PROSPECTUS
SALIVA DIAGNOSTIC SYSTEMS, INC.
6,507,500 Shares of Common Stock
Par value $.01 per Share
Saliva Diagnostic Systems, Inc. (the "Company") is registering
6,507,500 shares of common stock, $.01 par value (the "Common
Stock"), which include (i) 1,000,000 shares to be issued upon
exercise of warrants granted to Whale Securities Co., L.P. (the
"Whale Warrants"); (ii) 225,000 shares to be issued upon exercise
of warrants granted in connection with a private placement (the
"Private Placement Warrants"); and (iii) 5,282,500 shares of Common
Stock owned by certain shareholders of the Company (the Common
Stock, the Private Placement Warrants and the Whale Warrants are
sometimes collectively referred to herein as the "Securities"). All
of the Securities offered hereby are being sold by certain
shareholders of the Company, each of whom received their Securities
either (a) pursuant to private placements conducted by the Company,
(b) in consideration for acting as consultants to the Company, (c)
in exchange for debt, or (d) in settlement of a dispute. See
"Certain Transactions," "Selling Shareholders" and "Description of
Securities." In the event all of the Whale Warrants and Private
Placement Warrants are exercised, the Company will receive
$1,450,000. There is no assurance that such exercises will occur.
The Company will not receive any of the proceeds from the sale of
the Securities being offered hereby (the "Offering").
The exercise price of the Whale Warrant was based on
negotiation between Whale and the Company. The exercise price of
the Private Placement Warrants was based on the market value of the
Common Stock as reported by Nasdaq on the date of grant.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD
THE LOSS OF THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS" ON PAGE 7.
______________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is June 10, 1996
Price to
Public(1) Underwriting Discount Proceeds to Selling
Shareholders(1)
Per
share of
Common
Stock $3.968 $ -- $ 3.968
Total $25,821,760<PAGE>
$ -- $25,821,760
(1) Estimated
AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and in accordance therewith, files reports and other information
with the Securities and Exchange Commission (the "Commission").
Such reports and other information can be inspected and copied at
the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; and the
Commission's regional offices at Room 1204, 219 South Dearborn
Street, Chicago, Illinois 60604, Room 1028, 7 World Trade Center,
New York, New York 10007, and Suite 500 East, 5757 Wilshire
Boulevard, Los Angeles, California 90036. Copies of such material
can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549 at the prescribed rates.
The Company furnishes Annual Reports to the holders of its
securities which contain financial information which have been
examined and reported upon, with an opinion expressed by, its
independent certified public accountants.
INFORMATION INCORPORATED BY REFERENCE
The Company will furnish, without charge, to each person,
including any beneficial owners, to whom a copy of this Prospectus
is delivered, upon the written or oral request of such person, a
copy of any or all of any documents which may have been
incorporated herein by reference (other than exhibits to such
documents unless such exhibits are specifically incorporated by
reference into the document that this Prospectus incorporates by
reference). Requests for such documents should be directed to
Shareholder Relations, Saliva Diagnostic Systems, Inc., 11719 NE
95th Street, Vancouver, Washington 98682; telephone number (360)
696-4800.
The Common Stock is traded in the over-the-counter market
under the NASDAQ symbol SALV. The closing "bid" and "ask" prices
of the Common Stock on April 29, 1996 as reported by NASDAQ were
and $4 3/8 and $4 1/2, respectively.
The Selling Shareholders may sell the shares in one or more
transactions (which may involve one or more block transactions) on
the over-the-counter markets on the NASDAQ and upon terms then
prevailing or at prices related to the then current market price,
or in separately negotiated transactions or in a combination of
such transactions. The Securities offered hereby may be sold by
one or more of the following methods, without limitation: (a) a
block trade in which a broker or dealer so engaged will attempt to
sell the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction; (b) purchases
by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this Prospectus; (c) ordinary
brokerage transactions and transactions in which the broker
solicits purchasers; and (d) face-to-face transactions between
sellers and purchasers without a broker-dealer.
In effecting sales, brokers or dealers engaged by the Selling
Shareholders may arrange for other brokers or dealers to
participate. Such broker or dealers may receive commissions or
discounts from the Selling Shareholders in amounts to be
negotiated. All other expenses incurred in connection with this
offering will be borne by the Company other than the Selling
Shareholders' legal fees. Such brokers and dealers and any other
participating brokers or dealers may, in connection with such
sales, be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). Any
discounts or commissions received by any such brokers or dealers
may be deemed to be underwriting discounts and commissions under
the Securities Act. The Company has agreed to indemnify the
Selling Shareholders and the Selling Shareholders have agreed to
indemnify the Company against certain civil liabilities, including
liabilities under the Securities Act.
Whale is a broker-dealer registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and is a
member of the National Association of Securities Dealers, Inc.
("NASD"). The Selling Shareholders reserve their right to withdraw
or cancel any offer and reject any offer, in whole or in part. The
Selling Shareholders may be deemed to be underwriters of the shares
offered hereby within the meaning of the Securities Act.
The expenses of this offering are estimated to be
approximately $35,000, all of which shall be paid by the Company.
Regular brokerage commissions and other expenses, including
expenses of counsel, if any, for the Selling Shareholders, shall be
borne by the Selling Shareholders.
Prospective purchasers should carefully consider the matters
discussed under the caption "Risk Factors."
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by
reference to the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in
this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety.
Saliva Diagnostic Systems, Inc., a Delaware corporation (the
"Company") is primarily engaged in the development, manufacturing
and marketing of proprietary specimen collection devices for use in
conjunction with diagnostic assays and rapid blood and saliva-based
tests designed to detect the presence of antibodies to the Human
Immunodeficiency Virus (HIV) virus and other diseases and the
presence of drugs of abuse, such as cocaine and marijuana. The
Company has a limited operating history and limited revenues from
product sales to date.
The Company was founded in 1990 to develop proprietary saliva
specimen collection devices designed for use in conjunction with
diagnostic assays to detect the presence of antibodies to the HIV
virus and the presence of drugs of abuse as an alternative to the
predominantly used blood based testing. In 1994, the Company
broadened its product base to include other types of alternative
testing technologies including blood-based testing to represent
alternative approaches to take advantage of unique market niches.
The Company has two categories of products: medical specimen
collection devices and rapid antibody immunoassays (tests). The
Company's initial product, Omni-SAL, an on-site, easy-to-use
medical collection device, utilizes saliva as a diagnostic tool to
detect the presence of the HIV virus, other diseases, nicotine and
drugs of abuse. The Company has commenced limited distribution of
Omni-SAL to customers located outside the United States, which are
manufactured by SDS's foreign subsidiary in Singapore. The
Company's other collection devices include Saliva Sampler, which is
used to collect saliva specimens, and Omni-SWAB, a serrated cotton
swab with an injectable head, which can be used to obtain DNA
specimens for gene amplification processes. See "The Company --
Principal Products."
The first of the Company's second category of products, rapid
antibody immunoassays, is Sero.Strip HIV 1/2, now being produced in
limited quantities by SDS's foreign subsidiary in Singapore. It is
a serum and plasma based test that uses one microliter (the volume
on the head of a pin) of specimen.
The second product in the Company's second category of
products, which is in the final stages of development, is
Hema.Strip HIV 1/2. This is a self-contained system for the
collection, processing and analysis of three microliters of blood
gathered from a fingerstick. This device is designed for on-site
testing, emergency situations and, in certain parts of the world,
for screening blood donors. The third product, which is in its
final stages of development, is Saliva.Strip HIV 1/2, which uses
saliva as the specimen. Research in this platform continues for
detection of other diseases. SDS has begun to develop products for
detection of hepatitis, rubella, and H.pylori. See "The Company --
Principal Products."
The Company is the successor corporation to E&J Systems, Inc.,
a California corporation formed in 1986, which merged into a
Delaware corporation in 1992. The Company has three subsidiaries.
In 1994, the Company's (then) 90%-owned subsidiary, Saliva
Diagnostic Systems (Asia) Ltd. ("SDS Asia"), formed Saliva
Diagnostic Systems (Singapore) Pte. Ltd. ("SDS Singapore"). In
1995, the Company reacquired the minority interest (10%) in SDS
Asia and the outstanding minority interest (19%) in SDS Singapore.
Unless otherwise indicated, all references to the Company include
the Company and its wholly-owned subsidiaries, SDS U.K., Ltd., SDS
Asia and SDS Singapore.
The Offering
Securities Offered............. 6,507,500 shares of Common
Stock. See "Description of
Securities."
Common Stock outstanding after
the Offering(1)................. 22,035,285 shares
Risk Factors...................... The securities offered hereby
involve a high degree of risk
and should not be purchased by
investors who cannot afford the
loss of their entire
investment. See "Risk Factors."
NASDAQ symbols.....................Common Stock - SALV
Warrants - SALVW
(1) Assumes exercise of all of the Whale Warrants and the Private
Placement Warrants. Does not include (i) 463,250 shares of
Common Stock reserved for issuance upon exercise of
outstanding options under the Company's Stock Option Plans
(the "Stock Option Plans"), (ii) 47,500 shares of Common Stock
reserved for issuance upon exercise of options available for
future grant under the Stock Option Plans, (iii) 2,584,950
shares of Common Stock reserved for issuance upon exercise of
other warrants and options, and (iv) a three year warrant
granted to a licensee of the Company whereby the Licensee has
the right to purchase up to $1,000,000 of Common Stock at a
price equal to 60% of the average of the closing bid and ask
prices of the Common Stock during the ten days prior to
exercise. Mr. Ronald Lealos, President of the Company, has
agreed not to exercise 300,000 of his options until the
Company's certificate of incorporation can be amended to
authorize the issuance of additional shares.
Summary Financial Information
The summary financial information set forth below is derived from
the financial statements appearing elsewhere in this Prospectus.
Such information should be read in conjunction with such financial
statements, including the notes thereto.
Balance Sheet Data
Three Months Ended
December 31, 1995 March 31, 1996
(unaudited)
Working capital
(deficit) $ (290,228) $1,580,427
Total assets $4,358,458 $3,453,529
Total liabilities $3,381,147 $ 623,995
Shareholders' equity $ 977,311 $2,829,534
Income Statement Data
Year Ended Three Months Ended
December 31, March 31,
1995 1995 1996
(unaudited)
Net revenues $ 522,81 $ 74,831 $ 193,721
Net (loss) $(4,597,770) $ (536,955) $(1,004,591)
Net (loss) per
common share $ (.46) $ (.08) $ (.07)
Weighted average
number of common
shares outstanding 9,900,000 7,050,165 15,039,334
<PAGE>
RISK FACTORS
The Securities offered hereby are speculative and involve a
high degree of risk, including, but not limited to, the risk
factors described below. Each prospective investor should
carefully consider the following risk factors inherent in and
affecting the business of the Company and this offering before
making an investment decision.
1. Limited Operating History. Since July 1990, the Company
has been engaged almost exclusively in research and development
activities focused on developing proprietary collection devices and
rapid assays. Other than limited sales of the Company's initial
products, Omni-SAL (which sales were terminated in the United
States in May 1992, for testing for HIV), Omni-SWAB and Sero.Strip
HIV 1/2 (which is manufactured by SDS Singapore) the Company has
not yet commenced any significant product commercialization and,
until such time as it does, will not generate significant product
revenues. To date, sales of Omni-SAL, Omni-SWAB and Sero.Strip HIV
1/2 have been to a limited customer base. The Company has a
limited operating history upon which an evaluation of the Company's
prospects can be made. Such prospects must be considered in light
of the risks, expenses and difficulties frequently encountered in
the establishment of a new business in a continually evolving,
heavily regulated industry, characterized by an increasing number
of market entrants and intense competition, as well as the risks,
expenses and difficulties encountered in the shift from development
to commercialization of new products based on innovative
technology. The Company has been supplying Omni-SAL, Omni-SWAB and
Sero.Strip HIV 1/2 devices on a limited basis and intends to
continue to provide quantities of these devices for testing
purposes to various proposed distributors and customers, in order
to establish their efficacy, thus incurring expenses without
corresponding revenue. There can be no assurance that the Company
will be able to implement successfully its marketing strategy,
obtain necessary regulatory approval, generate increased revenues
or ever achieve profitable operations.
2. Significant Operating Losses; Accumulated Deficit;
Explanatory Paragraph in Report of Independent Certified Public
Accountants. The Company has incurred significant operating losses
since its inception, resulting in an accumulated deficit of
$16,761,847 and $17,766,438 at December 31, 1995 and March 31,
1996, respectively, and a shareholders' equity of $977,311 and
$2,829,534 at December 31, 1995 and March 31, 1996, respectively.
The Company has incurred additional losses through the date of this
Prospectus. Such losses are expected to continue for the
foreseeable future and until such time, if ever, as the Company is
able to attain sales levels sufficient to support its operations.
The Company's independent certified public accountants have
included an explanatory paragraph in their report stating that the
Company's ability to continue as a going concern is dependent on
its ability to raise capital and to attain future profitable
operations.
3. Significant Capital Requirements; Dependence on Proceeds
of This Offering; Need for Additional Financing. The Company's
capital requirements have been and will continue to be significant.
The Company has been dependent on private placements of its debt
and equity securities and on a public offering of securities in
March 1993 (the "Public Offering") pursuant to a Prospectus dated
March 3, 1993 (the "Prospectus") to fund such requirements. The
Company is dependent upon its other efforts to raise capital
resources, including proceeds received from the exercise of
warrants such as those being registered hereby, to finance the
costs of manufacturing, marketing and conducting clinical trials
and submissions for FDA approval of its products and continuing the
design and development of the Company's new products which utilize
its rapid testing format. The Company anticipates, based on
currently proposed plans and assumptions relating to its operations
(including assumptions regarding the progress of its research and
development and the timing and cost associated with obtaining
regulatory approvals for, and manufacturing and marketing of,-Omni-
SAL) that the net proceeds, if any, received by the Company upon
payment for the exercise price of the Securities offered hereby
will provide only a small portion of the funds necessary in
connection with implementation and continuation of its programs.
Marketing, manufacturing and clinical testing may require capital
resources substantially greater than the resources currently
available to the Company. There can be no assurance that the
Company will be able to obtain the substantial additional capital
resources necessary to permit the Company to implement or continue
its programs. The Company has no current arrangements with respect
to, or sources of, additional financing and there can be no
assurance that such financing will be available on commercially
reasonable terms or at all. It is not anticipated that any of the
officers, directors or shareholders of the Company will provide any
portion of the Company's future financing requirements. Any
additional equity financing may involve substantial dilution to the
interests of the Company's shareholders, which dilution has
periodically occurred in the past.
4. Uncertain Efficacy of Saliva as a Diagnostic Tool. The
human specimens traditionally used for the diagnostic testing and
quantitative measurement of most physiologically active substances,
drugs and toxins in the body, are blood and urine. Substantially
all of the assay-based diagnostic test kits currently available
were approved by the FDA for use with these testing specimens.
Historically, saliva has not been accepted as a suitable human
diagnostic specimen due to concerns regarding the relatively low
antibody concentration in saliva, the stability of saliva as a
specimen and the impact of a person's diet and enzymes on saliva.
In order to assure the efficacy of saliva collection, provisions
must be made to assure that a sufficient amount of saliva is
collected, the specimen is adequately stabilized and bacterial
growth does not cause test interference. Additionally, the Company
must develop and implement testing protocols which adapt, for use
with saliva, assays approved by the FDA for use with blood and
urine. Although the FDA has recently approved another saliva
collection device, Ora-Sure, manufactured by Epitope, Inc., there
can be no assurance that saliva specimens will prove to be as
accurate as blood or urine specimens, that these concerns can be
addressed, that saliva will be accepted as a diagnostic specimen or
that the Company will be able to develop or implement the necessary
testing protocols.
Political and social factors may create impediments to the use
of saliva as a diagnostic specimen. These factors include whether
certain diagnostic tests, such as HIV antibody tests, should be
conducted without trained specialists and whether tests using
saliva specimens in nontraditional testing environments will lead
to invasions of privacy. Although the Company acknowledges the
existence of such considerations, it is committed to developing
saliva collection and testing devices as useful diagnostic tools.
Limitations on the Company's ability to develop saliva as a
diagnostic specimen for testing purposes caused by political and
social factors could have a material adverse effect on the
Company's operations, possibly requiring the Company to
significantly curtail its operations.
5. Uncertainty of New Product Development. The design and
development of the Company's rapid testing platforms in their
current designs have been completed and limited revenues have been
generated from sales thereof. The Company will be required to
devote considerable additional efforts to finalize the evaluation
of its products. Satisfactory completion of development, testing,
evaluations, obtaining regulatory approvals and achieving
sufficient production levels of such products will be required
prior to their being available for commercial sale. The Company's
products remain subject to all the risks inherent in the
introduction of new diagnostic products, including unanticipated
problems, as well as the possible insufficiency of funds to
continue design and development which could result in abandonment
of or substantial change in the design or development of such
products. There can be no assurance that such products will be
successfully developed, be developed on a timely basis or prove to
be as effective as products based on existing or newly developed
technologies. The inability to successfully complete development,
or a determination by the Company, for financial or other reasons,
not to undertake to complete development of any product,
particularly in instances in which the Company has made significant
capital expenditures, could have a material adverse effect on the
Company.
6. Competition. The market which the Company plans to enter,
saliva-based and rapid-testing collections and diagnostic testing,
is highly competitive. The Company is aware of certain entities,
including ChemTrak, Inc., Epitope, Inc., Quidel and Trinity
Biotech, plc and specialized biotechnology firms, as well as
universities and other research institutions, which have developed
or are developing technologies and products which are competitive
with Omni-SAL and the Company's products under development. Many
of these competitors are established and have substantially greater
research, marketing and financial resources than the Company. The
Company expects that the number of products competing with its
products will increase as the perceived benefits of saliva-based
testing become more widely recognized. There can be no assurance
the Company will be able to compete successfully.
7. Technological Change and Risk of Technological
Obsolescence. The biotechnology industry, and, in particular,
saliva-based diagnostic testing, is subject to rapid and
significant technological change. The development of a cure for
AIDS or a vaccine to prevent HIV or AIDS could also have a material
adverse effect on the Company. There can be no assurance that the
Company's competitors will not succeed in developing technologies
and products relating to the collection of saliva for diagnostic
testing prior to the Company or that they will not develop
technologies and products that are more effective than any which
have been or are being developed by the Company. In addition, the
diagnostic products market is characterized by changing technology
and developing industry standards sometimes resulting in product
obsolescence or short product life cycles. Accordingly, the
ability of the Company to compete will be dependent on its
introducing products to the marketplace in a timely manner and
enhancing and improving such products. There can be no assurance
that the Company will be able to keep pace with technological
developments or that its products will not become obsolete.
8. Cessation of United States Manufacturing and Distribution.
In May 1992, the FDA advised the Company that saliva specimen
collection devices, including Omni-SAL, when used for HIV antibody
testing, are regulated as Class III medical devices under the FDC
Act and, as such, require the filing with and approval by the FDA
of a pre-marketing approval application ("PMA") in order to be
marketed. In response to the FDA's request, the Company agreed to
discontinue shipment of Omni-SAL devices manufactured in the United
States, both domestically and internationally, for testing for HIV
antibodies, whether for investigational or other use, prior to
filing an Investigational Device Exemption ("IDE") and obtaining a
PMA. In 1995, the FDA approved the Company's request to review a
premarketing application (PMA) for Omni-SAL, and authorized the
Company to begin clinical trials in the United States. SDS has not
conducted any clinical trials for Omni-SAL in the United States,
although preclinical data has been generated for the device in the
United States and foreign countries. The Company would be required
to use other FDA-approved confirmatory testing procedures during
the trials. There is no assurance that the Company will receive
FDA approval to market Omni-SAL or any of its other products in the
United States.
9. Government Regulation. The development, manufacture and
sale of the Company's products in the United States are subject to
regulation by the FDA and other governmental agencies. The process
of obtaining FDA approval is costly and time-consuming, and there
can be no assurance that any of the Company's products will be
approved by the FDA or other regulatory agencies. Delays in
obtaining regulatory approvals may adversely affect the
development, testing or marketing of the Company's products and the
ability of the Company to generate product revenues therefrom. The
Company is subject to regulation in certain foreign markets. There
can be no assurance that regulatory approvals for any of the
Company's products will be obtained in a timely manner, or at all.
The procedures for FDA approval vary depending on the type of
product involved. The Company's planned diagnostic products for
detection of HIV antibodies will be reviewed by the FDA's Center
for Biologic Evaluation and Research ("CBER") and will likely
receive more extensive regulatory scrutiny than diagnostic tests
not related to HIV. The FDA approval process generally takes
several years and there can be no assurance that it will ever be
obtained.
The FDA has not approved any AIDS-related testing devices
outside of a professional use setting. There can be no assurance
that, if the Company receives FDA approval of any of its products
for use in conjunction with AIDS-related testing, such approval
will not be limited to sale for professional use.
In addition, changes in existing regulations or enforcement
policy or the adoption of new regulations could make regulatory
compliance by the Company more difficult in the future. The FDA
has increased its scrutiny of product applications and regulatory
compliance of medical device companies, thus slowing the product
approval process for medical devices. This could have a material
adverse effect on the Company's proposed sale of certain products.
Failure to comply with applicable requirements may result in civil
penalties, delays or suspensions of clearances, seizures,
injunctions or recalls of products, operating restrictions and
criminal prosecutions and could have a material adverse effect on
the Company.
Agencies similar to the FDA regulate medical devices in some
foreign countries, whereas other countries allow unregulated
marketing of such devices. The Company's products will be required
to meet the regulations, if any, of any foreign country where they
are marketed.
If and when one of the Company's products is approved by the
FDA, it will be subject to continuing regulation by the FDA and
state and local agencies. The FDA has established a number of
requirements for manufacturers, including good manufacturing
practices ("GMP"), and requirements regarding labeling and
reporting. The failure to comply with these requirements can
result in regulatory action, including warning letters, product
seizure, injunction, product recalls, civil fines and prosecution.
An FDA enforcement action could have a material adverse effect on
the Company. To date, the Company has not been the subject of any
FDA enforcement actions. The FDA also audits clinical studies for
compliance with applicable requirements.
The Company is, or may become, subject to federal, state and
local laws and regulations relating to safe working conditions,
laboratory and manufacturing practices, and the use and disposal of
hazardous substances, including infectious disease agents used in
conjunction with the Company's research work. These regulations
could increase the Company's costs and could have an adverse effect
on the production and marketing of the Company's products.
The Company anticipates that its products will be affected by
the Clinical Laboratory Improvement Act of 1988 ("CLIA '88"). CLIA
'88 sets forth performance requirements that apply to subject
laboratories. CLIA '88 greatly expanded the number of laboratories
that are subject to regulation. CLIA '88 is intended to insure the
quality and reliability of all laboratory diagnostic testing in the
United States by, among other things, establishing training and
experience requirements for personnel operating clinical
laboratories. Because the regulations implementing CLIA '88 have
not yet been fully implemented, the Company is unable to assess its
impact on the Company. See "The Company -- Domestic Regulation."
10. Risks Related to Foreign Activities. The Company and its
manufacturers may be subject to various import duties imposed by
foreign governments applicable to both finished products and
components and may be affected by various other import and export
restrictions or duties as well as other developments having an
impact upon international trade. These factors could, under
certain circumstances, have an impact both on the manufacturing
cost and the wholesale and retail prices of such products. To the
extent that transactions relating to foreign sales, manufacturing
of the Company's products and purchases of components involve
currencies other than United States dollars, the operating results
of the Company could be adversely impacted by fluctuations in
foreign currency exchange rates. See "The Company -- Overseas
Regulation and Distribution."
11. Uncertainty of Market Acceptance; Dependence Upon Third
Party Distributors. The Company has limited marketing capabilities
and resources. Achieving market acceptance will require
substantial marketing efforts and the expenditure of significant
funds to inform potential consumers and the public of the perceived
benefits of the Company's current and proposed products. Moreover,
the Company does not have the financial or other resources to
undertake extensive marketing and advertising activities. The
Company has recently begun to develop strategic alliances and
marketing arrangements, including joint ventures, license or
distribution arrangements. The Company's prospects will be
significantly affected by its ability to successfully develop and
maintain its relationships with its joint venturers, licensors and
distributors and upon the marketing efforts of such third parties.
While the Company believes that any independent distributors and
sales representatives with whom it enters into such arrangements
will have an economic motivation to commercialize the Company's
products, the time and resources devoted to those activities
generally will be controlled by such entities and not by the
Company. There can be no assurance that the Company will be able,
for financial or other reasons, to develop and maintain any third
party distribution or marketing arrangements or that such
arrangements, if established, will result in the successful
commercialization of any of the Company's products.
12. Dependence on Manufacturers. The Company relies on
arrangements with third parties for the manufacture of its
products. Such manufacturers, if located in the United States or
if manufacturing products to be sold in the United States, must
comply with GMP and pass pre-approval inspections by the FDA and
periodic GMP inspections. There can be no assurance that the
Company's manufacturer will continue to comply with GMP, that the
Company will be able to locate additional manufacturers that comply
with GMP and secure agreements with such manufacturers on terms
acceptable to the Company. MML Diagnostic Packaging, Inc. ("MML"),
manufactures Omni-SWAB and Saliva Sampler for the Company in the
United States. There can be no assurance that MML will be able to
meet the Company's requirements. See "The Company --Manufacturing."
13. Dependence Upon Third-Party Suppliers. The Company
believes that most of the components used in the manufacture of its
proposed products are currently available from numerous suppliers
located in the United States, Europe and Asia. The Company
believes, however, that certain components are available from a
limited number of suppliers. Although the Company believes that it
will not encounter difficulties in obtaining these components,
there can be no assurance that the Company will be able to enter
into satisfactory agreements or arrangements for the purchase of
commercial quantities of such components. The failure to enter into
agreements or otherwise arrange for adequate or timely supplies of
components and the possible inability to secure alternative sources
of components could have a material adverse effect on the Company's
ability to manufacture its products. In addition, development and
regulatory approval of the Company's products in the United States
are dependent upon the Company's ability to procure certain
components and certain packaging materials from FDA-approved
sources. Since the FDA approval process requires manufacturers to
specify their proposed suppliers of certain components in their
PMAs, if any such component were no longer available from the
specified supplier, FDA approval of a new supplier would be
required, resulting in potential manufacturing delays.
14. Dependence on Key Personnel. The success of the Company
will be largely dependent on the personal efforts of Mr. Ronald L.
Lealos, its President, and certain key management and scientific
personnel. Although the Company has entered into a five-year
employment agreement with Mr. Lealos, the loss of his services or
the services of other key management or scientific personnel would
have a material adverse effect on the Company's business and
prospects. Competition among biotechnology companies for qualified
employees is intense, and the loss of key personnel or the
inability to attract and retain the additional highly skilled
employees required for the Company's activities could adversely
affect its business. There can be no assurance that the Company
will be able to hire or retain such necessary personnel. See
"Management."
15. Uncertainty of Patent Protection; Proprietary
Information. The Company has applied for ten United States patents
on certain aspects of its saliva collection and diagnostic testing
devices and has been awarded eight of these patents. To the extent
possible, the Company also anticipates filing patent applications
for protection on future products and technology which it develops.
There can be no assurance that patents applied for will be
obtained, that any such patents will afford the Company
commercially significant protection of its technology or that the
Company will have adequate resources to enforce its patents.
Inasmuch as the Company intends to sell its products in foreign
markets, it is in the process of seeking foreign patent protection
on its current products and technologies. The patent laws of other
countries may differ from those of the United States as to the
patentability of the Company's products and technologies and the
degree of protection afforded. Other companies may independently
develop equivalent or superior products and technologies and may
obtain patent or similar rights with respect thereto. Although the
Company believes that its products and technologies have been
independently developed and do not infringe on the patents of
others, there can be no assurance that the Company's products and
technologies do not and will not infringe on the patents of others.
In the event of infringement, the Company would, under certain
circumstances, be required to modify its device or obtain a
license. There can be no assurance that the Company will be able
to do either of the foregoing in a timely manner or upon acceptable
terms and conditions, and the failure to do so could have a
material adverse effect on the Company. There can be no assurance
that the Company will have the financial or other resources
necessary to successfully defend a claim of violation of
proprietary rights. See "The Company -- Patents and Proprietary
Information."
The Company also relies on confidentiality and nondisclosure
arrangements with its employees, licensees and other entities
engaged in joint product development and expects to enter into
confidentiality agreements with its employees. There can be no
assurance that these agreements will provide meaningful protection
to the Company.
16. Product Liability; Insurance Coverage. The Company may
be exposed to potential product liability claims by consumers. The
Company maintains product liability insurance coverage in an amount
up to $1,000,000 per occurrence, up to a maximum of $2,000,000. In
the event of a product liability claim, there can be no assurance
that such insurance will be sufficient to cover all possible
liabilities. In the event of a successful suit against the
Company, insufficiency of insurance coverage could have a material
adverse effect on the Company.
17. Possible Delisting of Securities from NASDAQ System;
Disclosure Relating to Low-Priced Stocks. The National Association
of Securities Dealers, Inc. (the "NASD"), which administers NASDAQ,
has established criteria for continued NASDAQ eligibility. In
order to continue to be included in NASDAQ, a company must maintain
$2,000,000 in total assets, a $200,000 market value of the public
float and $1,000,000 in total capital and surplus. In addition,
continued inclusion requires two market-makers and a minimum bid
price of $1.00 per share; provided, however, that if a company
falls below such minimum bid price, it will remain eligible for
continued inclusion in NASDAQ if the market value of the public
float is at least $1,000,000 and the Company has $2,000,000 in
capital and surplus. The failure to meet these maintenance
criteria in the future may result in the discontinuance of the
inclusion of the Company's securities in NASDAQ. In such event,
trading, if any, in the Company's securities may then continue to
be conducted in the non-NASDAQ over-the-counter market. As a
result, an investor may find it more difficult to dispose of, or to
obtain accurate quotations as to the market value of, the Company's
securities. In addition, the Company would be subject to a
Commission rule that, if the Company fails to meet certain criteria
set forth in such rule, imposes various sales practice requirements
on broker-dealers who sell securities governed by the rule to
persons other than established customers and accredited investors.
For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior
to sale. Consequently, the rule may have an adverse effect on the
ability of broker-dealers to effect transactions in the Company's
securities and may affect the ability of purchasers in this
offering to sell the Company's securities in the secondary market.
The Company has been required to increase its equity several times
over the past year in order to remain eligible for inclusion in
NASDAQ. This is likely to occur due to the Company's current
financial condition. There is no assurance that the Company will
be able to acquire additional capital to continue to qualify for
entry on NASDAQ as it has done before. Thus, there is no assurance
that the Company will continue to remain eligible for continued
inclusion on NASDAQ.
The Commission has adopted rules that define a "penny stock."
Although the Common Stock is presently outside the definitional
scope of a penny stock under these rules, in the event the Common
Stock were subsequently to become characterized as a penny stock,
broker-dealers dealing in the Common Stock will be subject to the
disclosure rules for transactions involving penny stocks. The
additional burdens imposed upon broker-dealers may discourage
broker-dealers from effecting transactions in penny stocks, which
could reduce the liquidity of the Common Stock and have a material
adverse effect on the trading market for the Common Stock.
18. No Dividends. To date, the Company has not paid any
dividends on its Common Stock and does not expect to declare or pay
any dividends in the foreseeable future.
19. Significant Outstanding Options and Warrants in Excess of
the Company's Authorized Shares. The Company has outstanding
options and warrants which if exercised would exceed the number of
shares the Company is authorized to issue. Upon completion of the
Offering and the exercise of the Whale Warrant and the Private
Placement Warrants, there are currently outstanding stock options
to purchase (i) an aggregate of 463,250 shares of Common Stock at
exercise prices ranging from $.60 to $2.625 per share; (ii)
warrants to purchase 1,380,000 shares which were issued in the
Company's public offering and are exercisable at $7.20 per share;
(iii) options and warrants to purchase 1,060,000 shares which were
issued to employees and consultants; and (iv) warrants to purchase
144,950 shares granted to investors in private placements. The
Company also has granted a three year warrant to a licensee to
purchase up to $1,000,000 of Common Stock at a price equal to 60%
of the average of the closing bid and ask prices of the Common
Stock during the ten days prior to exercise.
To the extent that outstanding options or warrants are
exercised, the Company may be in breach of its contractual
obligations to issue shares pursuant to the terms of the warrants
or options. In addition, upon exercise of these warrants or
options, dilution to the Company's shareholders may occur.
Moreover, the terms upon which the Company will be able to obtain
additional equity capital may be adversely affected since the
holders of outstanding options and warrants can be expected to
exercise them at a time when the Company would, in all likelihood,
be able to obtain any needed capital on terms more favorable to the
Company than the exercise terms provided by such outstanding
securities. Mr. Lealos has agreed not to exercise 300,000 of his
options until the Company's certificate of incorporation has been
amended to authorize additional shares.
20. Litigation. The Company had granted a license to Home
Access Health Corporation ("Home Access") in March 1995 to use
certain proprietary technology relating to Omni-SAL solely in
testing kit form in certain markets (the "License Agreement"). An
amendment to the License Agreement (the "Amendment") and a
Sublicense Agreement (the "Sublicense") were entered into between
Home Access and the Company in December 1995. In the Sublicense
the Company in effect licensed back its rights to Omni-SAL and
agreed to transfer to Home Access the 510(k) premarket notification
relating to Saliva Sampler and the IDE granted to the Company
related to Omni-SAL. A dispute has arisen between the Company and
Home Access over the scope and validity of the License Agreement,
the Amendment and the Sublicense (collectively the "Agreements").
The Company's position is that only Omni-SAL devices sold in kits
are covered by the Agreements. Home Access' position is that
pursuant to the Agreements the Company licensed to Home Access all
rights to the Omni-SAL for remote laboratory testing (excluding
rapid testing). Due to the dispute and Home Access' failure to
actively pursue use of the technology licensed pursuant to the
Agreements, the Company commenced a suit in Clark County Superior
Court in January 1996 for declaratory judgment, seeking termination
of the Agreements and/or a court interpretation of the scope of the
Agreements.
Home Access has asserted counterclaims in its answer to the
complaint dated June 4, 1996. Home Access alleges it is the
Company's failure to transfer the IDE and 510(k) and the Company's
notice of termination of the Agreements that impeded Home Access'
efforts to market and utilize the Technology licensed pursuant to
the Agreements. Home Access has counterclaimed for breach of
contract, tortious interference with its business relationships and
unfair competition. Home Access alleges it has incurred damages
estimated in excess of $1,000,000, plus its attorneys' fees and
costs.
In the event the Company does not prevail in the litigation,
in addition to payment of monetary damages, the Company may be
precluded from selling Omni-SAL for use in remote laboratory
applications (excluding rapid testing) except for uses the Company
has obtained in the Sublicense (to the extent the Sublicense is
valid). Furthermore, the Company may not be able to utilize the
510(k) for Saliva Sampler and may be precluded from conducting
clinical trials relating to the usage of Omni-SAL. No such trials
are presently scheduled.
The Company believes that the Agreements never covered
anything but licensing Omni-SAL to Home Access for applications in
kit form and that Home Acess' erroneous interpretation of the
Agreements would make the consideration transferred for the
Agreements wholly inadequate. The Company further believes that
Home Access has cancelled the Sublicense. The litigation is at an
early stage and the Company intends to vigorously defend itself in
this litigation. In the event, however, that Home Access prevails
in this litigation, such event could have a material adverse effect
on the Company. See "The Company -- Domestic Regulation" and "The
Company -- Legal Proceedings."
GLOSSARY OF CERTAIN TECHNICAL TERMS
AIDS.............. Acquired Immunodeficiency Syndrome. AIDS is
caused by the Human Immunodeficiency Virus,
HIV.
ANTIBODY.......... A protein which is a natural part of the human
immune system produced by specialized cells to
neutralize antigens, including viruses and
bacteria, that invade the body. Each antibody
producing cell manufactures a unique antibody
that is directed against, binds to and
eliminates one, and only one, specific type of
antigen.
ANTIGEN........... Any substance which, upon entering the body,
stimulates the immune system leading to the
formation of antibodies. Among the more
common antigens are bacteria, pollens, toxins,
and viruses.
ASSAY............. In medicine, a means of measuring a substance
of clinical interest. The results may be
either qualitative, as in "yes/no" (such as
pregnant/not pregnant) or quantitative, as in
determining the number of red blood cells in a
sample.
BIOTECHNOLOGY...... The commercial application of bioscience,
representing the disciplines of molecular
biology, cell biology, genetics, enzymology,
immunology, bacteriology, biochemistry and
fermentation processes through the use of
living organisms.
DIAGNOSTIC......... Pertaining to the determination of the nature
or cause of a disease or condition. Also
refers to reagents or procedures used in
diagnosis to measure proteins in a clinical
sample.
ELISA.............. Enzyme Linked Immunoabsorbent Assays. Assays
in which an enzyme is employed to produce a
color change indication for a reaction
endpoint.
ENZYME............. A protein that facilitates specific chemical
reactions.
HIV................ Human Immunodeficiency Virus. HIV (also
called HIV-1), a retrovirus, causes AIDS. A
similar retrovirus, HIV-2, causes a variant
disease, sometimes referred to as West African
AIDS. HIV infection leads to the destruction
of the immune system.
IMMUNOASSAY........ An assay which exploits antigen-antibody
reactions.
IMMUNOLOGY......... The study of immunity to diseases.
IMMUNODIAGNOSTICS.. Diagnostic tests which use antigen/antibody
reactions to determine the presence of a
disease, disorder or condition.
PATHOGEN.......... A microorganism or substance which produces a
disease.
PROTOCOL.......... A procedure pursuant to which an
immunodiagnostic test is performed on a
particular specimen in order to obtain the
desired reaction.
REAGENT............ A chemical added to a sample under
investigation in order to cause a chemical or
biological reaction which will enable
measurement or identification of a target
substance.
RETROVIRUS......... A type of virus which contains the enzyme
Reverse Transcriptase and is capable of
transforming infected cells to produce
diseases in the host such as AIDS.
SENSITIVITY........ Refers to the ability of an assay to detect
and measure small quantities of a substance of
interest. The greater the sensitivity, the
smaller the quantity of the substance of
interest the assay can detect. Also refers to
the likelihood of detecting the antigen when
present.
SPECIFICITY........ The ability of an assay to distinguish between
similar materials. The greater the
specificity, the better an assay is at
identifying a substance in the presence of
substances of similar makeup.
VIRUS............. A parasitic microorganism not visible by light
microscopy and dependent on host cells for its
reproductive and metabolic needs.
<PAGE>
THE COMPANY
Saliva Diagnostic Systems, Inc., a Delaware corporation (the
"Company") is primarily engaged in the development, manufacturing
and marketing of proprietary specimen collection devices for use in
conjunction with diagnostic assays and rapid blood and saliva-based
tests designed to detect the presence of antibodies to the Human
Immunodeficiency Virus (HIV) virus and other diseases and the
presence of drugs of abuse, such as cocaine and marijuana. The
Company has a limited operating history and limited revenues from
product sales to date.
The Company is the successor corporation to E&J Systems, Inc.,
a California corporation formed in 1986, which merged into a
Delaware corporation in 1992. The Company has three subsidiaries.
In 1994, the Company's (then) 90%-owned subsidiary, Saliva
Diagnostic Systems (Asia) Ltd. ("SDS Asia"), formed Saliva
Diagnostic Systems (Singapore) Pte. Ltd. ("SDS Singapore"). In
1995, the Company reacquired the minority interest (10%) in SDS
Asia and the outstanding minority interest (19%) in SDS Singapore.
Unless otherwise indicated, all references to the Company include
the Company and its wholly-owned subsidiaries, SDS U.K., Ltd., SDS
Asia and SDS Singapore.
Principal Products
The Company has two categories of products: medical specimen
collection devices and rapid antibody immunoassays (tests).
Sample Collectors
In the sample collector (medical specimen) category of the
Company's products, the Company has completed its current
development activities and commenced preliminary distribution of
its three specimen collection devices, Omni-SAL, Omni-Swab, and
Saliva Sampler. To date, most of the Company's revenues have been
derived from sales and licensing agreements for these products and
their component parts. Omni-SAL and Omni-Swab are sold
internationally through foreign distributors. Omni-Swab is also
distributed in the United States. Saliva Sampler is distributed in
the United States. See "Overseas Regulation and Distribution."
Omni-SAL consists of a small absorbent paper pad attached to
a stick, a visual sample adequacy indicator and a transport tube
containing a buffer solution which stabilizes the saliva specimen
for up to 21 days at ambient temperatures. To collect a saliva
specimen, the device is placed under a subject's tongue, generally
for no more than a few minutes. The sample adequacy indicator is
designed to assure a sufficient quantity of saliva has been
collected for analysis. The buffer solution permits the storage
and transportation of the specimen between points of collection and
testing, which is essential in developing countries where
refrigerated storage may not be feasible, or where specimens are
transported under uncontrolled conditions.
Omni-SAL is used overseas to collect saliva samples for HIV
and nicotine testing with other makers' assays. Omni-SAL is also
used to collect saliva samples for research purposes, in studies of
infectious diseases such as Hepatitis A, tuberculosis,
schistosomiasis and leptospirosis, and for drugs of abuse such as
cocaine and marijuana.
Saliva Sampler is a saliva collection device approved by the
FDA for the collection of saliva samples in the United States for
general purposes.
Until recently, saliva has not been an accepted diagnostic
medium, due to lower antibody concentrations and potential impact
of diet and enzymes in saliva. With the increased sensitivity of
new diagnostic techniques, lower antibody concentrations are not a
limiting factor. A large number of independent studies evaluating
the use of saliva for various diagnostic purposes have been
conducted worldwide and published within the last decade. As a
result of these studies, saliva is now becoming recognized as an
acceptable diagnostic medium for detecting the presence of certain
analytes. These analytes include antibodies to various diseases,
including HIV. To date, very few diagnostic assays for testing
saliva samples have been commercialized. The Company believes that
the market for saliva diagnostics will expand rapidly as new
assays, developed by the Company and its competitors, become
available.
The Company completed initial development of Omni-Swab in
1994, and received approval from the U. S. Food and Drug
Administration ("FDA") to distribute Omni-Swab in the United States
for general medical purposes in 1994. Omni-Swab is a sample
collection device comprised of a serrated cotton swab with an
ejectable head. It is used to collect various body cells for a
number of testing purposes, including DNA identification. The
Company has granted Life Technologies, Inc. of Gaithersburg,
Maryland, and Fitzco, Inc. of Maple Plain, Minnesota non-exclusive
marketing rights to sell Omni-Swab.
Rapid Antibody Immunoassays
The second category of the Company's products are its rapid
diagnostic assays for various diseases including HIV infection,
Hepatitis A & B, Helicobacter pylori (H. pylori) and
schistosomiasis. To date, the Company has completed its current
development activities relating to two of its three HIV assays,
Sero-Strip HIV-1/2 and Hema-Strip HIV-1/2. Saliva Strip HIV-1/2 is
in the final stages of its current development activities. The
Company is still in the development stages for its rapid assays for
the detection of other infectious diseases and drugs of abuse.
Sero-Strip HIV-1/2 ("Sero-Strip"), which uses serum and plasma
to detect HIV antibodies, is currently being produced and sold in
limited quantities. The Company commenced limited production and
distribution of Sero-Strip in 1995. Sero-Strip is designed to be
used in professional health care settings, where blood samples can
be drawn, and serum and plasma can be separated. Other than a
collection device, no medical equipment is needed to use the test,
and no special handling or storage is required. Up to 30 tests can
be performed with a single Sero-Strip kit. Sero-Strip appears to
provide stable results within 15 minutes.
Development of the current version of Hema-Strip HIV-1/2
("Hema-Strip") which uses a drop of whole blood for analysis, was
completed in March 1996 and the test is now being brought into
production. Hema-Strip is designed so that it may be used outside
clinical settings. The kit contains a collection device and is
sold in lots of 30 individually packaged tests. No other equipment
is required to use the test. Like Sero-Strip, the assay appears to
produce stable results within 15 minutes. No special handling or
storage appears to be required other than the avoidance of extreme
conditions.
Saliva Strip HIV-1/2 ("Saliva Strip"), an antibody assay with
sample collection and processing incorporated, is intended to
detect HIV antibodies in saliva. The current version of Saliva
Strip is in the final stages of development. Studies to collect
data for the test are underway in several countries in Asia, Latin
America and Africa. Final packaging design of the test is not
complete. During 1995, the Company commenced limited distribution
of Saliva Strip to researchers in Mexico and Brazil. The Company
is continuing to develop Saliva Strip for use in detection of other
diseases and substances.
Domestic Regulation
In the United States, under the Federal Food, Drug, and
Cosmetics Act ("the FDC Act"), the Food and Drug Administration
("FDA") regulates almost all aspects, including manufacture,
testing, and marketing, of medical devices that are made or
distributed domestically. The Company's domestically made and/or
distributed products have received FDA approval for certain limited
purposes. These include Omni-Swab and Saliva Sampler. The Company
has not yet initiated activities for FDA approval of its products
that are manufactured and distributed outside the United States.
All medical devices are categorized by the FDA as Class I,
Class II, or Class III. Class I devices are subject only to general
control provisions of the FDC Act, such as purity, labeling and
good manufacturing practices ("GMP"). Class II devices are required
to also ensure reasonable safety and efficacy through performance
standards and other controls. Class III devices must, in addition
to fulfilling all other provisions of the FDC Act, meet extensive
and rigorous FDA standards that may require clinical trials.
A manufacturer of medical devices which can establish that a
new device is "substantially equivalent" to a legally marketed
Class I or Class II medical device or to a Class III medical device
for which the FDA has not required a PMA (premarket approval
application) can seek FDA marketing clearance for the device by
filing a 510(k) Premarket Notification. The 510(k) Premarket
Notification may have to be supported by various types of
information, including performance data, indicating that the device
is as safe and effective for its intended use as a legally marketed
predicate device.
The Company is pursuing several strategies for initiating FDA
approval of its products not already approved for domestic
distribution. These strategies include alliances with other
companies and selling limited licensing rights to SDS products to
companies who agree to seek FDA approval for them. The Company may
also directly apply for FDA approval of those products.
In 1994, the FDA approved Omni-Swab as a Class I medical
device. In May 1995, in response to a "510K" application made by
the Company, the FDA approved Saliva Sampler as a Class II device,
accepting the Company's contention that, under the 510K application
guidelines, Saliva Sampler demonstrated "substantial equivalency"
to other non-saliva collection devices already in use for general
purposes. See "Risk Factors" and "-- Legal Proceedings."
The Company believes that all of its HIV products would, if
submitted to the FDA, fall under the Class III category of medical
devices. This includes the Company's saliva collection device,
Omni-SAL, if marketed as a specimen collection device for HIV
testing. The Company believes its proposed assay for H.pylori,
however, could be approved as a Class II device. The Company
believes its rapid tests for drugs of abuse when completed may
qualify for a 510K application. There is no assurance that the
Company's position with respect to these products will prevail with
the FDA.
If human clinical trials of a proposed device are required,
and the device presents "significant risk," the manufacturer or
distributor of the device will have to file an IDE (Investigational
Device Exemption) with the FDA prior to commencing human clinical
trials. The IDE must be supported by data, typically including the
results of animal and mechanical testing. If the IDE application
is approved, human clinical trials may begin at a specific number
of investigational sites and is limited to the number of subjects
approved by the FDA.
The Company has generated supporting data for its immunoassays
for diseases and conditions such as HIV infection, schistosomiasis
and H.pylori.
In 1994, the FDA approved the Company's request to classify
Omni-SAL under the Investigational Device Exemption (IDE)
provisions of the FDC Act, allowing the Company to manufacture and
distribute Omni-SAL for the limited purpose of demonstrating the
efficacy of using saliva as a diagnostic medium for HIV antibody
testing. See "Risk Factors" and " -- Legal Proceedings."
In 1995, the FDA approved the Company's request to review a
premarketing application (PMA) for Omni-SAL, and authorized the
Company to begin clinical trials in the United States. SDS has not
conducted any clinical trials for Omni-SAL in the United States,
although preclinical data has been generated for the device in the
United States and foreign countries. The Company would be required
to use other, FDA-approved confirmatory testing procedures during
the trials.
If and when the Company's products are approved by the FDA,
they will be subject to continuing regulation by the FDA and state
and local agencies. The FDA has established a number of
requirements for manufacturers, including good manufacturing
practices (GMP), and requirements regarding labeling and reporting.
The failure to comply with these requirements can result in
regulatory action, including warning letters, product seizure,
injunction, product recalls, civil fines and prosecution. An FDA
enforcement action could have a material adverse effect on the
Company. To date, the Company has not been the subject of any FDA
enforcement actions. The FDA also audits clinical studies for
compliance with applicable requirements.
Clinical Laboratory Improvement Act
In 1988, Congress passed the Clinical Laboratory Improvement
Act ("CLIA '88"). CLIA '88 greatly expanded the number of
laboratories that are subject to regulation. CLIA '88 sets forth
performance standards that apply to subject laboratories. In
February 1992, final regulations implementing CLIA '88 were issued.
The Company believes these complex regulations may have a
significant effect on diagnostic testing in the United States.
While it is difficult to predict the ultimate impact of CLIA
'88 on the Company, it is possible that it may make it more costly
and difficult for physicians to operate their own office
laboratories, resulting in closure of some of these small private
laboratories. This may reduce demand for some of the Company's
products.
New guidelines established by the FDA to implement CLIA '88
may also require the Company to generate additional testing data to
support a PMA or 510(K) Pre-Market notification.
Overseas Regulation and Distribution
Regulatory approval for medical devices varies from country to
country. Some countries do not require regulatory approval when
registering a product for sale to the private sector. Others rely
on evaluations by the agencies such as the World Health
Organization (WHO). The Company has submitted Sero-Strip to WHO
for evaluation, and intends to submit its other HIV tests as well.
Evaluation by WHO of Sero-Strip has been completed, and its final
report will be released after it incorporates the Company's
response to the analysis of the WHO's data.
The following lists the Company's products, where the products
are distributed, and where regulatory approval is pending (if
needed). In certain cases, the Company has utilized the experience
and assistance of local distributors in obtaining approval.
1. Omni-SAL is being distributed or has been approved as a
sample collection device for HIV testing and other uses in the
following countries: Argentina, Bahamas, Brazil, Canada, China,
Denmark, England, Finland, Greece, Ireland, Israel, Luxembourg,
Mexico, Malaysia, New Zealand, Norway, Peru, Philippines,
Singapore, Switzerland, Thailand, and Turkey. The Company has
submitted Omni-SAL for approval as a sample collection device for
HIV testing and other uses in France and South Africa, and plans to
apply for approval in several other European and Middle Eastern
nations.
2. Omni-Swab is distributed to many of the same countries as
Omni-SAL and the United States.
3. Saliva Sampler is distributed mainly in the United
States. FDA approval of this and Omni-Swab has pre-empted
regulatory review in many countries outside the United States.
4. Sero-Strip was approved for use and sale in Russia by the
Russian Ministry of Health in 1996, and has received a certificate
of free sale from Singapore, where it is manufactured. Sero-Strip
is also approved in the United Kingdom. It is currently being
distributed in Brazil, Malaysia, and Turkey, where regulatory
approval is not required. The test is pending approval (where
needed) in other Asian, European, and Latin American countries.
The Center for Disease Control in Atlanta, Georgia has concluded a
preliminary study using Sero-Strip and ordered more of the tests
for research use in Atlanta and epidemiological purposes in Kenya.
5. Hema-Strip is pending regulatory approval in Russia,
India, the Ukraine and the United Kingdom, and is being evaluated
by several health institutes in Malaysia, where regulatory approval
is not needed. Hema-Strip received a certificate of free sale from
the Ministry of Health in Singapore in April 1996 which allows
Hema-Strip to be manufactured in and distributed from Singapore to
other countries, as well as Singapore. The Company intends to
submit Hema-Strip to many if not all of the regions where its other
products are distributed or pending approval.
6. Saliva-Strip is in final stages of development in its
current form. When completed, the Company intends to submit the
device for approval (if needed) and distribution in the same areas
where its other products are sold. There is no assurance, however,
that any such approvals will be timely obtained or obtained at all.
Manufacturing
Omni-SAL is manufactured and distributed from the Company's
manufacturing facility in Singapore, while Omni-Swab and Saliva
Sampler are manufactured at MML Diagnostic Packaging, Inc. ("MML")
in the United States and distributed by the Company. Sero-Strip
HIV 1/2 and Hema-Strip HIV 1/2 are also manufactured and
distributed from the Company's facility in Singapore.
Manufacturers, if located in the United States or if manufacturing
products which are to be sold in the United States, must comply
with good manufacturing practices ("GMP") and pass pre-approval
inspections by the FDA and periodic GMP inspections. The Company
has been advised by MML that MML is in compliance with GMP and FDA
regulations.
The Company believes that the components used in the
manufacture of its current and proposed products are currently
available from numerous suppliers located in the United States,
Europe and Asia. The Company believes that certain components are
available from a limited number of suppliers. Although the Company
believes that it will not encounter difficulties in obtaining these
components, there can be no assurance that the Company will be able
to enter into satisfactory agreements or arrangements for the
purchase of commercial quantities of such components.
Marketing
The Company has directed its primary marketing and
distribution efforts for most of its HIV products to international
markets, principally in Asia, Latin America, Europe and the Middle
East. Continuing data collection studies conducted by the Company
in conjunction with overseas governments and health agencies have
established relationships between the Company and these entities
and promoted familiarity with the Company's products in these
areas.
For its other products, particularly the Company's proposed
assay for the H. pylori bacteria, the Company has actively sought
the attention of pharmaceutical corporations who manufacture or
distribute therapies for peptic ulcers. The Company is currently
in discussions with several such firms.
The Company is also attempting to develop strategic alliances
with other companies to jointly develop diagnostic tests which use
saliva and/or blood as the testing specimen.
There can be no assurance, however, that the Company's
marketing efforts to develop alliances with other companies will be
successful.
Principal Customers
During the Company's fiscal year ended December 31, 1995
("Fiscal 1995"), two customers, Fitzco, Inc. and Osborn
Laboratories, accounted for approximately 50% of the Company's
revenues. In addition, the Company sold Omni-SWAB to the British
government for use in its penal system to collect epithelial
surface cells for DNA samples for identity testing and several
insurance companies in Great Britain purchased Omni-SAL to test for
HIV. A loss of any these customers would have a material adverse
effect on the Company.
Licenses
The Company intends to utilize certain licensees to assist it
in distributing its products. In March 1995, the Company entered
into a license agreement with Home Access Health Corporation ("Home
Access") granting Home Access an exclusive license to utilize the
Company's proprietary technology regarding Omni-SAL for a limited
market segment. This license agreement was terminated during 1995
and the Company has sued Home Access. See "Risk Factors" and " --
Legal Proceedings."
In March 1994, the Company granted a non-exclusive license to
Orgenics, Ltd. ("Orgenics") pursuant to which Orgenics can make or
have made diagnostic products incorporating the features of Omni-
SAL. Orgenics has paid the Company an initial licensing fee of
$200,000 and will pay 4% royalties on Orgenics' products which
incorporate the Omni-SAL technology, and 6% royalties on kits of
Omni-SAL sold by Orgenics. In addition, Orgenics received a
warrant expiring in March 1997 to purchase up to $1,000,000 of the
Company's Common Stock at a 40% discount from the average of the
closing bid and ask prices during the ten days immediately prior to
such purchase.
Research and Development
During the years ended December 31, 1995 and 1994, the
Company's research and development expenses were approximately
$353,098 and $584,939, respectively.
Competition
The saliva and blood-based collection and diagnostic testing
market in which the Company participates is highly competitive.
The Company is aware of other corporations in the United States
that have or are developing similar products. These companies
include ChemTrak, Inc., Epitope Inc., Quidel and Trinity Biotech
PLC, as well as universities and other research institutions. The
Company's products will compete with these entities, some of which
are well established and have substantially greater research,
marketing, and financial resources than the Company. The Company
expects that competition will increase as the advantages of-saliva-
based testing become more widely recognized.
Patents and Proprietary Information
The Company has applied for ten patents on certain aspects of
its saliva collection and diagnostic testing devices. The Company
has been awarded eight of these patents and there can be no
assurance that any more patents will be obtained. Inasmuch as the
Company intends to sell its products in foreign markets, it intends
to seek foreign patent protection on such products and
technologies. The patent laws of other countries may differ from
those of the United States as to the patentability of the Company's
products and technologies and the degree of protection afforded.
Much of the technology developed by the Company is subject to
trade secret protection. To reduce the risk of loss of trade
secret protection through disclosure, the Company generally enters
into confidentiality agreements with its employees. There can be
no assurance that the Company will be successful in maintaining
such trade secret protection or that others will not capitalize on
certain of the Company's technology.
Personnel
At April 29, 1996, the Company had 23 full-time employees and
one part-time employee, including 18 persons engaged in research,
development, testing and regulatory affairs and administration and
six persons engaged in management and marketing. The Company
considers its relations with its employees to be good. None of the
Company's employees are represented by labor unions.
Description of Property
The Company's executive offices and laboratory facility are
located at 11719 NE 95th Street, Vancouver, Washington in a 7,488
square foot facility. The Company has additional laboratory
facilities in a 3,020 foot facility located across the street from
its principal facility. The premises are occupied pursuant to
leases with an unaffiliated party which expire in August 31, 2002.
The Company leases 432.80 square meters (approximately 4,500
square feet) in Singapore which it uses for offices and
manufacturing facilities. The three-year lease is from an
unaffiliated party and expires in June 1997.
Legal Proceedings
Hardy v. Saliva Diagnostic Systems, Inc., Ronald L. Lealos,
Eugene Seymour and Richard S. Kalin, was brought in United States
District Court, District of Connecticut by Mr. Luc Hardy, a former
director and officer of the Company. The complaint lists several
causes of action against the Company and the individual defendants,
including breach of Mr. Hardy's employment agreement with the
Company, intentional interference with contract by the individual
defendants, slander and deceptive trade practices. The complaint
seeks damages and punitive damages in an unspecified amount. The
Company believes this complaint is without merit as Mr. Hardy was
fired for cause and intends to vigorously defend itself. Discovery
has been completed.
In January 1996, the Company filed suit against Home Access
Health Corporation ("HAHC") (Saliva Diagnostic Systems, Inc. v.
Home Access Health Corporation) in Washington Superior Court, Clark
County. The Company had entered into a license agreement with HAHC
which gave HAHC the exclusive right to market Omni-SAL for home
testing kits. The Company believes HAHC has failed to utilize the
license and is seeking declaratory judgment to revoke the license.
The lawsuit is in the preliminary stage; although the Company
intends to vigorously pursue this case, there is no assurance that
it will prevail. In the event the Company does not prevail, the
Company may be forced to pay royalties to HAHC for Omni-SAL
products directly sold by the Company.
In response to the Company's amended complaint, on June 4,
1996, Home Access answered the amended complaint and asserted
counterclaims against the Company. Home Access alleged it is SDS'
failure to transfer the IDE and 510(k) and the Company's notice of
termination of the Agreements that impeded Home Access' efforts to
market and utilize the technology originally licensed to Home
Access pursuant to the License Agreement. Home Access has
counterclaimed for breach of contract, tortious interference with
its business relationships and unfair competition. Home Access
alleges it has incurred damages estimated in excess of $1,000,000,
plus its attorneys' fees and costs.
In the event the Company does not prevail in the litigation,
in addition to payment of monetary damages, the Company may be
precluded from selling Omni-SAL for use in remote laboratory
applications (excluding rapid testing) except for uses the Company
has obtained in the Sublicense (to the extent the Sublicense is
valid). Furthermore, the Company may not be able to utilize the
510(k) or conduct clinical trials utilizing the IDE. No such
trials are presently scheduled.
The Company believes that the Agreements never covered
anything but licensing Omni-SAL to Home Access for applications in
kit form and further believes Home Acess' erroneous interpretation
of the Agreements would make the consideration transferred for the
Agreements wholly inadequate. The Company further believes that
Home Access has cancelled the Sublicense. The litigation is at an
early stage and the Company intends to vigorously defend itself in
this litigation. In the event, however, that Home Access prevails,
it could have a material adverse effect on the Company. See "Risk
Factors -- Litigation" and "The Company -- Domestic Regulation."
Meritxell Ltd. v. Saliva Diagnostic Systems, Inc., commenced
in the United States District Court for the Southern District,
involves the conversion rate of a convertible debenture issued to
it by the Company. The Company believes the suit is without merit
inasmuch as the plaintiff failed to comply with all of the terms of
the convertible debenture. Plaintiff is seeking damages in an
unspecified amount. The suit is in the preliminary stages and
management of the Company intends to vigorously defend the Company.
Other than that set forth above, to the best knowledge of the
Company, no other material legal proceedings are pending or have
been threatened.
DIVIDEND POLICY
To date, the Company has not declared or paid any dividends on
its Common Stock. The payment of future dividends, if any, on the
Common Stock, is within the discretion of the Board of Directors
and will depend upon the Company's earnings, its capital
requirements and financial condition and other relevant factors.
The Board does not intend to declare any dividends on its Common
Stock in the foreseeable future, but instead intends to retain all
future earnings, if any, for use in the Company's business
operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
The following discussion and analysis of financial condition
results of operations for the years ended 1995 and 1994 and the
three month periods ended March 31, 1996 and March 31, 1995 should
be read in conjunction with the financial statements and notes
thereto included herein.
General
Since July 1990, the Company has been engaged almost
exclusively in research and development activities focused on
developing proprietary saliva and blood-based collection devices
and rapid tests for infectious diseases and drugs of abuse. Other
than sales of the Company's collection devices, the Company has not
yet commenced any significant product commercialization. The
Company has incurred significant operating losses since its
inception, resulting in an accumulated deficit of $16,761,847 at
December 31, 1995. Such losses are expected to continue for the
foreseeable future and until such time, if ever, as the Company is
able to attain sales levels sufficient to support its operations.
The Company's independent certified public accountants have
included an explanatory paragraph in their report stating that the
Company's ability to continue as a going concern is dependent on
its ability and to attain future profitable operations or to
continue to raise additional capital.
Three Months Ended March 31, 1996 Compared to Three Months Ended
March 31, 1995
The Company had total revenues of $193,721 and $74,831 for the
three months ended March 31, 1996 and 1995, respectively. The
increase in revenues was primarily the result of sales of Omni-SAL
from the Company's Singapore facility and sales of Omni-SWAB.
Selling, general and administrative expenses ("SG&A")
increased to $904,785 from $494,319 for the three months ended
March 31, 1996 and 1995, respectively. This increase of $410,466
or 83% was largely attributable to an increase in personnel and
salaries.
The Company incurred a net loss of $1,004,591 or $.07 per
share, for the quarter ended March 31, 1996, compared with a loss
of $536,955, or $.08 per share, in the year ago period. The
increase in net loss was primarily attributable to the increase in
SGA and an increase in costs associated with an increase in the
number of products produced by the Company. During the 1996
period, there were 15,039,334 weighted average number of shares
outstanding as compared to 7,050,165 shares in the corresponding
year earlier period.
Year Ended December 31, 1995 Compared to Year Ended December 31,
1994.
Revenues for the year ended December 31, 1995 ("Fiscal 1995")
were $621,299, as compared to revenues of $460,673 for the year
ended December 31, 1994 ("Fiscal 1994"). The increase in revenues
was primarily attributable to sales of Omni-SAL from the Company's
Singapore facility and sales of Omni-SWAB.
Research and development costs for Fiscal 1995 decreased to
$353,098 from $584,939 in Fiscal 1994. The decrease was a result
of the Company's attempt to control costs in light of its limited
capital resources.
Selling, general and administrative expenses ("SGA") for
Fiscal 1995 were $4,158,641, an increase of $1,232,020, or
approximately 42% from $2,926,621 for Fiscal 1994. The Company
attributes the increase in SGA to an increase in salaries paid to
consultants and employees and costs associated with the Company's
capital-raising activities.
For Fiscal 1995, the Company incurred a net loss of
$4,597,770, or $.46 per share as compared to a net loss of
$3,357,771, or $.70 per share for Fiscal 1994, an increase of
$1,239,999 (a decrease of $.24 per share).
Liquidity and Capital Resources
The Company's working capital at March 31, 1996 was
$1,580,427. It had a working capital deficit of $290,228 at
December 31, 1995. Its current ratio was 1.21 to 1 at March 31,
1996 as compared to .91 to 1 at December 31, 1995.
During the quarter ended March 31, 1996, net cash used by the
Company's operating activities was $945,045 as compared to $689,601
of cash used in operating activities in the quarter ended March 31,
1995. The primary use of funds during both periods was to finance
losses from operations.
Cash used from investment activities for the first quarter of
1996 was $90,790 as compared to cash used of $51,248 in the year
ago period. The primary use of funds in both periods was the
purchase of equipment.
Cash provided from financing activities in the quarter ended
March 31, 1996 was $59,632 as compared to cash provided from these
activities in the first quarter of 1995 of $1,567,695. The largest
portion of cash provided during Fiscal 1995 was from the Company's
private offerings of securities.
In October and November 1995, the Company sold a principal
amount of $3,685,000 nine percent convertible debentures to 12
overseas investors. The convertible debentures were converted into
an aggregate of 7,901,380 shares of Common Stock from January
through March 1996 (approximately 40% of the outstanding shares).
In November 1995, the Company received gross proceeds of
$300,000 from a private offering of its securities. The offering
consisted of Units; each Unit cost $100,000 and contained 100,000
shares of Common Stock and a warrant to purchase an additional
150,000 shares at an exercise price of 50% of the closing bid price
of the shares of Common Stock as reported by NASDAQ on the date the
holder elects to exercise his warrant. In January 1996, holders of
an aggregate of 345,000 warrants have elected to exercise their
warrants for an aggregate purchase price of $101,952. Mr. Ronald
Lealos, the President of the Company, purchased .3 Units and
exercised his warrant to purchase 45,000 shares. Dr. Eugene Seymour
and Dr. M.J. Scheinbaum, directors of the Company, each purchased
one Unit and each exercised his warrant to purchase an additional
150,000 shares.
From November 1994 through March 1995 the Company received
gross proceeds of approximately $2.1 million from a private
offering of its securities, pursuant to which it issued 4,545,000
shares of Common Stock.
In March 1994, as a result of entry into a license agreement
with Orgenics Ltd., Orgenics Ltd. was granted a three year option,
expiring in March 1997, to purchase up to $1,000,000 (but not more
than 19%) of the Common Stock at 60% of the average of the closing
bid and asked price for the Common Stock during the ten trading
days prior to such purchase.
The Company has significant requirements for capital to
continue to fund its activities. As a result of the above-
described activities, management believes it has adequate resources
to fund its current activities for the next several months. After
this period, unless the Company has developed alternative financing
arrangements, it will likely be required to obtain additional
capital to continue to fund its activities. There is no assurance,
however, that such additional capital will be available, or if
available, whether it will be available on terms acceptable to the
Company.
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded in the Over-the-Counter market and
is quoted on NASDAQ.
The following table sets forth, in each fiscal quarter for the
Company's two most recent fiscal years, high and low bid quotations
for the Common Stock. The market quotations represent prices
between dealers, do not include retail markup, markdown, or
commissions and may not represent actual transactions.
Quarter Ended High Bid Low Bid
December 31, 1995 $3.1875 $ .6875
September 30, 1995 4.50 2.8125
June 30, 1995 4.125 2.3125
March 31, 1995 3.00 .5625
Quarter Ended High Bid Low Bid
March 31, 1994 $5.00 $3.00
June 30, 1994 3.75 1.00
September 30, 1994 2.625 1.25
December 31, 1994 1.6875 1.00
On April 29, 1996, the closing bid price in the Over-the-
Counter market for the Common Stock, as reported by NASDAQ, was
$4.375 and the closing bid for the Company's warrants to purchase
1,380,000 shares of Common Stock at $7.20 per share, as reported by
NASDAQ, was $.75.
On April 29, 1996, there were approximately 349 holders of
record of the Common Stock. The Company believes that there are
significantly more beneficial holders of the Common Stock as many
of the shares of Common Stock are held in "street" name. There
were also 34 holders of record of the publicly-traded warrants. See
"Description of Securities."
MANAGEMENT
Position with Director
Name Age the Company Since
David Barnes, MD 51 Director November 1993
Ronald L. Lealos 47 President and Director January 1992
Kenneth J. McLachlan 49 Director and Chief December 1995
Financial Officer
M.J. Scheinbaum, MD 55 Director February 1996
Hans R. Vauthier 71 Director May 1996
Dr. David Barnes. Dr. Barnes, a pathologist, was elected to
the Board of Directors in November 1993. Dr. Barnes has been the
Managing Director of SDS International Ltd. (U.K.) ("SDS-UK") since
commencement of its operations. Prior to being Managing Director of
SDS-UK, Dr. Barnes was Director of Medical Services for Hemotex
Ltd., a laboratory service mainly dealing with the U.K. insurance
industry. He was responsible for forming a joint-venture
partnership with the Royal London hospital. Before this, Dr.
Barnes worked in South America and in Saudi Arabia where as Deputy
Minister of Health he was responsible for the medical aspects of
the Saudi Kingdom's hospital building program.
Ronald L. Lealos. Mr. Lealos was elected President and
Treasurer in July 1993, and Director and General Manager in January
1992. He has been employed by the Company since September 1990,
when the Company commenced its current business activities. Since
commencement of his employment to date, Mr. Lealos has overseen the
research work on the Company's products, directed the Company's
manufacturing operations and has coordinated much of the Company's
research activities.
M.J. Scheinbaum, MD. Dr. Scheinbaum was elected to the Board
of Directors in February 1996 to fill a vacancy. Dr. Scheinbaum,
a psychiatrist, has been in private practice since 1970. Dr.
Scheinbaum received his medical degree in 1966 from Howard
University Medical School.
Kenneth J. McLachlan. Mr. McLachlan was elected to the Board
of Directors in December 1995 to fill a vacancy. In May 1996, Mr.
McLachlan was appointed Chief Financial Officer of the Company.
From 1988 until 1993, Mr. McLachlan served as Chief Financial
Officer and Executive Vice President of Corange Boehringer
Mannheim, a privately-owned multinational health care group. In
1993, he founded his own international finance and tax firm,
located in the Netherlands. Mr. McLachlan is a director of
Burnfield PLC, a publicly-held company located in Great Britain.
Hans R. Vauthier, Ph.D. Dr. Vauthier was appointed to the
Board of Directors in May 1996 to fill a vacancy which occured upon
the resignation of Dr. Eugene Seymour. Since 1981, Dr. Vauthier has
been a principal of Vauthier & Partner A.G., a consulting firm
located in Berne, Switzerland which assists pharmaceutical
companies in discovering and developing new products. Dr. Vauthier
received his doctorate in economics and business administration
from the University of Berne in Switzerland.
During the year ended December 31, 1995 ("Fiscal 1995"), the
Board of Directors had six meetings and acted five times by
unanimous consent. The Company currently does not have a standing
audit, compensation or nominating committee.
OTHER EXECUTIVE OFFICERS
Position
Name Age Position With the Company Held Since
Willfried 51 Vice President for 1993
Schramm, Ph.D. Research & Development
Duke van 51 Managing Director 1993
Kalken
Willfried Schramm, Ph.D. Dr. Schramm has been Vice President
for Research and Development of the Company since August 1993. He
commenced his employment with the Company in 1993. From 1985 until
his commencement of employment by the Company, he was Vice
President for Research and Development for BioQuant, Inc., Ann
Arbor, Michigan ("BioQuant"), where he conducted research on
biotechnical issues including usage of saliva as a diagnostic
specimen. Dr. Schramm was also on the Board of Directors of
BioQuant from 1991 until 1993. Dr. Schramm received his Ph.D. in
chemistry from the University of Hamburg in 1977.
Duke van Kalken. Mr. van Kalken has been Managing Director of
SDS (Singapore) Pte. Ltd. since April 1993 and has been Managing
Director of SDS (Asia) Ltd. Hong Kong since May 1992. From December
1991 until May 1992, Mr. van Kalken was a consultant to the Bangkok
Royal Country Club in Thailand and to Golf Digest Magazine. From
January 1988 until December 1992, he was President of Saugatuck
Investment Co. in Westport, Connecticut, which specialized in real
estate investments.
EXECUTIVE COMPENSATION
The following table sets forth information relating to the
cash compensation received during Fiscal 1995 and the Company's
fiscal years ended December 31, 1994 and 1993 by the Company's
executive officers:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Name and Annual Com- Other Compen-
Principal Fiscal pensation Annual Com- sation
Position Year Salary ($) pensation ($) Options
<S> <C> <C> <C> <C>
Ronald L. Lealos 1995 31,925 $130,000(1) 400,000
President 1994 106,200 - 130,000
1993 93,625 17,731 -
Duke van Kalken 1995 123,220 58,300(2) 50,000
Managing 1994 136,800 69,308(2) 130,000
Director 1993 100,351 68,411(2) -
Willfried 1995 100,000 - 75,000
Schramm
Dr. David Barnes 1995 131,750 - 175,000
Managing
Director
_________________
(1) Received 230,000 shares of Common Stock in the Company in lieu
of $130,000 salary.
(2) Additional foreign cost of living allowance.
</TABLE>
EMPLOYMENT AND CONSULTING AGREEMENTS
In January 1995 the Company entered into a five year
employment agreement with its President, Ronald L. Lealos. The
employment agreement provides for an annual base compensation of
approximately $250,000 plus an unaccountable travel allowance of
$12,000. The employment agreement also provides that the Company
provide Mr. Lealos with any benefits received by the Company's
other executive employees including health and life insurance in
addition to certain other benefits.
In January 1994, the Company and its subsidiary, SDS Asia,
entered into a three year consulting agreement with Duke van Kalken
under which Mr. van Kalken receives an annual salary of US $60,000.
In addition, Mr. van Kalken was granted an option to purchase
50,000 shares of Common Stock.
STOCK OPTION PLANS
On March 19, 1992, the Company adopted a Stock Option Plan
(the "1992 Plan") pursuant to which options to purchase up to an
aggregate of 350,000 shares of Common Stock could be granted. Such
options shall be non-incentive options.
On May 17, 1994, the Company adopted a 1994 Stock Option Plan
(the "1994 Plan") pursuant to which options to purchase up to
350,000 shares of Common Stock may be granted to employees,
consultants, advisors to the Company's Board of Directors, and
qualified directors. Options granted pursuant to the Plan may be
incentive options or non-qualified options as such terms are
defined in the Internal Revenue Code of 1986, as amended (the 1992
Plan and the 1994 Plan are collectively referred to as the
"Plans").
The Plans are administered by the Board of Directors which has
the authority to determine the persons to whom options may be
granted, the number of shares of Common Stock to be covered by each
option, the time or times at which the options may be granted or
exercised whether under the 1994 Plan, the options are to be
incentive options or non-qualified options and, for the most part,
the terms and provisions of the options. The exercise price of
options granted under the Plans may not be less than the fair
market value of the shares of Common Stock on the date of grant.
The following tables indicate the options granted to officers and
directors of the Company during Fiscal 1995:
<PAGE>
OPTION GRANTS DURING FISCAL 1995
Percent of
Total Options Expira-
Options Granted in Exercise tion
Name Granted Fiscal Year Price($) Date
David Barnes 175,000 17.5% $1.00 3/2/98
Ronald L. Lealos 400,000 40.1% $1.00 3/2/98
Willfried Schramm 75,000 7.5% $1.00 3/2/98
Duke van Kalken 50,000 5.0% $1.00 3/2/98
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1995
AND OPTIONS/SAR VALUES
Value of
Unexercised
Number of In-the-money
Shares Unexercised Options at
Acquired on Value Options (All Year End(All
Name Exercise(#) Realized($) Exercisable) Exercisable)
Dr. David Barnes 0 0 187,500 0
Ronald Lealos 0 0 530,000 0
COMPENSATION OF DIRECTORS
Directors are not compensated for their services as such,
including attendance at directors' and other meetings. All non-
employee directors are entitled to an option grant for 3,000 shares
of Common Stock under the Plans.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of the
date of the Prospectus and as adjusted to reflect the sale of the
securities offered hereby, based on information obtained from the
persons named below, with respect to the beneficial ownership of
shares of Common Stock by (i) each person known to the Company who
beneficially owns more than five (5%) percent of the outstanding
shares of Common Stock, (ii) each director of the Company, and
(iii) all officers and directors of the Company as a group:
<TABLE>
<CAPTION>
Number of
Name Shares Percentage of
and Address of Beneficially Outstanding
Beneficial Owner Owned(1) Shares of Common Stock
Before After
Offering Offering(6)
<S> <C> <C> <C>
Eugene Seymour, M.D. 1,501,401(2) 7.2% 5.2%
1465 Monaco Drive
Pacific Palisades,
CA 90272
Mr. Ronald Lealos 1,171,921(3) 5.5% 4.2%
11719 NE 95th Street
Vancouver, WA 98682
David Barnes, MD 283,000(4) 2.1% 2.1%
11 Sovereign Close
Sovereign Court
London E19 HW England
Kenneth J. McLachlan - - -
403 Collingwood House
Dolphin Square
London SW1 3NF England
Hans R. Vauthier - - -
Steinengraben 28
Ch-4051
Basel, Switzerland
M. Joel Scheinbaum 750,000(6) 3.6% *%
7509 W. 83rd Street
Los Angeles, CA 90293
All Officers and 2,204,921(3)(4) 10.1 % 5.4%
Directors as a (5)
Group (5 persons)
* Less than 1%.
(1) A person is deemed to be the beneficial owner of securities
that can be acquired by such person within 60 days from the
date hereof upon the exercise of options or warrants. Each
beneficial owner's percentage ownership is determined by
assuming that options that are held by such person (but not
those held by any other person) and that are exercisable
within 60 days from the date hereof have been exercised.
Except as otherwise indicated, and subject to applicable
community property and similar laws, each of the persons named
below has sole voting and investment power with respect to the
shares shown as beneficially owned.
(2) Includes (i) options to purchase 38,000 shares of Common Stock
at exercise prices ranging from $1.00 per share to $2.625 per
share, and (ii) 37,500 shares of Common Stock and warrants to
purchase 80,000 shares of Common Stock exercisable at prices
ranging from $2.00 to $3.50 per share owned by Wilshire
Medical Group Defined Benefit Pension Plan, of which Dr.
Seymour is Trustee.
(3) Includes options to purchase 530,000 shares of Common Stock at
exercise prices ranging from $1.00 per share to $1.375 per
share. Does not include options to purchase 300,000 shares of
Common Stock which Mr. Lealos agreed not to exercise until the
Company's Certificate of Incorporation is amended.
(4) Includes options to purchase 283,000 shares of Common Stock at
exercise prices ranging from $1.375 per share to $5.50 per
share.
(5) Includes warrants to purchase 100,000 shares of Common Stock
at $2.00 per share.
(6) Assumes sale of all securities registered hereby.
</TABLE>
The Company is unaware of any arrangement, the operation of
which, at a subsequent date, may result in a change of control of
the Company.
SELLING SHAREHOLDERS
An aggregate of 6,507,500 shares of Common Stock are being
offered for the account of the Selling Shareholders who acquired
their securities in April and November 1995 and May 1996, Common
Stock to be issued upon exercise of the Whale Warrant and the
Private Placement Warrants. See "Description of Securities" and
"Certain Relationships." The Company will not receive any proceeds
from the sale of the Selling Shareholders' Securities. Sales of
any shares of Common Stock by the Selling Shareholders, or even the
existence of the right to exercise the Whale Warrants or the
Private Placement Warrants, may depress the price of the Common
Stock.
The following table sets forth certain information with
respect to persons for whom the Company is registering such shares
of Common Stock for resale to the public. To the best of the
Company's knowledge, none of the Selling Shareholders has any plan,
arrangement, understanding, agreement, commitment or intention to
sell their securities. Except as indicated with an asterisk, none
of the following individuals or entities has held any position or
office within the Company nor has had any other material
relationship with the Company.
<PAGE>
<TABLE>
<CAPTION>
Amount of Amount of Percentage
Amount of Securities Securities of Securities
Securities Being Owned After Owned if more
Owned(1) Registered Offering(1)(2) Than 1%
<S> <C> <C> <C> <C>
Douglas Becker 50,000 50,000 ---
Brad Beidner 100,000 100,000 ---
Berman Group 50,000 50,000 ---
David Bernstein 50,000 50,000 ---
Paul Bernstein 35,000 35,000 ---
Brian Bramell 75,000 30,000 45,000
Stefanie Brown 50,000 50,000 ---
Carol Bruckner 25,000 25,000 ---
Harris Cahn 550,000 550,000 ---
Ceppos Group 100,000 100,000 ---
Barry and Jorunn Coe 100,000 100,000 ---
Anthony DiNota 8,000 8,000 ---
Group
Nora Eskes
Common Stock 28,212 25,000 3,212
Options 37,000 --- 37,000
Etek Electronics Corp.
Common Stock 100,000 100,000 ---
Warrants 25,000 25,000 ---
Keith Faisano 12,000 12,000 ---
Jim Furmston 50,000 50,000
G&G Diagnostics LPI
Common Stock 100,000 100,000 ---
Warrants 25,000 25,000 ---
Jan Gilbert 200,000 200,000 ---
Gerald Grayson 50,000 50,000 ---
Handcar Ltd. 100,000 100,000 ---
Pension Plan
Lynn Hargrave 50,000 50,000 ---
Havens Partners LP 25,000 25,000 ---
Stephen Horowitz 50,000 50,000 ---
Richard Kalin 50,000 50,000 ---
Robert Kramer
Common Stock 5,000 5,000 ---
Warrants 90,000 --- 90,000
Peter Lange 6,250 6,250 ---
Frank Kohner 50,000 50,000 ---
Ronald Lealos* 4.2
Common Stock 641,912 275,000 366,912
Options 625,000 --- 625,000
Alain Levi 360,000 360,000 ---
Yuan Lin 180,000 180,000 ---
Dr. Sanford Mailman 50,000 50,000 ---
Stuart Miller 50,000 50,000 ---
<PAGE>
Amount of Amount of Percentage
Amount of Securities Securities of Securities
Securities Being Owned After Owned if more
Owned(1) Registered Offering(1)(2) Than 1%
<S> <C> <C> <C> <C>
Gary Nathanson 208,200 135,000 73,200
Peterson Machine 50,000 50,000 ---
Products Corp.
Employee Retire-
ment Trust
Read Trustees Limited 500,000 500,000 ---
Larry Saliterman 50,000 50,000 ---
Joel Scheinbaum MD
Corporate Profit
Sharing Plan*
Common Stock 180,000 180,000 ---
Warrants 50,000 50,000 ---
Joel Scheinbaum, MD*
Common Stock 220,000 220,000 ---
Warrants 50,000 50,000 ---
Scheinbaum Family Trust* 250,000 250,000 ---
Eugene Seymour, MD*
Common Stock 1,571,401 335,000 1,236,401 5.2%
Options 38,000 --- 38,000
Slate Daiagi 50,000 50,000 ---
Realty Inc.
Robert Shemian 25,000 25,000 ---
John St. John 40,000 40,000 ---
George Stanton 80,000 80,000
Jeff Tipton 50,000 50,000 ---
Trinet Inter- 25,000 25,000 ---
national Fund Ltd.
Whale Securities 1,000,000 1,000,000 ---
Co., L.P.
Wilshire Center
Geriatrics Medical
Group, Inc. Pension
Plan*
Common Stock 37,500 --- 37,500
Warrants 80,000 75,000 5,000
Jack Wolff 6,250 6,250 ---
Umbria, Ltd. 300,000 300,000 ---
Millard Zimet 50,000 50,000 ---
* Director or officer of the Company (or an affiliate of a
director or officer of the Company).
(1) Assumes exercise of the Whale Warrants and Private
Placement Warrants.
(2) Assumes sale of all securities being registered hereby.
</TABLE>
CERTAIN TRANSACTIONS
During the four fiscal years ended December 31, 1995, Dr.
Seymour lent the Company substantial amounts of money to fund its
operations. During Fiscal 1994 and Fiscal 1995, the Company
converted the remaining balances of loans it received from Dr.
Seymour into shares of Common Stock at the rate of $1.00 per share.
Dr. Seymour received 231,120 and 90,000 shares in exchange for his
loans during Fiscal 1994 and Fiscal 1995, respectively. During
Fiscal 1994, the Company also terminated Dr. Seymour's employment
contract, and issued Dr. Seymour 75,000 shares as consideration for
the termination and as settlement of amounts due under the
employment agreement.
During Fiscal 1994 and Fiscal 1995, the Company conducted a
private placement of its securities (the "Private Placement")
whereby it sold an aggregate of 4,545,000 shares of Common Stock
and a two year warrant to purchase an aggregate of 225,000 shares
of Common Stock at $2.00 per share (the "Private Placement
Warrants.") for approximately $2,200,000. A pension plan
affiliated with Dr. Seymour (the "Pension Plan") acquired 450,000
shares of Common Stock and a warrant to purchase 75,000 shares at
an exercise price of $2.00 per share in the Private Placement. The
Pension Plan acquired the securities on the same terms as the other
investors in the Private Placement who acquired their securities
before January 1, 1995. Mr. Lealos purchased 200,000 shares of
Common Stock in the Private Placement on the same terms as the
other investors in the Private Placement. All of the shares of
Common Stock and the shares underlying the Private Placement
Warrants issued in this private placement are being registered
pursuant to the registration statement of which this Prospectus
forms a part.
In April 1995, Dr. Chyang Fang, a former director and employee
of the Company, and the Company agreed to terminate Dr. Fang's
contract. The settlement agreement provided that Dr. Fang could
exercise his five year option to purchase 100,000 shares of the
Company's Common Stock; the first 50,000 options were exercised in
April 1995; the remaining options, exercisable in April 1996,
remain unexercised and will expire on April 1999.
In November 1995, the Company received gross proceeds of
$300,000 from a private offering of its securities. The offering
consisted of Units; each Unit cost $100,000 and contained 100,000
shares of Common Stock and warrants to purchase an additional
150,000 shares at an exercise price of 50% of the closing bid price
of the shares of Common Stock as reported by NASDAQ on the date the
holder elects to exercise his warrant. In January 1996, holders of
an aggregate of 345,000 warrants have elected to exercise their
warrants for an aggregate purchase price of $101,952. Mr. Lealos
purchased 0.3 Units and exercised his warrant to purchase 45,000
shares of Common Stock. Drs. Eugene Seymour and M.J. Scheinbaum,
directors of the Company, each purchased one Unit and each
exercised his warrant to purchase an additional 150,000 shares of
Common Stock. All of the shares of Common Stock issued in this
private offering are being registered pursuant to the registration
statement of which this Prospectus forms a part.
Other Transactions
As to each transaction between the Company and an affiliate of
the Company, a majority of the disinterested members of the Board
of Directors determined that such transactions were on terms at
least as fair as had they been consummated with unrelated third
parties. The Board of Directors has adopted a policy that in the
future, before it enters into any transactions with a related
party, it will be a requirement for a similar determination to be
made by a majority of the Company's disinterested directors.
DESCRIPTION OF SECURITIES
General
The Company's Certificate of Incorporation authorizes the
Company to issue up to 25,000,000 shares of Common Stock, par value
$.01 per share. As of the date of this Prospectus, 20,810,285
shares of Common Stock are outstanding.
Common Stock
The holders of Common Stock are entitled to one vote for each
share held of record on all matters to be voted on by stockholders.
There is no cumulative voting with respect to the election of
directors, with the result that the holders of more than 50% of the
shares voted for the election of directors can elect all of the
directors. The holders of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of
funds legally available therefor. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining
available for distribution to them after payment of liabilities and
after provision has been made for each class of stock, if any,
having preference over the Common Stock. Holders of shares of
Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption provisions
applicable to the Common Stock. All of the outstanding shares of
Common Stock are, and the shares of Common Stock offered hereby,
when issued against the consideration set forth in this Prospectus,
will be, fully paid and nonassessable.
<PAGE>
Public Warrants
The Company has 1,380,000 outstanding warrants which are
publicly traded (the "Public Warrants"). Each Public Warrant
entitles the registered holder thereof (the "Warrantholders") to
purchase one share of Common Stock at a price of $7.20, subject to
adjustment in certain circumstances, until 5:00 p.m., Eastern Time,
on June 1, 1996 unless extended by the Company. The Public
Warrants may be purchased separately and will be separately
transferable immediately upon issuance.
The Public Warrants are redeemable by the Company, with the
consent of Whale, at any time upon notice of not less than 60 days
at a price of $.10 per Warrant, provided that the last sale price
of the Common Stock on all ten of the trading days ending on the
third day prior to the day on which the Company gives notice has
been at least 150% (currently $10.80, subject to adjustment) of
the then effective exercise price of the Public Warrants. The
Warrantholders shall have exercise rights until the close of
business on the date fixed for redemption.
The exercise price and number of shares of Common Stock or
other securities issuable on exercise of the Public Warrants are
subject to adjustment in certain circumstances, including in the
event of a stock dividend, recapitalization, reorganization, merger
or consolidation of the Company.
The Public Warrants may be exercised upon surrender of the
warrant certificate on or prior to the expiration date at the
offices of the warrant agent, with the exercise form on the reverse
side of the warrant certificate completed and executed as
indicated, accompanied by full payment of the exercise price (by
certified check payable to the Company) to the warrant agent for
the number of Public Warrants being exercised. The Warrantholders
do not have the rights or privileges of holders of Common Stock.
No Public Warrant will be exercisable unless at the time of
exercise the Company has filed with the Commission a current
prospectus covering shares of Common Stock and such shares have
been registered or qualified to be exempt under the securities laws
of the state of residence of the holder of such Public Warrant.
The Company will use its best efforts to have all shares so
registered or qualified on or before the exercise date and to
maintain a current prospectus relating thereto until the expiration
of the Public Warrants, subject to the terms of the Warrant
Agreement. While it is the Company's intention to do so, there can
be no assurances that it will be able to do so.
No fractional shares will be issued upon exercise of the
Public Warrants. However, if a Warrantholder exercises all Public
Warrants then owned of record by him, the Company will pay such
Warrantholder, in lieu of the issuance of any fractional share
which is otherwise issuable, an amount is cash based on the market
value of the Common Stock on the last trading day prior to the
exercise date.
Exercise of Underwriter's Warrant
Whale acquired the Underwriter's Warrant in the Public
Offering which occurred in March 1993. In connection with the
Public Offering, the Company sold to Whale for $120 the
Underwriter's Warrant which entitled it to purchase up to 120,000
shares of Common Stock at $7.20 per share (adjusted to 720,000
shares at an exercise price of $1.50 per share as set forth below)
(the "Warrant Exercise Price") and/or 120,000 warrants (the
"Underlying Warrants") at an exercise price of $9.00 per share of
Common Stock (the "Underlying Warrant Exercise Price") at $.15 per
Warrant. The terms of the Underwriter's Warrant provide that
holders of the Underwriter's Warrant are given, at nominal cost,
the opportunity to profit from a rise in the market price of the
Common Stock and are also given antidilution rights in the event
the Company issues additional shares of Common Stock. The
Underwriter's Warrant provides that the Warrant Exercise Price and
the number of shares of Common Stock issuable upon exercise of the
Underwriter's Warrant will be adjusted in the event the Company
issues shares of Common Stock for a consideration less than the
Warrant Exercise Price or the market price of the Common Stock.
The Company had issued additional securities since March 1993
resulting in activation of the antidilution provision of the
Underwriter's Warrant. The number of shares of Common Stock
purchasable upon exercise of the Underwriter's Warrant were
initially adjusted so that Whale and its designees were entitled to
purchase 720,000 shares at an Underwriter's Warrant Exercise Price
of $1.50 per share. In September 1995 Whale exercised a portion of
the Underwriter's Warrant to purchase an aggregate of 180,462
shares. In April 1996, the Underwriter's Warrant was further
amended to adjust the number of shares based on issuances of Common
Stock by the Company after September 1995.
The Company and Whale disagreed about the calculations to
adjust the remaining shares and the exercise price of the shares
remaining in the Underwriter's Warrant. Therefore, the Company and
Whale entered into a settlement agreement pursuant to which the
Company amended the shares issuable pursuant to the Underwriter's
Warrant to 753,361 and the new Exercise Price was $1.07. In
addition, the Company granted Whale an option to purchase 1,000,000
shares of Common Stock at $1.00 per share (the "New Whale
Warrant").
New Whale Warrant
As partial settlement for the Company's and Whale's
discrepancy in calculating the adjustment pursuant to the
antidilution provision in the Underwriter's Warrant, the Company
granted Whale a warrant to purchase 1,000,000 shares of Common
Stock at an exercise price of $1.00 per share. 500,000 shares are
exercisable until the later of June 17, 1996 or the 30th day after
the date this registration statement becomes effective. The
remaining 500,000 Warrants are exercisable until the later of
October 16, 1996, or 90 days after the date this registration
statement becomes effective.
To the extent that the Whale Warrants and the Private
Placement Warrants are exercised, dilution to the interests of the
Company's stockholders will occur. Further, the terms upon which
the Company will be able to obtain additional equity capital was
likely adversely affected since the holders of the Whale Warrants
and the Private Placement Warrants can be expected to exercise them
a time when the Company would, in all likelihood, be able to obtain
any needed capital on terms more favorable to the Company.
Each of the Selling Shareholders has entered into a selling
shareholder agreement with the Company pursuant to which each
Selling Shareholder agrees that the information regarding each such
Selling Shareholder contained herein is accurate and the parties
agree to indemnify each other in the event of any untrue
statements.
LEGAL MATTERS
The validity of the securities being offered will be passed
upon for the Company by Kalin & Banner, 757 Third Avenue, New York,
New York 10017. Mr. Richard S. Kalin, a partner in Kalin & Banner,
is an assistant Secretary of the Company and purchased 50,000
shares in the Company's 1995 private placement upon the same terms
as the other investors thereto.
EXPERTS
The financial statements of the Company for the fiscal years
ended December 31, 1994 and 1995 included in this Prospectus and in
the Registration Statement have been audited by Hollander, Gilbert
& Co., independent certified public accountants, to the extent and
for the periods set forth in their report appearing elsewhere
herein and in the Registration Statement, and are included in
reliance upon such report given upon the authority of said firm as
experts in auditing and accounting.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law empowers
a corporation to indemnify its directors and officers and to
purchase insurance with respect to liability arising out of their
capacity or status as directors and officers provided that this
provision shall not eliminate or limit the liability of a director
(i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing
violation of law, (iii) arising under Section 174 of the General
Corporation Law of Delaware, or (iv) for any transaction from which
the director derived an improper personal benefit.
The Delaware Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive
of any other rights to which the directors and officers may be
entitled under the corporation's by-laws, any agreement, vote of
shareholders or otherwise.
Article tenth of the Company's Certificate of Incorporation
eliminates the personal liability of directors to the fullest
extent permitted by Section 145 of the Delaware Corporation Law.
The effect of the foregoing is to require the Company to
indemnify the officers and directors of the Company for any claim
arising against such persons in their official capacities if such
person acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE
SECURITIES ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR
PERSONS CONTROLLING THE COMPANY PURSUANT TO THE FOREGOING
PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT IN THE OPINION OF
THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION IS
AGAINST PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT AND IS
THEREFORE UNENFORCEABLE.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange
Commission (the "Commission"), Washington, D.C., a Registration
Statement on Form SB-2 (the "Registration Statement") under the
Securities Act with respect to the Common Stock offered by this
Prospectus. This Prospectus, filed as part of such Registration
Statement, does not contain all of the information set forth in, or
annexed as exhibits to, the Registration Statement, certain parts
of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the
Company and this offering, reference is made to the Registration
Statement, including the exhibits filed therewith, which may be
inspected without charge at the Office of the Commission, 450 Fifth
Street, NW, Washington, DC, 20549. Copies of the Registration
Statement may obtained from the Commission at its principal office
upon payment of prescribed fees. Statements contained in this
Prospectus as to the contents of any contract or other document are
not necessarily complete and, where the contract or other document
has been filed as an exhibit to the Registration Statement, each
statement is qualified in all respects by reference to the
applicable document filed with the Commission.
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Consolidated Balance Sheets as of
December 31, 1994 and 1995 F-3
and March 31, 1996 (Unaudited)
Consolidated Statements of Operations - F-5
For the Years Ended
December 31, 1994 and 1995 and
Three Months Ended March 31, 1995
and 1996 (Unaudited)
Consolidated Statement of Stockholders' Equity - F-6
For the Years Ended
December 31, 1994 and 1995 and
Three Months Ended March 31, 1996
(Unaudited)
Consolidated Statements of Cash Flows - F-8
For the Years Ended
December 31, 1994 and 1995 and
Three Months Ended March 31, 1995
and 1996 (Unaudited)
Notes to Consolidated Financial Statements F-10
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Saliva Diagnostic Systems, Inc.
We have audited the consolidated balance sheets of Saliva
Diagnostic Systems, Inc. and subsidiaries as of December 31, 1994
and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
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 misstatements. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Saliva Diagnostic Systems, Inc. and subsidiaries as of
December 31, 1994 and 1995 and the results of operations,
stockholders' equity and cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As discussed in Note 3, the Company's recovery of goodwill
aggregating $585,000 at December 31, 1995 is dependent on the
future development of commercial viability of its products. The
ultimate outcome of this uncertainty cannot presently be
determined. Accordingly, the financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 2 to the financial statements, the Company's significant
operating losses and significant capital requirements raise
substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any
adjustments that might result from the outcome of these
uncertainties.
Hollander, Gilbert & Co.
Los Angeles, California
March 29, 1996
F-2
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1994 1995 1996
(Unaudited)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS
Cash $96,431 $2,688,014 $1,711,811
Accounts receivable 47,039 43,291 116,064
Inventories (Note 4) 92,600 300,161 329,054
Prepaid expenses 28,956 22,364
TOTAL CURRENT ASSETS 236,070 3,060,422 2,179,293
PROPERTY AND EQUIPMENT, Net (Note 5) 560,284 470,593 506,323
OTHER ASSETS
Deposits 64,156 70,019 73,022
Patents and trademarks, net of
accumulated amortization of
$18,952 in 1994 and $29,983 in
1995 and 32,283 at March 31, 1996 133,778 127,057 124,891
Goodwill, net of accumulated
amortization of $15,000 in
1995 and $30,000 at
March 31, 1996 (Note 3) 585,000 570,000
Prepaid loan fees (Note 6) 45,367
Prepaid consulting fees 5,000
TOTAL OTHER ASSETS 202,934 827,443 767,913
$ 999,288 $4,358,458 $3,453,529
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
<CAPTION>
CONSOLIDATED BALANCE SHEETS, Continued
December 31, March 31,
1994 1995 1996
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C> <C>
Accounts payable and
accrued expenses $ 569,960 $500,078 $ 514,757
Accrued interest payable 8,000 49,703 68,240
Current portion of obligations
under capital leases (Note 8) 23,713 15,869 15,869
Convertible debentures (Note 6) 100,000 2,785,000
TOTAL CURRENT LIABILITIES 701,673 3,350,650 598,866
OBLIGATIONS UNDER CAPITAL LEASES,
net of current portion (Note 8) 43,624 30,497 25,129
MINORITY INTEREST (Note 3) 37,138
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Note 6)
Common stock - authorized 25,000,000
shares, $.01 par value, issued and
outstanding 6,304,332, 13,126,366
and 19,683,674 at December 31, 1994
and 1995 and March 31, 1996,
respectively 63,043 131,264 196,837
Additional paid-in capital 12,434,356 17,726,578 20,522,957
Notes receivable related to sale
of stock (83,825) (83,825) (83,825)
Cumulative foreign translation
adjustment (32,644) (34,859) (39,997)
Accumulated deficit (12,164,077)(16,761,847) (17,766,438)
TOTAL STOCKHOLDERS' EQUITY 216,853 977,311 2,829,534
$ 999,288 $ 4,358,458 $ 3,453,529
See accompanying Notes to Consolidated Financial Statements.
F-4
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended Three Months Ended
December 31, March 31,
1994 1995 1995 1996
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Product sales $ 242,207 $ 522,814 $ 73,293 $ 171,379
Technology
licensing income 200,000 59,855
Other fees and
interest income 18,466 38,630 1,538 22,342
TOTAL REVENUES 460,673 621,299 74,831 193,721
COSTS AND EXPENSES
Cost of product sold 177,054 149,629 23,005 120,510
Research and development 584,939 353,098 90,972 103,995
Selling, general and
administrative 2,926,621 4,158,641 494,319 904,784
Interest expense and
loan fees 129,830 557,701 3,490 69,023
TOTAL COSTS AND EXPENSES 3,818,444 5,219,069 611,786 1,198,312
NET LOSS $(3,357,771) $(4,597,770) $(536,955) $(1,004,591)
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING 4,790,000 9,900,000 7,050,165 15,039,334
LOSS PER COMMON SHARE $ (0.70) $ (0.46) $ (0.08) $ (0.07)
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996 (UNAUDITED)
Note Cumulative
Common Stock Additional Receivable Foreign
Shares Paid-in (Sale of Translation Accumulated
Outstanding Amount Capital Stock) Adjustment Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
December 31, 1993 3,370,842 $ 33,708 $ 8,732,143 $ (83,825) $ 30,486 $(8,806,306) $(93,794)
Sale of common
stock in
private offering 81,125 811 161,439 162,250
Issuance of shares
for services 2,500 25 2,475 2,500
Sale of common stock
in exempt offering 953,995 9,540 2,092,454 2,101,994
Notes payable converted
into common shares 580,000 5,800 574,200 580,000
Advances from majority
stockholder converted
into common stock 231,120 2,311 228,809 231,120
Issuance of shares
to majority stockholder
for services 75,000 750 74,250 75,000
Discount on note
receivable related to
sale of stock (1,066) (1,066)
Notes payable converted
into common shares 149,750 1,498 148,252 149,750
Sale of common stock
in private offering 860,000 8,600 421,400 430,000
Foreign translation
adjustment (63,130) (63,130)
Net loss for the year (3,357,771) (3,357,771)
BALANCE,
December 31, 1994 6,304,332 63,043 12,434,356 (83,825) (32,644)(12,164,077) 216,853
Sale of common stock
in private
offerings 3,715,000 37,150 1,935,350 1,972,500
Issuance of shares
to officer for
compensation 230,000 2,300 127,700 130,000
Convertible debentures
converted into
common shares 1,726,572 17,266 945,234 962,500
Issuance of warrants
to consultants 780,000 780,000
Issuance of options
in settlement agreement 88,750 88,750
Issuance of shares
to consultants 100,000 1,000 149,000 150,000
Options exercised 170,000 1,700 154,300 156,000
Underwriter's warrants
exercised 180,462 1,805 268,888 270,693
Consulting warrants
exercised 250,000 2,500 247,500 250,000
Issuance of shares
to acquire minority
interest in
subsidiaries 450,000 4,500 595,500 600,000
Foreign translation
adjustment (2,215) (2,215)
Net loss for the year (4,597,770) (4,597,770)
BALANCE,
December 31, 1995 13,126,366 131,264 17,726,578 (83,825) (34,859) (16,761,847) 977,311
See accompanying Notes to Consolidated Financial Statements.
F-6<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY, Continued
Note Cumulative
Common Stock Additional Receivable Foreign
Shares Paid-in (Sale of Translation Accumulated
Outstanding Amount Capital Stock) Adjustment Deficit Total
Warrants exercised 345,000 3,450 98,502 101,952
Debentures converted
into common shares 6,212,308 62,123 2,697,877 2,760,000
Foreign translation
adjustment (5,138) (5,138)
Net loss for
the period (1,004,591) (1,004,591)
BALANCE,
March 31, 1996
(Unaudited) 19,683,674 $196,837 $20,522,957 $ (83,825) $(39,997) $(17,766,438) $2,829,534
See accompanying Notes to Consolidated Statements.
F-7
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended Three Months Ended
December 31, March 31,
1994 1995 1995 1996
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $(3,357,771) $(4,597,770) $(536,955) $(1,004,591)
Adjustments to
reconcile net loss
to net cash used
by operating activities:
Cumulative foreign
translation adjustment (63,130) (2,215) 13,694 (5,138)
Depreciation and
amortization 323,934 749,750 74,170 114,590
Expenses satisfied with
issuance of shares 77,500 1,148,750 11,952
Changes in operating
assets and
liabilities:
(Increase) decrease in
accounts receivable 26,372 3,748 7,330 (72,773)
(Increase) decrease in
inventory 63,082 (207,561) (3,137) (28,893)
Increase (decrease) in
prepaid expenses (28,956) 6,592
Increase (decrease) in
accounts payable
and accrued expenses 212,037 (11,906) (244,703) 33,216
NET CASH USED BY
OPERATING ACTIVITIES (2,717,976) (2,999,571) (689,601) (945,045)
CASH FLOWS FROM INVESTING
ACTIVITIES
Patents and trademarks (26,109) (4,310) (2,225) (134)
Deposits (46,261) (5,863) (1,523) (3,003)
Purchase of equipment (239,498) (118,295) (47,500) (87,653)
NET CASH USED BY
INVESTING ACTIVITIES (311,868) (128,468) (51,248) (90,790)
See accompanying Notes to Consolidated Financial Statements.
F-8
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Years Ended Three Months Ended
December 31, March 31,
1994 1995 1995 1996
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
FINANCING ACTIVITIES
Convertible debentures 153,156 3,128,900
Repayments of convertible
debentures (37,500) (4,805) (25,000)
Repayment of obligations
under capital leases (20,971) (5,368)
Sale of stock -
private placement
and exempt offering 2,694,244 1,972,500 1,572,500
Collection of note
receivable related
to sale of stock 21,467
Stock warrants and
options exercised 676,693 90,000
NET CASH PROVIDED BY
FINANCING ACTIVITIES 2,868,867 5,719,622 1,567,695 59,632
NET INCREASE (DECREASE)
IN CASH (160,977) 2,591,583 826,846 (976,203)
CASH BALANCE,
Beginning of period 257,408 96,431 96,431 2,688,014
CASH BALANCE,
End of period $ 96,431 $2,688,014 $923,277 $1,711,811
INTEREST AND
LOAN FEES PAID $ 113,399 $ 565,035
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Shares issued in lieu
of fees and expenses $ 77,500 $1,148,750 $ 11,952
Advances from majority
stockholder converted
into common shares $ 231,120
Acquisition of minority
interest $ 600,000
Conversion of debentures
into common shares $ 2,760,000
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-9
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND
MARCH 31, 1996 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - The Company is primarily engaged in development,
marketing and distribution of proprietary saliva and other specimen
collection devices, designed for use in conjunction with diagnostic assays to
detect the presence of antibodies including the HIV virus and the presence of
drugs of abuse, such as cocaine and marijuana. The Company's other products
include Omni-SWAB, a sterile cotton swab with a potential injectable
swab-head which can be used to obtain DNA specimens for gene amplification
processes, and products which were developed to ultimately lead to the
development of rapid diagnostic assays for various diseases. The Company has
commenced limited distribution of Omni-SAL to customers located outside the
United States and Omni-SWAB in the United States.
Principles of Consolidation - The consolidated financial statements in 1994
include the accounts of the Company and its wholly-owned subsidiary, Saliva
Diagnostic Systems International Limited, 90%-owned subsidiary, Saliva
Diagnostic Systems Ltd. ("Asia") and Asia's 83%-owned subsidiary, Saliva
Diagnostic Systems (S) PTE. Ltd. ("Singapore"). In 1995, the Company acquired
the minority interest in Asia and Singapore. As a result, Asia and Singapore
became wholly-owned subsidiaries of the Company (see Note 3). All
intercompany transactions have been eliminated.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
Inventories - Inventories consisting of finished goods are stated at the
lower of cost or market determined on a first-in, first-out (FIFO) basis.
Property and Equipment - Property and equipment is stated at cost.
Depreciation is computed on the straight-line method based upon the estimated
useful life of the asset. Useful lives are generally as follows;
Office furniture & equipment 5 to 7 years
Equipment 7 years
Tooling 7 years
Exhibits 7 years
Vehicles 5 years
Patents and Trademarks - The costs of patents and trademarks are being
amortized on the straight line method over a 17 year life.
Goodwill - Goodwill represents the excess of the cost of companies acquired
over the fair value of their net assets at the date of acquisition and is
being amortized on the straight-line method over ten years.
F-10
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Product Liability - The Company has not established any allowance for product
liability at present because of the limited distribution of its product and
limited history which reflect no instance of problems with liability.
Income Taxes - The Company utilizes the asset and liability approach for
financial accounting and reporting for income taxes. If it is more likely
than not that some portion or all of a deferred tax asset will not be
realized, a valuation allowance is recognized.
Loss Per Share - Loss per common share is based upon the weighted average
number of common shares and common share equivalents outstanding during the
periods. Common share equivalents are not included as they are anti-dilutive.
Revenues - The Company derived revenues from two sources: sale of product and
licensing. Revenues are recognized as the service or product has been
delivered.
Research and Development - Research and development expenditures include
those costs associated with the Company's own on-going research and
development activities. All research and development costs are expensed as
incurred.
The Company has entered into various informal arrangements with certain
laboratories/manufacturers of assay kits whereby these
laboratories/manufacturers will share certain unspecified costs of research
and development. However, the Company has no obligation to perform research
and development for these entities.
Currency Fluctuations - Foreign currency transactions and financial
statements are to be translated into U.S. dollars at current rates, except
that revenues, costs and expenses are translated at average current rates
during each reporting period. The resulting translation adjustments are
recorded directly into a separate component of stockholders' equity. Gains
and losses resulting from foreign currency transactions, which are
insignificant, are included in income currently.
2. GOING CONCERN
Significant Operating Losses - Accumulated Deficit - The Company has incurred
significant operating losses since its inception, resulting in an accumulated
deficit of $16,761,847, $12,164,077 and $17,766,438, at December 31, 1995 and
1994 and March 31, 1996 (unaudited), respectively, and limited stockholders'
equity of $977,311 and $216,853 December 31, 1995 and December 31, 1994,
respectively. Such losses are expected to continue for the foreseeable future
and until such time, if ever, as the Company is able to attain sales levels
sufficient to support its operations.
Significant Capital Requirements - Need for Additional Financing - The
Company's capital requirements have been and will continue to be significant.
The Company has been dependent on private placements of its debt and equity
securities and on a public offering of securities in March 1993 to fund such
requirements. Additionally, since 1992, Dr. Eugene Seymour, a major
stockholder and a director of the Company, has loaned and advanced over
$755,000 to the Company, of which approximately $360,000 has been repaid,
F-11
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
approximately $155,000 has been contributed to the capital of the Company and
the balance has been converted to shares of common stock at a rate of $1.00
per share. An affiliate of Dr. Seymour has invested an additional $200,000 in
the Company during 1994. The Company is dependent upon its other efforts to
raise capital resources, including proceeds received from the exercise of
Warrants to finance the cost of manufacturing, marketing and conducting
clinical trials and submissions for FDA approval of its products and
continuing the design and development of the Company's new products which
utilize its rapid testing format. Marketing, manufacturing and clinical
testing may require capital resources substantially greater than the
resources currently available to the Company. There can be no assurance that
the Company will be able to obtain the substantial additional capital
resources necessary to permit the Company to implement or continue its
programs. The Company has no current arrangements with respect to, or sources
of, additional financing and there can be no assurance that such financing
will be available on commercially reasonable terms or at all. It is not
anticipated that any of the officers, directors or shareholders of the
Company will provide any portion of the Company's future financing
requirements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.
3. ACQUISITIONS
On September 30, 1995, the Company purchased the minority interest in its 90%
owned subsidiary, Saliva Diagnostic Systems (Asia) Ltd. and the minority
interest in Asia's 83% owned subsidiary. The Company issued 350,000 shares of
its common stock valued at $500,000 to a director/stockholder of the foreign
subsidiaries and 100,000 shares to unrelated stockholder valued at $100,000.
The assets acquired were valued at fair market value based on the estimates
of the management of the Company which approximate the adjusted fair market
value of the shares issued.
The transaction was accounted for as a purchase and resulted in an excess of
purchase price over net assets acquired of $600,000. Amortization of goodwill
amounted to $15,000 in 1995 and $15,000 for three months ended March 31, 1996
(unaudited).
4. INVENTORIES
Inventories consisted of the following at December 31, 1994 and 1995 and
March 31, 1996:
1994 1995 1996
(Unaudited)
Raw materials $ $186,492 $204,395
Work in process 21,202 66,807 73,220
Finished goods 71,398 46,862 51,439
$92,600 $300,161 $329,054
F-12
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. PROPERTY AND EQUIPMENT
Property and Equipment consisted of the following at December 31, 1994 and
1995 and March 31, 1996:
1994 1995 1996
(Unaudited)
Office Furniture & Equipment $ 85,072 $ 76,711 $ 77,296
Machinery and Laboratory
Equipment 502,823 650,461 671,926
Tooling 196,897 156,457 209,869
Leasehold Improvements 48,725 38,727 50,918
Vehicle 122,677 126,388 126,388
Exhibits 30,955 60,710 60,710
987,149 1,109,454 1,197,107
Less: accumulated
depreciation and
amortization 426,865 638,861 690,784
$ 560,284 $ 470,593 $ 506,323
6. STOCKHOLDERS' EQUITY
Public Offering - In March 1993 the Company closed a public offering in which
it sold 1,300,000 shares of its common stock at $6.00 per share and 1,380,000
warrants to purchase 1,380,000 shares of the Company's common stock for $7.20
per share, at $.10 per warrant. The Company received net proceeds of
$6,364,630 after expenses related to the offering of $1,573,490.
The Company also sold for $120 to the underwriter a five-year warrant to
purchase up to 120,000 shares of common stock at $9 per share, exercisable
for four years commencing March 3, 1994 at a price of 110% of the public
offering price, as adjusted, of the common stock. During 1995, the
underwriter exercised a portion of its warrants and purchased 180,462 shares
for an aggregate amount of $270,693. As of December 31, 1995, the number of
shares that the remaining warrants can purchase has been adjusted to 756,362
shares at $1.07 per share.
Note Receivable Related to Sale of Stock - In January 1992 the Company sold
to its President 366,912 shares of common stock for $92,970. The officer paid
$9,145 and issued a note to the Company for $83,825, payable in three years
with interest of 6% per annum. These shares were considered outstanding for
all periods in the calculation of earnings per share. The note which was
originally due December 1994 was extended until December 1995. In December
1995, the Company extended the note for another year.
Convertible Debentures - During 1992, the Company sold privately $630,000 of
its 8% convertible debentures payable in May 1994 to various investors,
including $25,000 to an affiliate of the Company. These debentures can be
converted into the Company's common stock at a rate of $7.00 per share. In
May 1994 certain debenture holders converted $580,000 principal amount of
debentures into an aggregate of 580,000 shares of common stock. In November
F-13
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1995, the Company repaid $25,000 principal amount of debentures including all
accrued and unpaid interest. In January 1996, the Company repaid the
remaining $25,000 debenture including all accrued and unpaid interest.
The Company raised $75,000 and $324,500 in 1993 and 1994, respectively, in a
combination of common shares, non-negotiable two year 8% convertible
debentures convertible at a rate of $2.00 per share after one year from the
date of issuance and three year warrant to purchase additional shares of
common stock at $3.50 per share. Each $50,000 unit consisted of 12,500 common
shares, a $25,000 convertible debenture and a warrant to purchase 5,000
shares of common stock. The Company issued a total of 99,875 shares of common
stock and $199,750 convertible debentures and warrants to purchase a total of
39,950 shares of common stock. In July 1994, certain debenture holders
converted $149,750 principal amount of debentures into an aggregate of
149,750 shares of common stock. In September 1995, certain debenture holders
converted $37,500 principal amount of debentures into an aggregate of 37,500
shares of common stock. In November 1995, the Company repaid $12,500
principal amount of debentures including all accrued and unpaid interest.
During 1995, the Company sold privately $3,685,000 of its 9% convertible
debentures payable on October 31, 1996. The holders of the debentures are
entitled, at their option, at any time commencing 45 days after issue to
convert any or all of the original principal amount of the debentures into
shares of common stock of the Company at a conversion price for each share of
common stock equal to seventy percent (70%) of the market price (as defined
in the debenture agreement) of the common stock. In December 1995, certain
debenture holders converted $925,000 principal amount of debentures into an
aggregate of 1,689,072 shares of common stock. The Company incurred $556,100
in loan fees of which $510,733 was charged to expense in 1995. During the
three months ended March 31, 1996, certain debenture holders converted
$2,760,000 principal amount of debentures into 6,212,308 shares of common
stock.
Private Placements - In April 1994 the Company sold an aggregate of 953,995
shares of common stock to overseas investors for a net consideration of
$2,101,994.
In December 1994 the Company sold 860,000 shares of common stock for an
aggregate consideration of $430,000. During 1995, the Company, sold an
additional 3,645,000 shares of common stock for $1,802,500, including 200,000
shares issued to its President.
In December 1995, the Company, in a new private placement, sold 300,000
shares of common stock for an aggregate consideration of $300,000, including
30,000 shares to its President. The units sold included warrants to purchase
a total of 450,000 shares of common stock at an exercise price of 50% of the
closing bid price of the shares of common stock on the date the holder elects
to exercise the warrant. During the three months ended March 31, 1996, a
total of 345,000 warrants were exercised.
F-14
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Warrants and Shares Issued to Consultants - During 1995, the Company issued
warrants to purchase a total of 650,000 shares of common stock at an exercise
price of $1.00 per share for consulting services rendered. The warrants were
valued at $1.20 per share. As of December 31, 1995, 250,000 warrants have
been exercised.
In 1995, the Company issued 100,000 shares of common stock to consultants
valued at a total of $150,000.
Settlement Agreement - During 1995, the Company reached a settlement
agreement with a director of its subsidiary whereby the Company granted the
director options to purchase 100,000 shares of common stock at an exercise
price of $.60 per share. The options were valued at a total of $88,750. The
director immediately exercised 50,000 shares and paid the Company $30,000.
Warrants Issued to Licensee - In March 1994, as a result of entry into a
license agreement with Orgenics Ltd., Orgenics Ltd. was granted a three year
option, expiring in March 1997, to purchase up to $1,000,000 of shares of
common stock (but not more than 19% of the then-outstanding common stock) at
60% of the average of the closing bid and asked price for the common stock
during the ten trading days prior to purchase.
Shares Issued to Officer - During 1995, the Company issued 230,000 shares of
common stock to its President valued at $130,000 as additional compensation
for the year 1995. The President also receive cash compensation of $31,925 in
1995.
Stock Option Plans - In March 1992, the Company established a stock option
plan (1992 Plan). The 1992 Plan, as amended, covers 350,000 shares of its
common stock. Under the terms of the 1992 Plan, the Company is authorized to
issue options to employees and directors of the Company or its subsidiaries.
Decisions such as grants to employees, the selection of recipients, number of
options, the exercise price, duration and other terms, including whether the
options shall be incentive stock options as defined by the Internal Revenue
Code of 1986 or non-qualified options, are subject to the discretion of the
Board of Directors except that the exercise price may not be less than 110%
of the fair market value at the time of grant to holders of in excess of 10%
of the Company's common stock.
In addition, the 1992 Plan provides for automatic grants to each non-employee
director of the Company (including anyone designated by the Underwriter) of
3,000 shares of common stock on the date of the proposed public offering or,
in the case of election to the Board of Directors after consummation of said
offering, upon such election at a price of 100% of fair market value of the
common stock at the time of grant. The options may be exercised after six
months and before five years from the date of grant.
As of December 31, 1995, 178,000 options were outstanding under the 1992 Plan
with exercise prices ranging from $0.60 to $5.60 per share.
F-15
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
In July 1994, the Company established a stock option plan (1994 Plan). The
1994 Plan, covers 350,000 shares of its common stock. Under the terms of the
1994 Plan, the Company is authorized to issue incentive and non-statutory
stock options to employees, consultants, advisors and/or directors. Options
shall be exercisable at the fair market value at the date of the grant except
options issued to persons who own in excess of 10% of the Company's stock may
be no less than 110% of the fair market value.
In addition, the 1994 Plan provides for automatic grants to all directors and
advisors who are not employees of the Company or its subsidiaries of 3,000
fully vested non-qualified options at the time this Plan was adopted by the
Board or upon election or appointment to the Board, if not a member of the
Board at the time this plan was adopted by the Board.
As of December 31, 1995, 286,000 options were outstanding under the 1994 Plan
with exercise prices ranging from $0.60 to $2.625 per share.
On March 2, 1995, the Company's Board of Directors granted options to
purchase 997,000 shares, including 400,000 shares to its President, of the
Company's common stock to its employees, outside of the above Stock Option
Plans. Such options are exercisable on March 2, 1995, at $1.00 per share and
expire on March 2, 1998. As of December 31, 1995, 970,000 options were
outstanding.
7. INCOME TAXES
The Company has a net operating loss carryforward of approximately $14
million which is available to offset future taxable income, if any, expiring
through the year 2010. The Company has not recorded any deferred tax asset as
a result of the net operating loss carryforward as it has provided a 100%
allowance against this asset.
8. COMMITMENTS AND CONTINGENCIES
Employment Agreements - The Company has entered into various three year
employment agreements with certain officers. These employment agreements
provide for minimum annual compensation of between $88,000 and $100,000. In
addition, each employment agreement provides for bonuses, cost of living
increases, reimbursement of business expenses, health insurance and related
benefits.
Each employment agreement provides that it may be terminated if the employee
becomes permanently disabled (ill health, physical or mental disability, or
inability for reasons beyond his control to perform duties for six months) or
if the Company discontinues operating its business. Each employment agreement
further provides that each of the officers will not compete with the Company
for three years from the date of the agreement or one year from the
termination of the respective agreements, whichever is later.
Obligations under Capital Leases - The Company has acquired vehicles under
notes requiring 48 to 60 payments of $1,842 per month including interest at
6% to 10% per annum.
F-16
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The following represents the maturity schedule as of December 31, 1995:
1996 $15,869
1997 15,323
1998 15,174
Total 46,366
Less current portion 15,869
$30,497
Litigation - A former director and officer of the Company has filed a
complaint in Federal court listing several causes of action against the
Company and the individual defendants, including breach of employment
agreement with the Company, intentional interference with contract by the
individual defendants, slander and deceptive trade practices. The complaint
seeks damages and punitive damages in an unspecified amount. The Company
believes this complaint is without merit as the plaintiff was fired for cause
and intends to vigorously defend itself.
9. OPERATING LEASES
The Company leases its offices and laboratory spaces, under operating leases
with initial terms of three to seven years. Future minimum lease payments by
year and in the aggregate, under noncancelable operating leases with initial
or remaining lease terms in excess of one year, consisted of the following at
December 31, 1995:
Year Ended December 31,
1996 $198,085
1997 151,278
1998 118,548
1999 124,476
2000 128,556
Thereafter 214,260
$935,203
Rent expense for the years ended December 31, 1994 and 1995 and March 31,
1996 (unaudited) were $164,603, $237,855 af $78,088, respectively.
F-17
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. SEGMENT INFORMATION
Information about the Company's operations in different geographic areas
follows:
<TABLE>
<CAPTION>
Adjustments
United United and
States Asia Kingdom Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Product sales to
unaffiliated
customers $317,812 $70,696 $134,306 $ $522,814
Technology licensing
income 59,855 59,855
Other fees and
interest income 23,057 15,537 36 38,630
Transfers between
geographic areas 59,235 172,961 (232,196) 0
Total revenues $400,104 $319,049 $134,342 $(232,196) $621,299
Operating profit
(loss) $(3,959,955) $(497,969) $(139,846) $ $(4,597,770)
Identifiable assets
at
December 31,
1995 $ 3,342,815 $ 955,776 $ 59,867 $ $ 4,358,458
</TABLE>
Transfers between geographic areas are accounted for at an amount which
approximates cost. Operating loss is total revenues less operating expenses.
Identifiable assets are those assets of the Company that are identifiable
with the operations in each geographic area.
Customer Concentration - During 1994, one customer accounted for
approximately 23% of total sales. During 1995, two customers accounted for
approximately 50% of total sales. During the three months ended March 31,
1996 (unaudited), two customers accounted for approximately 54% of total
sales.
11. PROFORMA STOCKHOLDERS' EQUITY (UNAUDITED)
Subsequent to quarter ended March 31, 1996, the Company received gross
proceeds of $1,286,096 from the exercise of certain warrants to purchase
1,213,361 shares of common stock.
F-18
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Following is a condensed unaudited proforma statement of stockholders' equity
and total assets as of March 31, 1996, giving effect to the above
transactions in the Company's common stock after year end:
Historical stockholders' equity $2,829,534
Sale of common stock in private placement 1,286,096
Proforma stockholders' equity $4,115,630
Historical total assets $3,453,529
Sale of common stock in private placement 1,286,096
Proforma total assets $4,739,625
F-19
<PAGE>
No dealer, sales representative
or other individual has been authorized to give
any information or make any representation not con-
ained in this Prospectus in connection with this
offering other than those contained in this
Prospectus and if given or made, such information
or representation must not be relied upon as having
been authorized by the Company. This Prospectus
does not constitute an offer to sell or
solicitation of an offer to buy the Common Stock by
anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the
person making such offer or solicitation is not
qualified to do so or to any person to whom it is
unlawful to make such offer or solicitation.
Neither the delivery of this Prospectus nor any
sale made hereunder shall under any circumstances
create an implication that the information
contained herein is correct as of any time
subsequent to its date.
TABLE OF CONTENTS
Page
Prospectus Summary . . . . . 4
Risk Factors . . . . . . . . 7
The Company . . . . . . .21
Dividend Policy. . . . . . .31
Management's Discussion
and Analysis. . . . . . .31
Market for Registrant's
Common Equity and
Related Stockholder
Matters . . . . . . . . .34
Management . . . . . . . . .35
Principal Shareholders. . . 39
Selling Shareholders . . . .41
Certain Transactions . . .44
Description of Securities. .45
Legal Matters. . . . . . . .48
Experts. . . . . . . . . . .48
Indemnification of Officers
and Directors . . . . . .48
Additional Information . . .49
Index to Financial
Statements. . . . . . . . F-1
Until July 5, 1996 (25 days after the date
of the Prospectus), all dealers effecting
transactions in the registered securities, whether
or not participating in this distribution, may be
required to deliver a Prospectus. This delivery
requirement is in addition to the obligation of
dealers to deliver a Prospectus when acting as
Underwriter and with respect to their unsold
allotments or subscriptions.
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS,
INC.
6,507,500 Shares of Common
Stock
Prospectus
June 10, 1996