE>
InVitro's IRRITECTION and CORROSITEX assays and the Guardian DNA product
line are marketed in the United States and internationally by the Company's
internal sales and technical staff and through independent distributors for
designated industries or geographical markets. In addition, the Company has
appointed and trained independent regional testing laboratories to offer
testing services using InVitro's proprietary tests. For smaller accounts that
do not have the staff to perform internal testing or accounts that only
require testing on an isolated basis, InVitro frequently services its
customer's requirements by encouraging the account to submit samples for
testing by InVitro's internal technical staff or to a trained independent
regional testing laboratory.
During Fiscal 1996, the Company's in vitro assays were sold to
approximately 250 accounts. Approximately 100 other accounts during Fiscal
1996 purchased testing services by submitting samples for testing and
certification of results by the Company's internal technical staff.
During the fiscal year ended September 30, 1996, the Company entered
into agreements with five companies in Europe to represent IRRITECTION and
CORROSITEX products, supported in part by the Company's sales and technical
support employee based in France. Vel N.V., a unit of Merck & Co.,
distributes these products in Belgium and Luxembourg; Transia Gmbh
Industriediagnostika represents the Company's products in Germany; Tecal
Quimica represents the Company in Spain; Argo Prodotti Chimici distributes
products in Italy; and G&S Pharmaceutical Consultants handles the Company's
products in Switzerland.
InVitro marketing is supported with trade advertising and direct mail,
product and technical literature, presentations at industry seminars and
symposiums, training sessions and direct customer service and support.
The following table summarizes the source of InVitro revenues by
geographic area for the periods indicated. For further geographic segment
information, see Note 8 of the Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
Fiscal Year ended September 30,
-------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Revenues:
United States ............ 65 % 65 % 69 %
Europe ................... 23 % 21 % 24 %
Asia ..................... 12 % 14 % 7 %
------ ------ ------
Total Revenues ...... 100 % 100 % 100 %
====== ====== ======
</TABLE>
The Company's backlog of unfilled orders is not significant because
shipment is generally made from inventories upon receipt of customer orders.
MANUFACTURING
InVitro's protein reagent formulations are manufactured from a variety
of natural materials that are extracted with buffered solutions and then
separated by a series of standardized biochemical processes. The resulting
reagents are typically lyophilized (freeze dried) to produce a final reagent
in dry form that is stable over time. All other components and laboratory
supplies for the Company's test kits are purchased by InVitro from readily
available sources.
A complete IRRITECTION Assay System test kit typically consists of the
protein reagent, a set of calibrators yielding known classifications ranging
- 9 -
<PAGE>
from nonirritating to severely irritating, false negative control check
reagents, dilution buffer and distilled water to rehydrate the reagent,
membranes for delivery of test samples to the reagent, and a plastic 96-well
microplate. Equipment necessary to perform the Company's IRRITECTION assays
includes a computer-driven microplate reader, a pipette, and a dispensing
pipet. If the sample is an irritant or toxic, the spacing and organization of
proteins in the reagent changes and the reagent will become opaque. The
endpoint of InVitro's IRRITECTION Assay System, opacity of the reagent, is
measured using the microplate reader. Measurements obtained from various
concentrations of the sample tested are then compared with readings from known
calibrators to determine the degree of irritancy at various concentrations of
the sample. Results classify the samples as nonirritating, mild, moderate or
severely irritating.
InVitro's proprietary technology for corrosivity testing includes a
biobarrier membrane system and a chemical detection system. The CORROSITEX
test kit consists of a number of glass vials filled with chemical detection
fluid and capped by a biobarrier membrane which is designed to mimic the
effect of corrosives on living skin. As soon as the corrosive sample
permeates this biobarrier, the fluid below changes color or texture. Users
simply record the time it takes for the sample to break through the membrane.
MATERIALS AND SUPPLIES
The Company's test kits and laboratory services are dependent upon the
availability of proprietary synthetic protein matrices. Although raw
materials are readily available, formulations are labor intensive. After
preparation of the liquid protein matrix has been completed, the solution is
then lyophilized (freeze-dried) for stability by a third-party contractor.
Other materials and supplies used by InVitro are standard laboratory
items and are readily available from several different suppliers and vendors.
Long lead time items are stocked in inventory ahead of projected manufacturing
requirements. Instruments and laboratory supplies purchased by the Company
are covered by warranties from the manufacturer.
InVitro test kits are assembled and packaged at the Company's facilities
in Irvine, California. In most instances, test kits are shipped directly to
the customer or to a distributor. The Company has equipment to automate
certain labeling and assembly processes.
InVitro follows a policy of ensuring quality of its test kits and
services by documented manufacturing procedures, a quality assurance program,
and technical and customer service. The Company warrants all products to
function according to specification. Test kits have demonstrated durability
in shipping, and have established shelf lives of up to three years with
lyophilized reagents. Once the reagent is rehydrated (water added to the
freeze dried powder), the reagent is stable for periods ranging from seven to
30 days or more.
The Company currently maintains product liability insurance with respect
to its products in the amount of $2,000,000 ($1,000,000 per occurrence).
However, there is no assurance that such coverage will continue to be
available or will be sufficient to cover any or all claims. To date, the
Company has not been advised of any material adverse claims resulting from the
use of its testing products or services.
VALIDATION TESTING AND CERTAIN LIMITATIONS
Initial customer acceptance of new alternatives to existing forms of
toxicity testing often involves the necessity of validating the efficacy of
the new method. Validation requires that test results from the new method be
- 10 -
<PAGE>
compared with tests run on the same samples using existing methods. Testing
is repeated across a broad spectrum of chemicals and compounds independently
in different laboratories to correlate results from both methods. The
reliability of this process is complicated by the fact that effects of
substances on laboratory animals, via traditional in vivo tests, do not
necessarily correlate with the effects of those substances on humans, and in
vivo testing has frequently experienced large variations between laboratories.
The Company's experience to date indicates that validation testing is
required for each new product application and often with individual
prospective customers. A significant education effort and validation testing
often is required to convince prospective customers utilizing traditional in
vivo testing methods that the Company's products are efficacious.
In InVitro's experience, a new account generates initial orders for
validation testing and repeat orders are typically deferred pending successful
completion of validation testing by the customer. Accordingly, the Company's
sales historically have fluctuated as new products or modifications are
introduced, and as new accounts are established. The Company has developed a
standardized procedure designed to expedite and assist prospective customers
in a three step process of initial purchase evaluation, validation testing,
and incorporation of the Company's tests into their regular testing
procedures.
As a general rule, the Company does not anticipate that in vitro testing
methods developed by InVitro or others will totally supplant conventional in
vivo testing methods, except in instances in which animal testing may be
prohibited by law, when a customer as a matter of policy has determined to
eliminate animal testing, or where InVitro designs a specific customer program
for monitoring toxic substances that has not been previously satisfied by
conventional in vivo methods.
In vitro technologies are only sometimes applicable as a complete
replacement for in vivo testing, such as assigning Packing Group
classifications for hazardous materials prior to transport. Certain
substances are not qualified to be tested by in vitro tests, and substances
that irritate by physical mechanisms (e.g., granular abrasive mechanisms as
contrasted to liquids) would require in vivo testing. In many instances, in
vitro tests developed by the Company are useful as complementary or adjunctive
test methods that save time and money for toxicity testing by users.
Therefore, in addition to emphasizing advantages such as time, cost and other
factors when compared to conventional animal testing or other emerging
alternatives, InVitro often seeks to position its tests as a screen in the
product formulation cycle and to develop additional products and industry
applications that respond to existing or proposed regulatory requirements.
Certain countries in Europe have adopted, effective January 1, 1998, a
ban on animal testing in the cosmetics industry whenever there is a viable
alternative testing method.
COMPETITION -- GUARDIAN DNA
Guardian DNA competes with traditional child identification methods such
as photographing and fingerprinting, as well as with other biological
identification products. Other competitors in the field have substantially
greater financial and marketing resources than are available to InVitro. The
Company believes that competitive factors in this market include ease of use,
price and access to marketing resources. Photographing and fingerprinting
programs include, among others, Project Kid Care from Polaroid Corporation,
which photographed 1.7 million children in 1993 in the U.S., and Kidprint, a
service of Blockbuster Video, which videotaped and fingerprinted 650,000
children in the U.S. during 1993. Biological identification companies include
Child Trace International, Inc., Safe-T-Child, QuestGen and BirthMark.
- 11 -
<PAGE>
COMPETITION -- IRRITECTION AND CORROSITEX ASSAY SYSTEMS
The Company's in vitro testing products and services compete primarily
with conventional in vivo animal and human testing procedures. For certain
applications and accounts, especially as to CORROSITEX, InVitro is endeavoring
to penetrate markets where testing has not been a standard procedure. Even
though the Company believes it has successfully established itself as a leader
in the field of in vitro irritancy and toxicology, this is a new and emerging
field.
In Vivo Dermal and Ocular Testing:
In the past, ocular irritancy has been evaluated in vivo using live
animals or humans. These procedures are based upon the rabbit eye irritancy
test developed by John Draize and commonly employed since 1944 (the "Draize"
test). The work published by John Draize revealed that opacification, or the
precipitation of proteins in the cornea of the eye, was the major component of
ocular irritation caused by chemicals. Corneal opacity has consequently been
the major component of most, if not all, subsequent ocular irritancy
evaluations.
The Draize eye test requires introduction of a potential chemical
irritant to the eye of a live rabbit and observation of changes in corneal
opacity over a period extending from seven to 21 days. Although this approach
is the primary test used to evaluate the ocular irritancy of a wide variety of
substances, it has several drawbacks in addition to objections raised by
animal rights advocates: measurements are determined by human observation of
redness and opacity and are therefore subjective; the time required for
testing is lengthy; and the cost of performing each test is relatively high,
generally ranging from $500 to $2,000 per sample tested.
Conventional in vivo methods for testing skin irritancy to date
generally include both animal and human tests. With animal testing, a sample
of the substance to be tested is applied to the shaved skin of numerous
rabbits. The reaction of the animal skin is then subjectively observed by a
technician over a period of time. An alternative in vivo method involves
placing the substance to be tested on a localized area of a human for a
controlled period. Human testing is normally performed using 10 to 20
individuals with varying skin pigmentations. Results of both the animal and
human methods are subjectively determined by observing the degree of
irritation that develops on the skin exposed to the tested substance as
compared to skin that has not been so exposed.
In Vivo Testing for Packing Group Classification:
Under the original United Nations guidelines and DOT regulations, the
only specified method for classification of chemicals into Packing Groups was
a test method using live rabbits. This in vivo procedure requires shaving up
to six rabbits, and applying the test substance and a negative control to the
shaved rabbit skin. Corrosion is determined by full depth tissue destruction
and irreversible alteration of the skin tissue. If full depth skin tissue
destruction occurs within three minutes of exposure on the rabbits' skin, the
substance is classified Packing Group I (highly corrosive); if destruction
occurs after three minutes but within one hour, the substance is classified
Packing Group II (moderately corrosive); if destruction occurs after one hour
but within four hours, the substance is classified Packing Group III (mildly
corrosive); if destruction does not occur within four hours, the substance is
considered noncorrosive.
United Nations guidelines and DOT regulations require that the most
severe Packing Group classification be assigned to a substance if that Packing
Group's criteria occur in at least two out of six rabbits. The rabbits are
- 12 -
<PAGE>
then quarantined for a period of 48 hours after which they are inspected for
both delayed corrosivity and permanent tissue damage; the rabbits are then
destroyed. These tests are generally conducted by independent testing
laboratories at a current cost of $400 to $1,200 per test, and normally
require from four to eight weeks for completion.
Other In Vitro Technologies:
At least three other firms offer products using other technology in the
emerging field of in vitro irritancy and toxicology testing. Clonetics
Corporation of San Diego, California has developed tests using cultures of
commercially available strains of human cells. MatTek Corporation of
Ashland, Massachusetts has developed skin equivalents. Micro Devices Company
of Menlo Park, California has developed fluorescent-based tests for monitoring
bacterial death from water-based toxic substances. The Company believes that
these cell culture techniques will prove to be of value in the study of very
specific biochemical activities, but believes they may be more fragile and
expensive when compared to use of InVitro systems as a generalized screening
test. Two companies that had formerly introduced skin equivalents developed
from human cells have abandoned their efforts to market cell-based products,
one of which was the only other company to obtain a DOT exemption for Packing
Group classification by in vitro testing.
There are numerous companies with access to potentially relevant
technologies, many of which have substantially greater resources than the
Company. Accordingly, it is difficult at present to predict the degree to
which the Company may be exposed to future competition for in vitro
alternatives to animal testing. Furthermore, there can be no assurance that
developments by others will not render the Company's products, applications or
technologies uneconomic or obsolete.
The Company expects technological developments in the biotechnology
industry to occur at a rapid rate and competition may intensify as
technological advances in the field are made and become more widely known.
Universities, governmental institutions and various other private or public
foundations are responsible for much of the biotechnical research currently
being performed. These entities are becoming increasingly aware of the
commercial applications of their research which could result in increased
competition for alternatives to conventional animal testing methods.
GOVERNMENTAL REGULATION
CORROSITEX
On April 28, 1993, the DOT granted an exemption which permits the use of
CORROSITEX for testing chemicals, formulations and hazardous waste for Packing
Group classification of corrosive substances. During 1995 that exemption was
extended until March 1, 1997 and has been expanded to eliminate certain
restrictions that applied to the original 1993 exemption. Prior to issuance
of the 1993 exemption, United Nations guidelines and regulations of the DOT
authorized only a test method using live rabbits for classification of
corrosive substances into Packing Groups.
The Interagency Coordinating Committee for the Validation of Alternative
Methods ("ICCVAM") Corrosivity Working Group is in the process of conducting
an interagency peer review of CORROSITEX. ICCVAM represents several U.S.
regulatory agencies including DOT, EPA, FDA, the Occupational Safety and
Health Administration ("OSHA") and the Consumer Product Safety Commission.
Management believes the revenue potential of CORROSITEX would be enhanced if
it were to be approved for corrosivity testing on an interagency basis.
- 13 -
<PAGE>
During 1996, CORROSITEX received an exemption from Transport Canada
confirming that CORROSITEX may be employed as an alternative to tests
specified in paragraph 3.25(1)(b) of the Canadian Transportation of Dangerous
Goods Regulations. These regulations implemented by the Safety and Security
Section, Transportation of Dangerous Goods Directorate, specifically provide
an exemption from testing regulations to members of the Canadian Chemical
Producers Association if they utilize CORROSITEX to determine Packing Group
classification.
IRRITECTION
The U.S. Food and Drug Administration ("FDA") relies upon the results of
a variety of tests in order to determine safety and labeling requirements for
consumer and industrial products sold in the United States. Various
comparable safety and labeling requirements exist in other countries.
Historically, the FDA and most foreign regulators have accepted the
conventional Draize rabbit test as an efficacious method for evaluating ocular
irritancy and conventional animal and human skin tests for evaluating skin
irritancy. Certain countries in Europe, however, have restricted or
prohibited the use of animal testing methods for safety testing of substances
not intended for human consumption. As a means of promoting the search for
alternatives to animal testing, a consumer affairs committee of the European
Economic Community has agreed to ban the testing of cosmetics products on
animals beginning in January 1998.
The FDA has advised the Company that the FDA does not regulate products
(such as the Company's tests) which are used in the product formulation and
quality assurance processes by manufacturers. The FDA's position is that the
manufacturer itself is responsible for assuring and verifying the propriety
and accuracy of its test methods. The FDA does, however, reserve the right of
reviewing the adequacy of test methods used by manufacturers in the course of
FDA inspections. To this end, the FDA purchased the IRRITECTION Assay System
in 1995 to become familiar with in vitro testing applications in the eye and
skin care products industries.
Because the Company cannot apply to the FDA for formal regulatory
acceptance of the Company's products as an acceptable alternative to animal
testing, InVitro believes that regulatory acceptance for its IRRITECTION
system will result over time from repeated and favorable use by manufacturers.
The Company works closely with numerous customers to validate its testing
methods compared to in vivo results and to shorten their product development
cycles. Regulatory acceptance of CORROSITEX for Packing Group classification
of corrosives, as well as InVitro s consulting services to develop customized
testing applications for industry-specific workplace safety requirements, are
expected to further industry acceptance of the Company's products and in vitro
technology.
PROPRIETARY RIGHTS
Certain features of the Company's reagent/membrane system of determining
dermal toxicity incorporated in the IRRITECTION and CORROSITEX systems are
covered by Company patents issued by the U.S. Patent and Trademark Office on
October 1, 1991 and May 2, 1995, respectively.
InVitro holds an exclusive worldwide license from Preventive Diagnostics
Corporation ("PDC") covering a U.S. Patent issued on September 23, 1986 that
covers certain features of the Company's test kits for determining ocular
toxicity. Under the terms of the exclusive license granted in 1985 by PDC, as
amended July 21, 1988, PDC is entitled to an earned royalty of 6% of the
Company's net sales of its ocular irritancy products.
- 14 -
<PAGE>
Corresponding foreign patents for the Company's U.S. patents and the
patent licensed from PDC have been applied for or granted in Europe and Japan.
The Company intends to rely upon its patents, trade secrets, proprietary know-
how, database of reagent information and validation studies to develop and
maintain its competitive position. The Company's executive officers and key
technical personnel have entered into confidentiality agreements and have
agreed to assign to the Company any inventions relating to the Company's
business developed by them while in the Company's employ. However, there can
be no assurance that others may not acquire or independently develop similar
technology or that the Company will be able to maintain the confidentiality of
its trade secrets and proprietary know-how.
RESEARCH AND DEVELOPMENT
The following table sets forth, for the periods indicated, the amount of
funds expended by the Company for Company-sponsored research, development and
validation testing:
<TABLE>
<CAPTION
Fiscal year ended September 30,
--------------------------------------------------
<S> <C>
1995 ........................ $ 594,000
1996 ........................ $ 232,000
</TABLE>
Additional amounts were spent by numerous customers to perform their own
validation testing and to assist the Company with developing new test systems
and/or modifications to existing test systems.
Although there can be no assurance that it will be successful, the
Company plans in the future to expand its current product lines by producing
other in vitro testing systems relating to human health care and environmental
concerns.
EMPLOYEES
As of November 1, 1996, the Company had 16 full-time employees and one
part-time technical consultant. Three employees are primarily engaged in
manufacturing and production, three in laboratory services, technical support
and new product development, five in sales and marketing, and five in
administrative functions. The Company is not a party to any collective
bargaining agreements and believes that it has good relationships with its
employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 8,556 square feet at 16632 Millikan
Avenue, Irvine, California 92606 for corporate and sales offices, laboratories
and facilities for production and warehousing. These facilities are leased
from an unaffiliated third party for a term expiring on February 28, 1998.
The lease currently provides for a base rent of $6,400 per month plus
utilities. This lease was amended as of March 1, 1996 to reduce the space
formerly utilized by the Company and to reduce the Company's monthly rental
rate as of that date by approximately $3,100 per month. The Company believes
its facilities are adequate to accommodate its foreseeable requirements.
Other sales personnel located throughout the United States and in Japan do not
require additional Company facilities since they travel and otherwise make
telephone calls from their home. See Note 6 of the Notes to Consolidated
Financial Statements elsewhere herein for additional information concerning
lease obligations of the Company.
- 15 -
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to legal proceedings from time to time in the
ordinary course of its business. There are no such proceedings at present
that would have a material adverse effect on the Company should the Company
not prevail on the merits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the Nasdaq SmallCap Market under
the trading symbol "INVI". The following tables set forth, for the periods
indicated, the high and low prices for the Company's Common Stock as reported
by the Nasdaq SmallCap Market:
<TABLE>
<CAPTION>
Period High Low
-------------- ------------ -------------
<S> <C> <C>
1994:
Quarter ended Dec 31 .......... $ 2 1/16 $ 15/16
1995:
Quarter ended Mar 31 .......... $ 1 11/16 $ 5/8
Quarter ended Jun 30 .......... 1 11/16 15/16
Quarter ended Sep 30 .......... 2 1/16 9/16
Quarter ended Dec 31 .......... 1 1/2 9/16
1996:
Quarter ended Mar 31 .......... $ 1 1/32 $ 1/2
Quarter ended Jun 30 .......... 1 21/32 11/16
Quarter ended Sep 30 .......... 1 1/16 17/32
</TABLE>
On December 17, 1996, the closing sale price for the Company's common
stock as reported by the Nasdaq SmallCap Market was $ 9/32. As of December
17, 1996, there were approximately 300 holders of record of the Company's
Common Stock. The Company believes the number of beneficial holders of its
Common Stock exceeds 4,000 persons. Certain beneficial owners of the Common
Stock are represented by approximately 10,400,0000 shares held in brokerage or
other nominee accounts.
The Company's Board of Directors has recently proposed a 1-for-10
reverse stock split as to the outstanding Common Stock that will be subject to
approval by shareholders at the Company's next annual shareholders meeting.
All share figures and per share data in this Report are stated without giving
effect to the proposed reverse stock split. The proposed 1-for-10 reverse
stock split is deemed advisable to increase the per share price of the
Company's Common Stock with a view to placing the Company in a better position
to maintain the listing of its Common Stock on The Nasdaq SmallCap Market,
although there can be no assurance the Company will be successful in
maintaining such listing. The Nasdaq Stock Market recently announced proposed
rule changes that would, among other proposed changes, require removal of
listed status for any security trading at less than a minimum bid price of
$1.00 per share. Bid prices for the Company's Common Stock have been
consistently less than $1.00 per share throughout the period from July 23,
1996 through December 17, 1996.
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<PAGE>
No cash dividends have been declared or paid by the Company since its
inception. There are no contractual provisions that would prohibit the
Company from payment of dividends on its common stock. The Company intends to
employ all available funds for development of its business and, accordingly,
does not intend to pay cash dividends in the foreseeable future.
As reported in the Company's Form 8-K Report dated October 7, 1996,
the Company received $250,000 in gross proceeds from the sale of 799,935
shares of the Company's common stock (the "Offering") under Regulation S of
the Securities Act of 1933 to two foreign investors executed on September 30,
1996 and closed on October 7, 1996. The purchase price for shares of the
Company's common stock of $0.312525 per share represented a negotiated
discount of approximately 50% from the market value for the common stock of
$0.625 per share on September 29, 1996. From total gross proceeds of
$250,000, the Company incurred fees payable to a placement agent, World
Capital Funding, Incorporated, in the aggregate amount of $25,000, resulting
in net proceeds to the Company of $225,000. The Offering was terminated by
the Company on September 30, 1996 and all funds were received by the Company
on or before October 7, 1996.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto appearing elsewhere in
this Report.
RESULTS OF OPERATIONS:
YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995
REVENUES: The Company's revenues for the year ended September 30, 1996
("Fiscal 1996") were $1,063,000, an decrease of approximately 6% compared to
revenues of $1,137,000 in the prior fiscal year ended September 30, 1995
("Fiscal 1995"). Revenues in Fiscal 1995 year included $44,000 received under
a nonrecurring consulting contract.
Revenues of $578,000 for the last half of Fiscal 1996 reflect an
increase of $93,000, or 19%, compared to $485,000 in revenues for the first
half of Fiscal 1996 ended March 31, 1996. For the reasons discussed in more
detail below, InVitro's management believes sales declines in prior periods
were stabilized in the last half of Fiscal 1996 and that revenues should
increase in future periods.
The Company recognized that sales of InVitro's EYTEX and SKINTEX ocular
and dermal irritation test kits experienced declines in 1994 and 1995. The
Company reformatted these tests into a newly configured IRRITECTION Assay
System, which included an automated plate reader system. Availability of the
Company's internal laboratory services have been emphasized for smaller
accounts, isolated testing requirements and as a first step in evaluation for
prospective new accounts.
During Fiscal 1996, the Company entered into agreements with five
companies in Europe to represent InVitro's IRRITECTION Assay System for dermal
and ocular irritation and its CORROSITEX products for determining Packing
Group classification. These agreements added distributors in Belgium and
Luxembourg, Germany, Spain, Italy and Switzerland. Company revenues from
Europe increased during Fiscal 1996 by 4% compared to a 4% decline in Fiscal
1995, and management believes these additional channels of distribution will
contribute to future revenue increases although there can be no assurance of
such revenue increases.
- 17 -
<PAGE>
Reduced sales of CORROSITEX test kits to determine Packing Group
classification of corrosive substances were experienced during Fiscal 1995 and
Fiscal 1996 because of a continuing high level of industry noncompliance with
DOT Packing Group classification regulations and the absence of reorders from
certain customers that purchased CORROSITEX to satisfy a onetime testing need.
Sales of CORROSITEX were $325,000 in Fiscal 1996 compared to $359,000 in
Fiscal 1995, but showed some recovery in that CORROSITEX sales for the six
months ended September 30, 1996 were $39,000 higher than in the first half of
Fiscal 1996. The Company anticipates that sales of CORROSITEX may benefit in
the future by a proposed addition to the U.S. Environmental Protection Agency
("EPA") manual of solid waste test methods, which lists CORROSITEX as a method
of characterizing dermal corrosivity (EPA Publication SW-846, Method 1120).
Management believes that EPA Method 1120, if adopted, ultimately will lead to
more routine use of CORROSITEX than has been realized to date.
Management anticipates that CORROSITEX revenues may also be stimulated
by the expiration on October 1, 1996 of a grace period applicable to shippers
under the 1993 DOT Packing Group classification regulations. As of October 1,
1996, all hazardous materials are required to be shipped in U.N. marked and
tested packaging. This change means that a whole range of corrosive liquid
and solid product shippers, as well as generators of hazardous waste and
substances, must purchase U.N. compliant packaging for the first time. When
ordering such packaging, DOT regulations requires shippers to provide their
packaging suppliers with minimum marking levels required for their materials
based on specific gravity, vapor pressure, Packing Group classification and
mass. Since 1993, Packing Group classification has been required to be
declared only on shipping documents; as of October 1, 1996, the declaration of
Packing Group classification will be required in a commercial communication
with the packaging supplier.
In addition, CORROSITEX received an exemption during 1996 from Transport
Canada confirming that CORROSITEX may be employed as an alternative to tests
specified in paragraph 3.25(1)(b) of the Canadian Transportation of Dangerous
Goods Regulations. These regulations implemented by the Safety and Security
Section, Transportation of Dangerous Goods Directorate, specifically provide
an exemption from testing regulations to members of the Canadian Chemical
Producers Association if they utilize CORROSITEX to determine Packing Group
classification.
To take advantage of its internal sales force and distribution
capabilities, the Company entered into an exclusive distributorship agreement
in March 1996 to market the Guardian-DNA child identification system to
hospitals, birthing and other institutional obstetric markets. (See Item 1 of
this Report.) The Company began test marketing the Guardian DNA system in
selected U.S. beta sites commencing in late June and early July 1996, which
was followed by a full marketing launch in major metropolitan areas during the
quarter ending September 30, 1996. During October 1996, InVitro entered into
an agreement providing for the distribution of Guardian DNA literature and
discount coupons in hospital gift packs to approximately 3.7 million new
mothers from January through December 1997. Management anticipates that the
Guardian DNA product line will increase the Company's revenues in future
periods although there can be no assurance of such revenue increases.
COSTS OF GOODS SOLD: Cost of revenues for Fiscal 1996 were $660,000,
or approximately 62.1% of sales, compared to $794,000, or 69.8% of sales, for
Fiscal 1995, resulting in gross profit margins of 37.9% for the Fiscal 1996
period compared to 30.2% in Fiscal 1995. The increase in gross profit margin
for Fiscal 1996 resulted primarily from reduced overhead by the disposition of
a large freeze-dryer in December 1995 and a reduction as of March 1996 in the
amount of space leased by the Company. Due to fixed manufacturing costs, a
portion of which are unabsorbed due to low revenues, gross margins for the
Company's proprietary in vitro products and services are expected to remain at
or near present levels until sales growth necessary to absorb a higher
- 18 -
<PAGE>
percentage of fixed costs is attained, as to which there can be no assurance.
However, the Company anticipates that gross margins in future periods will
show continued improvement due to InVitro's introduction of the Guardian DNA
product line, since the Company's cost of revenues for Guardian DNA is limited
to the purchase of finished kits from a supplier and a limited amount of
warehouse space to store Guardian DNA inventories.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $2,144,000 in Fiscal 1996, a reduction of
approximately $411,000, or 16%, compared to $2,555,000 in selling, general and
administrative expenses for Fiscal 1995. The decrease is primarily due to
cost containment and a reduction in administrative staff in Fiscal 1996
resulting from management's program to eliminate all nonessential costs and
expenses. The Company anticipates selling, marketing and advertising expenses
will increase in future periods to support marketing of Guardian DNA discussed
above, although there can be no assurance such efforts will generate
significant revenue increases.
RESEARCH AND DEVELOPMENT. Research and development expenses for
Fiscal 1996 were $232,000, a $362,000 decrease, or 60.9%, from $594,000 in
research and development expenses in Fiscal 1995. To conserve capital
resources, InVitro has elected to outsource as much of its research and
development requirements for the near term as is possible. Consistent with
this policy, the decline in research and development expenses is primarily
attributable to reductions in personnel and decreased expenditures for
research materials and supplies.
The Company has recently entered into strategic alliances with third
parties to promote joint development of industry product applications.
Agreements were entered into with Celsis International and Tanks Inc. in
February 1996. The alliance with Celsis will assess the effectiveness of the
Company's IRRITECTION assay system in markets for animal testing, and the
Tanks Inc. alliance will assess the effectiveness of CORROSITEX in conjunction
with Tanks' Barrier products in petrochemical and other corrosion removal
markets. In cooperation with one of its contract laboratories, Burlington
Research, the Company has targeted major textile manufacturer and plans to
install the IRRITECTION assay system in at least two textile manufacturing
companies during the first quarter of Fiscal 1997.
As discussed above, the Company also acquired exclusive distribution
rights to the Guardian DNA identification system through institutional
markets. Strategic alliances for product development and the Guardian DNA
marketing agreement collectively offer the potential of expanding the
Company's markets for new applications and products without adding expense to
the Company's internally funded research and development.
OTHER INCOME. Interest income was $74,000 in Fiscal 1996, a decline
of $114,000 compared to Fiscal 1995. The decrease in interest income was
attributable to a lower amount of cash equivalent resources and marketable
securities during Fiscal 1996 compared to Fiscal 1995.
NET LOSS. The Company's net loss of $1,899,000 for Fiscal 1996
declined by approximately $864,000, a significant 31.3% decrease compared to
$2,763,000 net loss for Fiscal 1995. The net loss in Fiscal 1995 Year
included a provision of $145,000 for loss on the sale of freeze-drying
equipment. Net loss reductions are primarily attributable to cost containment
programs discussed above.
InVitro's operating management anticipates the Company will continue to
incur losses, but at a lower rate based on expectations of sales growth noted
above, for the immediate near term due to the Company's current level of fixed
expenses for manufacturing overhead and selling, general and administrative
expenses. Losses are expected to continue until such time as sales increase
to a level necessary to absorb fixed costs. No assurances can be given as to
whether or when sales increases may be achieved. Sales increases will be
- 19 -
<PAGE>
dependent in part upon expanding use of the Company's products and services by
customers and in part upon sales and marketing of new products by the Company.
The Company's operating management anticipates that a successful launch
of the Guardian DNA product line, combined with gradual anticipated growth in
its core IRRITECTION and CORROSITEX assay systems and services, will lead to a
turn-around in financial performance and significant progress toward
management's goal of attaining a profitable level of operations by the end of
Fiscal 1997. However, there can be no assurance of future growth in revenues
or that the Company will achieve revenue increases in an amount necessary to
attain profitable operations.
LIQUIDITY AND CAPITAL RESOURCES:
At September 30, 1996, the Company's cash resources totalled $1,209,000
and its working capital was $1,677,000. During the 1996 Year, the Company's
cash increased by $44,000, due primarily to the sale of common stock for net
cash proceeds of $893,000 and liquidation of $991,000 in marketable
securities, offset by cash outflows used by operating activities of
$1,789,000.
The Company's principal capital requirements include working capital to
finance sales and marketing activities, other general and administrative
expenses and product development. The Company has no significant pending
commitments for capital expenditures, and capital equipment additions are not
expected to be material in amount for the foreseeable future. During the 1996
Year, the Company's inventories increased by $174,000 primarily as the result
of an increase of $185,000 represented by year-end inventories of Guardian DNA
to support distribution rights to this product line acquired in 1996.
The Company anticipates that the introduction of Guardian DNA to
approximately 3.7 million new mothers from January through December 1997 under
an agreement with GiftPax/American Sampling Incorporated will significantly
increase InVitro's inventory purchase requirements for Guardian DNA during
Fiscal 1997 if a favorable response to this program is received. In addition,
in order to maintain exclusive marketing rights through hospital and
institutional markets under the Miragen Distributorship Agreement, the Company
will be required to attain minimum purchase quotas under the Distributorship
Agreement requiring an average of at least $60,000 per month in inventory
additions during the last half of Fiscal 1997 which the Company expects to
finance from existing cash resources and internal cash flow. There can be no
assurance InVitro will attain the sales necessary to maintain exclusive
marketing rights under the Miragen Distributorship Agreement or that it would
be able to reduce minimum quota requirements to maintain exclusivity.
Management is actively pursuing strategies to increase the Company's
sales volume and reduce its negative cash flow. Based on currently planned
activities and assuming reasonable revenue increases projected by the
Company's strategic plan, management believes that its cash resources at
September 30, 1996 are sufficient to fund the Company's operations for at
least the next 12 months.
TAX LOSS AND CREDIT CARRYFORWARDS:
The Company has federal and state net operating loss carryforwards at
September 30, 1996 of approximately $19,704,000 and $7,953,000, respectively,
and research and development tax credits of approximately $325,000 for federal
income tax purposes. The federal and state operating loss carryforwards begin
to expire in 2000 and 1996, respectively. Additionally, due to ownership
changes which occurred during fiscal 1991, 1993 and 1996, the utilization of
approximately $8,000,000 of federal net operating loss carryforwards is
subject to annual limitations in future periods. The research and development
tax credits begin to expire in 2000. For further loss carryforward
information, see Note 5 of the Notes to Consolidated Financial Statements.
- 20 -
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are included in this Report:
<TABLE>
<CAPTION>
INVITRO INTERNATIONAL AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS AT SEPTEMBER 30, 1996
<S> <C>
Page
----
Independent Auditor's Report ........................................... 22
Consolidated Financial Statements as of September 30, 1996:
Consolidated Balance Sheet at September 30, 1996 .................... 23
Consolidated Statements of Operations for the years ended
September 30, 1996 and 1995 ...................................... 24
Consolidated Statements of Changes in Shareholders' Equity
for the years ended September 30, 1996 and 1995 .................. 25
Consolidated Statements of Cash Flows for the years ended
September 30, 1996 and 1995 ...................................... 26
Notes to Consolidated Financial Statements .......................... 27
</TABLE>
- 21 -
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
and Stockholders
InVitro International
Irvine, California
We have audited the accompanying consolidated balance sheet of InVitro
International and subsidiary as of September 30, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of InVitro
International and subsidiary as of September 30, 1996, and the results of
their operations and their cash flows for each of the two years ended
September 30, 1996 in conformity with generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
Anaheim, California
November 1, 1996
- 22 -
<PAGE>
INVITRO INTERNATIONAL
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30,
1996
-------------
<S> <C>
ASSETS:
Current assets:
Cash and cash equivalents ................................ $ 1,209,000
Accounts receivable - net of allowance for
doubtful accounts of $10,000 ........................... 146,000
Stock subscription receivable (Note 9) ................... 250,000
Inventories (Note 2) ..................................... 366,000
Prepaid expenses ......................................... 57,000
-------------
Total current assets ................................. 2,028,000
Furniture, equipment and leasehold improvements,
net (Note 3) ............................................. 221,000
Deposits and other assets .................................. 166,000
-------------
Total Assets ............................................... $ 2,415,000
=============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable ......................................... $ 174,000
Accrued payroll and employee benefits .................... 82,000
Accrued restructuring costs (Note 6) ..................... 51,000
Accrued private placement costs .......................... 25,000
Other accrued liabilities ................................ 19,000
-------------
Total current liabilities ............................ 351,000
-------------
Commitments and Contingencies (Notes 6 and 7)
Shareholders' Equity (Notes 4, 7 and 9):
Preferred stock, no par value; 1,000,000 shares
authorized; no shares issued or outstanding ............ --
Common stock, no par value;
40,000,000 shares authorized;
Issued and outstanding, 13,228,365 shares ........... 24,811,000
Subscribed but not paid for and not issued,
799,935 shares (Note 9) .......................... 225,000
Accumulated deficit ...................................... (23,028,000)
Currency translation adjustment .......................... 56,000
-------------
Total shareholders' equity ........................... 2,064,000
-------------
Total Liabilities and Shareholders' Equity ................. $ 2,415,000
=============
</TABLE>
See accompanying notes to consolidated financial statements.
- 23 -
<PAGE>
INVITRO INTERNATIONAL
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues ................................... $ 1,063,000 $ 1,137,000
------------ ------------
Costs and expenses:
Cost of revenues ......................... 660,000 794,000
Selling, general and administrative
expenses (Notes 6 and 7) ............... 2,144,000 2,555,000
Research and development ................. 232,000 594,000
Provision for loss on sale of
equipment (Note 3) ..................... -- 145,000
------------ ------------
Total costs and expenses .......... 3,036,000 4,088,000
------------ ------------
Operating loss ............................. (1,973,000) (2,951,000)
Interest income ............................ 74,000 188,000
------------ ------------
Net loss ................................... $ (1,899,000) $ (2,763,000)
============ ============
Net loss per common share .................. $ (0.15) $ (0.23)
============ ============
Weighted average
common shares outstanding ................ 12,386,893 11,969,682
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
- 24 -
<PAGE>
INVITRO INTERNATIONAL
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Common Stock Subscriptions Currency Total
------------------------ -------------------------- Accumulated translation Shareholders'
Shares Amount Shares Amount deficit adjustments Equity
---------- ------------ ----------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
September 30,
1994 ........... 11,969,682 $ 23,864,000 -0- $ -0- $ (18,366,000) $ 65,000 $ 5,563,000
Net loss for
the year ...... -- -- -- -- (2,763,000) -- (2,763,000)
Currency
translation
adjustments .... -- -- -- -- -- (2,000) (2,000)
---------- ------------ ----------- ------------- ------------- ----------- ------------
Balances at
September 30,
1995 ........... 11,969,682 $ 23,864,000 -0- $ -0- $ (21,129,000) $ 63,000 $ 2,798,000
Common stock
issued for cash
in private
placements ..... 1,249,350 909,000 -- -- -- -- 909,000
Common stock
subscribed for
but not paid
for ............ -- -- 799,935 225,000 -- -- 225,000
Exercise of
stock
options ........ 9,333 9,000 -- -- -- -- 9,000
Net loss for
the year ....... -- -- -- -- (1,899,000) -- (1,899,000)
Contributed
capital arising
from common stock
compensation
purchase
warrants ....... -- 29,000 -- -- -- -- 29,000
Currency
translation
adjustments .... -- -- -- -- -- (7,000) (7,000)
---------- ------------ ----------- ------------- ------------- ----------- ------------
Balances at
September 30,
1996 ........... 13,228,365 $ 24,811,000 799,935 $ 225,000 $ (23,028,000) $ 56,000 $ 2,064,000
========== ============ =========== ============= ============= =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
- 25 -
<PAGE>
INVITRO INTERNATIONAL
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ................................... $ (1,899,000) $ (2,763,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization ......... 187,000 226,000
Provision for loss on sale of equipment -- 145,000
Compensation expense arising from
common stock purchase warrants ...... 29,000 --
Changes in operating assets
and liabilities:
Accounts receivable ................. 44,000 103,000
Inventories ......................... (174,000) 141,000
Prepaid expenses and other assets ... 53,000 2,000
Accounts payable and accrued expenses (29,000) (539,000)
------------ ------------
Net Cash (Used In)
Operating Activities .................... (1,789,000) (2,685,000)
------------ ------------
INVESTING ACTIVITIES:
Proceeds from maturities of
marketable securities .................... 991,000 1,015,000
Proceeds from sale of equipment ............ 50,000 --
Capital expenditures ....................... (96,000) (51,000)
Additions to capitalized patent costs ...... (23,000) (57,000)
------------ ------------
Net Cash Provided By
Investing Activities .................... 922,000 907,000
------------ ------------
FINANCING ACTIVITIES:
Net cash provided by
issuance of common stock ................ 918,000 --
------------ ------------
Effect of foreign exchange rate
changes on cash ......................... (7,000) (2,000)
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS .................... 44,000 (1,780,000)
Cash and cash equivalents at
beginning of year ....................... 1,165,000 2,945,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ... $ 1,209,000 $ 1,165,000
============ ============
Supplemental disclosures
of cash flow information:
Cash paid during the period for:
Income taxes ......................... $ 1,000 $ 1,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
- 26 -
<PAGE>
INVITRO INTERNATIONAL AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
InVitro International (the "Company") is engaged in the development,
manufacture and sale of proprietary and preventive products and services
directed to human and environmental safety. The Company's proprietary
diagnostic products and services are used by manufacturers and others to
evaluate the safety of household, industrial and consumer products and to
classify corrosives and other hazardous materials in compliance with federal
transportation regulations. Child safety and DNA identification products are
marketed through hospitals and other institutional markets to provide parents
with materials for education, documentation and identification of their
children.
The accompanying financial statements include the accounts of the Company and
its wholly-owned inactive European subsidiary. All intercompany transactions
have been eliminated in consolidation. In August 1994, the Company initiated
the process of liquidating its European subsidiary. Beginning with the year
ended September 30, 1995, the Company's activities in Europe are carried out
by a French branch office of the U.S. parent company. The Company also
conducts business in Asia through an independent sales agent based in Japan.
BASIS OF PRESENTATION
The Company's financial statements are presented on a going concern basis,
which contemplates the realization of assets and satisfaction of liabilities
in the normal course of business. The Company incurred net losses of
$1,870,000 and $2,763,000 for the years ended September 30, 1996 and 1995,
respectively. Additionally, the Company has experienced negative cash flows
from operating activities of $1,789,000 and $2,685,000, respectively, for
these same two years.
In response to continuing operating losses and a decline in sales which began
during fiscal 1994, management implemented certain cost reduction measures in
1995 and 1996, including reducing its U.S. workforce, eliminating excess
facilities and downsizing its European sales office. The Company has also
implemented new sales and marketing programs and in 1996 obtained exclusive
distribution rights to the DNA child identification system for institutional
markets in an effort to increase revenues.
Cost reductions and new marketing programs have reduced the level of operating
losses. Management anticipates that the Company will continue to incur losses
for at least the near term future due to its current level of fixed expenses
for manufacturing overhead, as well as expenses for research and development,
selling, general and administrative activities, all in relation to its current
sales volume. Losses are expected to continue until such time as sales
increase to a level necessary to absorb fixed costs. At its current expense
levels the Company would need approximately $5,000,000 in annual sales to
break even. No assurances can be given as to whether or when sales increases
may be achieved. Sales increases will be dependent in part upon expanding use
of the Company's products and services by both existing customers and
prospective new accounts, many of which are in the early stages of evaluating
in vitro alternatives to traditional animal testing methods.
At September 30, 1996, the Company's cash resources were $1,209,000 and an
additional $250,000 was collected on the stock subscription receivable (see
Note 9 to the Consolidated Financial Statements). As a result of previous
actions taken to reduce expenses, management believes that the Company s cash
resources are sufficient to fund operations for at least the next year.
Further, if actions being taken to increase sales are successful, or
additional cost reduction steps are taken, operating results could improve.
- 27 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
CASH EQUIVALENTS
For financial reporting purposes, cash equivalents consist of money market
fund accounts and all other highly liquid investments with a maturity of three
months or less when purchased.
At September 30, 1996, the Company had approximately $1,165,000 on deposit in
a mutual fund.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Management has recorded reserves that they believe are appropriate
for obsolete inventory. However, the Company has purchased inventories of
Guardian DNA in anticipation of future sales and adjustments to the inventory
reserve would be required if such sales are not generated.
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is determined using
the straight-line method based upon the estimated useful lives of the assets
with estimated useful lives ranging from three to 10 years. Leasehold
improvements are amortized over the life of the lease or the life of the
asset, whichever is shorter.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to expense as incurred.
ADVERTISING COSTS
The Company expenses the production costs of advertising in the month that the
advertisement is first published. Advertising expense during the years ended
September 30, 1996 and 1995 amounted to $313,000 and $158,000, respectively.
Advertising costs included in prepaid expenses at September 30, 1996 and 1995
amounted to $13,000 and $3,000, respectively.
CREDIT RISK
The Company sells its products to independent distributors, contract
laboratories and end users in approximately ten different industries in the
U.S., Europe and Asia. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses and such losses, to date, have been
minimal. Management believes that future credit losses will not be material.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign operations have been
translated to U.S. dollars in accordance with FASB Statement No. 52, "Foreign
Currency Translation". Translation gains and losses resulting from certain
intercompany transactions are excluded from results of operations and are
accumulated in the separate component of shareholders' equity. Gains and
losses from foreign currency transactions denominated in a currency other than
the parent company's or its foreign operations' local currencies are included
in results of operations.
- 28 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PATENTS
Patents are amortized over an estimated useful life of five years using the
straight-line method. Aggregate patent costs net of accumulated amortization
amounted to $122,000 at September 30, 1996 and are included in deposits and
other assets in the accompanying balance sheet.
EARNINGS PER SHARE
Earnings per share were computed by dividing net loss for the period by the
weighted average number of shares of common stock and dilutive common stock
equivalents. All common stock equivalents (stock options and warrants) have
been excluded from earnings per share for the years ended September 30, 1996
and 1995, as the effect of these common stock equivalents is antidilutive.
INCOME TAXES
Deferred income taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment.
USE OF ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the financial statement date and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In 1996, the Company adopted Financial Accounting Standards Board Statement
No. 107, which requires disclosure about the fair value of the Company's
financial instruments. The carrying amount of cash, accounts receivable,
stock subscription receivable and accounts payable approximates fair value
because of the short term maturity of those instruments.
ACCOUNTING DEVELOPMENTS
In 1995 the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation". Statement No. 123 establishes financial accounting and
reporting standards for stock-based compensation plans such as a stock
purchase plan. The Statement generally suggests, but does not require, stock-
based compensation transactions with employees be accounted for based on the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable. An enterprise may
continue to follow the requirements of Accounting Principles Board (APB)
Opinion No. 25, which does not require compensation to be recorded if the
consideration is at least equal to the fair value at the measurement date. If
an enterprise elects to follow APB Opinion No. 25, it must disclose the pro
forma effects on net income as if compensation were measured in accordance
with the suggestions
- 29 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
of Statement No. 123. Nonemployee stock-based transactions occurring after
December 15, 1995 must be accounted for at fair value. The Company has
determined that it will continue to follow the measurement principles of APB
Opinion No. 25 for stock-based employee compensation, therefore, adoption of
this pronouncement in fiscal year 1997 is not expected to have a material
impact on the financial statements.
NOTE 2. INVENTORIES
Inventories consist of the following:
<TABLE>
<S> <C>
Raw materials and work-in-process .......... $ 59,000
Finished goods ............................. 307,000
------------
$ 366,000
============
</TABLE>
NOTE 3. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements consist of the following:
<TABLE>
<S> <C>
Furniture and equipment .................... $ 840,000
Leasehold improvements ..................... 206,000
------------
1,046,000
Less accumulated depreciation .............. (825,000)
------------
$ 221,000
============
</TABLE>
In December 1995, the Company sold a large capacity freeze dryer for $40,000
which had been used by the Company to manufacture reagent powder for certain
of its test kits. The Company has subcontracted with the purchaser of the
this equipment to supply the Company's future requirements for reagent
materials. The Company recorded a provision of $145,000 in September 1995 to
write this equipment down to its net realizable value and to reserve for the
estimated disposal costs.
NOTE 4. STOCK OPTIONS, WARRANTS AND OTHER STOCK ACTIVITY
The Company has adopted three stock option plans under which a total of
1,450,000 shares of the Company's common stock were available for the granting
of stock options to the Company's employees, consultants, officers and
directors. Options granted under the Plans are exercisable during such period
as defined by the Board of Directors.
A summary of stock option activity under the three stock option plans follows:
<TABLE>
<S> <C>
Options granted and outstanding at September 30, 1994 .. 854,750
Granted ............................................. 1,080,000
Expired or canceled ................................. (785,850)
Exercised ........................................... --
-----------
Options granted and outstanding at September 30, 1995 .. 1,148,900
Granted ............................................. 25,000
Expired or canceled ................................. (159,667)
Exercised ........................................... (9,333)
-----------
Options granted and outstanding at September 30, 1996 .. 1,004,900
===========
Exercise price of outstanding options .............. $1.00 - $5.00
</TABLE>
- 30 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4. STOCK OPTIONS, WARRANTS AND OTHER STOCK ACTIVITY (continued)
At September 30, 1996, options for 584,559 shares were exercisable and there
were 178,692 options available for future grants.
In August 1995, the Company adopted a stock option plan for non-employee
directors. Under this plan, each non-employee director is granted an option
to purchase 25,000 shares of common stock on the first business day of each
fiscal year.
A summary of stock option activity under the stock option plan for non-
employee directors follows:
<TABLE>
<S> <C>
Options granted and outstanding at September 30, 1995 .. -0-
Granted .............................................. 75,000
Expired or canceled .................................. --
Exercised ............................................ --
------------
Options granted and outstanding at September 30, 1996 .. 75,000
============
Exercise price of outstanding options .................. $1.375
</TABLE>
At September 30, 1996, no options were exercisable and there were 425,000
options available for future grants. In October 1996, options to purchase a
total of 100,000 shares at an exercise price of $1.00 per share were granted
to the Company's four non-employee directors.
Pursuant to an agreement in March 1996, as consideration for future consulting
services the Company issued 75,000 common stock purchase warrants to a
financial public relations consultant. The warrants are exercisable at $1.25
per share and expire on March 31, 1999.
Pursuant to an agreement in January 1994, as consideration for future
consulting services the Company issued 500,000 common stock purchase warrants
to a management consulting firm which is affiliated with one of the Company s
directors. The warrants were exercisable at $7.00 per share (with respect to
250,000 warrants) and $10.00 per share (with respect to the remaining 250,000
warrants), and expire on January 31, 1999. In January 1995, in recognition of
this consulting firm s extensive services in working with federal government
agencies to further the regulatory acceptance of the Company s products, the
Board of Directors approved a reduction in the exercise price of these 500,000
warrants to $1.75 per share.
Pursuant to an agreement in February 1993, the Company issued 229,741 common
stock purchase warrants to an investment banking firm which are exercisable at
$4.00 per share until February 16, 1998. These warrants were issued as
consideration for financial consulting services.
At September 30, 1996, there were 2,154,641 shares of common stock reserved
for issuance upon future exercise of options and warrants outstanding at that
date.
A portion of the stock options issued to employees includes a compensation
element which is measured and recorded by the difference on the date of grant
between the exercise price of the stock options and the fair market value of a
share of common stock which is assumed to be the quoted price at the grant
date under APB Opinion 25. Common stock purchase warrants issued in
connection with a consulting agreement included a compensation element which
was measured using its fair value. In connection with the stock options
granted during 1996, $29,000 was recorded as compensation expense and
- 31 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4. STOCK OPTIONS, WARRANTS AND OTHER STOCK ACTIVITY (continued)
contributed capital in the accompanying financial statements. There was no
compensation recorded in the 1995 financial statements as a result of common
stock purchase warrants or options.
NOTE 5. INCOME TAXES
The Company has federal and state net operating loss carryforwards at
September 30, 1996 which expire as follows:
<TABLE>
<CAPTION>
Date of Research and
Expiration Federal State Development
---------- ------------ ----------- ------------
<S> <C> <C> <C>
1996 $ 1,781,000
1997 1,404,000
1998 2,672,000
1999 1,188,000
2000 $ 52,000 $ 4,000
2001 284,000 908,000 17,000
2002 551,000 25,000
2003 398,000 13,000
2004
2005 3,240,000 105,000
2006 3,443,000
2007 2,816,000 45,000
2008 4,222,000 73,000
2009 2,643,000 41,000
2010 2,055,000 2,000
------------ ----------- ---------
$ 19,704,000 $ 7,953,000 $ 325,000
============ =========== =========
</TABLE>
Due to ownership changes which occurred in fiscal 1991, 1993 and 1996, the
utilization of approximately $8,000,000 of federal operating loss
carryforwards is subject to annual limitations in future periods, which could
substantially reduce the Company s ability to offset future taxable income.
Utilization of operating loss carryforwards could be further constrained if
additional ownership changes occur in the future.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
Company's deferred tax assets at September 30, 1996 and 1995 are comprised as
follows:
<TABLE>
<CAPTION>
September 30,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Inventory valuation .................... $ 29,000 $ 36,000
Accrued expenses ....................... 31,000 99,000
Allowance for doubtful accounts ........ 4,000 6,000
Other assets ........................... 12,000 --
Research and development tax credits ... 323,000 323,000
Net operating loss carryforwards ....... 7,200,000 6,551,000
------------ ------------
7,599,000 7,015,000
Deferred tax liabilities:
Depreciation ........................... (23,000) (19,000)
------------ ------------
Net deferred tax assets before allowance . 7,576,000 6,996,000
Valuation allowance for deferred tax assets (7,576,000) (6,996,000)
------------ ------------
Net deferred tax assets .................. $ -0- $ -0-
============ ============
</TABLE> - 32 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5. INCOME TAXES (continued)
Management has deemed it appropriate to record a valuation allowance on the
deferred tax assets due to the past losses and no assurance of future
earnings.
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rates to income before income taxes due
to the valuation allowance recorded on deferred tax assets.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company leases its facility in Irvine, California for $6,400 per month
under a two year lease which expires on February 28, 1998.
The Company has entered into equipment leases which are accounted for as
operating leases. Future commitments under all of the Company's noncancelable
equipment lease agreements are as follows:
<TABLE>
<S> <C>
Fiscal 1997 .......................... $ 85,000
Fiscal 1998 .......................... 35,000
-----------
$ 121,000
===========
</TABLE>
Rent expense for the years ended September 30, 1996 and 1995 amounted to
$130,000 and $160,000, respectively.
In 1988 the Company entered into an agreement with another company for an
exclusive license to patent rights which are utilized in the Company's ocular
irritancy diagnostic test. Under terms of this license agreement, the Company
is required to pay royalties of 6% of products sold utilizing this patent.
Royalty expense under this agreement, which is included in cost of revenues,
amounted to $13,000 and $17,000 for the years ended September 30, 1996 and
1995, respectively. The license agreement expires upon expiration of the
patent in 2003.
The Company is a defendant in a wrongful termination lawsuit which arose when
the Company determined to liquidate its European subsidiary. Management,
based in part on consultation with legal counsel, believes this suit is
without substantial merit and should not result in a judgment which in the
aggregate would have a material adverse effect on the Company s financial
statements.
A restructuring reserve was established when the Company liquidated its
European subsidiary. Management has elected to keep this accrual until all
matters related to the liquidation have been settled.
NOTE 7. RELATED PARTY TRANSACTIONS
In January 1995, the Company granted to a retiring director an option to
purchase 30,000 shares of common stock at $1.75 per share in consideration for
this individual agreeing to remain available as a consultant to the Company.
During the years ended September 30, 1996 and 1995, the Company paid $25,000
and $43,000, respectively, to an attorney who is a director of the Company.
The Company entered into a Distributorship Agreement in March 1996 to market
the Guardian-DNA identification system developed and supplied by Miragen Inc.
("Miragen"). The Company holds exclusive rights to market and distribute
- 33 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7. RELATED PARTY TRANSACTIONS (continued)
Guardian DNA products to birthing centers, hospitals and other institutional
obstetric markets for an initial three year term, renewable annually
thereafter. To maintain exclusive marketing rights under the Miragen
Distributorship Agreement, the Company is required to attain minimum purchase
quotas of at least 20,000 units in the first year of the agreement and at
least 36,000 units in the second year of the agreement. Minimum purchase
quotas for the third year of the agreement will be determined by mutual
agreement approximately 120 days before that period commences. Two of the
Company's officers, directors and shareholders are also officers, directors
and shareholders of Miragen.
NOTE 8. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one primary industry segment, providing safety testing
products and services including child safety and DNA identification products
to institutions and parents and in vitro (non-animal) diagnostic tests to
customers in the cosmetics, personal care, household products, textiles,
pharmaceuticals, chemicals and hazardous waste transportation industries.
Sales, operating loss, and identifiable assets by geographic area for the
years ended September 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
United States ........................ $ 684,000 $ 735,000
Europe ............................... 248,000 239,000
Asia ................................. 131,000 163,000
------------ ------------
$ 1,063,000 $ 1,137,000
============ ============
Operating loss:
United States ........................ $ (1,890,000) $ (2,849,000)
Europe ............................... (56,000) (63,000)
Asia ................................. (27,000) (39,000)
------------ ------------
$ (1,973,000) $ (2,951,000)
============ ============
Identifiable assets:
United States ........................ $ 2,289,000 $ 3,034,000
Europe ............................... 54,000 73,000
Asia ................................. 72,000 46,000
------------ ------------
$ 2,415,000 $ 3,153,000
============ ============
</TABLE>
NOTE 9. SUBSEQUENT EVENTS
The stock subscription receivable of $250,000 was collected in October 1996.
- 34 -
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Inapplicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
[This information is incorporated by reference to the Company's proxy
statement for its 1997 Annual Meeting of Shareholders.]
ITEM 10. EXECUTIVE COMPENSATION
[This information is incorporated by reference to the Company's proxy
statement for its 1997 Annual Meeting of Shareholders.]
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
[This information is incorporated by reference to the Company's proxy
statement for its 1997 Annual Meeting of Shareholders.]
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
[This information is incorporated by reference to the Company's proxy
statement for its 1997 Annual Meeting of Shareholders.]
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following exhibits are filed with this Report or are
incorporated by reference herein:
# Indicates exhibits filed with this Report; all other exhibits are
incorporated by reference to prior filings.
(M) Denotes management contract or compensation plan or arrangement.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -------------------------------------------------------
<S> <C> <C>
3.1 Registrant's Restated Articles of Incorporation as filed with
Secretary of State of California on February 8, 1996
(incorporated by reference to Exhibit 3.1 filed with
Registrant's Quarterly Report on Form 10-QSB for the Quarter
ended December 31, 1995).
3.2 Bylaws of the Registrant (incorporated by reference to Exhibit
3.2 filed with Registrant's Registration Statement on Form S-1,
Commission File No. 33-39125).
3.3 Amendment to Section 2 of Article III of Registrant's ByLaws,
adopted by shareholder vote on March 27, 1992 (incorporated by
reference to Exhibit 3.2.2 filed with Registrant's Report on
Form 10-Q for the quarter ended March 31, 1992).
- 35 -
<PAGE>
3.4 Amendment to Sections 6 and 7 of Article IX of Registrant's
ByLaws, adopted by director vote on October 21, 1992
(incorporated by reference to Exhibit 3.2.3 filed with
Registrant's Post-Effective Amendment No. 4 to Registration
Statement on Form S-1, Commission File No. 33-39125).
(M) 10.1 Registrant's 1988 Stock Option Plan (incorporated by reference
to Exhibit 10.1 filed with Registrant's Registration Statement
on Form S-1, Commission File No. 33-39125).
(M) 10.2 Registrant's 1991 Stock Option Plan (incorporated by reference
to Exhibit 10.11 filed with Registrant's Report on Form 10-K
for the Transition Period Ended September 30, 1991).
(M) 10.3 Registrant's 1992 Stock Option Plan (incorporated by reference
to Exhibit 10.3.1 filed with Registrant's Report on Form 10-K
for the year ended September 30, 1992).
(M) 10.4 Registrant's 1996 Stock Option Plan for Non-Employee Directors
(incorporated by reference to Exhibit 10.4 filed with
Registrant's Annual Report on Form 10-K for the Fiscal Year
ended September 30, 1995).
(M) 10.5.1 Stock Option Agreement under 1996 Stock Option Plan for Non-
Employee Directors dated October 2, 1995 granted by Registrant
to William M. Curtis covering 25,000 shares (incorporated by
reference to Exhibit 10.5 filed with Registrant's Annual Report
on Form 10-K for the Fiscal Year ended September 30, 1995).
(M) 10.5.2 Stock Option Agreement under 1996 Stock Option Plan for Non-
Employee Directors dated October 2, 1995 granted by Registrant
to Irwin J. Gruverman covering 25,000 shares (incorporated by
reference to Exhibit 10.6 filed with Registrant's Annual Report
on Form 10-K for the Fiscal Year ended September 30, 1995).
(M) 10.5.3 Stock Option Agreement under 1996 Stock Option Plan for Non-
Employee Directors dated October 2, 1995 granted by Registrant
to Jeffrey A. Safchik covering 25,000 shares (incorporated by
reference to Exhibit 10.7 filed with Registrant's Annual Report
on Form 10-K for the Fiscal Year ended September 30, 1995).
# (M) 10.5.4 Stock Option Agreement under 1996 Stock Option Plan for Non-
Employee Directors dated October 1, 1996 granted by Registrant
to William M. Curtis covering 25,000 shares.
# (M) 10.5.5 Stock Option Agreement under 1996 Stock Option Plan for Non-
Employee Directors dated October 1, 1996 granted by Registrant
to Irwin J. Gruverman covering 25,000 shares.
# (M) 10.5.6 Stock Option Agreement under 1996 Stock Option Plan for Non-
Employee Directors dated October 1, 1996 granted by Registrant
to Jeffrey A. Safchik covering 25,000 shares.
# (M) 10.5.7 Stock Option Agreement under 1996 Stock Option Plan for Non-
Employee Directors dated October 1, 1996 granted by Registrant
to David A. Reed covering 25,000 shares.
(M) 10.6.1 Stock Option Agreement under 1992 Stock Option Plan dated
October 29, 1992 granted by Registrant to William M. Curtis
covering 50,000 shares (incorporated by reference to Exhibit
10.3.5 filed with Registrant's Report on Form 10-K for the year
ended September 30, 1992).
- 36 -
<PAGE>
(M) 10.6.2 Stock Option Agreement under 1992 Stock Option Plan dated
September 29, 1994 granted by Registrant to Jeffrey A. Safchik
covering 50,000 shares (incorporated by reference to Exhibit
10.8 filed with Registrant's Report on Form 10-K for the year
ended September 30, 1994).
(M) 10.6.3 Stock Option Agreement under 1992 Stock Option Plan dated
November 7, 1994 granted by Registrant to W. Richard Ulmer
covering 250,000 shares (incorporated by reference to Exhibit
10.12 filed with Registrant's Report on Form 10-K for the year
ended September 30, 1994).
(M) 10.6.4 Stock Option Agreement under 1991 Stock Option Plan dated
September 1, 1995 granted by Registrant to W. Richard Ulmer
covering 160,000 shares (incorporated by reference to Exhibit
10.36 filed with Registrant's Annual Report on Form 10-K for
the Fiscal Year ended September 30, 1995).
(M) 10.6.5 Stock Option Agreement under 1992 Stock Option Plan dated
September 1, 1995 granted by Registrant to Dennis E. Chenoweth
covering 60,000 shares (incorporated by reference to Exhibit
10.38 filed with Registrant's Annual Report on Form 10-K for
the Fiscal Year ended September 30, 1995).
(M) 10.7 Employment agreement dated November 2, 1994 between the
Registrant and W. Richard Ulmer (incorporated by reference to
Exhibit 10.15 filed with Registrant's Report on Form 10-K for
the year ended September 30, 1994).
10.8.1 Indemnification Agreement dated August 27, 1992 between
Registrant and William M. Curtis (incorporated by reference to
Exhibit 10.31 filed with Registrant's Report on Form 10-K for
the year ended September 30, 1992).
10.8.2 Indemnification Agreement dated March 11, 1993 between
Registrant and Irwin J. Gruverman (incorporated by reference
to Exhibit 10.34 filed with Registrant's Post-Effective
Amendment No. 1 to Registration Statement on Form S-1,
Commission File No. 33-39125).
10.8.3 Indemnification Agreement dated August 24, 1995 between
Registrant and Dennis E. Chenoweth (incorporated by reference
to Exhibit 10.19 filed with Registrant's Annual Report on Form
10-K for the Fiscal Year ended September 30, 1995).
10.8.4 Indemnification Agreement dated February 8, 1994 between
Registrant and Jeffrey A. Safchik (incorporated by reference
to Exhibit 10.49 filed with Registrant's Report on Form 10-Q
for the quarter ended March 31, 1994).
10.8.5 Indemnification Agreement dated November 15, 1994 between
Registrant and W. Richard Ulmer (incorporated by reference to
Exhibit 10.22 filed with Registrant's Report on Form 10-K for
the year ended September 30, 1994).
# 10.8.6 Indemnification Agreement dated August 5, 1996 between
Registrant and David A. Reed.
10.9 Form of Series B Common Stock Purchase Warrants exercisable at
$3.50 per share until May 28, 1997 (incorporated by reference
to Exhibit 10.1 filed with Registrant's Report on Form 10-Q for
the quarter ended June 30, 1992).
- 37 -
<PAGE>
10.10 Form of Series C Common Stock Purchase Warrants exercisable at
$4.00 per share until February 16, 1998 (incorporated by
reference to Exhibit 10.38 filed with Registrant's Report on
Form 10-K for the year ended September 30, 1993).
(M) 10.11.1 Consulting Agreement dated January 31, 1994 between Registrant
and Greenstreet Partners (incorporated by reference to Exhibit
10.45 filed with Registrant's Report on Form 10-Q for the
quarter ended March 31, 1994).
(M) 10.11.2 Warrant Agreement dated March 9, 1994 between Registrant and
Greenstreet Partners relating to Redeemable Series D Common
Stock Purchase Warrants covering 250,000 shares expiring on
January 31, 1999 (incorporated by reference to Exhibit 10.46
filed with Registrant's Report on Form 10-Q for the quarter
ended March 31, 1994).
(M) 10.11.3 Letter Agreement dated March 26, 1995 amending Warrant
Agreement dated March 9, 1994 between Registrant and
Greenstreet Partners relating to Redeemable Series D Common
Stock Purchase Warrants covering 250,000 shares expiring on
January 31, 1999 (incorporated by reference to Exhibit 10.2
filed with Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995).
(M) 10.11.4 Warrant Agreement dated March 9, 1994 between Registrant and
Greenstreet Partners relating to Redeemable Series E Common
Stock Purchase Warrants covering 250,000 shares expiring on
January 31, 1999 (incorporated by reference to Exhibit 10.47
filed with Registrant's Report on Form 10-Q for the quarter
ended March 31, 1994).
(M) 10.11.5 Letter Agreement dated March 26, 1995 amending Warrant
Agreement dated March 9, 1994 between Registrant and
Greenstreet Partners relating to Redeemable Series E Common
Stock Purchase Warrants covering 250,000 shares expiring on
January 31, 1999 (incorporated by reference to Exhibit 10.3
filed with Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995).
# 10.12 Warrant Agreement dated March 21, 1996 between Registrant and
Bob Grossmann relating to Common Stock Purchase Warrants Series
F covering 75,000 shares expiring on March 31, 1999.
10.13.1 Lease dated May 11, 1990 between Registrant as lessee and Dale
M. Kellogg and Barbara T. Kellogg, Trustees, as lessor, for
facilities at 16632 Millikan Avenue, Irvine, California
(incorporated by reference to Exhibit 10.2 filed with
Registrant's Registration Statement on Form S-1, Commission
File No. 33-39125).
# 10.13.2 Third Amendment dated January 23, 1996 to Lease dated May 11,
1990 between Registrant as lessee and Dale M. Kellogg and
Barbara T. Kellogg, Trustees, as lessor, for facilities at
16632 Millikan Avenue, Irvine, California.
10.14 License Agreement dated July 1, 1988 between the Registrant and
Preventive Diagnostics Corporation (incorporated by reference
to Exhibit 10.5 filed with Registrant's Registration Statement
on Form S-1, Commission File No. 33-39125).
- 38 -
<PAGE>
10.15.1 Distributorship Agreement dated March 11, 1996 between the
Registrant and Miragen Inc. (incorporated by reference to
Exhibit 10.39 filed with Registrant's Quarterly Report on Form
10-QSB for the Quarter ended March 31, 1996).
# 10.15.2 Amendment dated November 25, 1996 to Distributorship Agreement
between the Registrant and Miragen Inc.
10.16 Form of Regulation S Offshore Transaction Subscription
Agreement executed by the Registrant in connection with the
sale of 600,000 shares of Common Stock on May 16, 1996
(incorporated by reference to Exhibit 10.40 filed with
Registrant's Report on Form 8-K dated as of May 16, 1996).
10.17 Regulation S Offshore Transaction Subscription Agreement dated
June 18, 1996 between the Registrant and Angelina Panvini as to
the sale of 649,350 shares of Common Stock (incorporated by
reference to Exhibit 10.41 filed with Registrant's Report on
Form 8-K dated as of June 18, 1996).
10.18 Regulation S Offshore Transaction Subscription Agreement dated
September 30, 1996 between the Registrant and Wahoo
International Corporation as to the sale of 639,948 shares of
Common Stock (incorporated by reference to Exhibit 10.42 filed
with Registrant's Report on Form 8-K dated as of October 7,
1996).
10.19 Regulation S Offshore Transaction Subscription Agreement dated
September 30, 1996 between the Registrant and Settondown
Capital International Ltd. as to the sale of 159,987 shares of
Common Stock (incorporated by reference to Exhibit 10.43 filed
with Registrant's Report on Form 8-K dated as of October 7,
1996).
# 10.20 Agreement dated October 24, 1996 between the Registrant and
American Sampling Incorporated for distribution of Guardian DNA
materials in GiftPaxs to participating hospitals.
# 23.1 Consent of Counsel
# 23.2 Consent of McGladrey & Pullen, LLP, independent public
accountants.
# 27 Financial Data Schedule at September 30, 1996.
# 99.1 Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of
1995.
</TABLE>
(b) REPORTS ON FORM 8-K.
There were no Reports on Form 8-K filed by the Company during the
quarter ended September 30, 1996. A Report on Form 8-K dated as of October 7,
1996 was filed concerning the sale of 799,935 shares of the Company's Common
Stock in a Regulation S private placement offshore financing transaction
pursuant to agreements executed on September 30, 1996.
- 39 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: December 17, 1996
INVITRO INTERNATIONAL
(Registrant)
By: /s/ W. Richard Ulmer
---------------------------------
W. Richard Ulmer, President and Chief Executive Officer
(principal executive officer; principal financial officer)
By: /s/ Kristina A. Parker
---------------------------------
Kristina A. Parker, Controller
(principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- ----------------------- --------- ------------------------
<S> <C> <C>
/s/ Dennis E. Chenoweth
- ------------------------ Director December 17, 1996
Dennis E. Chenoweth
/s/ William M. Curtis
- ------------------------ Director December 17, 1996
William M. Curtis
/s/ Irwin J. Gruverman
- ------------------------ Director December 17, 1996
Irwin J. Gruverman
/s/ David A. Reed
- ------------------------ Director December 17, 1996
David A. Reed
/s/ Jeffrey A. Safchik
- ------------------------ Director December 17, 1996
Jeffrey A. Safchik
/s/ W. Richard Ulmer
- ------------------------ Director December 17, 1996
W. Richard Ulmer
</TABLE>
- 40 -
<PAGE>
InVitro International
STOCK OPTION AGREEMENT
UNDER 1996 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
______________________________________
Date of Grant: October 1, 1996
INVITRO INTERNATIONAL, a California corporation (the "Company") hereby
grants to WILLIAM M. CURTIS ("Optionee"), pursuant to the 1996 Stock Option
Plan for Non-Employee Directors of the Company (the "Plan"), a copy of which
is appended hereto and made a part hereof as Schedule I, an option to purchase
a total of TWENTY-FIVE THOUSAND (25,000) shares of Common Stock of the Company
at a price of ONE DOLLAR ($1.00) per share (subject to adjustment as provided
in Section 8 of the Plan), on the terms and conditions set forth in the Plan
and hereinafter. This option shall not be exercisable later than on October
1, 2006 (herein referred to as the "Expiration Date"), and may only be
exercised at a time when the Optionee is an employee of the Company except as
otherwise provided in paragraphs 6(d) and 6(e) of the Plan in the event of
termination of service as a director of the Company.
1. Vesting. Subject to the terms and conditions of this Agreement,
the shares subject this option shall be exercisable as follows:
(a) The first EIGHT THOUSAND THREE HUNDRED THIRTY-THREE (8,333) shares
covered by this option may be exercised at any time, in whole or in
part, from and after OCTOBER 1, 1997; and
(b) The next EIGHT THOUSAND THREE HUNDRED THIRTY-THREE (8,333) shares
covered by this option may be exercised at any time, in whole or in
part, from and after OCTOBER 1, 1998; and
(c) The remaining EIGHT THOUSAND THREE HUNDRED THIRTY-FOUR (8,334) shares
covered by this option may be exercised at any time, in whole or in
part, from and after OCTOBER 1, 1999;
provided, however, that in no event shall this option be exercisable later
than the Expiration Date.
2. Termination. This option and all rights hereunder to the extent
such rights shall not have been exercised shall terminate and become null and
void if the Optionee ceases to be a director of the Company (whether by
resignation, retirement, dismissal, death or otherwise), except that (a) in
the event of the mandatory retirement pursuant to Board policy, death or
permanent disability of the Optionee while
InVitro International Stock Option Page 1
<PAGE>
a director of the Company, this option may be exercised within the applicable
period of time and by the persons indicated in paragraph 6(e) of the Plan, and
(b) in the event of the termination of the Optionee's service as a director of
the Company for any other reason, this option only to the extent exercisable
at the date of such termination may be exercised prior to the expiration of
three (3) months from the date of such termination, and shall terminate in all
other respects; provided, however, that in no event may this option be
exercised after the Expiration Date.
3. Exercise. This option is exercisable with respect to all, or from
time to time with respect to any portion, of the shares then subject to such
exercise, by delivering written notice of such exercise, in the form
prescribed by the Stock Option Committee, to the principal office of the
Secretary of the Company. Each such notice shall be accompanied by payment in
full of the purchase price of such shares.
4. Non-Transferable. This option shall during the Optionee's
lifetime be exercisable only by the Optionee, and neither it nor any right
thereunder shall be transferable except by will or laws of descent and
distribution, or be subject to attachment, execution or other similar process.
In the event of any attempt by the Optionee to alienate, assign, pledge,
hypothecate or otherwise dispose of the option or any right thereunder, except
as provided for herein, or in the event of the levy of any attachment,
execution or similar process upon the rights or interest hereby conferred, the
Company may terminate the option by notice to the Optionee and the option
shall thereupon become null and void.
5. Miscellaneous.
(a) Neither the granting of this option nor the exercise thereof shall
be construed as conferring upon the Optionee any right to continue as a
director of the Company, or as interfering with or restricting in any way the
right of the Company to terminate such services at any time in accordance with
applicable law.
(b) Neither the Optionee, nor any person entitled to exercise his or
her rights in the event of his or her death, shall have any of the rights of a
shareholder with respect to the shares subject to the option, except to the
extent that certificates for such shares shall have been issued upon exercise
of the option as provided for herein.
(c) The Company is relieved from any liability for the non-issuance or
non-transfer or any delay in the issuance or transfer of any shares of Common
Stock subject to this option which results from the inability of the Company
to obtain, or in any delay in obtaining, from each regulatory body having
jurisdiction all requisite authority to issue or transfer shares of Common
Stock of the Company in satisfaction of this option if counsel for the Company
deems such authority necessary for the lawful issuance or transfer of any such
shares.
(d) No Common Stock acquired by exercise of this option shall be sold
or otherwise disposed of in violation of any federal or state securities law
or regulation.
(e) This option shall be exercised in accordance with such administra-
tive regulations as the Stock Option Committee may from time to time adopt.
All decisions of the Stock Option Committee upon any question arising under
the Plan or under this instrument shall be conclusive and binding upon the
Optionee and all other persons.
InVitro International Stock Option Page 2
<PAGE>
IN WITNESS WHEREOF, this Stock Option Agreement has been executed as of
the day and year first written above.
INVITRO INTERNATIONAL
By: /s/ W. Richard Ulmer
-----------------------
W. RICHARD ULMER, President
[Corporate Seal]
ATTEST:
/s/ Dennnis E. Chenoweth
- ------------------------------------------
Dennis E. Chenoweth, Senior Vice President
InVitro International Stock Option Page 3
<PAGE>
InVitro International
STOCK OPTION AGREEMENT
UNDER 1996 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
______________________________________
Date of Grant: October 1, 1996
INVITRO INTERNATIONAL, a California corporation (the "Company") hereby
grants to IRWIN J. GRUVERMAN ("Optionee"), pursuant to the 1996 Stock Option
Plan for Non-Employee Directors of the Company (the "Plan"), a copy of which
is appended hereto and made a part hereof as Schedule I, an option to purchase
a total of TWENTY-FIVE THOUSAND (25,000) shares of Common Stock of the Company
at a price of ONE DOLLAR ($1.00) per share (subject to adjustment as provided
in Section 8 of the Plan), on the terms and conditions set forth in the Plan
and hereinafter. This option shall not be exercisable later than on October
1, 2006 (herein referred to as the "Expiration Date"), and may only be
exercised at a time when the Optionee is an employee of the Company except as
otherwise provided in paragraphs 6(d) and 6(e) of the Plan in the event of
termination of service as a director of the Company.
1. Vesting. Subject to the terms and conditions of this Agreement,
the shares subject this option shall be exercisable as follows:
(a) The first EIGHT THOUSAND THREE HUNDRED THIRTY-THREE (8,333) shares
covered by this option may be exercised at any time, in whole or in
part, from and after OCTOBER 1, 1997; and
(b) The next EIGHT THOUSAND THREE HUNDRED THIRTY-THREE (8,333) shares
covered by this option may be exercised at any time, in whole or in
part, from and after OCTOBER 1, 1998; and
(c) The remaining EIGHT THOUSAND THREE HUNDRED THIRTY-FOUR (8,334) shares
covered by this option may be exercised at any time, in whole or in
part, from and after OCTOBER 1, 1999;
provided, however, that in no event shall this option be exercisable later
than the Expiration Date.
2. Termination. This option and all rights hereunder to the extent
such rights shall not have been exercised shall terminate and become null and
void if the Optionee ceases to be a director of the Company (whether by
resignation, retirement, dismissal, death or otherwise), except that (a) in
the event of the mandatory retirement pursuant to Board policy, death or
permanent disability of the Optionee while
InVitro International Stock Option Page 1
<PAGE>
a director of the Company, this option may be exercised within the applicable
period of time and by the persons indicated in paragraph 6(e) of the Plan, and
(b) in the event of the termination of the Optionee's service as a director of
the Company for any other reason, this option only to the extent exercisable
at the date of such termination may be exercised prior to the expiration of
three (3) months from the date of such termination, and shall terminate in all
other respects; provided, however, that in no event may this option be
exercised after the Expiration Date.
3. Exercise. This option is exercisable with respect to all, or from
time to time with respect to any portion, of the shares then subject to such
exercise, by delivering written notice of such exercise, in the form
prescribed by the Stock Option Committee, to the principal office of the
Secretary of the Company. Each such notice shall be accompanied by payment in
full of the purchase price of such shares.
4. Non-Transferable. This option shall during the Optionee's
lifetime be exercisable only by the Optionee, and neither it nor any right
thereunder shall be transferable except by will or laws of descent and
distribution, or be subject to attachment, execution or other similar process.
In the event of any attempt by the Optionee to alienate, assign, pledge,
hypothecate or otherwise dispose of the option or any right thereunder, except
as provided for herein, or in the event of the levy of any attachment,
execution or similar process upon the rights or interest hereby conferred, the
Company may terminate the option by notice to the Optionee and the option
shall thereupon become null and void.
5. Miscellaneous.
(a) Neither the granting of this option nor the exercise thereof shall
be construed as conferring upon the Optionee any right to continue as a
director of the Company, or as interfering with or restricting in any way the
right of the Company to terminate such services at any time in accordance with
applicable law.
(b) Neither the Optionee, nor any person entitled to exercise his or
her rights in the event of his or her death, shall have any of the rights of a
shareholder with respect to the shares subject to the option, except to the
extent that certificates for such shares shall have been issued upon exercise
of the option as provided for herein.
(c) The Company is relieved from any liability for the non-issuance or
non-transfer or any delay in the issuance or transfer of any shares of Common
Stock subject to this option which results from the inability of the Company
to obtain, or in any delay in obtaining, from each regulatory body having
jurisdiction all requisite authority to issue or transfer shares of Common
Stock of the Company in satisfaction of this option if counsel for the Company
deems such authority necessary for the lawful issuance or transfer of any such
shares.
(d) No Common Stock acquired by exercise of this option shall be sold
or otherwise disposed of in violation of any federal or state securities law
or regulation.
(e) This option shall be exercised in accordance with such administra-
tive regulations as the Stock Option Committee may from time to time adopt.
All decisions of the Stock Option Committee upon any question arising under
the Plan or under this instrument shall be conclusive and binding upon the
Optionee and all other persons.
InVitro International Stock Option Page 2
<PAGE>
IN WITNESS WHEREOF, this Stock Option Agreement has been executed as of
the day and year first written above.
INVITRO INTERNATIONAL
By: /s/ W. Richard Ulmer
-----------------------
W. RICHARD ULMER, President
[Corporate Seal]
ATTEST:
/s/ Dennnis E. Chenoweth
- ------------------------------------------
Dennis E. Chenoweth, Senior Vice President
InVitro International Stock Option Page 3
<PAGE>
InVitro International
STOCK OPTION AGREEMENT
UNDER 1996 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
______________________________________
Date of Grant: October 1, 1996
INVITRO INTERNATIONAL, a California corporation (the "Company") hereby
grants to JEFFREY A. SAFCHIK ("Optionee"), pursuant to the 1996 Stock Option
Plan for Non-Employee Directors of the Company (the "Plan"), a copy of which
is appended hereto and made a part hereof as Schedule I, an option to purchase
a total of TWENTY-FIVE THOUSAND (25,000) shares of Common Stock of the Company
at a price of ONE DOLLAR ($1.00) per share (subject to adjustment as provided
in Section 8 of the Plan), on the terms and conditions set forth in the Plan
and hereinafter. This option shall not be exercisable later than on October
1, 2006 (herein referred to as the "Expiration Date"), and may only be
exercised at a time when the Optionee is an employee of the Company except as
otherwise provided in paragraphs 6(d) and 6(e) of the Plan in the event of
termination of service as a director of the Company.
1. Vesting. Subject to the terms and conditions of this Agreement,
the shares subject this option shall be exercisable as follows:
(a) The first EIGHT THOUSAND THREE HUNDRED THIRTY-THREE (8,333) shares
covered by this option may be exercised at any time, in whole or in
part, from and after OCTOBER 1, 1997; and
(b) The next EIGHT THOUSAND THREE HUNDRED THIRTY-THREE (8,333) shares
covered by this option may be exercised at any time, in whole or in
part, from and after OCTOBER 1, 1998; and
(c) The remaining EIGHT THOUSAND THREE HUNDRED THIRTY-FOUR (8,334) shares
covered by this option may be exercised at any time, in whole or in
part, from and after OCTOBER 1, 1999;
provided, however, that in no event shall this option be exercisable later
than the Expiration Date.
2. Termination. This option and all rights hereunder to the extent
such rights shall not have been exercised shall terminate and become null and
void if the Optionee ceases to be a director of the Company (whether by
resignation, retirement, dismissal, death or otherwise), except that (a) in
the event of the mandatory retirement pursuant to Board policy, death or
permanent disability of the Optionee while
InVitro International Stock Option Page 1
<PAGE>
a director of the Company, this option may be exercised within the applicable
period of time and by the persons indicated in paragraph 6(e) of the Plan, and
(b) in the event of the termination of the Optionee's service as a director of
the Company for any other reason, this option only to the extent exercisable
at the date of such termination may be exercised prior to the expiration of
three (3) months from the date of such termination, and shall terminate in all
other respects; provided, however, that in no event may this option be
exercised after the Expiration Date.
3. Exercise. This option is exercisable with respect to all, or from
time to time with respect to any portion, of the shares then subject to such
exercise, by delivering written notice of such exercise, in the form
prescribed by the Stock Option Committee, to the principal office of the
Secretary of the Company. Each such notice shall be accompanied by payment in
full of the purchase price of such shares.
4. Non-Transferable. This option shall during the Optionee's
lifetime be exercisable only by the Optionee, and neither it nor any right
thereunder shall be transferable except by will or laws of descent and
distribution, or be subject to attachment, execution or other similar process.
In the event of any attempt by the Optionee to alienate, assign, pledge,
hypothecate or otherwise dispose of the option or any right thereunder, except
as provided for herein, or in the event of the levy of any attachment,
execution or similar process upon the rights or interest hereby conferred, the
Company may terminate the option by notice to the Optionee and the option
shall thereupon become null and void.
5. Miscellaneous.
(a) Neither the granting of this option nor the exercise thereof shall
be construed as conferring upon the Optionee any right to continue as a
director of the Company, or as interfering with or restricting in any way the
right of the Company to terminate such services at any time in accordance with
applicable law.
(b) Neither the Optionee, nor any person entitled to exercise his or
her rights in the event of his or her death, shall have any of the rights of a
shareholder with respect to the shares subject to the option, except to the
extent that certificates for such shares shall have been issued upon exercise
of the option as provided for herein.
(c) The Company is relieved from any liability for the non-issuance or
non-transfer or any delay in the issuance or transfer of any shares of Common
Stock subject to this option which results from the inability of the Company
to obtain, or in any delay in obtaining, from each regulatory body having
jurisdiction all requisite authority to issue or transfer shares of Common
Stock of the Company in satisfaction of this option if counsel for the Company
deems such authority necessary for the lawful issuance or transfer of any such
shares.
(d) No Common Stock acquired by exercise of this option shall be sold
or otherwise disposed of in violation of any federal or state securities law
or regulation.
(e) This option shall be exercised in accordance with such administra-
tive regulations as the Stock Option Committee may from time to time adopt.
All decisions of the Stock Option Committee upon any question arising under
the Plan or under this instrument shall be conclusive and binding upon the
Optionee and all other persons.
InVitro International Stock Option Page 2
<PAGE>
IN WITNESS WHEREOF, this Stock Option Agreement has been executed as of
the day and year first written above.
INVITRO INTERNATIONAL
By: /s/ W. Richard Ulmer
-----------------------
W. RICHARD ULMER, President
[Corporate Seal]
ATTEST:
/s/ Dennnis E. Chenoweth
- ------------------------------------------
Dennis E. Chenoweth, Senior Vice President
InVitro International Stock Option Page 3
<PAGE>
InVitro International
STOCK OPTION AGREEMENT
UNDER 1996 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
______________________________________
Date of Grant: October 1, 1996
INVITRO INTERNATIONAL, a California corporation (the "Company") hereby
grants to DAVID A. REED ("Optionee"), pursuant to the 1996 Stock Option Plan
for Non-Employee Directors of the Company (the "Plan"), a copy of which is
appended hereto and made a part hereof as Schedule I, an option to purchase a
total of TWENTY-FIVE THOUSAND (25,000) shares of Common Stock of the Company
at a price of ONE DOLLAR ($1.00) per share (subject to adjustment as provided
in Section 8 of the Plan), on the terms and conditions set forth in the Plan
and hereinafter. This option shall not be exercisable later than on October
1, 2006 (herein referred to as the "Expiration Date"), and may only be
exercised at a time when the Optionee is an employee of the Company except as
otherwise provided in paragraphs 6(d) and 6(e) of the Plan in the event of
termination of service as a director of the Company.
1. Vesting. Subject to the terms and conditions of this Agreement,
the shares subject this option shall be exercisable as follows:
(a) The first EIGHT THOUSAND THREE HUNDRED THIRTY-THREE (8,333) shares
covered by this option may be exercised at any time, in whole or in
part, from and after OCTOBER 1, 1997; and
(b) The next EIGHT THOUSAND THREE HUNDRED THIRTY-THREE (8,333) shares
covered by this option may be exercised at any time, in whole or in
part, from and after OCTOBER 1, 1998; and
(c) The remaining EIGHT THOUSAND THREE HUNDRED THIRTY-FOUR (8,334) shares
covered by this option may be exercised at any time, in whole or in
part, from and after OCTOBER 1, 1999;
provided, however, that in no event shall this option be exercisable later
than the Expiration Date.
2. Termination. This option and all rights hereunder to the extent
such rights shall not have been exercised shall terminate and become null and
void if the Optionee ceases to be a director of the Company (whether by
resignation, retirement, dismissal, death or otherwise), except that (a) in
the event of the mandatory retirement pursuant to Board policy, death or
permanent disability of the Optionee while
InVitro International Stock Option Page 1
<PAGE>
a director of the Company, this option may be exercised within the applicable
period of time and by the persons indicated in paragraph 6(e) of the Plan, and
(b) in the event of the termination of the Optionee's service as a director of
the Company for any other reason, this option only to the extent exercisable
at the date of such termination may be exercised prior to the expiration of
three (3) months from the date of such termination, and shall terminate in all
other respects; provided, however, that in no event may this option be
exercised after the Expiration Date.
3. Exercise. This option is exercisable with respect to all, or from
time to time with respect to any portion, of the shares then subject to such
exercise, by delivering written notice of such exercise, in the form
prescribed by the Stock Option Committee, to the principal office of the
Secretary of the Company. Each such notice shall be accompanied by payment in
full of the purchase price of such shares.
4. Non-Transferable. This option shall during the Optionee's
lifetime be exercisable only by the Optionee, and neither it nor any right
thereunder shall be transferable except by will or laws of descent and
distribution, or be subject to attachment, execution or other similar process.
In the event of any attempt by the Optionee to alienate, assign, pledge,
hypothecate or otherwise dispose of the option or any right thereunder, except
as provided for herein, or in the event of the levy of any attachment,
execution or similar process upon the rights or interest hereby conferred, the
Company may terminate the option by notice to the Optionee and the option
shall thereupon become null and void.
5. Miscellaneous.
(a) Neither the granting of this option nor the exercise thereof shall
be construed as conferring upon the Optionee any right to continue as a
director of the Company, or as interfering with or restricting in any way the
right of the Company to terminate such services at any time in accordance with
applicable law.
(b) Neither the Optionee, nor any person entitled to exercise his or
her rights in the event of his or her death, shall have any of the rights of a
shareholder with respect to the shares subject to the option, except to the
extent that certificates for such shares shall have been issued upon exercise
of the option as provided for herein.
(c) The Company is relieved from any liability for the non-issuance or
non-transfer or any delay in the issuance or transfer of any shares of Common
Stock subject to this option which results from the inability of the Company
to obtain, or in any delay in obtaining, from each regulatory body having
jurisdiction all requisite authority to issue or transfer shares of Common
Stock of the Company in satisfaction of this option if counsel for the Company
deems such authority necessary for the lawful issuance or transfer of any such
shares.
(d) No Common Stock acquired by exercise of this option shall be sold
or otherwise disposed of in violation of any federal or state securities law
or regulation.
(e) This option shall be exercised in accordance with such administra-
tive regulations as the Stock Option Committee may from time to time adopt.
All decisions of the Stock Option Committee upon any question arising under
the Plan or under this instrument shall be conclusive and binding upon the
Optionee and all other persons.
InVitro International Stock Option Page 2
<PAGE>
IN WITNESS WHEREOF, this Stock Option Agreement has been executed as of
the day and year first written above.
INVITRO INTERNATIONAL
By: /s/ W. Richard Ulmer
-----------------------
W. RICHARD ULMER, President
[Corporate Seal]
ATTEST:
/s/ Dennnis E. Chenoweth
- ------------------------------------------
Dennis E. Chenoweth, Senior Vice President
InVitro International Stock Option Page 3
<PAGE>
INDEMNIFICATION AGREEMENT
This Agreement dated August 5, 1996 by and between INVITRO
INTERNATIONAL, a California corporation (the "Company") and DAVID A. REED (the
"Indemnified Party").
WHEREAS, the Indemnified Party has and/or will act as a
director, officer, employee, financial advisor and/or agent of the Company;
and
WHEREAS, in consideration of such services, and pursuant to authority of
its Board of Directors, the Company has agreed to enter into this Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
1. The Company hereby agrees to indemnify and hold harmless the
Indemnified Party against any and all losses, claims, damages, judgments,
liabilities or costs, including related attorneys' fees and other costs of
investigation, preparation, defense and providing evidence, whether or not in
connection with litigation in which the Indemnified Party is a party, as and
when such losses, claims, damages, judgments, liabilities or costs are
incurred, which are directly or indirectly caused by, relating to, based upon
or arising out of any act or omission on the part of the Indemnified Party in
his or her capacity as a director, officer, employee, financial advisor or
agent of the Company or in connection with any transactions undertaken as a
result of such relationship, including any actions taken or decisions made as
a director, officer, employee, financial advisor or agent with respect
thereto. Furthermore, the Company waives its right to bring any claim against
the Indemnified Party in connection with any matter caused by, relating to,
based upon or arising out of any act or omission on the part of the
Indemnified Party in his or her capacity as a director, officer, employee,
financial advisor or agent of the Company or in connection with any
transactions undertaken as a result of such relationship, other than any
actions based on the gross negligence or willful misconduct of the Indemnified
Party.
2. The Indemnified Party shall promptly notify the Company in writing
of any action or proceeding (including any governmental investigation) brought
or asserted against the Indemnified Party in respect of which indemnity is
sought from the Company hereunder, and (subject to clause (c) below) the
Company shall promptly assume the defense thereof, including the employment of
counsel reasonably satisfactory to the Indemnified Party and the payment of
all fees and expenses incurred in connection with the defense thereof. The
Indemnified Party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof if (a) the Indemnified Party
shall pay the fees and expenses of such separate counsel or (b) the Company
shall have failed promptly to assume the defense of such action or proceeding
through counsel reasonably satisfactory to the Indemnified Party or (c) the
named parties to any such action or proceeding (including any impleaded
parties) include both the Indemnified Party and the Company and the
Indemnified Party shall have been advised in writing by counsel that there
maybe one or more legal defenses available to the Indemnified Party which are
different from or additional to those available to the Company, in which case
<PAGE>
the Indemnified Party may elect in writing to employ separate counsel at the
expense of the Company (after which the Company shall not have the right to
defense of such action or proceeding on behalf of such Indemnified Party), it
being understood, however, that the Company shall not, in connection with any
one such action or proceeding or separate but substantially similar or related
actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses of
more than one separate firm of attorneys (together with appropriate local
counsel) at any time, which firm shall be designated by agreement of all
indemnified parties and, if no agreement is reached by the indemnified parties
within 15 days of the filing of the relevant complaint, by the Company. The
Company shall not be liable for any settlement of any such action or
proceeding effected without its written consent (which shall not be
unreasonably withheld), but if any such action or proceeding is settled with
its written consent, the Company agrees to indemnify and hold harmless the
Indemnified Party from and against any loss, claim, damage, or liability (to
the extent stated above) by reason of such settlement or judgment.
3. In order to provide for just and equitable contribution, if a
claim for indemnification hereunder is found unenforceable in a final judgment
by a court of competent jurisdiction (not subject to further appeal), even
though the express provisions hereof provide for indemnification in such
case, then the Company shall contribute to the losses, claims, damages,
judgments, liability or costs to which the Indemnified Parties may be subject
in accordance with the relative benefits received by, and the relative fault
of, the Company in connection with the statements, acts or omissions which
resulted in such losses, claims, damages, judgments, liabilities, or costs.
4. These indemnification provisions shall (i) remain operative and in
full force and effect regardless of any termination of the relationship
between the Company and the Indemnified Party; (ii) inure to the benefit of
any successors, assigns, heirs or personal representative of the Indemnified
Party; and (iii) be in addition to any other rights that the Indemnified Party
may have.
IN WITNESS WHEREAS, this Agreement has been executed by the parties
hereto on the date first written above.
"Company" INVITRO INTERNATIONAL
By: /s/ W. Richard Ulmer
---------------------------
W. Richard Ulmer, President
"Indemnified Party" /s/ David A. Reed
--------------------------------
DAVID A. REED
2
<PAGE>
No. INVIF-01
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT"). ACCORDINGLY, NO TRANSFER OF THESE
SECURITIES OR ANY INTEREST THEREIN MAY BE MADE EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT UNLESS THE ISSUER HAS RECEIVED AN OPINION
OF COUNSEL SATISFACTORY TO IT THAT SUCH TRANSFER DOES NOT REQUIRE REGISTRATION
UNDER THE ACT.
```````````````````````````````````````````````````````````````````````
INVITRO INTERNATIONAL
(Incorporated under the laws of the State of California)
SERIES F COMMON STOCK PURCHASE WARRANT
75,000 SHARES OF COMMON STOCK
Void After March 31, 1999 (the "Expiration Date")
```````````````````````````````````````````````````````````````````````
This is to certify that, for value received, receipt of which is hereby
acknowledged, BOB GROSSMANN, 1257 Siskiyou Blvd., Suite 171, Ashland, Oregon
97520, or assigns (hereinafter called the "holder"), is entitled to purchase
from INVITRO INTERNATIONAL, a California corporation (hereinafter called the
"Company"), at the Warrant Price of ONE DOLLAR AND TWENTY-FIVE CENTS ($1.25)
per share, subject to adjustment as hereinafter provided (hereinafter called
the "Warrant Price"), at any time on or before 5:00 P.M. California time on
March 31, 1999 (the "Expiration Date"), up to SEVENTY-FIVE THOUSAND (75,000)
fully paid and non-assessable shares of Common Stock of the Company
(hereinafter called "Common Stock"), subject to the terms and conditions
hereof, including such adjustments as may be required under the terms hereof.
This Warrant represents all or a portion of 75,000 Series F common stock
purchase warrants (the "Warrants") originally issued by the Company on March
21, 1996 pursuant to a letter agreement for consulting services between the
Company and Bob Grossmann. This Warrant represents part of such issue and is
herein called "this Warrant."
This Warrant may be exercised by the holder as hereinabove provided as
to the whole or any part of the shares of Common Stock covered hereby, by
surrender of this Warrant at the principal office of any transfer agent for
the Common Stock, or, if the Company shall not have any transfer agent for the
Common Stock, at the principal office of the Company (any such transfer agent,
or the Company acting hereunder, being hereinafter called the "Warrant
Agent"), with the statement of election to subscribe attached hereto duly
executed and upon payment to the Company of the Warrant Price for shares so
purchased in cash or by certified check or bank draft. Thereupon (except that
if, upon such date, the stock transfer books of the Company shall be closed,
then upon the next succeeding date on which such transfer books are open),
this Warrant shall be deemed to have been exercised and the person exercising
the same to have become a holder of record of shares of Common Stock (or of
the other securities or property to which such person is entitled upon such
exercise) purchased hereunder for all purposes, and certificates for such
shares so purchased shall be delivered to the purchaser within a reasonable
time (not exceeding five business days, except while the transfer books of the
Company are closed) after this Warrant shall have been exercised as set forth
hereinabove. If this Warrant shall be exercised in respect of a part only of
the shares of Common Stock covered hereby, the holder shall be entitled to
receive a similar warrant of like tenor and date covering the number of shares
in respect of which this Warrant shall not have been exercised.
- 1 -
<PAGE>
The Company covenants and agrees that all shares which may be issued
upon the exercise of the rights represented by this Warrant will, upon
issuance, be validly issued, fully paid and non-assessable and free from all
taxes, liens and charges with respect to the issue thereof (other than taxes
in respect of any transfer occurring contemporaneously with such issue). The
Company further covenants and agrees that, during the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized and reserved a sufficient number of shares of Common
Stock to provide for the exercise of the rights represented by this Warrant.
The rights of the holder of this Warrant shall be subject to the
following terms and conditions:
Section 1. Certain Adjustments and Notices
1.1. In case the Company shall hereafter at any time change as a whole,
by split-up, subdivision or combination in any manner or by the making of a
stock dividend, the number of outstanding shares of Common Stock into a
different number of shares of Common Stock with or without par value, (i) the
number of shares of Common Stock which immediately prior to such change the
holder of this Warrant shall have been entitled to purchase pursuant to this
Warrant shall be increased or decreased in direct proportion to the increase
or decrease, respectively, in the number of shares of Common Stock outstanding
immediately prior to such change, and (ii) the Warrant Price in effect
immediately prior to such change shall be increased or decreased, as the case
may be, in inverse proportion to such increase or decrease in the number of
such shares outstanding immediately prior to such change; in any such event,
the rights of the holder of this Warrant to an adjustment in the number of
shares of Common Stock purchasable on exercise of this Warrant as herein
provided shall continue and be preserved in respect of any shares, securities,
or assets which the holder of this Warrant becomes entitled to purchase
hereafter.
1.2. In case of any capital reorganization or any reclassification of
the capital stock of the Company or in case of the consolidation or merger of
the Company with another corporation, or in case of any sale, transfer or
other disposition to another corporation of all or substantially all the
property, assets, business and goodwill of the Company as an entirety, as the
case may be, the holder of this Warrant shall thereafter be entitled to
purchase (and it shall be a condition to the consummation of any such
reorganization, reclassification, consolidation, merger, sale, transfer or
other disposition, that appropriate provision shall be made so that such
holder shall thereafter be entitled to purchase) the kind and amount of shares
of stock and other securities and property receivable, upon such capital
reorganization, reclassification of capital stock, consideration, merger,
sale, transfer or other disposition, by a holder of the number of shares of
Common Stock which this Warrant entitled the holder thereof to purchase
immediately prior to such capital reorganization, reclassification of capital
stock, consolidation, merger, sale, transfer or other disposition; and in any
such case appropriate adjustments (as determined in good faith by the Board of
Directors of the Company or of such other corporation, as the case may be)
shall be made in the application of the provisions herein set forth with
respect to rights and interests thereafter of the holder of this Warrant, to
the end that the provisions set forth herein (including the specified changes
in and other adjustments of the Warrant Price) shall thereafter be applicable,
as near as reasonably may be, in relation to any shares or other property
thereafter purchasable upon the exercise of this Warrant.
1.3. In case the Company shall hereafter at any time declare a dividend
upon shares of Common Stock payable otherwise than out of retained earnings or
otherwise than in shares of Common Stock or in stock or obligations directly
or indirectly convertible into or exchangeable for Common Stock, the holder of
this Warrant shall, upon exercise of this Warrant in whole or in part, be
entitled to receive, in addition to the number of shares of Common Stock
deliverable upon such exercise against payment of the Warrant Price therefor,
but without further consideration, the cash, stock or other securities or
property which the holder of
- 2 -
<PAGE>
this Warrant would have received as dividends (otherwise than out of such
retained earnings and otherwise than in shares of Common Stock or in such
convertible or exchangeable stock or obligations) if continuously since the
date set forth at the foot of this Warrant such holder (i) had been the holder
of record of the number of shares of Common Stock deliverable upon such
exercise and (ii) had retained all dividends in stock or other securities
(other than shares of Common Stock or such convertible or exchangeable stock
or obligations) paid or payable in respect of said number of shares of Common
Stock or in respect of any such stock or other securities so paid or payable
as such dividends. For purposes of this Section 1.3, a dividend payable
otherwise than in cash shall be considered to be payable out of retained
earnings only to the extent of the fair value of such dividend as determined
by the Board of Directors of the Company.
1.4. No certificates for fractional shares of Common Stock shall be
issued upon the exercise of this Warrant, but in lieu thereof the Company
shall, upon exercise in full of this Warrant, purchase out of funds legally
available therefor any such fractional interest for an amount in cash equal to
the current market value of such fractional interest calculated to the nearest
cent, computed on the basis of the closing sale price, as reported by the
National Association of Securities Dealers, Inc., of the Common Stock in the
over-the-counter market on the most recent day within ten days prior to the
date of such exercise for which such closing prices shall have been so
reported, or, if the Common Stock is listed on a stock exchange registered
with the Securities and Exchange Commission, the last reported sale price on
such exchange on such day; and if there shall have been no sale on said day,
then the computation shall be made on the basis of the last reported sale
price on such exchange within ten days prior to such date. If there have been
no reported closing sale prices, as the case may be, within such ten days, the
current market value shall be fixed in a manner determined in good faith by
the Board of Directors of the Company.
1.5. Whenever the Warrant Price is adjusted, as herein provided, the
Company shall forthwith file with the Warrant Agent a statement signed by the
President or any one of the Vice Presidents of the Company and by its
Treasurer or an Assistant Treasurer, stating the adjusted Warrant Price
determined as herein provided. Such statement shall show in detail the facts
requiring such adjustment, including a statement of the consideration received
by the Company for any additional securities issued. Whenever the Warrant
Price is adjusted, the Company will forthwith cause a notice stating the
adjustment and the Warrant Price to be mailed to the registered holder of this
Warrant at the address of such holder shown on the books of the Company.
1.6. Notices of Record Date, Etc. In case:
(a) the Company shall take a record of the holders of its Common Stock
(or any other securities issuable upon the exercise of the
Warrants) for the purpose of entitling them to receive any
dividend (other than a regular cash dividend at the same rate as
the rate of the last regular cash dividend theretofore paid) or
other distribution, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other
securities, or to receive any other right; or
(b) of any capital reorganization of the Company, any reclassification
of the capital stock of the Company, any consolidation or merger
of the Company with or into another corporation, or any conveyance
of all or substantially all of the assets of the Company to
another corporation; or
(c) of any voluntary or involuntary dissolution, liquidation or
winding up of the Company,
then, and in each such case, the Company shall mail or cause to be mailed to
each holder of record of the Warrants at the time outstanding a notice
specifying, as the case may be, (i) the date on which a record is to
- 3 -
<PAGE>
be taken for the purpose of such dividend, distribution or right, and stating
the amount and character of such dividend, distribution or right, or (ii) the
date on which such reorganization, reclassification, consolidation, merger,
conveyance, dissolution or winding up is to take place, and the time, if any,
is to be fixed, as to which the holders of record of Common Stock (or such
other securities at the time receivable upon the exercise of the Warrants)
shall be entitled to exchange their shares of Common Stock (or such other
securities) for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution or winding up. Such notice shall be mailed at least 20 days prior
to the date therein specified and the Warrants may be exercised prior to said
date during the term of the Warrants.
Section 2. Investment Intent
2.1 The holder of this Warrant, by acceptance hereof, agrees to give
written notice to the Company before exercising or selling this Warrant of
such holder's intention to do so, describing briefly the manner of any
proposed sale of this Warrant or such holder's intention as to the disposition
to be made of shares of Common Stock issuable upon such proposed exercise
hereof. Promptly upon receiving such written notice, the Company shall
present copies thereof to counsel for the Company for such counsel's opinion.
If in the opinion of such counsel, or upon receipt by the Company of a
reasonably satisfactory opinion from any other counsel, to the effect that the
proposed exercise or sale may be effected without registration under the
Securities Act of 1933, as amended ("Securities Act"), of this Warrant or the
shares of Common Stock issuable on the exercise hereof, the holder of this
Warrant shall be entitled to sell this Warrant, or to exercise this Warrant in
accordance with its terms and dispose of the shares received upon such
exercise, all in accordance with the terms of the notice delivered by such
holder to the Company. If in the opinion of counsel the proposed exercise or
sale described in said written notice given by the holder of this Warrant may
not be effected without registration of this Warrant or the shares of Common
Stock issuable on the exercise hereof, the Company shall promptly give written
notice of such opinion to the holder of this Warrant. The holder of this
Warrant agrees that, if the proposed exercise or sale by such holder cannot,
in the opinion of counsel, be effected without such registration, the holder
will not so exercise or sell this Warrant or the shares of Common Stock
issuable upon the exercise hereof unless this Warrant or the shares of Common
Stock issuable upon the exercise hereof are registered by the Company as
herein provided.
Section 3. Registration Rights
3.1. Optional Registration at the Election of the Company.
3.1.1. If at any time after December 31, 1996, the Company at
its sole discretion may elect to file a registration statement on Form S-1, S-
2, S-3, SB-1 or SB-2, or any form substituted therefor, with respect to the
shares of Common Stock issuable upon exercise of the Warrants. Such
registration statement may, at the election of the Company, include other
securities of the Company. In the event the Company elects to file a
registration statement with respect to shares of Common Stock issuable upon
exercise of the Warrants under the Securities Act, the Company will give to
each holder or holders of the Warrants and/or shares of Common Stock acquired
upon the exercise of the Warrants at least ten (10) days prior written notice
of its intention to file such registration statement (the "Optional
Registration").
3.1.2. Unless any holder of Warrants shall direct otherwise, the
Company shall include all shares of Common Stock evidenced by the Warrants or
issued upon the exercise thereof in any such Optional Registration statement
and will maintain the prospectus included in any registration statement which
may be so filed current for a period of at least nine (9) months subsequent to
the effective date of such registration statement.
- 4 -
<PAGE>
3.1.3. Nothing in this Section 3.1 shall be deemed to obligate
the Company to proceed with any registration of its securities after giving
the notice herein provided.
3.1.4. The obligations of the Company under this Section 3.1
shall be fully satisfied after it has notified the holders of the Warrants of
one (1) opportunity to participate in any Optional Registration under this
Section 3 which shall have become effective under the Securities Act.
3.1.5. All costs and expenses of any such Optional Registration
incurred by the Company, including, without limitation, filing fees, and all
legal, accounting and printing costs and expenses, shall be paid by the
Company. The holder of the Warrants and/or shares issued upon exercise of the
Warrants shall pay all sales and brokerage commissions directly related to the
sale of securities for their account.
3.2. Mandatory Registration in Certain Events.
3.2.1. In the event: (a) the holders of the Warrants and/or
shares of Common Stock acquired upon exercise of the Warrants shall have not
been offered the opportunity of participating in an Optional Registration as
contemplated by Section 3.1 above; and (b) at any time after March 31, 1997
when a written demand for registration is received by the Company under this
Section 3.2, the Warrants have been "in-the-money" (as defined in Section
3.2.2 below) for at least sixty (60) consecutive calendar days prior to the
date of such demand for registration hereunder; and (c) such demand for
registration is received prior to the Expiration Date of the Warrants as to
any shares of Common Stock covered by Warrants that have not been exercised or
within one year after such Expiration Date as to any shares of Common Stock
covered by Warrants that have been exercised;
then a majority of the holders of the Warrants and/or shares of Common Stock
acquired upon exercise of the Warrants shall have the right to demand in
writing that the Company use its best efforts to register shares of Common
Stock acquired and/or issuable upon exercise of the Warrants under the
Securities Act in accordance with this Section 3.2.
3.2.2. For the purposes of this Section 3.2, the Warrants shall
be deemed to have been "in-the-money" on any day within the aforesaid 60 day
period if the closing sale price of the Company's Common Stock, as reported by
The Nasdaq SmallCap Market or any other securities exchange or other automated
quotation service on which the Company's Common Stock is then regularly
quoted, shall exceed the Warrant Price then in effect on such day. Should
there be no closing sale price on any particular day during the 60 day period
in which other securities are regularly traded and quoted, the closing price
for such date shall be deemed to be the closing bid price on such day for the
Company's Common Stock as so quoted. On any day within the aforesaid 60 day
period in which the Company's Common Stock is not quoted by reason of said
date being a weekend date, holiday or other date on which securities are not
regularly traded and quoted by the applicable securities exchange or other
automated quotation service, the closing price for the Common Stock for such
date shall be deemed to be the same closing price as existed on the
immediately preceding date on which securities were regularly traded and
quoted.
3.2.3. Upon receipt of a demand for registration under this
Section 3.2, the Company within 60 days thereafter will file a registration
statement under the Securities Act covering all shares subject to such
Warrants and/or shares held by any such holder or holders upon exercise of
Warrants and covered by any such request, and will maintain the prospectus
included in any registration statement which may be so filed current for a
period of at least nine (9) months subsequent to the effective date of such
registration statement. The obligations of the Company under this Section 3.2
shall be fully satisfied after the holders of the Warrants have participated
in one (1) registration statement which has been declared effective under the
Securities Act of 1933 in accordance with the provisions of Sections 3.1 above
and/or this Section 3.2. All costs and expenses of any
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<PAGE>
such registration statement incurred by the Company including, without
limitation, filing fees, and all legal, accounting and printing costs and
expenses, shall be paid by the Company. The holder of the Warrants and/or
shares issued upon exercise of the Warrants shall pay all sales and brokerage
commissions directly related to the sale of securities for their account.
3.2.4. Limitation Upon Mandatory Registration Rights. If an
investment banker engaged by the Company in connection with an firm commitment
underwritten public offering of securities proposed for registration under the
Securities Act for the account of the Company determines in its sole
discretion that registration of securities pursuant to this Section 3.2 for
the account of the holders shares of Common Stock issuable or acquired upon
exercise of the Warrants would interfere with or be detrimental to such
offering for the account of the Company, the Company shall give prompt written
notice of such determination to such holder or holders, setting forth in
reasonable detail the reasons for such determination. In such event the
Company, upon written notice to the holder of such securities, shall have the
right to require, as a condition of such registration, that the holder of such
securities execute a written agreement that such holder will not sell such
securities for a period of up to six (6) months after the effective date of
the registration statement for a firm commitment underwritten public offering
for the account of the Company without the prior consent of the underwriter.
The provisions of this Section 3.2.2 shall no longer apply in the event the
proposed firm commitment underwritten public offering for the Company is
withdrawn or abandoned for any reason.
3.3. Amendment or Supplement to Prospectus. If at any time within
nine (9) months after a registration statement covering the shares of Common
Stock subject to or acquired upon exercise of Warrants as provided in Section
3.1 or 3.2 hereof, shall have become effective, to the knowledge of the
Company any event occurs as a result of which a prospectus included therein
relating to shares of Common Stock subject to or acquired upon exercise of
Warrants, as then amended or supplemented, would include any untrue statement
of a material fact, or would not state a material fact necessary to make the
statements therein, in the light of the circumstances then existing, not
misleading, the Company will promptly notify the holder or holders of Warrants
and/or shares of Common Stock covered by such prospectus thereof and the
Company will at its own cost and expense amend or supplement such prospectus
in order to correct such statement or omission in order that the prospectus as
so amended or supplemented will comply with the requirements of Section 10(a)
of the Securities Act.
3.5. Undertakings. In connection with any registration statement or
post-effective amendment pursuant to Section 3.1 or 3.2:
(a) The Company will comply with all applicable rules and regulations
of the Securities and Exchange Commission or any similar Federal commission
and will make available to its security holders, as soon as practicable, an
earnings statement (which need not be audited) covering a period of at least
12 months, but not more than 18 months, beginning with the first month after
the effective date of the registration statement or post-effective amendment,
as the case may be, which earnings statement will satisfy the provisions of
Section 11(a) of the Securities Act.
(b) Each holder of the Warrants and/or shares of Common Stock covered
by such registration statement, as the case may be, will furnish in writing to
the Company such information regarding such holder and its proposed plan of
distribution of such shares as the Company shall reasonably request and which
would be available to such holder without undue expenditure of time or cost in
order to have such registration statement declared effective.
(c) The Company agrees to furnish to the holders of the Warrants and
of the shares of Common Stock acquired upon the exercise thereof, a prospectus
(in such reasonable quantities as such holders shall request) containing
certified financial statements and other information meeting the requirements
of the
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<PAGE>
Securities Act and the rules and regulations thereunder and relating to the
Warrants and/or shares of Common Stock subject thereto and/or shares of Common
Stock acquired upon the exercise of the Warrants. The furnishing of such
prospectus shall be at the expense of the Company.
(d) The Company will use its best efforts to qualify the shares of
Common Stock covered by any registration statement or post-effective amendment
for public offering or sale on the effectiveness thereof in such jurisdictions
as the holders offering the same shall reasonably request; provided, however,
that the Company shall not be required to qualify as a foreign corporation in
any jurisdiction or to give a general consent to service of process in any
jurisdiction except in connection with matters arising from the sale of shares
of Common Stock in such jurisdiction, nor shall the Company be required to
qualify the shares for sale at the Company's expense in any states other than
New York and California except with the consent of the Company.
(e) Any new prospectus with respect to the shares of Common Stock
issuable upon exercise of the Warrants shall provide that such securities may
be offered or sold only upon such terms respecting the price or distribution
thereof, as the owners reasonably determine.
3.6. Indemnification. In the event of any registration of shares of
Common Stock subject or acquired upon exercise of Warrants, the Company will
indemnify and hold harmless each holder of Warrants and shares of Common Stock
being offered and each person, if any, who may be deemed to control such
holder within the meaning of Section 15 of the Securities Act against any
losses, claims, damages or liabilities, joint or several, to which any of them
may become subject under the Securities Act, or otherwise, in so far as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of
any material fact contained, on the effective date thereof, in any
registration statement or post-effective amendment under which such Warrants
and shares of Common Stock were registered under the Securities Act, any
preliminary prospectus or final prospectus contained therein, or any amendment
or supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse each of them for any legal or any other expenses reasonably incurred
by them in connection with investigating, defending or settling any such loss,
claim, damage, liability or action; provided, however, that the Company will
not be liable in any such case to any of them to the extent that any such
loss, claim, damage, liability or expense arises out of or is based upon any
untrue statement of any material fact contained, or is based upon any omission
or alleged omission to state a material fact, on the effective date thereof in
such registration statement or post-effective amendment, such preliminary
prospectus or such final prospectus or any such amendment or supplement in
reliance upon and in conformity with information furnished in writing by such
persons to the Company expressly for use in the preparation thereof.
The obligations of indemnification hereunder shall include any and all
losses, claims, damages, judgments, liabilities or costs, including related
attorneys' fees and other costs of investigation, preparation, defense and
providing evidence, whether or not in connection with litigation in which the
party to be indemnified is a party, as and when such losses, claims, damages,
judgments, liabilities or costs are incurred, which are directly or
indirectly caused by, relating to, based upon or arising out of any act or
omission on the part of the indemnifying party hereunder.
Each such person shall promptly give notice to the Company after such
person has actual knowledge of any such claim as to which indemnity may be
sought hereunder, or of the commencement of any legal proceedings against such
person as to such claim, whichever shall first occur, and (subject to clause
(c) below) the Company shall promptly assume the defense thereof, including
the employment of counsel reasonably satisfactory to such person and the
payment of all fees and expenses incurred in connection with the defense
thereof. Such person shall have the right to employ separate counsel in any
such action and to participate in
- 7 -
<PAGE>
the defense thereof if (a) such person shall pay the fees and expenses of such
separate counsel or (b) the Company shall have failed promptly to assume the
defense of such action or proceeding through counsel reasonably satisfactory
to such person or (c) the named parties to any such action or proceeding
(including any impleaded parties) include both such person and the Company and
such person shall have been advised in writing by counsel that there may be
one or more legal defenses available to him which are different from or
additional to those available to the Company, in which case such person may
elect in writing to employ separate counsel at the expense of the Company
(after which the Company shall not have the right to defense of such action or
proceeding on behalf of such person), it being understood, however, that the
Company shall not, in connection with any one such action or proceeding or
separate but substantially similar or related actions or proceedings in the
same jurisdiction arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (together with appropriate local counsel) at any time, which
firm shall be designated by agreement of all such persons and, if no agreement
is reached by all such persons and, if no agreement is reached by all such
persons within 15 days of the filing of the relevant complaint, by the
Company. The Company shall not be liable for any settlement of any such
action or proceeding effected without its written consent (which shall not be
unreasonably withheld), but if any such action or proceeding is settled with
its written consent, the Company agrees to indemnify and hold harmless such
person from and against any loss, claim, damage, or liability (to the extent
stated above) by reason of such settlement or judgment.
Section 4. Miscellaneous
4.1. The issue of any stock or other certificate upon the exercise of
this Warrant shall be made without charge to the registered holder hereof for
any tax in respect of the issue of such certificate. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of any certificate in a name other
than that of the registered holder of this Warrant, and the Company shall not
be required to issue or deliver any such certificate unless and until the
person or persons requesting the issue thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
4.2. This Warrant and all rights hereunder or any portion thereof are
transferable on the books of the Company, upon surrender of this Warrant, with
the form of assignment attached hereto duly executed by the registered holder
hereof or by his attorney duly authorized in writing, to the Warrant agent at
its principal office hereinabove referred to, and thereupon there shall be
issued in the name of the transferee or transferees, in exchange for this
Warrant, a new Warrant or Warrants of like tenor and date, representing in the
aggregate the right to subscribe for and purchase the number of shares, or
such portion thereof as shall be so transferred, which may be subscribed for
and purchased hereunder and if there shall be any balance of such shares not
so transferred, there shall be issued in the name of the registered holder of
this Warrant, a new Warrant or Warrants of like tenor and date representing in
the aggregate the right to subscribe for and purchase the balance of the
number of shares which may be subscribed for and purchased hereunder.
4.3. If this Warrant shall be lost, stolen, mutilated or destroyed, the
Company may instruct the Warrant Agent, on such terms as to indemnify or
otherwise as the Company may in its discretion impose, to issue a new Warrant
of like denomination, tenor and date as the Warrant so lost, stolen, mutilated
or destroyed. Any such new Warrant shall constitute an original contractual
obligation of the Company, whether or not the allegedly lost, stolen,
mutilated or destroyed Warrant shall be at any time enforceable by anyone.
4.4. The Company and any Warrant Agent may deem and treat the
registered holder of this Warrant as the absolute owner of this Warrant for
all purposes and shall not be affected by any notice to the contrary.
- 8 -
<PAGE>
4.5. This Warrant shall not entitle the holder to any rights of a
stockholder of the Company, either at law or in equity, including, without
limitation, the right to vote, to receive dividends and other distributions,
to exercise any preemptive rights or to receive any notice of meetings of
stockholders or of any other proceedings of the Company.
4.6. This Warrant shall be governed by the laws of the State of
California.
IN WITNESS WHEREOF, INVITRO INTERNATIONAL has caused this Warrant to be
signed in its corporate name by its duly authorized officer as of the day and
year written below.
Dated: March 21, 1996
INVITRO INTERNATIONAL
By: /s/ W. Richard Ulmer
-------------------------------
W. Richard Ulmer, President and Chief Executive Officer
[CORPORATE SEAL]
Attest:
/s/ William M. Curtis
- --------------------------------
William M. Curtis, Secretary
- 9 -
<PAGE>
TRANSFER OF WARRANT
For value received ____________________________________________ hereby sells,
assigns and transfers unto ________________________, the right to purchase
_______________ of the shares of Common Stock of INVITRO INTERNATIONAL, a
California corporation, which rights are represented by the within Warrant,
and does hereby irrevocably constitute and appoint _____________________
attorney to transfer said rights on the books of the within named Company,
with full power of substitution in the premises.
Dated: ___________________, 199__ ________________________________
(Signature)
________________________________
Signature Guarantee
****************************************************************************
ELECTION TO SUBSCRIBE
Date:_________________, 199__
To: INVITRO INTERNATIONAL: The undersigned hereby subscribes for __________
of the shares of Common Stock covered by the within Warrant and tenders
payment herewith in the amount of $_______________ in accordance with the
terms thereof:
Deliver Stock Certificates(s)
[ ] [ ]
Issue Certificate(s) for said Stock by mail against counter-receipt
TO: TO:
__________________________________ _____________________________________
(Name) (Name)
__________________________________ _____________________________________
(Taxpayer Identification Number) (Street and Number)
__________________________________ _____________________________________
(Street and Number) City State ZIP Code
__________________________________
City State ZIP Code
and if said number of shares shall not be all of the shares covered by the
within Warrant, that a new Warrant for the balance of the shares remaining be
registered in the name of, and delivered, to the registered holder of this
Warrant certificate.
__________________________________ _____________________________________
(Signature of Registered Holder) Signature Guarantee
- 10 -
<PAGE>
THIRD AMENDMENT TO LEASE Dated May 11, 1990
This amendment entered into January 23 1996
shall be effective March 1, 1996 and CANCELS previous
AMENDMENT #1 and AMENDMENT #2
Paragraph #1 Ropak Laboratories has changed name to Invitro
International.
Paragraph #2 Invitro International as of March 1 will vacate the
Northerly 5334'+ or - of the building and 45% of the parking
and rent only the southerly 8556'+ or - of the building and
55% of the parking.
Paragraph #3 Term. The Term of this amended lease shall be from March 1
1996 to February 28,1998. (24 months)
Paragraph #4 Rent shall be $6,400 payable in advance on the first day of
each month. Lessee shall pay Lessor $6,400 upon execution
hereof as rent for March 1996.
Paragraph #5 Security deposit $16,400 total. $10,516 is presently on
deposit leaving a balance $5,884 to be paid upon the signing
of this amendment.
New Paragraph #6: The lessee agrees to pay the monthly water bill for the
entire facility but will pay for electrical and gas
consumption only in the space occupied by InVitro
International. The Lessor agrees to install new electric
and gas meters to permit separate billing for these
utilities in the two portions of the building. The Lessor
also agrees to perform the following minor repairs: repair
of leaks in the roof, replacement of damaged ceiling tiles,
repair of damaged rear door, and repair of garbage bin area.
/s/ Dale Kellogg /s/ W. Richard Ulmer
- ----------------------------- --------------------------------
LESSOR LESSEE
<PAGE>
AMENDMENT to DISTRIBUTORSHIP AGREEMENT
This Amendment Agreement (this "Amendment") is made and entered into
this day of November 1996, by and among INVITRO INTERNATIONAL, a California
corporation ("INVITRO"), and MIRAGEN INC., a California corporation
("MIRAGEN"), with reference to that certain Distributorship Agreement between
the parties dated March 11, 1996 (the "Distributorship Agreement").
A. The parties agree that the definition of "Institutional Markets"
contained in paragraph B of the recitals to the Distributorship
Agreement is hereby amended as follows:
For the purposes of this Agreement, the term "Institutional
Markets" shall mean (i) hospitals, birthing facilities and all
similar obstetric facilities providing for the delivery of newborn
infants; (ii) neonatologists, gynecologists, pediatricians, child
birth educators, lactation consultants and other health care
professionals providing for the professional care and education of
pregnant women, new mothers and/or newborn infants; and (iii) any
dissemination of sales and/or advertising materials through the
facilities or channels of distribution represented by any of the
above-referenced institutional markets and acceptance of orders so
solicited.
B. The parties agree that Section 4.1(b) of the Distributorship Agreement
is hereby amended to extend the minimum secure storage period from 16 to
18 years, as follows:
"(b) During the term of this Agreement and after the
expiration of this Agreement, MIRAGEN further covenants and agrees
to maintain and preserve in its secure freezer, or similar
designated storage facility, all samples mailed or otherwise
delivered to MIRAGEN resulting from the sale and use of Guardian
DNA Products sold by INVITRO for a period of at least 18 years
from and after the date each such sample was first received by
MIRAGEN."
C. The parties agree that Section 8.1 of the Distributorship Agreement is
hereby amended to provide that minimum quantities of Guardian DNA
Products required to be purchased by INVITRO during years one through
three of the Distributorship Agreement, in order for INVITRO to maintain
exclusive distribution rights to the Institutional Markets, shall be as
follows:
<TABLE>
<CAPTION>
Period Number of Units
-------------- --------------------
<S> <C>
Year 1 >(Symbol for greater than) 20,000
Year 2 >(Symbol for greater than) 36,000
Year 3 >(Symbol for greater than) 36,000*
</TABLE>
*Year 3 unit minimums will be negotiated between INVITRO and MIRAGEN at
least 120 days prior to the end of Year 2 of this Agreement. Should the
parties fail to agree on the number of units to be purchased in order to
maintain INVITRO's exclusive distribution rights in
<PAGE>
Institutional Markets, and provided INVITRO has purchased at least
36,000 units in Year 2, MIRAGEN will not grant any other third party
marketing and distribution rights to Guardian DNA for Institutional
Markets unless MIRAGEN has notified INVITRO and has offered INVITRO a
right of first refusal to such rights on terms not less favorable to
INVITRO than offered to any proposed third party distributor. If
MIRAGEN extends a right of first refusal to INVITRO, INVITRO is
obligated to accept such an offer within 10 business days after receipt
of the same, failing which INVITRO shall be deemed to have waived such
rights.
D. The address for notifications to MIRAGEN and the zip code for
notifications to INVITRO under Section 14.7 of the Distributorship
Agreement are amended as follows:
To MIRAGEN: MIRAGEN INC.
Attention: Chief Financial Officer
6 Morgan, Suite 160
Irvine, California 92718
Facsimile No. (714) 454-1557
To INVITRO: INVITRO INTERNATIONAL
Attention: President
16632 Millikan Avenue
Irvine, California 92606
Facsimile No. (714) 851-4985
Except as expressly amended above, no other amendments to the
Distributorship Agreement are contemplated by this Amendment.
MIRAGEN INC.
By: /s/ Kevin B. Morton
-----------------------------
Kevin B. Morton, President
INVITRO INTERNATIONAL
By: /s/ W. Richard Ulmer
------------------------------
W. Richard Ulmer, President
2
<PAGE>
GiftPax(R)
American Sampling
Incorporated
IN VITRO INTERNATIONAL/NEW MOTHER GIFTPAX
THIS AGREEMENT, made and entered into this 24th day of October 1996, by and
between American Sampling Incorporated, having its principal place of business
at 84 Park Avenue, Flemington, New Jersey 08822-1159, hereinafter referred to
as the "Distributor", and In Vitro International, having its principal place
of business at 4241 Buena Vista #3, Dallas, Texas 75205, hereinafter referred
to as the "Advertiser."
WITNESSETH:
WHEREAS, the Distributor is engaged in the business of distributing New Mother
GiftPax (gift packages containing sample products, premiums and other items)
to new mothers and makes such distribution through participating hospitals
located in the territory or area set forth in Schedule "A" herein, and
WHEREAS, the Advertiser desires to have its products, literature and/or
premiums consisting of a Guardian DNA Offer included in New Mother GiftPax and
distributed in said territory upon the terms and conditions hereinafter set
forth.
NOW, THEREFORE, the parties hereto agree as follows:
1.Advertiser hereby agrees to furnish and deliver to the Distributor, at its
Fredericktown, Missouri warehouse, freight prepaid, the required amount of
Guardian DNA Offers for distribution by the Distributor. Delivery shall be
made on or before the 20th of the month prior to distribution with the first
delivery due by on or before December 20, 1996 and can be monthly, quarterly,
or semi-annually. The commencement date of such distribution shall be January
1997 and shall continue through December 1997, or until all inserts are
distributed. The distributor agrees to procure the maximum distribution of
said items in the described territory, and the Advertiser agrees to furnish
the Distributor for distribution a minimum of 3,773,000 units (314,416 units
per month).
2. Distributor and Advertiser will review this agreement on a quarterly
basis. Advertiser may terminate agreement at the time of quarterly
review. Upon termination, right of first refusal will no longer apply.
3. Distribution costs will be covered on a per inquiry basis. Advertiser
will send Distributor $5.00 per order received. Payment and a full
report of activity shall be submitted to Distributor on a monthly basis
commencing March 1, 1997.
4. All products and literature furnished by the Advertiser for inclusion in
New Mother GiftPax must first be approved by the Distributor, and this
Agreement is contingent upon the acceptance by the various participating
hospitals of the item manufactured or
<PAGE>
GiftPax(R)
American Sampling
Incorporated
2
marketed by the Advertiser for inclusion in New Mother GiftPax.
5. The Distributor hereby agrees that it will not include in New Mother
GiftPax packages, within the territory set forth in Schedule "A," any
item or article identical in type and use or similar to items furnished
to it for distribution by the Advertiser. The Advertiser, in turn,
agrees not to furnish such items for distribution through participating
hospitals other than through New Mother GiftPax.
6. Upon request, the Distributor will furnish to the Advertiser a schedule
indicating the participating hospitals supplied, by name, city, state,
and the number of New Mother GiftPax delivered containing the
Advertiser's item.
7. The Advertiser agrees to indemnify and hold the Distributor harmless
from and against any and all claims, judgments, attorneys' fees and
court costs arising out of claims based on the Advertiser's actions or
its literature and/or the use thereof. The Distributor shall give the
Advertiser prompt written notice of any claim, and the Advertiser shall
have the right to defend same. The Distributor agrees to indemnify and
hold the Advertiser harmless from and against any and all claims,
judgments, attorneys' fees and court costs arising out of claims based
on the Distributor's actions or on the products, premiums and other
items and/or the use thereof of the other manufacturers participating in
the distribution program. The Advertiser shall give the Distributor
prompt written notice of any claim, and the Distributor shall have the
right to defend same.
8. Right of First Refusal: Advertiser's Guardian DNA Offer is hereby
granted the right of first refusal from the date of the signing of this
Agreement through the end of the business day, September 30, 1997, for
the DNA Testing category for Distributor's New Mother GiftPax 1997
Distribution. While this right is in existence, should a category
competitor request participation in the New Mother GiftPax distribution,
the Distributor shall notify the Advertiser, in writing, and it shall
have fifteen (15) business days from receipt of said notification to
exercise the right of first refusal granted herein. Such participation,
however, shall be on terms and conditions no less favorable to the
Distributor than those offered by the category competitor. Distribution
of sample products always takes precedence over literature distribution
for any product category where sampling is viable.
<PAGE>
GiftPax(R)
American Sampling
Incorporated
3
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
signed and executed the day and year first above written.
IN VITRO INTERNATIONAL
By: /s/ W. Richard Ulmer
--------------------------------------
Title: CEO & President InVitro International
--------------------------------------
Date: 10-24-96
--------------------------------------
AMERICAN SAMPLING INCORPORATED
By: /s/ Patricia Przywara By: /s/ Laura Przywara
------------------------ --------------------------
Title: President Title: Mgr. Sales Admin
------------------------ --------------------------
Date: 10-24-96 Date: 10-24-96
------------------------ --------------------------
<PAGE>
GiftPax(R)
American Sampling
Incorporated
4
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
SCHEDULE "A"
TERRITORY IN WHICH THE GUARDIAN DNA OFFERS ARE TO BE DISTRIBUTED
BY THE DISTRIBUTOR AND SHIPPING INSTRUCTIONS
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
New Mother GiftPax containing a Guardian DNA Offer will be distributed
nationally in the 48 contiguous states, including the District of Columbia.
All coverage will be to new mothers. Total inventory required is 3,773,000
units.
Advertiser will deliver, prepaid, the following inventory requirements on or
before December 20, 1996 with subsequent deliveries on or before the 20th of
the month prior to distribution to:
GIFTPAX PACKING LOCATION
------------------------
Monthly: 314,416 units
Total: 3,773,000 units
Ship To: GiftTax/American Sampling, Inc.
200 S. Chamber Drive
Fredericktown, Missouri 63645
Attn: Mr. Bob Holland
Phone: (573) 783-7078
Fax: (573) 783-7098
Instructions: 1.) Delivery hours 7:00 a.m. - 12 noon
(Monday - Friday)
2.) Call for an appointment for trailer loads
3.) Mark all cartons as to contents and quantity
4.) Indicate NEW MOTHER GIFTPAX on shipping instructions
<PAGE>
EXHIBIT 23.1
CONSENT OF CURTIS & VACCARO
We hereby consent to the use of our name in the Registration Statement
on Form S-8 of InVitro International, Commission File No. 33-47535 [filed on
May 1, 1992 covering its 1988 Incentive Stock Option Plan, its 1991 Stock
Option Plan and shares of common stock covered by such Plans], as amended by
the incorporation by reference therein of the Report on Form 10-KSB of InVitro
International for the fiscal year ended September 30, 1996, and to the filing
of our opinion dated April 28, 1992 as Exhibit 5.1 to such Registration
Statement dated May 1, 1992.
We hereby consent to the use of our name in the Registration Statement
on Form S-8 of InVitro International, Commission File No. 33-65640 [filed on
July 6, 1993 covering its 1992 Stock Option Plan and shares of common stock
covered by such Plan], as amended by the incorporation by reference therein of
the Report on Form 10-KSB of InVitro International for the fiscal year ended
September 30, 1996, and to the filing of our opinion dated June 30, 1993 as
Exhibit 5.1 to such Registration Statement dated July 6, 1993.
Laguna Hills, California
December 15, 1996
CURTIS & VACCARO
By: /s/ William M. Curtis
-----------------------------
William M. Curtis, Of Counsel
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-65640 and No. 33-47535) of our report, dated
November 1, 1996, which appears on page 22 of the Annual Report on Form 10-KSB
of InVitro International for the years ended September 30, 1996 and 1995.
/s/ McGladrey & Pullen, LLP
Anaheim, California
December 17, 1996
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the
Consolidated Statements of Operations and Consolidated
Balance Sheet of InVitro International and subsidiary and is
qualified in its entirety by reference to such consolidated
financial statements.
</LEGEND>
<CIK> 0000872610
<NAME> INVITRO INTERNATIONAL
<MULTIPLIER>1,000
<S> <C>
<FISCAL-YEAR-END> Sep-30-1996
<PERIOD-START> Oct-01-1995
<PERIOD-END>Sep-30-1996
<PERIOD-TYPE>12-MOS
<CASH> 1,209
<SECURITIES>0
<RECEIVABLES>156
<ALLOWANCES>10
<INVENTORY> 366
<CURRENT-ASSETS> 2,028
<PP&E> 1,046
<DEPRECIATION> 825
<TOTAL-ASSETS> 2,415
<CURRENT-LIABILITIES> 351
<BONDS> 0
0
0
<COMMON> 24,811
<OTHER-SE> (22,747)
<TOTAL-LIABILITY-AND-EQUITY> 2,415
<SALES> 1,063
<TOTAL-REVENUES> 1,063
<CGS> 660
<TOTAL-COSTS>3,036
<OTHER-EXPENSES> (74)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,899)
<INCOME-TAX>0
<INCOME-CONTINUING> (1,899)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME>(1,899)
<EPS-PRIMARY>(.15)
<EPS-DILUTED>(.15)
</TABLE>
<PAGE>
EXHIBIT 99.1
CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING INFORMATION
InVitro International (the "Company" or "InVitro") wishes to caution
readers that the following important factors, among others, in the future
could cause actual results and needs of the Company to vary materially from
forward-looking statements made from time to time by the Company on the basis
of management's then-current expectations. The in vitro safety testing field
in which the Company has competed since 1989 is a recent industry and the
Company's recent market introduction of the Guardian DNA child identification
system is a new product line, all of are directed to competitive markets and
involve a high degree of risk. Accuracy with respect to forward-looking
projections is difficult.
An investment in the securities of the Company is speculative in nature,
involves a high degree of risk, and should not be made by an investor who
cannot afford the loss of his or her investment. Investors should carefully
consider the following risk factors associated with an investment in the
Company's securities.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT AND OPERATING LOSSES.
The Company commenced operations in September 1985, was engaged primarily in
research and development until 1989. The Company has incurred substantial
losses from operations since inception and has not been profitable. As of
September 30, 1996, InVitro has an accumulated deficit of $23,038,000 and net
losses of $1,899,000 for the fiscal year ended September 30, 1996 and
$2,763,000 for the fiscal year ended September 30, 1995. The Company
therefore has a limited operating history from which to forecast future
business operations. See "Management's Discussion and Analysis or Plan of
Operation" and the consolidated financial statements elsewhere in this Report
and in prior filings with the Securities and Exchange Commission. Results of
operations in the future will be influenced by numerous factors, including
market acceptance of the Company's products, the ability of the Company to
develop and manage the introduction of new products, competition, and the
ability of the Company to control costs. There can be no assurance that
revenue growth or profitability on a quarterly or annual basis will be
attained. The Company therefore is subject to all the risks incident to the
creation of a new business with a limited history of operations including,
among others, the possibility of unforeseen expenses, difficulties,
complications and delays, and it may be difficult or impossible to obtain
additional financing if required for the Company's business.
NO ASSURANCE OF MARKET ACCEPTANCE. The Company believes that its future
growth and profitability will depend upon market acceptance during 1997 by
retail consumers of its recently introduced Guardian DNA child safety and
identification system and, over longer periods, upon general industry
acceptance of in vitro safety testing methods as a supplement or alternative
to conventional in vivo diagnostic testing. The Company's in vitro safety
testing products also may be dependent for certain applications on
governmental enforcement of testing regulations, as to which there can be no
assurance. Market acceptance of new products and methodology requires
substantial time and effort and is subject to various risks. To date the
Company has achieved revenues that are insufficient to cover its operating
costs and expenses. There can be no assurance that sales levels will be
increased. A significant education effort and validation testing normally is
required to convince prospective customers who utilize conventional animal
testing that the Company's in vitro safety testing products are efficacious.
The Guardian DNA system represents a new product introduction to the market
and there can be no assurance of market acceptance or future sales levels.
-1-
<PAGE>
POSSIBLE NEED FOR ADDITIONAL FINANCING. The Company's working capital
was $1,677,000 at September 30, 1996, and management anticipates the Company
may be required to seek additional equity or debt financing in the future to
sustain its operations. It is anticipated that marketing and advertising
expenses will increase during Fiscal 1997 to support the market introduction
of Guardian DNA. The Company's actual future capital requirements will depend
on numerous factors, including, but not limited to, the Company's progress in
generating increased revenues from the introduction of Guardian DNA, growth in
sales of its proprietary in vitro safety testing products, the cost of
marketing and advertising programs, management's ability to control costs,
inventory requirements, competing technological and market developments and
the cost of obtaining additional new products for distribution. The Company
has no commitment to obtain additional funds and there can be no assurance it
will be successful in the event management determines the Company should
initiate efforts to obtain additional financing.
Because of the Company's limited capital, it also may undertake
additional equity offerings whenever conditions are favorable, even if it does
not have an immediate need for additional capital at that time. There can be
no assurance that the Company will be able to obtain additional funding when
needed, or that such funding, if available, will be obtainable on reasonable
terms. Any such additional financing may result in significant dilution to
existing shareholders. If adequate funds are not available, the Company may
be required to accept unfavorable alternatives, including (i) the delay,
reduction or elimination of product introductions and expansion, marketing and
advertising and other operating expenses, or (ii) arrangements with
collaborative partners that may require the Company to relinquish material
interests in its products that it would not otherwise relinquish.
DEPENDENCE UPON SUPPLIERS AND SINGLE SOURCE OF SUPPLY. Certain
components and materials used in the Company's safety testing products are
purchased from single sources and the Guardian DNA system is purchased solely
from Miragen Inc. While the Company believes that components and materials
for its safety testing products are available from alternate sources on
reasonable terms, an interruption of supply of these components or of Guardian
DNA products from Miragen Inc. could materially adversely affect the Company
prospects.
LACK OF GOVERNMENTAL REGULATION OR ENFORCEMENT. Various governmental
agencies, such as the U.S. Food and Drug Administration ("FDA"), the U.S.
Department of Transportation and the U.S. Environmental Protection Agency,
rely upon the results of a multiple number of tests in order to determine the
safety, labeling, transport and/or disposal of consumer and industrial
products. The FDA has historically considered the conventional Draize rabbit
test to be the most conclusive for evaluating ocular irritancy and
conventional animal and human skin tests for evaluating skin irritancy. The
Company has been advised by the FDA that products such as the Company's
IRRITECTION in vitro tests are not regulated by the FDA since the manufacturer
itself is responsible for assuring and verifying the confidence of its testing
methods. Although sale and use of the Company's products do not require
premarket approval by the FDA, acceptance of the Company's tests by regulatory
agencies as an efficacious alternative to conventional animal testing could
enhance the marketability of, and markets for, the Company's products. There
can be no assurance that such acceptance by regulatory agencies can or will be
attained for any one or more of the Company's ocular or dermal safety tests or
that the efficacy of the Company's testing alternatives will be preferred by
customers to other forms of testing.
Although the U.S. Department of Transportation ("DOT") has granted an
exemption which permits the use of CORROSITEX for testing chemicals,
formulations and hazardous waste for Packing Group classification of corrosive
substances, the DOT does not have an active enforcement program in this area
and the Company has experienced a continuing high level of industry
-2-
<PAGE>
noncompliance with DOT Packing Group classification regulations first adopted
during 1993. There can be no assurance that governmental enforcement will be
increased or that the Company will otherwise be successful in its efforts to
increase sales of CORROSITEX.
DEPENDENCE ON KEY PERSONNEL. The success of the Company will be
substantially dependent on the services of its officers, directors and
professional consultants. The Company is dependent in particular upon the
services of W. Richard Ulmer, its President and Chief Executive Officer. The
Company also relies, and for the foreseeable future will rely, on independent
advisors and consultants to provide certain services to the Company. There
can be no assurance that such services will continue to be available to the
Company on a timely basis when needed, or that the Company could find
qualified replacements. The Company's operations therefore are dependent upon
a limited number of key employees and consultants and the loss of the services
of these or other key personnel could have a material adverse effect upon the
Company. The Company does not maintain key man insurance on the lives of its
executive officers and key consultants.
CONFLICTS OF INTEREST. The Company in the past has engaged in a number
of material transactions with its directors and executive officers and/or
their affiliates, and may engage in such transactions in the future. All such
transactions have been in the past, and will be in the future, approved by a
majority of the Company's disinterested directors.
TECHNOLOGICAL CHANGE AND INCREASED COMPETITION. Modern biotechnology
has undergone, and continues to undergo, rapid and significant technological
change. The Company's success will depend on its ability to maintain a
competitive position with respect to its proprietary technology and to
continue to attract and retain qualified personnel. There can be no assurance
that future technological developments will not render products of the Company
uneconomical or obsolete or that the Company will not be adversely affected by
competition or by the future development of products by others.
NO ASSURANCE AS TO PROTECTION OF PATENTS AND PROPRIETARY RIGHTS;
RELIANCE ON TRADE SECRETS. The Company holds or is licensed under various
U.S. patents covering certain features of its safety testing products and
certain aspects of the Guardian DNA system are covered by patent rights of
Miragen licensed for sales and marketing use by the Company. There can be no
assurance that any issued patent will provide significant competitive
advantages, or that challenges will not be instituted against the
enforceability of patents owned or licensed by the Company. The cost of
litigation to uphold the validity of a patent and prevent infringement can be
substantial even if the Company prevails. In certain cases, the Company
relies upon trade secrets to protect proprietary technology and formulations
which it has developed or may develop in the future. There can be no
assurance that secrecy obligations will be honored or that others have or will
not independently develop similar or superior technology.
UNDETERMINED EFFECT OF BLANK CHECK PREFERRED STOCK; POTENTIAL FOR
SUBSTANTIAL DILUTION. The Company's articles of incorporation authorize the
issuance of up to 40 million shares of common stock and up to one million
shares of "blank check preferred stock" with such rights, preferences,
privileges and limitations as may be determined from time to time by its board
of directors. Accordingly, the Board has the power without prior shareholder
approval to issue additional shares of common stock and/or one or more series
of preferred stock with such rates of dividends, redemption provisions,
liquidation preferences, voting rights, conversion privileges and any other
characteristics as the Board may deem necessary. Any such additional
issuances of common stock and/or preferred stock may result in substantial and
material dilution to existing holders of the Company's securities. In
addition, the existence of a substantial amount of authorized and unissued
common stock and blank check preferred stock could discourage, delay or
prevent a takeover of the Company if any such transaction were to be proposed.
-3-
<PAGE>
RISK OF PRODUCT LIABILITY. The testing, marketing and sale of
diagnostic products entails an inherent risk of product liability and there
can be no assurance that product liability claims will not be asserted against
the Company. Although the Company carries a product liability insurance
policy, there can be no assurance that it will be able to maintain the same or
that any claims will not exceed the amount of such coverage. To the extent
product liability claims exceed the amount of insurance coverage, if any, the
Company may suffer adverse materials effects.
VOLATILITY OF SECURITIES PRICES. The public market for equity
securities of high technology and biomedical companies, including the
Company's Common Stock, has been volatile. Factors such as quarterly
variations in operating results, trading volume, general market trends,
announcements of technological innovations or new commercial products,
announcements by competitors, governmental regulation and approvals, and
general market conditions may have a significant effect on the market price of
the Company's Common Stock.
FOREIGN CURRENCY FLUCTUATIONS. The Company's derives a portion of its
revenues from foreign countries and sales to certain customers are accordingly
effected in foreign currencies. The Company publishes its consolidated
financial statements in U.S. dollars after translating transactions in foreign
currencies into U.S. dollars. In periods when the U.S. dollar depreciates
against the relevant foreign currencies, reported earnings attributable to
transactions in foreign currencies may be enhanced. In periods when the U.S.
dollar appreciates against the relevant foreign currencies, however, reported
earnings attributable to transactions in foreign currencies may be reduced.
-4-
