As filed with the Securities and Exchange Commission on October
10, 1996
Registration No. 33-46648
=================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE
AMENDMENT NO. 1 TO THE
REGISTRATION STATEMENT
ON FORM S-1
UNDER THE SECURITIES ACT OF 1933
SALIVA DIAGNOSTIC SYSTEMS, INC.
(Name of Small Business Issuer as Specified in its Charter)
Delaware 3841 91-1549305
(State of (Primary Standard (IRS Employer
Incorporation) Industrial Classi- Identification
fication Code Number) Number)
11719 NE 95th Street
Suite G
Vancouver, Washington 98682
(360) 696-4800
(360) 254-7942 (fax)
(Address and telephone number of registrant's principal executive
offices) and principal place of business
Ronald L. Lealos, President
Saliva Diagnostic Systems, Inc.
11719 NE 95th Street
Suite G
Vancouver, Washington 98682
(360) 696-4800
(360) 254-7942 (fax)
(Name, address and telephone number of agent for service)
Please send a copy of all communications to:
Richard S. Kalin, Esq.
Kalin & Banner
757 Third Avenue
7th Floor
New York, New York 10017
(212) 888-9010
(212) 759-3234 (fax)
Approximate date of proposed sale to the public: As soon as
practicable after the effective date of this Registration
Statement.
If this form is registering additional securities pursuant to
Rule 462(b) under the Securities Act please check the following box
and list the Securities Act registration statement number of the
earlier effective registration statement for the offering [ ].
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [
]
If delivery of the prospectus is expected to be made pursuant
to Rule 434 please check the following box. [ ]
If any of the securities being registered on this form are to
be offered on a delayed or continuous basis pursuant to Rule 415
under the Securities Act of 1933 check the following box. [X]
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date
until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to
said Section 8(a), may determine.
<PAGE>
SUBJECT TO COMPLETION DATED OCTOBER 10, 1996
PROSPECTUS
SALIVA DIAGNOSTIC SYSTEMS, INC.
1,380,000 Shares of Common Stock
Par value $.01 per Share
This offering is made solely to the holders of redeemable
warrants (the "Warrants") of Saliva Diagnostic Systems, Inc. (the
"Company") which were included as part of the Company's March 1993
public offering of shares of Common Stock, par value $.01 per share
(the "Common Shares") and the Warrants. Each Warrant entitles the
holder to purchase one Common Share at an exercise price of $3.00.
One Warrant plus $3.00 must be tendered to the Company in order to
exercise a Warrantholder's right to purchase one Common Share. See
"Terms of Offering." The Warrants provide that they are
exerciseable until December 31, 1996, at which time all Warrants
which remain unexercised shall become null and void. See
"Description of Securities." In the event all of the Warrants are
exercised, the Company will receive net proceeds of $3,933,000.
There is no assurance that all or any of the Warrants will be
exercised.
The Common Shares and Warrants are traded on the Nasdaq. On
October 7, 1996, the closing bid prices were $2.50 and $.34375
respectively.
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 9.
______________
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 October ______, 1996<PAGE>
Price to Underwriting Proceeds to
Warrantholder(1) Discount Company(2)(3)
--------------- ------------ -----------
Per
share of
Common Stock $3.00 $.15 $2.85
- -----------------------------------------------------------------
Total(4) $4,140,000 $207,000 $3,933,000
- -----------------------------------------------------------------
(1) The shares of Common Stock offered hereby may be purchased upon
exercise of the Warrants by tendering one Warrant and $3.00 for
each Common Share being purchased.
(2) The Company will pay to Whale Securities Co., L.P., as
solicitation agent, five percent of the exercise price of each Warrant.
See "Terms of Offering."
(3) Before deducting expenses for accounting, legal and printing,
expenses incurred in this offering, estimated at $35,000,
payable by the Company.
(4) Assumes exercise of all of the Warrants. There can be no
assurance that any of the Warrants will be exercised.
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 without charge
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 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511, and 7 World Trade Center, New
York, New York 10048. Copies of such material can be obtained from
the Public Reference Section of the Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549 and
its public reference facilities in New York, New York and Chicago,
Illinois 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.
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, relatively 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 located
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 testing products, rapid antibody
immunoassays, is Sero.Strip HIV 1/2, now being produced in limited
quantities by SDS's foreign subsidiary located in Singapore. It is
a serum and plasma-based test that requires one microliter (the
volume on the head of a pin) of specimen to complete the test.
The second product in the Company's testing 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 testing product, which is in its final stages of development,
is Saliva.Strip HIV 1/2, which uses saliva as the specimen. The
Company is continuing to research the development of the
immunoassay. For example, 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.
<PAGE>
The Offering
Securities Offered............. 1,380,000 shares of Common
Stock. See "Description of
Securities."
Common Stock outstanding:
Before the Offering............. 21,885,785 shares
After the Offering...............23,265,785 shares(1)
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 Warrants. Does not include (i)
443,250 shares of Common Stock reserved for issuance upon
exercise of outstanding options under the Company's Stock
Option Plans (the "Stock Option Plans"), (ii) 54,500 shares of
Common Stock reserved for issuance upon exercise of options
available for future grant under the Stock Option Plans, (iii)
1,679,950 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 his stock options until
the Company's certificate of incorporation can be amended to
authorize the issuance of additional shares or until the
Company has sufficient number of authorized but unissued
shares to honor its commitments.
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.
<TABLE>
<CAPTION>
Balance Sheet Data
Six Months Ended
December 31, 1995 June 30, 1996
(unaudited)
<S> <C> <C>
Working capital
(deficit) $ (290,228) $2,298,376
Total assets $4,358,458 $4,299,029
Total liabilities $3,381,147 $ 707,842
Shareholders' equity $ 977,311 $3,591,187
Income Statement Data
Year Ended Six Months Ended
December 31, June 30,
1995 1995 1996
(unaudited)
<S> <C> <C> <C>
Net revenues $ 621,299 $ 281,762 $ 348,395
Net (loss) $(4,597,770) $(2,072,719) $(2,084,290)
Net (loss) per
common share $ (.46) $ (.22) $ (.11)
Weighted average
number of common
shares outstanding 9,900,000 9,400,000 18,760,000
</TABLE>
<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 $18,846,137 at December 31, 1995 and June 30, 1996,
respectively, and a shareholders' equity of $977,311 and $3,591,187
at December 31, 1995 and June 30, 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 costs 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 Warrants 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. 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 Warrants, there are currently
outstanding stock options to purchase (i) an aggregate of 443,250
shares of Common Stock at exercise prices ranging from $.60 to
$5.50 per share; (ii) options and warrants to purchase 1,310,000
shares which were issued to employees and consultants; and (iii)
warrants to purchase 369,950 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 any of his stock
options until the Company's certificate of incorporation has been
amended to authorize additional shares or until the Company has
sufficient number of authorized but unissued shares to honor its
commitments.
5. 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.
Until recently, 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.
6. 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.
7. Competition. The market in which the Company
participates, saliva-based and rapid-testing collections and
diagnostic testing, is highly competitive. The Company is aware of
certain entities, including ChemTrak, Inc., Home Access Health
Corp., Johnson & Johnson, 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. Home
Access Health Corp. and Johnson & Johnson have developed blood-based
products to test for HIV which have been approved by the FDA.
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 and rapid testing become more widely recognized. See
"The Company -- Competition". There can be no assurance the
Company will be able to compete successfully.
8. 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. 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 or developing quick tests using saliva or other
specimens 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.
9. 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.
10. 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 approved limited 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."
11. 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."
12. 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 developed several strategic alliances and marketing
arrangements, including joint ventures, licenses 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.
13. Dependence on Manufacturers. The Company relies on
arrangements with third parties for the manufacture of two 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."
14. 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.
15. 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."
16. 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 to date, 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 certain of 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, to the extent they are
obtained, will provide meaningful protection to the Company.
17. 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.
18. 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 few years in order to remain eligible for inclusion
in NASDAQ. This could occur again due to the Company's limited net
worth and continuing operating losses. 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.
19. 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.
DILUTION
As of June 30, 1996, there were 21,350,785 shares of Common
Stock issued and outstanding. The following table reflects the
relative percentage of Common Share ownership in the Company, the
cost per Common Share to the owners, and the net tangible book
value per Common Share as of June 30, 1996, before and after giving
effect to the exercise of all of the Warrants:
Prior to Subsequent Cost Per
Offering to Offering Common Share
-------- ----------- ------------
Present Shareholders 100% 93.4% $1.00
Warrantholders 0% 6.6% $3.00
Net Tangible Book Value $.1365 $.2830
Per Common Share (1)
(1) Net Tangible Book Value Per Common Share is defined as the
tangible assets minus liabilities, as shown on the Company's
balance sheet at June 30, 1996, divided by the number of
Common Shares issued and outstanding.
The net tangible book value of the outstanding Common Shares
prior to this offering is approximately $.1365 per Common Share.
Upon the exercise of all of the Warrants, net of the solicitation
fee, the net tangible book value of such shares will increase to
approximately $.2830 per Common Share at no cost to the present
shareholders while the Warrantholder's equity will decrease from
the $3.00 per Common Share exercise price to approximately $.2830
per Common Share. The increase in the equity of the present
shareholders will be approximately $.1465 per Common Share while
the decrease in the Warrantholder's equity will be approximately
$2.717 per Common Share.
<PAGE>
USE OF PROCEEDS
The net proceeds to be realized by the Company from the
exercise of the Warrants after deduction of the solicitation fee
are estimated to be $3,933,000 if all of the Warrants are
exercised. These funds will be added to the Company's working
capital.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Balance Sheet Data
December 31,
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working cap-
tal (deficit) $ 15,744 $(2,227,369) $ (775,410) $(465,603) $ (290,228)
Total assets 166,344 843,493 1,284,318 999,288 4,358,458
Total liabil-
ities 110,092 2,912,637 1,378,112 745,297 3,381,147
Shareholders'
equity 56,252 (2,069,144) (93,794) 216,853 977,311
(deficiency)
<CAPTION>
Income Statement Data
Year Ended December 31,
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net
revenues $347,457 $ 23,620 $ 229,330 $ 460,673 $ 621,299
Net (loss) (5,098) (3,092,366) (5,634,089) (3,357,771) (4,597,770)
Net (loss)
per common
share (1.63) (1.83) (.70) (.46)
Weighted
average
number of
common
shares
outstanding 2,041,000 3,089,000 4,790,000 9,900,000
</TABLE>
<PAGE>
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 is 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.
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.
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. In September 1996 the license agreement was
superceded (the "September Agreement"). Under the terms of the
September Agreement, the Company granted to Home Access a two year,
exclusive license (except for certain previously granted licenses)
to use Omni-SAL in kits. In order to retain exclusively, Home
Access is required to take specified steps by specific dates. Home
Access shall pay the Company a royalty of $.25 per Omni-SAL product
for the first 1,000,000 products utilized by Home Access, $.15 for
the next 1,000,000 products and $.10 per product for Omni-Sal
products in excess of 2,000,000.
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.
In November 1995, the Company granted a five-year exclusive
license to distribute its products in India. The Company will
receive an 8% royalty for products sold.
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., Home Access Health Corp.,
Johnson & Johnson and 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. Both Home Access and Johnson
& Johnson have developed blood-based products which have been
approved by the FDA. Each of these products collects the sample
specimen which is forwarded to a remote laboratory for testing.
The Company expects that competition will increase as the
advantages of saliva-based and rapid 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 October 7, 1996, the Company had 27 full-time employees and
one part-time employee, including 18 persons engaged in research,
development, testing and regulatory affairs and 10 persons engaged
in administration, 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 had filed suit against Home
Access Health Corporation ("Home Access") (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. In September 1996, the
Company and Home Access resolved this dispute and entered into a
license agreement which supercedes all prior agreements. See "The
"Company -- Licensing".
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, 1994 and 1993 and
the six month periods ended June 30, 1996 and June 30, 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 $18,846,137 at
June 30, 1996. 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.
Six Months Ended June 30, 1996 Compared to Six Months Ended June
30, 1995
The Company had total revenues of $348,395 and $281,762 for
the six months ended June 30, 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.
Costs and expenses increased to $2,432,685 from $2,354,481 for
the six months ended June 30, 1996 and 1995, respectively. This
increase was largely attributable to an increase in personnel and
salaries.
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).
Year Ended December 31, 1994 Compared to Year Ended December 31,
1993.
Revenues for the year ended December 31, 1994 ("Fiscal 1994")
were $460,673, as compared to revenues of $229,330 for the year
ended December 31, 1993 ("Fiscal 1993"). The increase in revenues
was primarily attributable to sales of Omni-SAL from the Company's
Singapore facility and license fees.
Research and development costs for the Fiscal 1994 decreased
to $584,939 from $1,548,659 in Fiscal 1993. 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 1994 were $2,926,621 an increase of $24,450, or
approximately one percent, from $2,902,171 for Fiscal 1993. During
Fiscal 1994, SGA expenses were similar to those during the previous
year.
For Fiscal 1994, the Company incurred a net loss of $3,357,771
or $.70 per share, as compared to a net loss of $5,634,089, or
$1.83 per share for Fiscal 1993, a decrease of $2,276,318. The
reduction in net loss was primarily due to a significantly reduced
write-off of loan fees, lower research and development expenses and
greater revenues.
Liquidity and Capital Resources
The Company's working capital at June 30, 1996 was $2,298,376.
It had a working capital deficit of $290,228 at December 31, 1995.
Its current ratio was 4.86 to 1 at June 30, 1996 compared to .91 to
1 at December 31, 1995.
During the six months ended June 30, 1996, net cash used by
the Company's operating activities was $1,935,381 as compared to
$1,509,237 of cash used in operating activities in the six months
ended June 30, 1995. The primary use of funds during both periods
was to finance losses from operations.
Cash used in investment activities for the first six months of
1996 was $297,234 as compared to cash used of $81,480 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 six months
ended June 30, 1996 was $1,981,312 as compared to cash provided
from these activities in the same period of 1995 of $1,818,646.
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 December 1995
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, and its two fiscal periods
in 1996, high and low bid quotations for the Common Stock.
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
June 30, 1996 4.9375 1.625
March 31, 1996 2.4375 .46875
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 October 7, 1996, the closing bid price in the Over-the-Counter
market for the Common Stock, as reported by NASDAQ, was
$2.50 and the closing bid for the Company's warrants to purchase
1,380,000 shares of Common Stock at $.34375 per share, as reported
by NASDAQ.
On October 7, 1996, there were approximately 410 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 29 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
<PAGE>
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.
<PAGE>
OTHER EXECUTIVE OFFICERS
Position
Name Age Position With the Company Held Since
Willfried 52 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 $130,000(1) 400,000
President 1994 106,200 - 130,000
1993 93,625 17,731 -
Duke van Kalken 1995 123,220 58,300(2) 50,000
Managing 1994 136,800 69,308(2) 130,000
Director 1993 100,351 68,411(2) -
SUMMARY COMPENSATION TABLE (Cont'd)
Long Term
Name and Annual Com- Other Compen-
Principal Fiscal pensation Annual Com- sation
Position Year Salary ($) pensation ($) Options
<S> <C> <C> <C> <C>
Willfried 1995 100,000 - 125,000
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 $60,000.
In addition, Mr. van Kalken was granted an option to purchase
50,000 shares of Common Stock.
STOCK OPTION PLANS
On March 19, 1992, the Company adopted a Stock Option Plan
(the "1992 Plan") pursuant to which options to purchase up to an
aggregate of 350,000 shares of Common Stock could be granted. Such
options shall be non-incentive options.
On May 17, 1994, the Company adopted a 1994 Stock Option Plan
(the "1994 Plan") pursuant to which options to purchase up to
350,000 shares of Common Stock may be granted to employees,
consultants, advisors to the Company's Board of Directors, and
qualified directors. Options granted pursuant to the Plan may be
incentive options or non-qualified options as such terms are
defined in the Internal Revenue Code of 1986, as amended (the 1992
Plan and the 1994 Plan are collectively referred to as the
"Plans").
The Plans are administered by the Board of Directors which has
the authority to determine the persons to whom options may be
granted, the number of shares of Common Stock to be covered by each
option, the time or times at which the options may be granted or
exercised whether under the 1994 Plan, the options are to be
incentive options or non-qualified options and, for the most part,
the terms and provisions of the options. The exercise price of
options granted under the Plans may not be less than the fair
market value of the shares of Common Stock on the date of grant.
The following tables indicate the options granted to officers and
directors of the Company during Fiscal 1995:
<TABLE>
<CAPTION>
OPTION GRANTS DURING FISCAL 1995
Percent of
Total Options Expira-
Options Granted in Exercise tion
Name Granted Fiscal Year Price($) Date
<S> <C> <C> <C> <C>
David Barnes 175,000 16.2% $1.00 3/2/98
Duke van Kalken 50,000 4.6% $1.00 3/2/98
Ronald L. Lealos 400,000 37.1% $1.00 3/2/98
Willfried Schramm 75,000 7.0% $1.00 3/2/98
Willfried Schramm 50,000 4.6% $2.38 3/25/99
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1995
AND OPTIONS/SAR VALUES
Value of
Unexercised
Number of In-the-money
Shares Unexercised Options at
Acquired on Value Options (All Year End(All
Name Exercise(#) Realized($) Exercisable) Exercisable)
<S> <C> <C> <C> <C>
Dr. David Barnes 0 0 187,500 0
Ronald Lealos 0 0 530,000 0
</TABLE>
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 October 1, 1996
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. 1,352,401(2) 6.3% 5.9%
1465 Monaco Drive
Pacific Palisades,
CA 90272
Mr. Ronald Lealos 1,171,921(3) 5.3% 5.0%
11719 NE 95th Street
Vancouver, WA 98682
David Barnes, MD 283,000(4) 1.3% 1.2%
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) 3.5% 3.3%
7509 W. 83rd Street
Los Angeles, CA 90293
All Officers and 2,204,921(3)(4) 9.9% 9.3%
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 exercise of all of the Warrants.
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.
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, 21,885,785
shares of Common Stock are outstanding not including 1,380,000
shares registered pursuant to this Prospectus.
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.
Public Warrants
The Warrants which are publicly traded were issued in
connection with the Company's March 1993 public offering. The
Company has 1,380,000 outstanding Warrants; each Warrant entitled
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 March 2, 1996. The Board of Directors of the Company extended
the expiration date of the Warrants to December 31, 1996 and
amended the exercise price to $3.00.
The Warrantholders shall have exercise rights until the close
of business on the date fixed for redemption.
The Warrants may be exercised upon surrender of the warrant
certificate on or prior to the expiration date at the offices of
American Stock Transfer & Trust Co. (the "Warrant Agent"), with the
exercise form on the reserse 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 Warrants being exercised. The
Warrantholders do not have the rights or privileges of holders of
Common Stock.
TERMS OF OFFERING
The Company, through American Stock Transfer & Trust Company,
as Warrant Agent, is offering 1,380,000 Common Shares upon the
exercise of 1,380,000 Warrants presently outstanding. Each
Warrant evidences the holder's right to purchase one Common Share
at any time prior to 5:00 P.M. E.S.T. until October 31, 1996.
Warrantholders who wish to exercise their Warrants should:
(a) properly complete and execute the back portion of the
Warrant Certificate for the number of Warrants which are to be
exercised;
(b) include a check payable to Saliva Diagnostic Systems,
Inc. in an amount equal to $3.00 times the number of Common Shares
being purchased (the number of Common Shares purchased will equal
the number of Warrants which are exercised);
(c) mail the executed Warrant Certificate and check to
American Stock Transfer & Trust Company, 40 Wall Street, New York,
New York 10005.
Whale Securities Co., L.P. shall be entitled to a fee of five percent of
the gross proceeds realized by the Company from the exercise of the
Warrants.
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 owns 45,000 common
shares.
EXPERTS
The financial statements of the Company for the fiscal years
ended December 31, 1993, 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 S-1 (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. The Registration
Statement and such exhibits and schedules may be inspected without
charge at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the
Commission located at Seven World Trade Center, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such materials may be obtained from the
Public Reference Section of the Commission, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its
public reference facilities in New York, New York and Chicago,
Illinois, at prescribed rates.
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Consolidated Balance Sheets as of F-3
December 31, 1993, 1994 and 1995
and June 30, 1996 (Unaudited)
Consolidated Statements of Operations - F-6
For the Years Ended
December 31, 1993, 1994 and 1995 and
Six Months Ended June 30, 1995
and 1996 (Unaudited)
Consolidated Statement of Stockholders' F-8
Equity For the Years Ended
December 31, 1993, 1994 and 1995 and
Six Months Ended June 30, 1996
(Unaudited)
Consolidated Statements of Cash Flows - F-14
For the Years Ended
December 31, 1993, 1994 and 1995 and
Six Months Ended June 30, 1995
and 1996 (Unaudited)
Notes to Consolidated Financial Statements F-18
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, 1993,
1994 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the
three years ended December 31, 1995. 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, 1993, 1994 and 1995 and the results of operations,
stockholders' equity and cash flows for each of the three years
ended December 31, 1995, 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>
</TABLE>
<TABLE>
<CAPTION>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
-------------------
1993 1994 1995 1996
---- ---- ---- --------
(Unaudited)
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash $ 257,408 $ 96,431 $2,688,014 $2,436,711
Accounts receivable 73,411 47,039 43,291 80,061
Stock subscription
receivable 22,533
Inventories (Note 4) 155,682 92,600 300,161 352,834
Prepaid expenses 28,956 24,768
------- ------- --------- --------
TOTAL CURRENT ASSETS 509,034 236,070 3,060,422 2,894,374
------- ------- --------- ---------
PROPERTY AND EQUIPMENT,
Net (Note 5) 523,511 560,284 470,593 654,175
------- ------- --------- ---------
OTHER ASSETS
Deposits 17,895 64,156 70,019 73,022
Patents and trademarks,
net of accumulated
amortization of $8,193
in 1993, $18,952 in 1994
and $29,983 in 1995
and $34,583 at June
30, 1996 118,428 133,778 127,057 122,458
Goodwill, net of
accumulated amortiza-
tion of $15,000 in 1995
and $45,000 at June 30,
1996 (Note 3) 585,000 555,000
Prepaid loan fees
(Note 6) 80,450 45,367
Prepaid consulting
fees 35,000 5,000
---------- -------- ---------- ----------
TOTAL OTHER ASSETS 251,773 202,934 827,443 750,480
---------- -------- ---------- ----------
$1,284,318 $999,288 $4,358,458 $4,299,029
========== ======== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
<CAPTION>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
------------------
1993 1994 1995 1996
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable and
accrued expenses $334,844 $569,960 $500,078 $492,821
Accrued interest payable 68,217 8,000 49,703 68,240
Advances from majority
stockholder 231,120
Current portion of long-
term debt and obliga-
tions under capital
leases (Note 8) 650,263 23,713 15,869 34,937
Convertible debentures
(Note 6) 100,000 2,785,000
--------- ------- --------- -------
TOTAL CURRENT LIABILITIES 1,284,444 701,673 3,350,650 595,998
--------- ------- --------- -------
LONG-TERM DEBT AND OBLIG-
ATIONS UNDER CAPITAL
LEASES, net of current
portion (Note 8) 93,668 43,624 30,497 111,844
--------- ------- --------- -------
MINORITY INTEREST
(Note 3) 37,138
--------- ------- --------- -------
COMMITMENTS AND CONTIN-
GENCIES (Note 8)
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
<CAPTION>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
LIABILITIES AND STOCKHOLDERS' EQUITY, Continued
December 31, June 30,
1993 1994 1995 1996
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
STOCKHOLDERS' EQUITY
(Note 6)
Common stock - author-
ized 25,000,000 shares,
$.01 par value, issued
and outstanding
3,370,842, 6,304,332,
13,126,366 and 21,350,785
at December 31, 1993,
1994, 1995 and June 30,
1996, respectively 33,708 63,043 131,264 213,510
Additional paid-in
capital 8,732,143 12,434,356 17,726,578 22,375,931
Note receivable related
to sale of stock (83,825) (83,825) (83,825) (83,825)
Cumulative foreign
translation adjustment 30,486 (32,644) (34,859) (68,292)
Accumulated deficit (8,806,306) (12,164,077)(16,761,847)(18,846,137)
--------- ---------- ----------- ----------
TOTAL STOCKHOLDERS'
EQUITY (93,794) 216,853 977,311 3,591,187
--------- ---------- ----------- ----------
$1,284,318 $ 999,288 $ 4,358,458 $4,299,029
========= ========== =========== =========
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended Six Months Ended
December 31, June 30,
------------------------------ ---------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES
Product sales $ 188,208 $ 242,207 $ 522,814 $ 217,882 $ 296,316
Technology
licensing income 200,000 59,855
Other fees and
interest income 41,122 18,466 38,630 63,880 52,079
------- ------- ------- ------- -------
TOTAL REVENUES 229,330 460,673 621,299 281,762 348,395
------- ------- ------- ------- -------
COSTS AND EXPENSES
Cost of product sold 64,066 177,054 149,629 47,029 187,263
Research and
development 1,548,659 584,939 353,098 429,570 195,838
Selling, general and
administrative 2,902,171 2,926,621 4,158,641 1,871,301 1,979,916
Interest expense and
loan fees 588,523 129,830 557,701 6,581 69,668
--------- --------- -------- --------- ---------
TOTAL COSTS
AND EXPENSES 5,103,419 3,818,444 5,219,069 2,354,481 2,432,685
--------- --------- --------- --------- ---------
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended Six Months Ended
December 31, June 30,
------------------------------ ------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
LOSS BEFORE EXTRA-
ORDINARY ITEM (4,874,089)
EXTRAORDINARY ITEM
LOAN FEES WRITTEN
OFF (760,000)
---------
NET LOSS $(5,634,089) $(3,357,771) $(4,597,770) $(2,072,719) $(2,084,290)
========= ========= ========= ========= =========
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING 3,089,000 4,790,000 9,900,000 9,400,000 18,760,000
========= ========= ========= ========= ==========
LOSS PER COMMON SHARE $ (1.83) $ (.70) $ (.46) $ (.22) $ (.11)
========= ========= ========= ========= ==========
See accompanying Notes to Consolidated Financial Statements.
F-7
<CAPTION>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND JUNE 30, 1996 (UNAUDITED)
Common Stock Note Cumulative
___________________ Additional Receivable Foreign Accumu-
Paid-in (Sale of Translation lated
Shares Amount Capital Stock) Adjustment Deficit Total
------ ------ --------- --------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
December 31, 1992 1,803,832 $18,038 $1,191,393 $(106,358) $ $(3,172,217) $2,069,144
Issuance of
shares in lieu
of loan fees 190,000 1,900 758,100 760,000
Sale of stock
in public
offering 1,300,000 13,000 6,351,630 6,364,630
Issuance of
shares for
settlement
of employment
agreements 42,500 425 175,825 176,250
Issuance of
stock for fees 15,760 158 62,882 63,040
Sale of common
stock in
private offering 18,750 187 37,313 37,500
Payment received
subsequent
to year end 22,533 22,533
F-8
<PAGE>
<CAPTION>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND JUNE 30, 1996 (UNAUDITED), Continued
Common Stock Note Cumulative
___________________ Additional Receivable Foreign Accumu-
Paid-in (Sale of Translation lated
Shares Amount Capital Stock) Adjustment Deficit Total
------ ------ --------- --------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Contribution of
capital by
major shareholder 155,000 155,000
Foreign translation
adjustment 30,486 30,486
Net loss for the year (5,634,089) (5,634,089)
--------- ------- --------- --------- -------- ---------- ---------
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 con-
verted into common
shares 580,000 5,800 574,200 580,000
Advances from ma-
jority stockholder
converted into
common stock 231,120 2,311 228,809 231,120
F-9
<PAGE>
<CAPTION>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND JUNE 30, 1996 (UNAUDITED), Continued
Common Stock Note Cumulative
___________________ Additional Receivable Foreign Accumu-
Paid-in (Sale of Translation lated
Shares Amount Capital Stock) Adjustment Deficit Total
------ ------ --------- --------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Issuance of shares
to majority stock-
holder for serv-
ices 75,000 750 74,250 75,000
Discount on note
receivable related
to sale of stock (1,066) (1,066)
Notes payable con-
verted into com-
mon 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)
------- ----- ------- --------- ------- --------- ---------
F-10
<PAGE>
<CAPTION>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND JUNE 30, 1996 (UNAUDITED), Continued
Common Stock Note Cumulative
___________________ Additional Receivable Foreign Accumu-
Paid-in (Sale of Translation lated
Shares Amount Capital Stock) Adjustment Deficit Total
------ ------ --------- --------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
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
F-11
<PAGE>
<CAPTION>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND JUNE 30, 1996 (UNAUDITED), Continued
Common Stock Note Cumulative
___________________ Additional Receivable Foreign Accumu-
Paid-in (Sale of Translation lated
Shares Amount Capital Stock) Adjustment Deficit Total
------ ------ --------- --------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
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
Debentures
converted
into common
shares 6,212,308 62,123 2,697,877 2,760,000
Warrants and
options
exercised 1,995,611 19,957 1,897,892 1,917,849
F-12
<CAPTION>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND JUNE 30, 1996 (UNAUDITED), Continued
Common Stock Note Cumulative
___________________ Additional Receivable Foreign Accumu-
Paid-in (Sale of Translation lated
Shares Amount Capital Stock) Adjustment Deficit Total
------ ------ --------- --------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Issuance of
shares
in settlement
agreements 16,500 166 53,584 53,750
Foreign
translation
adjustment (33,433) (33,433)
Net loss for the
six months ended
June 30, 1996 (2,084,290) (2,084,290)
__________ _______ ________ ______ _______ _________ _________
Balance, 21,350,785 $213,510 $22,375,931 $(83,825) $(68,292) $(18,846,137) $3,591,187
June 30, 1996 ========== ======== ========= ======= ======= ========== =========
See accompanying Notes to Consolidated Financial Statements.
F-13
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended Six Months Ended
December 31, June 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING
ACTIVITIES
Net loss $(5,634,089) $(3,357,771) $(4,597,770) $(2,072,719) $(2,084,290)
Adjustments
to reconcile
net loss
to net cash
used by op-
erating
activites:
Cumulative
foreign
translation
adjustment 30,486 (63,130) (2,215) 28,902 (33,433)
Depreciation
and amort-
ization 322,106 323,934 749,750 155,946 190,615
Expenses
satisfied
with issu-
ance of
shares 999,290 77,500 1,148,750 568,750 65,702
Changes in
operating
assets and
liabilities:
(Increase)
decrease
in accounts
receivable (73,411) 26,372 3,748 (48,274) (36,770)
(Increase)
decrease in
inventory (155,682) 63,082 (207,561) (3,137) (52,673)
Increase
(decrease)
in prepaid
expenses (28,956) 4,188
F-14
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Year Ended Six Months Ended
December 31, June 30,
----------------------------- --------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Increase
(decrease) in
accounts
payable and
accrued
expenses (327,626) 212,037 (11,906) (138,705) 11,280
---------- ------- ---------- ----------- -------
NET CASH USED
BY OPERATING
ACTIVTIES (4,838,926) (2,717,976) (2,999,571) (1,509,237) (1,935,381)
--------- ----------- ----------- ----------- -----------
CASH FLOWS
FROM
INVESTING
ACTIVITIES
Patents and
trademarks (16,069) (26,109) (4,310) (8,091)
Deposits (36,500) (46,261) (5,863) (3,004)
Purchase of
equipment (481,057) (239,498) (118,295) (73,389) (294,230)
--------- --------- --------- --------- ---------
NET CASH
USED BY
INVESTING
ACTIVITIES (533,626) (311,868) (128,468) (81,480) (297,234)
--------- --------- --------- --------- ---------
See accompanying Notes to Consolidated Financial Statements.
F-15
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Years Ended Six Months Ended
December 31, June 30,
------------------------- --------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
FINANCING ACTIVITIES
Advances and
contribution
from stockholder/
officer, net (318,880)
Convertible
debentures
and notes
payable 153,156 3,128,900 36,146 109,476
Repayment of
convertible
debentures (733,019) (37,500) (25,000)
Repayment of
obligations
under capital
leases (20,971) (9,061)
Sale of Stock -
public
offering 6,603,030
Sale of Stock -
private placement
and exempt
offering 37,500 2,694,244 1,972,500 1,782,500
Collection of note
receivable related
to sale of stock 21,467
Stock warrants and
options exercised 676,693 1,905,897
--------- --------- --------- --------- ---------
NET CASH PROVIDED
BY FINANCING
ACTIVITIES 5,588,631 2,868,867 5,719,622 1,818,646 1,981,312
--------- --------- --------- --------- ---------
NET INCREASE
(DECREASE)
IN CASH 216,079 (160,977) 2,591,583 227,929 (251,303)
CASH BALANCE,
Beginning of
period 41,329 257,408 96,431 96,431 2,688,014
------- -------- --------- ------- ---------
F-16
<PAGE>
<CAPTION>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Year Ended Six Months Ended
December 31, June 30,
------------------- -------------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CASH BALANCE,
End of period $ 257,408 $ 96,431 $2,688,014 $ 324,360 $2,436,711
======= ======= ========= ======== =========
INTEREST AND
LOAN FEES PAID $192,800 $113,399 $ 565,035
SUPPLEMENTAL SCHEDULE
OF NONCASH INVESTING
AND FINANCING ACTI-
VITIES
Shares issued
in lieu of fees
and expenses $999,290 $ 77,500 $1,148,750 $ 568,750 $ 11,952
Advances from
majority stock-
holder converted
into common shares $231,120
Conversion of
advances to con-
tributed capital $155,000
Acquisition of
minority interest $600,000
Conversion of
Debentures into
Common Stock $2,760,000
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
F-17
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995 AND
JUNE 30, 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.
F-18
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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.
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 reflects 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.
F-19
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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 $8,806,306, $12,164,077,
$16,761,847 and $18,846,137, at December 31, 1993, 1994, 1995 and
June 30, 1996 (unaudited), respectively, and limited stockholders'
equity of $977,311, $216,853 and $93,794 at December 31, 1995,
December 31, 1994 and December 31, 1993, 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,
has loaned and advanced over $755,000 to the Company, of which
approximately $360,000 has been repaid, 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
F-20
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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 $30,000
for six months ended June 30, 1996 (unaudited).
F-21
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4. INVENTORIES
Inventories consisted of the following at December 31, 1994 and
1995 and June 30, 1996:
1994 1995 1996
-------- -------- -------
(Unaudited)
Raw materials $ $186,492 $ 63,193
Work in process 21,202 66,807 1,781
Finished goods 71,398 46,862 $ 287,860
-------- -------- ---------
$92,600 $300,161 $352,834
====== ======== =======
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31,
1994 and 1995 and June 30, 1996:
1994 1995 1996
------- -------- -------
(Unaudited)
Office furniture
& Equipment $ 85,072 $ 76,711 $ 78,590
Machinery and
laboratory
equipment 502,823 650,461 759,510
Tooling 196,897 156,457 250,490
Leasehold
improvements 48,725 38,727 81,827
Vehicle 122,677 126,388 180,576
Exhibits 30,955 60,710 30,955
-------- -------- --------
987,149 1,109,454 1,381,948
Less: accumulated
depreciation and
amortization 426,865 638,861 727,773
-------- --------- ---------
$560,284 $ 470,593 $ 654,175
======= ======== ========
F-22
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 $3.00 per share (as adjusted from
$7.20), 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
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.
F-23
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 six
months ended June 30, 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.
F-24
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 six months ended June 30, 1996, a total of
345,000 warrants were exercised.
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.
F-25
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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.
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.
F-26
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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. During the six months ended June 30, 1996, 19,750 options
were exercised.
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-27
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, 1993, 1994 and 1995
and June 30, 1996 (unaudited) were $80,003, $164,603, $237,855 and
$114,196, respectively.
F-28
10. SEGMENT INFORMATION
Information about the Company's operations in different geographic
areas follows:
<TABLE>
<CAPTION>
Adjust-
ments
and
United United Elimina- Consol-
States Asia Kingdom tions idated
------ ---- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Product
sales
to un-
affiliated
customers $ 317,812 $ 70,696 $ 134,306 $ $ 522,814
Technology
licensing
income 59,855 59,855
Other fees
and inter-
est 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
========= ========= ======== ======= ===========
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 six months ended June 30, 1996 (unaudited), two
customers accounted for approximately 49% of total sales.
F-29
11. PROFORMA STOCKHOLDERS' EQUITY (UNAUDITED)
Subsequent to quarter ended June 30, 1996, the Company received gross proceeds
of $535,000 from the exercise of certain warrants to purchase 535,000 shares of
common stock.
Following is a condensed unaudited proforma statement of stockholders' equity
and total assets as of June 30, 1996, giving effect to the above transactions
in the Company's common stock after year end:
Historical stockholders' equity $3,591,187
Warrants exercised 535,000
---------
Proforma stockholders' equity $4,126,187
=========
Historical total assets 4,299,029
Warrants exercised 535,000
---------
Proforma total assets $4,834,029
=========
F-30
<PAGE>
No dealer, sales representative
or other individual has been authorized to
give any information or make any representation
not contained 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 . . . . . . . . 5
Risk Factors . . . . . . . . . . . 9
Dilution . . . . . . . . . . . . .18
Use of Proceeds. . . . . . . . . .20
Selected Financial Data. . . . . .20
The Company . . . . . . . . . .23
Dividend Policy. . . . . . . . . 33
Management's Discussion
and Analysis. . . . . . . . . .33
Market for Registrant's
Common Equity and
Related Stockholder
Matters . . . . . . . . . . . .36
Management . . . . . . . . . . . .37
Principal Shareholders. . . .. . 42
Certain Transactions . . . . . . .43
Description of Securities. . . . .45
Terms of Offering. . . . . . . . .46
Legal Matters. . . . . . . . . . .46
Experts. . . . . . . . . . . . . .46
Indemnification of Officers
and Directors . . . . . . . . .47
Additional Information . . . . . .47
Index to Financial Statements . . F-1
Until , 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>
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS,
INC.
1,380,000 Shares of Common
Stock
Prospectus
, 1996
<PAGE>
Exhibits.
2.1 The Company's Certificate of Incorporation, as
amended, incorporated by reference to Exhibits
2.1 through 2.6 to Registration Statement No. 33-
46648 filed on Form S-1 of the Company (the "S-1")
and to Exhibit 2.7 of the Company's Annual
Report on Form 10-KSB for its fiscal year ended
December 31, 1995 (the "1995 10-K").
3.1 The Company's By-Laws are incorporated by
reference to Exhibit 3.1 to the S-1.
4.1 Underwriter's Warrant incorporated by reference
to Exhibit 4.2 to the S-1.
4.2 New Whale Warrant issued to Whale Securities Co.,
L.P. for 1,000,000 shares incorporated by
reference to Exhibit 4.3 to Registration
Statement No. 33-95172 filed on Form SB-2 ("Form
SB-2").
10.1 Employment Agreement between the Company and
Ronald L. Lealos (incorporated by reference to
Exhibit 10.6 of the 1995 10-K).
10.2 Consulting Agreement between the Company and Duke
van Kalken (incorporated by reference to Exhibit
10.16 of the Company's Annual Report on Form 10-KSB
for its fiscal year ended December 31, 1993
(the "1993 10-K").
10.3 License Agreement between the Company and
Orgenics, Ltd. dated March 22, 1994 (incorporated
by reference to Exhibit 10.7 of the 1993 10-K).
10.4 Lease between the Company and East Ridge Business
Park, incorporated by reference to Exhibit 10.14
on Form S-1. Lease between the Company and East
Ridge Business Park for additional premises,
incorporated by reference to Exhibit 10.4 to Form
SB-2.
10.5 Stock Option Plan, incorporated by reference to
Exhibit 10.1 of the Form S-1.
10.6 Employment Agreement with Willfried Schramm
Ph.D., dated July 14, 1993, incorporated by
reference to Exhibit 10.29 of the 1993 Form 10-K.
10.7 License Agreement with Home Access Health
Corporation dated March 15, 1995, incorporated by
reference to Exhibit 10.8 to the Company's Annual
Report on Form 10-KSB for its fiscal year ended
December 31, 1994 ("1994 10-K").
10.8 License Agreement with Home Access Health
Corporation datged as of September 9, 1996.
10.9 1994 Stock Option Plan, incorporated by reference
to Exhibit A of the Proxy Statement for the
Company's 1994 annual meeting.
21.1 List of significant subsidiaries is incorporated
by reference to Exhibit 22.1 of Form S-1.
5 Opinion of Kalin & Banner.
24.1 Consent of Hollander, Gilbert & Company dated
October 9, 1996.
24.2 Consent of Kalin & Banner (included in Exhibit
5).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-1
and has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the
City of Vancouver, State of Washington, on the 9th day of October
1996.
SALIVA DIAGNOSTIC SYSTEMS, INC.
By: s/ Ronald L. Lealos
Ronald L. Lealos, President
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints each of them, his
true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments or
supplements to this Registration Statement and to file the same
with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting
unto such authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, to
all intents and purposes and as fully as they might or could do in
person, hereby ratifying and confirming all that such attorneys-in-fact
and agents, or their substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed below by the
following persons in the capacities and on the dates indicated.
S/Ronald L. Lealos President and Director, October 9, 1996
Ronald L. Lealos Principal Executive
Officer
S/Hans R. Vauthier Director October 9, 1996
Hans R. Vauthier
S/Kenneth J. McLachlan Director, Principal October 9, 1996
Kenneth J. McLachlan Financial
Officer
S/David Barnes Director October 9, 1996
David Barnes, M.D.
S/M.J. Scheinbaum Director October 9, 1996
M.J. Scheinbaum, M.D.
saliva\s1postef.796
<PAGE>
Exhibit Index
10.8 License Agreement with Home Access Health
Corporation datged as of September 9, 1996.
5 Opinion of Kalin & Banner.
24.1 Consent of Hollander, Gilbert & Company dated
October 8, 1996.
24.2 Consent of Kalin & Banner (included in Exhibit 5).
<PAGE>
Exhibit 10.8
LICENSE AGREEMENT
LICENSE AGREEMENT made and entered into effective as of September 9, 1996
between SALIVA DIAGNOSTIC SYSTEMS, INC. ("SDS") and HOME ACCESS
HEALTH CORPORATION f/k/a Anonymous Test Services, Inc. ("Home Access").
SDS is the owner of certain proprietary technology and possesses certain
special expertise and knowledge relating to saliva sampling and testing
(the "OMNI-SAL Technology").
SDS and Home Access have heretofore entered into (i) a License Agreement
dated March 15, 1995 (the "1995 License Agreement"), (ii) an Amendment No.
1 to the 1995 License Agreement (the "1995 Amendment"), and (iii) a
Sublicense Agreement effective as of March 15, 1995 (the "1995 Sublicense
Agreement") that relate to the OMNI-SAL Technology (the
1995 License Agreement, the 1995 Amendment, and the 1995 Sublicense
Agreement are hereinafter sometimes referred to as the "1995 Agreements").
Various disputes have arisen between SDS and Home Access concerning the 1995
Agreements and their respective rights, liabilities and obligations
thereunder and with respect thereto (the "Disputes"). Among other things:
(a) On or about January 9, 1996, SDS filed a lawsuit against Home Access
in the Superior Court of Clark County, Case No. 96 2 00130 2 entitled
Saliva Diagnostic Services, Inc. v. Home Access Health Corporation
(the "Washington Lawsuit");
(b) On or about January 23, 1996, SDS filed an Amended Complaint in the
Washington Lawsuit; and
(c) On or about June 7, 1996, Home Access filed an Answer and
Counterclaims in the Washington Lawsuit.
SDS and Home Access have entered into a Settlement Agreement (the "Settlement
Agreement") for the purpose of fully, completely and finally resolving the
Disputes and any other differences between them.
Under the terms and conditions of the Settlement Agreement, SDS and Home
Access are required to enter into this Agreement.
NOW, THEREFORE, SDS and Home Access hereby agree as follows:
1. Certain Definitions.
"Affiliate" in reference to any party means any entity that, directly or
indirectly controls, is controlled by, or under common control with such
party. "Control" in reference to any entity means the ability to elect
or select a majority of the board of directors or other governing body
of such entity.
"FDA" means the United States Food and Drug Administration.
"HIV" means the human immunodeficiency virus (commonly referred to as HIV).
"HIV Exclusive Period" means the period commencing on September 9, 1996 and
ending on September 8, 1998; provided, however, that, if all of the
warranties and representations made by SDS in Section 7.a hereof are and
remain true and accurate and Licensor fully performs and complies with all
of its covenants, agreements and undertakings contained in this Agreement:
i. The HIV Exclusive Period shall end on December 8, 1996, unless
Licensee delivers to Licensor, on or prior to December 8, 1996, a letter
in the form of Exhibit 1 attached hereto;
ii. The HIV Exclusive Period shall end on March 8, 1997, unless Licensee
delivers to Licensor, on or prior to March 8, 1997, a reasonably
detailed plan setting forth a preliminary design and time line for
submission to the FDA of a saliva-based HIV test product that utilizes
the Licensed Technology; and
iii. If (but only if) the FDA continues to require Investigational Device
Exemptions (IDE's) for such types of products, the HIV Exclusive Period
shall end on October 8, 1997, unless Licensee files with the FDA, on or
prior to October 8, 1997, for an Investigational Device Exemption (IDE)
for a saliva-based HIV test product that utilizes the Licensed Technology.
"Issued OMNI-SAL Patents" means any and all patents that have been issued as
of the date of this Agreement that relate to the OMNI-SAL Technology,
including, but not limited to the following patents:
United States Patent No. 5,260,031 dated November 9, 1993
United States Patent No. 5,268,148 dated December 7, 1993
United States Patent No. 5,283,038 dated February 1, 1994
Argentina Patent No. 244,884 dated November 30, 1993
Belgium Patent No. 9200585 granted April 13, 1993
Belgium Patent No. 1006232A3 granted June 14, 1994
France Application No. 9302567
Peru Patent No. 0174 with base date of June 22, 1992
but the Issued OMNI-SAL Patents do not include any patent that relates
solely to rapid or instant testing.
"Kit" means a kit or other package that contains (A) one or more Licensed
Products which are to be used to collect samples from up to two persons to
whom results of testing are to be furnished, and (B) shipping instructions
directing that samples collected with the Licensed Products be shipped for
testing to a laboratory that is not located at the collection site. A Kit
may contain items in addition to Licensed Products and shipping instructions.
Kits may be sold and distributed individually or in bulk.
"Licensed Application" means any application that utilizes a Kit. "HIV
Licensed Application" means any Licensed Application that is related to HIV.
"Non-HIV Licensed Application" means any Licensed Application that is not
related to HIV.
"Licensed Product" means any product that utilizes any of the Licensed
Technology, either alone or in conjunction with any other technology,
invention or know-how.
"Licensed Technology" includes all of the Issued OMNI-SAL Patents, and all
other current and future United States and foreign patents granted and
applied for, all amendments, extensions, continuations, continuations-in-
part, re-issued and re-examined patents, all know-how, all product and
manufacturing specifications, methods and procedures, and all future
improvements and developments related to the OMNI-SAL Technology, whether or
not proprietary or confidential, whether now owned or hereafter acquired or
developed, in which Licensor or any of its Affiliates now has or holds or
hereafter acquires any right, title, claim or interest, but the Licensed
Technology does not include any patent, amendment, extension, continuation,
continuation-in-part, re-issued or re-examined patent, know-how, product or
manufacturing specification, method or procedure, improvement or development
that relates solely to rapid or instant testing.
"Licensee" includes Home Access and its successors and assigns.
"Licensor" includes SDS and its successors and assigns.
2. License.
a. Licensor hereby grants Licensee a perpetual, worldwide right and license
(the "License") to use the Licensed Technology for any and all Licensed
Applications. Subject to the provisions of Section 2.i hereof:
i. For HIV Licensed Applications, the License shall be exclusive during
the HIV Exclusive Period and non-exclusive after the HIV Exclusive
Period ends; provided, however, that Licensor shall at all times retain
the right to make and manufacture, have made and manufactured, and sell
and distribute Kits solely for use in the life insurance industry,
including during the HIV Exclusive Period.
ii. For Non-HIV Licensed Applications, the License shall be non-exclusive,
both during the HIV Exclusive Period and after the HIV Exclusive Period
ends.
b. The License does not give Licensee any right to use the Licensed
Technology for any application in which a sample is collected for
testing at the collection site (i.e., rapid or instant
testing or onsite laboratory testing).
c. Licensee shall have the right to grant sublicenses to use to the
Licensed Technology for the Licensed Applications; provided, however,
that each sublicensee must agree to comply with and be bound by the
provisions of Sections 3 and 9 hereof and the proviso to Section 2.d
hereof, insofar as such provisions apply to sublicensees. Licensee
irrevocably and unconditionally guarantees that each of Licensee's
sublicensees will comply with the provisions of this Agreement that are
applicable to sublicensees.
d. The License gives Licensee and its sublicensees the right:
i. To use, make and manufacture, have made and manufactured, and sell
and distribute Licensed Products for Licensed Applications; and
ii. To practice the inventions covered by the claims of each patent
included in the Licensed Technology in connection with Licensed
Applications;
provided, however, that (A) Licensee and each sublicensee must comply with
all applicable laws of each jurisdiction in which Licensee or such
sublicensee operates with respect to each Licensed Product that Licensee or
such sublicensee makes and manufactures, has made and manufactured, or sells
and distributes within such jurisdiction, and (B) to the extent permitted
by applicable law, each Licensed Product (or the Kit containing such Licensed
Product) that Licensee and its sublicensees sells and distributes shall
state that such Licensed Product is made and manufactured (or such Kit
contains Licensed Product that is made and manufactured) under a license
from Licensor using patents and technology owned by Licensor.
e. During the HIV Exclusive Period:
i. Licensor and its Affiliates shall not sell or distribute or otherwise
provide any Licensed Products to any person or entity (other than
Licensee and its sublicensees) who intends to directly or indirectly use
such Licensed Products for (or intends to directly or indirectly sell or
distribute or otherwise provide such Licensed Products for use in
connection with) any application involving a Kit that is related to HIV,
including, but not limited to, clinical trials, and Licensor and its
Affiliates shall require each person and entity (other than Licensee and
its sublicensees) to whom any Licensed Products are sold or distributed
or otherwise provided to acknowledge and agree (which agreement
shall be for the benefit of and be directly enforceable by Licensee) that
such Licensed Products shall not be directly or indirectly used for (or
directly or indirectly sold or distributed or otherwise provided for use
in connection with) any application involving a Kit that is related to
HIV; and
ii. Licensor and its Affiliates shall not grant any person or entity
(other than Licensee and its sublicensees) any license or other right
to use any Licensed Technology in connection with any application
involving a Kit that is related to HIV, including, but
not limited to, clinical trials;
provided, however, that Licensor may make and manufacture, have made and
manufactured, and sell and distribute Kits solely for use in the life
insurance industry during the HIV Exclusive Period.
f. Home Access acknowledges that SDS has heretofore granted rights to use
the Licensed Technology and/or sell and distribute Licensed Products to
Orgenics, Ltd., Fremont Novo Sciences, L.L.C., and R.C.R. Rinaldi as
described in Schedule A attached hereto, and the existence of the rights
described in Schedule A attached hereto shall not constitute or give rise
to a breach of this Agreement by Licensor.
g. Licensee shall be free to use the Licensed Technology for any Licensed
Application, either alone or in conjunction with any other technology,
invention or know how. Licensee shall not have any obligation of any kind
to use the Licensed Technology, to make or manufacture any Licensed Product,
to or have made or manufactured any Licensed Product, or to sell or
distribute Kits containing Licensed Products, and Licensee shall be free to
pursue and use any other technology, invention or know-how in lieu of the
Licensed Technology; provided, however, that, if Licensee should deliver to
Licensor, on or prior to December 8, 1996, a letter in the form of Exhibit 1
attached hereto, Licensee shall have the obligation to use the Licensed
Technology to the extent (but only to the extent) provided in such letter.
h. The License is irrevocable and noncancellable, and Licensor shall have
no right to terminate the License for any reason, including, but limited to,
any actual or alleged breach of this Agreement by Licensee or any of its
sublicensees.
3. Making and Manufacturing Licensed Products.
a. Licensee and its sublicensees will have the right and option to make and
manufacture Licensed Products:
i. Using the same suppliers, manufacturers and subcontractors that
Licensor and its Affiliates use to supply components for, assemble, make
and manufacture products that utilize the Licensed Technology; and/or
ii. Using suppliers, manufacturers and subcontractors other than the
suppliers, manufacturers and subcontractors that Licensor and its
Affiliates use to supply components for, assemble, make and manufacture
products that utilize the Licensed Technology; and/or
iii. By establishing its own facilities to supply components for,
assemble, make and manufacture Licensed Products;
provided, however, that (A) each third party that supplies components for,
assembles, makes or manufactures Licensed Products must agree to comply with
all applicable laws of the jurisdictions in which such third party operates
with respect to each Licensed Product that such third party supplies
components for, assembles, makes or manufactures, (B) each third party
that supplies components for, assembles, makes or manufactures Licensed
Products must agree to be bound by the provisions of Section 9 hereof, and
(C) if Licensee chooses to establish its own facilities to supply components
for, assemble, make and manufacture Licensed Products, (x) Licensee will bear
all costs associated therewith, (y) all Licensed Products must meet or
exceed Licensor's quality standards, and (z) Licensor will have the right to
inspect such facilities and receive samples of Licensed Products to confirm
that Licensed Products are meeting Licensor's quality standards. Licensor
and Licensee shall each notify the other party of the names and addresses of
the suppliers, manufacturers and subcontractors that such party and its
Affiliates may from time to time use to supply components for, assemble,
make and manufacture products that utilize the Licensed Technology.
b. Licensee will defend Licensor from and against any and all claims that
any Licensed Product that Licensee or any of its sublicensees makes and
manufactures, has made and manufactured, or sells and distributes fails to
comply with any applicable law of the jurisdictions in which Licensee or such
sublicensee operates, and Licensee will indemnify and hold harmless Licensor
from and against all attorneys' fees and other costs and expenses, judgments,
settlements and liabilities that Licensee or any of its sublicensees may
suffer or incur in connection with any such claim; provided, however, that
Licensee shall not have any obligation to indemnify Licensor with respect to
(A) any claim that is based upon, arises out of or results from any actual
or alleged defect in any Licensed Product (or component therefor) that is
made and manufactured by or purchased from Licensor or any of its Affiliates,
or (B) any claim that the use of the Licensed Technology for any Licensed
Application infringes, violates or conflicts with any patent, contract,
license or other right of any third-party, including, but not limited to
the rights to use the Licensed Technology and/or sell and
distribute Licensed Products that SDS has granted to Orgenics, Ltd., Fremont
Novo Sciences, L.L.C., and R.C.R. Rinaldi that are described in Schedule A
attached hereto,
4. Notice of Improvements and Developments, Etc.
a. Licensor will promptly notify Licensee of all improvements and
developments and other additions to the Licensed Technology, and Licensor
will provide Licensee and its sublicenses with any and all information
(including, but not limited to, product data, product specifications,
product drawings and manufacturing documents), assistance and cooperation
concerning the Licensed Technology that Licensee may from time to time
reasonably request to enable Licensee and its sublicensees to fully utilize
the Licensed Technology for the purposes contemplated by this Agreement.
If Licensee requests from Licensor information that is not already in
existence and is obtained by Licensor only after substantial time and effort
or a substantial expenditure, or if Licensee requests from Licensor
assistance or cooperation that requires substantial time and effort or a
substantial expenditure by Licensor, Licensee shall compensate Licensor for
providing such information or such assistance or cooperation, as the
case may be, by reimbursing Licensor for its reasonable cost of providing
such information, assistance and cooperation; provided, however, that:
i. Licensee shall have no obligation to compensate Licensor for providing
information, assistance or cooperation unless, at the time Licensee
requested such information, assistance or cooperation, Licensor (A)
advised Licensee that Licensee will be required to compensate Licensor
for providing such information, assistance or cooperation, and (B)
furnished Licensee with an estimate of the reasonable cost of
providing such information, assistance and cooperation; and
ii. Licensee shall not be required to pay Licensor compensation for
providing information, assistance or cooperation in an amount in excess
of the estimated cost of providing such information, assistance and
cooperation that was furnished to Licensee by Licensor at the time
Licensee requested such information, assistance or cooperation.
b. If there should be an actual or threatened breach of any of the
provisions of Section 4.a hereof, it is acknowledged that such breach will
cause irreparable injury which cannot be fully and adequately compensated
by recovery of monetary damages alone and injunctive relief shall be a
proper (but not exclusive) remedy in respect of such breach.
c. All know-how, product and manufacturing specifications, methods and
procedures, improvements, developments and inventions (collectively,
"Licensee Improvements") that Licensee, any of its sublicensees, or any of
its or their employees, consultants, contract developers, suppliers, agents
or representatives (other than Licensor) may develop, make or conceive,
whether or not related to the Licensed Technology, whether or not developed,
made or conceived using the Licensed Technology, whether or not patentable,
and whether developed, made or conceived alone or with a third party (other
than Licensor), shall, as between Licensor and Licensee, be the sole and
exclusive property of Licensee, and Licensor shall not have or acquire any
right, title, claim or interest in, or have any right or license to use,
any such Licensee Improvements. It is understood that nothing in this
Section 4.c is intended to or shall in any way affect Licensor's right,
title and interest in and to the Licensed Technology, and, as between
Licensor and Licensee, Licensor shall be and remain the sole and
exclusive owner of the Licensed Technology.
5. Consideration for License.
a. Subject to the provisions of Section 2.i hereof, as consideration for the
License, Licensee will pay to Licensor royalties based upon the number of
Licensed Products contained in Kits sold by Licensee and its sublicensees,
as follows:
First 1,000,000 Licensed Products .................. $0.25/Licensed Product
Second 1,000,000 Licensed Products ................. $0.15/Licensed Product
All Licensed Products in excess of 2,000,000 ....... $0.10/Licensed Product
provided, however, that:
i. No royalties shall be payable with respect to Kits sold to any
Affiliate (e.g., Kits sold by Home Access to one of its Affiliates), but
royalties shall be payable with respect to subsequent sales of such Kits
by such Affiliate;
ii. Royalties shall be payable with respect to Kits sold by Licensee to
any non-affiliated sublicensee, but no royalties shall thereafter be
payable with respect to subsequent sales of such Kits by such sublicensee;
iii. All royalties shall cease when the last United States patent
included in the Licensed Technology expires, lapses or is invalidated;
provided, however, that the occurrence of an event described in this
clause iii shall not excuse Licensee from paying royalties that were due
and owing at the time such event occurred.
iv. If there should be any claim that the use of the Licensed Technology
by Licensee or any of its sublicensees for any Licensed Application
infringes, violates or conflicts with any patent, contract, license or
other right of any third-party and such claim results in or gives rise
to a lawsuit or other legal or administrative proceeding, then, in lieu
of paying royalties to Licensor, Licensee may pay such royalties into an
escrow until such claim is resolved and all indemnification obligations
of Licensor with respect to such claim under the License Agreement have
been satisfied;
v. No royalties shall be payable in respect of any Kits containing
Licensed Products that are made or manufactured by or purchased from
Licensor;
vi. Although no royalties shall be payable in respect of Kits containing
Licensed Products that are made or manufactured by or purchased from
Licensor, if Licensee or any of its sublicensees should purchase any
Licensed Products from Licensor, then, for the purpose of determining
the amount of the royalty per Licensed Product that Licensee is required
to pay under this Section 5.a, any Licensed Products purchased from
Licensor by Licensee and its sublicensees shall reduce the number of
Licensed Products contained in Kits sold by Licensee and its sublicensees
before the amount of the royalty per Licensed Product is reduced. By way
of example: if Licensee purchases 1,500,000 OMNI-SAL saliva collection
devices from Licensor, uses the 1,500,000 OMNI-SAL saliva collection
devices in the first 1,500,000 Kits that are sold by Licensee, and then
sells an additional 1,000,000 Kits containing 1,000,000 OMNI-SAL saliva
collection devices that were neither made or manufactured by nor
purchased from Licensor, (A) as a result of purchasing 1,500,000 OMNI-SAL
saliva collection devices from Licensor, the royalty per Licensed
Product that Licensee would be required to pay to Licensor would be
$0.15/Licensed Product for the first 500,000 Licensed Products and then
decline to $0.10/Licensed Product for all Licensed Products in excess of
500,000, (B) Licensee would not be obligated to pay any royalties to
Licensor in respect of any first 1,500,000 Kits that were sold by
Licensee, and (C) Licensee would be required to pay royalties to Licensor
in the total amount of $125,000 in respect of the additional 1,000,000
Kits that were sold by Licensee [(500,000 x $.15) + ( 500,000 x $.10) =
$125,000].
vii. Unless Licensee delivers to Licensor, on or prior to December 8, 1996,
a letter in the form of Exhibit 1 attached hereto, the royalty per
Licensed Product that Licensee is required to pay to Licensor shall be
increased to the following amounts:
First 1,000,000 Licensed Products .............. $0.35/Licensed Product
Second 1,000,000 Licensed Products ............. $0.18/Licensed Product
All Licensed Products in excess of 2,000,000 ... $0.125/Licensed Product
provided, however, that any such increased royalty per Licensed Device
would be subject to the provisions of clauses i through vi of this proviso.
b. The amount of royalties to be paid to Licensor will be calculated
quarterly based upon Kits sold by Licensee and its sublicensees during each
calendar quarter. Royalties will be due and payable, in the case of Kits
sold by Licensee, 30 days after the end of the calendar quarter, and, in the
case of Kits sold by sublicensees, 60 days after the end of the calendar
quarter. Each royalty payment will be accompanied by a schedule certified by
an officer of Licensee setting forth, in reasonable detail, the manner in
which such royalty was calculated. Licensee will keep files and records
sufficient to enable royalties to be calculated and verified, and Licensor
will have the right to audit the files and records of Licensee to confirm
that the amount of royalties that Licensee is paying to Licensor is the
amount of royalties to which Licensor is entitled. If Licensee should fail
to pay Licensor any royalties when due and the amount of such royalties that
Licensee fails to pay to Licensor when due exceeds 5% of the total amount of
royalties that was due, Licensee shall reimburse Licensor for its actual
reasonable out-of-pocket costs in performing the audit, if any, that disclosed
such failure.
6. Sale of Licensed Products to Licensee by Licensor.
a. If requested by Licensee, Licensor shall sell Licensed Products to
Licensee at the following prices (filters not included in prices):
First 1,000,000 Licensed Products:
F.O.B. Singapore ............................ $1.12/Licensed Product
F.O.B. Vancouver, Washington ..... $1.25/Licensed Product
Second 1,000,000 Licensed Products:
F.O.B. Singapore ........................... $0.95/Licensed Product
F.O.B. Vancouver, Washington .... $1.05/Licensed Product
All Licensed Product s in excess of 2,000,000:
F.O.B. Singapore ........................... $0.80/Licensed Product
F.O.B. Vancouver, Washington .... $0.90/Licensed Product
provided, however, that (A) the prices at which and the other terms and
conditions under which Licensee may purchase Licensed Products from Licensor
are to be no less favorable to Licensee than the most favorable prices at
which and the most favorable terms and conditions under which any other
for-profit entity may purchase Licensed Products from Licensor or any
of its Affiliates at any time after the date of this Agreement in the same
or a lesser quantity than Licensee; (B) if, at any time after the date of
this Agreement, Licensor or any of its Affiliates should sell or offer to
sell any Licensed Products to any other for-profit entity at a
price per Licensed Product that is less than the price per Licensed Product
specified in this Section 6.a, Licensee shall, at its option, thereafter be
entitled to purchase Licensed Products from Licensor in the same or a
greater quantity than such other for-profit entity at a price per
Licensed Product the same as the most favorable price per Licensed Product
for any such other for-profit entity; (C) if Licensor and its Affiliates
should decide to permanently cease supplying, manufacturing and
subcontracting the manufacture of Licensed Products, Licensor
shall give Licensee not less than 90 days prior written notice of Licensor
and its Affiliates permanent cessation of supplying, manufacturing and
subcontracting the manufacture of Licensed Products, and Licensor shall
thereupon cease to have any obligation to sell Licensed Products to Licensee
(other than Licensed Products ordered prior to Licensee's receipt of such
notification from Licensor); (D) the prices set forth in this Section 6.a.
are subject to adjustment by Licensor after December 31, 2001 to reflect,
on a dollar-for-dollar basis, any increase in the costs incurred by Licensor
to supply, manufacture or subcontract the manufacture of Licensed Products,
as the case may be; and (E) the prices set forth in this Section 6.a apply
only to Licensed Products in the form in which Licensor and its Affiliates
currently supply, manufacture and subcontract the manufacture of Licensed
Products, and, if Licensee requests that Licensor sell Licensed Products in
a form that differs from the form in which Licensor and its Affiliates
currently supply, manufacture and subcontract the manufacture of Licensed
Products, as the case may be, the prices set forth in this Section 6.1
are subject to adjustment to reflect on a dollar-for-dollar basis, any
increase in costs incurred by Licensor and its Affiliates to supply,
manufacture or subcontract the manufacture of such Licensed Products, as the
case may be, in such different form. Licensee will have the right to
inspect the facilities at which Licensed Products which it may purchase from
Licensor are to be manufactured and to receive samples of Licensed Products
from Licensor to confirm that Licensed Products that Licensee purchases from
Licensor will conform to Licensee's quality standards. Payment for Licensed
Products that Licensee purchases from Licensor shall be made 50% at the time
the order is placed and 50% at the time the order is delivered, unless
Licensor or any of its Affiliates offers more favorable payment terms for
Licensed Products to any other for-profit entity, in which case, the payment
terms for Licensee for the same or a greater quantity than such other for-
profit entity shall be the same as the most favorable payment terms that
Licensor grants or offers to any such other for-profit entity.
b. Licensor shall promptly advise Licensee in writing if and whenever
Licensor should sell any Licensed Products to another for-profit entity at a
price per Licensed Product that is less than the price per Licensed Product
specified in this Section 6.a. Upon the request of Licensee,
Licensor shall furnish to Licensee the prices at which and the other terms
and conditions under which Licensed Products are being or have been sold to
other for-profit entities at any time after the date of this Agreement,
together with supporting documentation.
c. Licensee shall be free to resell for use in Licensed Applications
Licensed Products that it purchases from Licensor to such persons and
entities, at such prices, and on such terms and conditions as Licensee, in
its sole discretion, may from time to time determine.
7. Infringement of Third Party Rights.
a. SDS warrants and represents that:
i. Licensor is and will be the exclusive owner of the Licensed Technology;
ii. The use of the Licensed Technology by Licensee and its sublicensees
for Licensed Applications does not and will not infringe any patent,
contract, license or other right of any third-party; and
iii. Except for the rights to use the Licensed Technology and/or sell
and distribute Licensed Products that SDS has granted to Orgenics, Ltd.,
Fremont Novo Sciences, L.L.C., and R.C.R. Rinaldi that are described in
Schedule A attached hereto, Licensor has not granted any right or
license to any person to use the Licensed Technology for any application
that could include a Licensed Application.
b. Licensor will defend Licensee and its sublicensees from and against any
and all claims that the use of any of the Licensed Technology by Licensee or
any of its sublicensees for any Licensed Application infringes, violates or
conflicts with any patent, contract, license or other right of any
third-party, including, but not limited to the rights to use the Licensed
Technology and/or sell and distribute Licensed Products that SDS has granted
to Orgenics, Ltd., Fremont Novo Sciences, L.L.C., and R.C.R. Rinaldi that
are described in Schedule A attached hereto, and Licensor will indemnify and
hold harmless Licensee and its sublicensees from and against all attorneys'
fees and other costs and expenses, judgments, settlements and liabilities that
Licensee or any of its sublicensees may suffer or incur in connection with
any such claim to the extent (but only to this extent) such claim relates to
the use of the Licensed Technology for a Licensed Application. Licensee will
give Licensor prompt written notice of any claim asserted against Licensee or
any of its sublicensees that Licensee has determined will give use
to a right to indemnification under this Section 7.b.
c. Any royalties that are escrowed pursuant to clause iv of the proviso to
Section 5.a hereof will be used and applied to satisfy the indemnification
obligations of Licensor under Section 7.b hereof; provided, however, that
after all such indemnification obligations have been satisfied, any remaining
escrowed royalties will be paid to Licensor.
d. It is understood that Licensor shall have no liability or obligation for
any packaging, advertising or promotional materials that Licensee and its
sublicensees may use.
8. Licensor Confidential Information.
a. The Licensed Technology and other information and materials that Licensee
and its sublicensees may from time to time be furnished or to which Licensee
and its sublicensees may from time to time obtain access in connection with
this Agreement or the License may constitute or contain information that
Licensor considers to be confidential ("Licensor Confidential Information").
b. Unless and except to the extent authorized by Licensor, Licensee and its
sublicensees will treat Licensor Confidential Information as confidential
and will not disclose or make use of Licensor Confidential Information for
any purpose other than a purpose contemplated by this Agreement; provided,
however, that Licensee and its sublicensees may disclose and make
available Licensor Confidential Information, on a confidential basis, to
persons who have a reasonable need to know or have access to such information
and materials in order to enable Licensee and its subcontractors to fully
utilize the Licensed Technology for the purposes contemplated by this
Agreement.
c. The provisions of Section 8.b. hereof shall not apply to any information
or materials that:
i. Are not identified as being confidential the time the same are disclosed
or made available to Licensee by Licensor or within a period of 60 days
thereafter; or
ii. Are already known to or in the possession of Licensee at the time such
information or materials are first disclosed or made available to Licensee
by Licensor or are thereafter lawfully obtained by Licensee from a person
other than Licensor; or
iii. Are in the public domain or generally known in the relevant trade,
industry or business at the time such information or materials are first
disclosed or made available to Licensee by Licensor or thereafter come into
the public domain or become generally known in the relevant trade, industry
or business other than by reason of an improper disclosure or use of the same
by Licensee or any of its sublicensees; or
iv. Are obtained by Licensee independent of this Agreement and the License;
provided, however, that if any such information or materials are subject to
any other confidentiality requirements or use restrictions, the provisions
of Section 8.b hereof shall apply to such information and materials to the
extent and so long as (but only to the extent and so long as) such
information or materials remain subject to such other confidentiality
requirements or use restrictions. In addition, Licensee and its
sublicensees may disclose, make available and use Licensor Confidential
Information to the extent required to enable Licensee and its
sublicensees to comply with any law, rule or regulation or any subpoena,
order or directive of any court or governmental agency or body; provided,
however, that Licensee shall use reasonable efforts to give Licensor prior
notice of any such disclosure for the purpose of enabling Licensor to
obtain a protective order.
d. If there should be an actual or threatened breach of any of the
provisions of Section 8.b. hereof, it is acknowledged that such breach will
cause irreparable injury which cannot be fully and adequately compensated
by recovery of monetary damages alone and injunctive relief shall be a
proper (but not exclusive) remedy in respect of such breach.
9. Licensee Confidential Information.
a. The manufacturing and other processes that Licensor may observe during
facility inspections pursuant to clause (C) of the proviso to Section 3.a
hereof, the information concerning suppliers, manufacturers and
subcontractors that Licensee furnishes to Licensor pursuant to Section 3.a
hereof, the schedules that Licensee furnishes to Licensor pursuant to
Section 5.b hereof, the files and records of Licensee to which Licensor
may be given access pursuant to Section 5.b hereof, and other information
and materials that Licensor may from time to time be furnished or to which
Licensor may from time to time obtain access in connection with this
Agreement or the License may constitute or contain information that
Licensee or its sublicensees consider to be confidential ("Licensee
Confidential Information").
b. Unless and except to the extent authorized by Licensee, Licensor will
treat Licensee Confidential Information as confidential and will not
disclose or make use of Licensee Confidential Information for any purpose
other than a purpose contemplated by this Agreement.
c. The provisions of Section 9.b. hereof shall not apply to any information
or materials that:
i. Are not identified as being confidential at the time the same are
disclosed or made available to Licensor by Licensee or within a period
of 60 days thereafter; or
ii. Are already known to or in the possession of Licensor at the time
such information or materials are first disclosed or made available to
Licensor by Licensee or its sublicensees or are thereafter lawfully
obtained by Licensor from a person other than Licensee or its
sublicensees; or
iii. Are in the public domain or generally known in the relevant trade,
industry or business at the time such information or materials are first
disclosed or made available to Licensor by Licensee or its sublicensees
or thereafter come into the public domain or become generally known in
the relevant trade, industry or business other than by reason of an
improper disclosure or use of the same by Licensor; or
iv. Are obtained by Licensor independent of this Agreement and the
License;
provided, however, that if any such information or materials are subject to
any other confidentiality requirements or use restrictions, the provisions
of Section 9.b. hereof shall apply to such information and materials to the
extent and so long as (but only to the extent and so long as) such
information or materials remain subject to such other confidentiality
requirements or use restrictions. In addition, Licensor may disclose, make
available and use Licensee Confidential Information to the extent required
to enable Licensor to comply with any law, rule or regulation or any
subpoena, order or directive of any court or governmental agency or body;
provided, however, that Licensor shall use reasonable efforts to give
Licensee prior notice of any such disclosure for the purpose of enabling
Licensee and its sublicensees to obtain a protective order.
d. If there should be an actual or threatened breach of any of the
provisions of Section 9.b hereof, it is acknowledged that such breach will
cause irreparable injury which cannot be fully and adequately compensated
by recovery of monetary damages alone and injunctive relief shall
be a proper (but not exclusive) remedy in respect of such breach.
10. Miscellaneous.
a. Licensor and Licensee are independent of each other and their
relationship is solely as independent contractors. Neither party shall have
the authority to bind, commit or incur any liability on behalf of the other
party or to otherwise act in any way as an agent or representative
of the other party.
b. This Agreement and the Settlement Agreement embody the entire agreement
and understanding of the parties with respect to the subject matter hereof
and supersede any and all prior negotiations, discussions, agreements and
understandings, oral or written, between the parties with respect to any of
the subject matter hereof.
c. No amendment or modification of this Agreement, and no waiver or consent
with respect to this Agreement, shall be effective or enforceable against
any party unless and until the amendment, modification, waiver or consent is
set forth in an instrument or instruments in writing signed by such party.
d. No delay by either party in exercising any right or remedy shall operate
as a waiver of such right or remedy, and no waiver of any right or remedy by
either party shall operate to waive on behalf of such party any future
compliance with such right or any future exercise of such remedy or affect
any other right or remedy of such party.
e. The rights and remedies of the parties are cumulative, and the rights
and remedies granted to either party pursuant to this Agreement are not
exclusive of, but are in addition to, any and all other rights and remedies
that such party may have under any law, any other agreement, or otherwise.
f. The provisions of this Agreement are to be read, construed and
interpreted as a whole, according to their fair meaning and in a manner
consistent with the purposes of this Agreement, and shall not be read,
construed or interpreted strictly for or against either party. Whenever
possible, each provision of this Agreement shall be interpreted in such
manner as to be valid, effective and enforceable pursuant to applicable law.
If any provision of this Agreement is held to be prohibited by or invalid
pursuant to any law, such provision shall be ineffective only to the extent
of the prohibition or invalidity, without invalidating the remaining
provisions of this Agreement, and the invalidity, ineffectiveness or
unenforceability of any provision of this Agreement in any jurisdiction
or as to any party shall not render or make such provision invalid,
ineffective or unenforceable in any other jurisdiction or as to the other
party.
g. The captions and headings on the Sections of this Agreement are for
purposes of convenience only and are not intended to affect the
interpretation of this Agreement or limit or restrict the meaning of any
defined term used in this Agreement.
h. If any action, suit or proceeding is instituted by either party against
the other party alleging any breach or default under this Agreement or is
otherwise brought to enforce, interpret, challenge or invalidate any of the
provisions of this Agreement, the prevailing party in such action, suit or
proceeding shall be entitled to recover from the losing party in such
action, suit or proceeding, all reasonable attorneys' fees, costs and
disbursements of such prevailing party in connection with such action,
suit or proceeding in addition to any other damages or relief to which the
such prevailing party may be entitled.
i. This Agreement may be executed in more than one counterpart. No
counterpart need contain the signature of more than one party, but the
counterparts must collectively contain the signatures of both SDS and
Home Access, and all the counterparts, taken together, shall constitute
one and the same agreement.
j. All questions concerning the validity, construction and interpretation
of this Agreement and the License and the rights, liabilities and
obligations of the parties in connection with this Agreement or the License
that are not governed by the federal Laws of the United States shall
be governed by the internal laws (other than the law of conflicts) of the
State of Illinois.
k. This Agreement shall be binding upon and enforceable against, and inure
to the benefit of, SDS and its successors and assigns and Home Access and
its successors and assigns. The License and the obligations of Licensor
related thereto shall be binding upon and enforceable against any person
that acquires any right, title, claim or interest in or to any of the
Licensed Technology, and prior to selling, assigning, transferring or
granting any person any right, title, claim or interest in or to any of
the Licensed Technology, Licensor will require such person to agree to be
bound by and comply with the provisions of this Agreement applicable to
Licensor with respect to all right, title, claim and interest that such
person acquires in the Licensed Technology, and Licensor will furnish a
copy of such agreement to Licensee. This Agreement and the License and
the rights and obligations of Licensee related to this Agreement and the
License shall be freely assignable and transferable by Licensee; provided,
however, that (i) the assignment of this Agreement and the License by
Licensee shall not relieve or release Licensee from paying royalties that
were due and owing at the time of such assignment, and (ii) Licensee may not
assign and transfer its rights separate from its obligations under this
Agreement. Each party shall give the other party prompt notice of any
assignment or transfer of this Agreement or the License or any of such
party's rights and obligations related to this Agreement. Each party
shall be liable to the other party for any breach of this Agreement by any
of its Affiliates.
l. Before either party shall institute any action, suit or proceeding
against the other party with respect to any matter concerning this Agreement
or the License and before Licensor shall terminate this Agreement pursuant
to Section 2.h hereof, the parties shall first attempt to resolve their
differences by non-binding mediation (using Dina R. Jansenson as a mediator
or, if she is unavailable or unwilling to serve as a mediator, using another
mediator acceptable to both parties); provided, however, that (A) either
party shall have the right to institute an action, suit or proceeding
against the other party if their differences have not be resolved within a
period of 45 days, and (B) the provisions of this Section 10.l shall not
apply to differences between the parties concerning Section 4.a, 8 or 9
hereof, and either party shall be free to bring an action for injunctive
relief at any time to remedy or prevent a breach of and/or to compel
compliance with Section 4.a, 8 or 9 hereof.
m. In the event either party should fail to pay any amount to the other
party when due, the party entitled to receive such amount shall be entitled
to receive interest on such amount from the date due until the date paid
at the rate of 2% over the "prime rate" as announced from time to time by
Citibank, changing as and when such announced "prime rate" changes.
* * * * * * * * * *
SALIVA DIAGNOSTIC SYSTEMS, INC.
By: __________________________
Title: ________________________
Date: September ___, 1996
HOME ACCESS HEALTH CORPORATION
f/k/a Anonymous Test Services, Inc.
By: __________________________
Title: ________________________
Date: September ___, 1996
C:\OFFICE\WPWIN\WPDOCS\REGSTMT.
<PAGE>
SCHEDULE A
to
LICENSE AGREEMENT
Orgenics, Ltd. has been granted a non-exclusive license to make and have
made diagnostic and OMNI-SAL products incorporating the Licensed Technology
and to use, sell or lease such diagnostic products throughout the world.
Fremont Novo Sciences, L.L.C. has been granted (i) an exclusive license
to distribute OMNI-SAL saliva collection devices in India until February
2005, and (ii) an exclusive license to manufacture OMNI-SAL saliva
collection devices in India for distribution in India until February 2005.
R.C.R. Rinaldi has been granted an exclusive right to distribute OMNI-SAL
saliva collection devices purchased from SDS for resale in Brazil until
September 2001.
<PAGE>
EXHIBIT 1
to
LICENSE AGREEMENT
_________________, 1996
SALIVA DIAGNOSTIC SYSTEMS, INC.
11719 NE 95th Street, Suite G
Vancouver, WA 98682
Reference is made to the License Agreement made and entered into as of
September 9, 1996 between you and us. Terms used in this letter that are
defined in the License Agreement shall have the meanings assigned to such
terms in the License Agreement.
We hereby advise you that, if Home Access applies to the FDA for approval of
a saliva-based HIV test product, Home Access will include saliva collection
devices that utilize the Licensed Technology in its application to the FDA:
provided, however, that Home Access shall have no obligation to include
saliva collection devices that utilize the Licensed Technology in its
application to the FDA if any of the following events should occur:
A. Any of the warranties and representations made by SDS in Section 7.a
of the License Agreement should be or become untrue or inaccurate; or
B. Licensor should not fully perform or comply with any of its covenants,
agreements and undertakings contained in the License Agreement; or
C. The License should be terminated;
D. The FDA should reject the application, and, after rejection by the
FDA, Home Access should elect to abandon the application; or
E. Home Access should notify Licensor in writing that it no longer
intends to use the Licensed Technology in its saliva-based HIV test
product.
We also hereby agree that, if the FDA should reject the application, and,
after rejection by the FDA, Home Access should elect to abandon the
application, or if Home Access should notify Licensor in writing that it no
longer intends to use the Licensed Technology in its saliva-based HIV test
product, the HIV Exclusive Period shall end and the License shall
become non-exclusive for all Licensed Applications, including HIV Licensed
Applications.
HOME ACCESS HEALTH CORPORATION
By: ___________________________
Its ___________________,
<PAGE>
Exhibit 5
Kalin & Banner
757 Third Avenue
New York, New York 10017
October 9, 1996
Saliva Diagnostic Systems, Inc.
11719 NE 95th Street
Vancouver, WA 98682
Gentlemen:
We have examined a copy of the Saliva Diagnostic Systems,
Inc. (the "Company") Certificate of Incorporation and By-Laws, as
amended, and the Certificate and Articles of Merger of the
Company, the minutes of various meetings of the Board of
Directors and stockholders, the Registration Statement on Form S-1, together
with all amendments thereto, the exhibits filed in
connection therewith, and form of Prospectus contained therein
(Registration No. 33-46648) (the "Registration Statement") filed
by the Company with the Securities and Exchange Commission, and
the original or certified copies of such records of the Company
and such agreements, certificates of public officials,
certificates of officers and representatives of the Company and
others, opinions of counsel, documents, papers, statutes and
authorities as we deem necessary as a basis for the opinions
hereinafter set forth. In such examinations we have assumed the
genuineness of all signatures and the conformity to original
documents of all copies submitted to us as certified or photostat
copies.
Based upon the foregoing, we are of the opinion that:
The 1,380,000 shares of Common Stock issuable upon exercise
of the warrants dated March 11, 1993 (the "Warrants"), when issued, and paid
for in accordance with the terms of the Warrants, will be legally issued,
fully paid and non-assessable shares of Common Stock.
We hereby consent to your filing of this opinion as an
exhibit to the Registration Statement and to the filing
of this opinion with applications as may be necessary or
advisable to register, qualify or establish eligibility for an
exemption from registration or qualification of the securities
under the blue sky laws of any state or other jurisdiction. We
also consent to the reference to our name under the caption
"Legal Matters" in the Prospectus contained in the Registration
Statement.
Very truly yours,
KALIN & BANNER
By:
Exhibit 24.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Saliva Diagnostic Systems,
Inc. Form S-1 (Registration Statement No. 33-46648) Amendment
No.1 of our report dated March 29, 1996 related to the Financial
Statements of Saliva Diagnostic Systems, Inc. which appears in
such Registration Statement. We also consent to the reference to
us under the heading "Experts" in such Registration Statement.
Hollander, Gilbert & Co.
Los Angeles, California
October 8, 1996
</TABLE>
