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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number : 0-21284
SALIVA DIAGNOSTIC SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 91-1549305
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
11719 NE 95TH STREET
VANCOUVER, WA 98682
(Address of principal executive offices and zip code)
(360) 696-4800
(Issuer's telephone number including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days:
Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock as of May 8,
1997 was 22,040,785 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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SALIVA DIAGNOSTIC SYSTEMS, INC.
FORM 10-QSB
INDEX
PART I FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheets -March 31, 1997
and December 31, 1996 2
Consolidated Statements of Operations -Three Months
Ended March 31, 1997 and 1996 3
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II OTHER INFORMATION
Item 2. Changes in Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 6. Exhibits and Reports on Form 8-K 9
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SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 1997 December 31, 1996
-------------- -----------------
ASSETS
Current assets:
Cash $ 1,393,237 $ 776,380
Accounts receivable 41,793 178,436
Inventories 275,735 268,431
Prepaid expenses 38,137 34,425
------------- ----------------
Total current assets 1,748,902 1,257,672
Property and equipment, less accumulated
depreciation of $851,573 and $792,309 451,078 493,649
Deferred financing costs, less accumulated
amortization of $5,200 114,800 --
Deposits 197,312 188,647
Restricted cash 120,500 120,500
Patents and trademarks, less accumulated
amortization of $41,481 and $39,183 115,435 117,733
------------- ----------------
$ 2,748,027 $ 2,178,201
------------- ----------------
------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,075,080 $ 818,073
Accrued interest payable 74,802 68,240
Current portion of long-term debt and
obligations under capital leases 31,812 35,057
------------- ----------------
Total current liabilities 1,181,694 921,370
7.5% Convertible debentures, due 1999, less
discount 1,125,000 --
Long-term debt and obligations under capital
leases, net of current portion 91,068 96,199
------------- ----------------
Total liabilities 2,397,762 1,017,569
Stockholders' equity:
Common stock , $.01 par value, 33,000,000
shares authorized, 22,040,785 shares
issued and outstanding 220,408 220,408
Additional paid-in capital 23,373,552 22,998,552
Note receivable from shareholder for stock (83,825) (83,825)
Cumulative foreign translation adjustment (70,723) (60,257)
Accumulated deficit (23,089,147) (21,914,246)
------------- ----------------
Total stockholders' equity 350,265 1,160,632
------------- ----------------
$ 2,748,027 $ 2,178,201
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------------- ----------------
The accompanying notes are an integral part of these balance sheets.
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SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
March 31,
------------------------------
1997 1996
------------ ------------
Revenues:
Product sales $ 227,034 $ 171,379
Technology license income -- 22,342
------------ -----------
Cost of sales 227,034 193,721
Gross profit
Costs and expenses:
Cost of products sold 259,641 120,510
Research and development expense 194,712 257,587
Selling, general and administrative
expense 953,913 751,192
------------ -----------
Loss from operations (1,181,232) (935,568)
Interest income 5,679 --
Interest expense (8,578) (69,023)
Other income 9,230 --
------------ -----------
Net loss $ (1,174,901) $(1,004,591)
------------ -----------
------------ -----------
Net loss per share $ (0.05) $ (0.07)
------------ -----------
------------ -----------
Shares used in per share calculations 22,040,784 15,039,334
------------ -----------
------------ -----------
The accompanying notes are an integral part of these financial statements.
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SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,174,901) $ (1,004,591)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Cumulative foreign translation adjustment (10,466) (5,138)
Depreciation and amortization 69,053 114,590
Shares issued in lieu of fees and expenses -- 11,592
Changes in current assets and liabilities:
Accounts receivable 136,643 (72,773)
Inventories (7,304) (28,893)
Prepaid expenses and deposits (12,377) 6,592
Accounts payable and accrued expenses 263,569 33,216
------------ ------------
Net cash used in operating activities (735,783) (945,045)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to patents and trademarks -- (134)
Additions to property and equipment (18,984) (87,653)
Other assets -- (3,003)
------------ ------------
Net cash used in investing activities (18,984) (90,790)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible debentures, net of issuance costs 1,380,000 --
Notes payable and interim financing, net (25,000)
Repayment of long term debt and capital lease obligations (8,376) (5,368)
Exercise of common stock purchase warrants 90,000
------------ ------------
Net cash provided by financing activities 1,371,624 59,632
------------ ------------
Net increase (decrease) in cash and cash equivalents 616,857 (976,203)
Cash and cash equivalents, beginning of period 776,380 2,688,014
------------ ------------
Cash and cash equivalents, end of period $ 1,393,237 $ 1,711,811
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 8,578 $ 69,023
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Shares issued in lieu of fees and expenses $ -- $ 11,952
Conversion of debentures into common shares -- 2,760,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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SALIVA DIAGNOSTIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements as of and for the
three month periods ended March 31, 1997 and 1996 have been prepared in
conformity with generally accepted accounting principles. The financial
information as of December 31, 1996 is derived from Saliva Diagnostic Systems,
Inc. (the "Company") consolidated financial statements included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1996. Certain
information or footnote disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
accompanying consolidated financial statements include all adjustments necessary
(which are of a normal and recurring nature) for the fair presentation of the
results of the interim periods presented. The accompanying consolidated
financial statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 1996, as included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1996.
Operating results for the three month period ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending December 31, 1997, or any other portion thereof.
2. RECLASSIFICATIONS
Certain reclassifications have been made to the March 31, 1996 statement of
operations to conform with the 1997 presentation. These reclassifications had no
effect on the results of operations in any periods presented.
3. INVENTORIES
Inventories are stated at the lower of cost or market determined on a first-
in, first-out (FIFO) basis, and consist of the following:
March 31, December 31,
1997 1996
---------- ------------
Raw materials $ 152,879 $ 253,000
Work in process 16,760 2,495
Finished goods 106,096 12,936
---------- ----------
$ 275,735 $ 268,431
---------- ----------
---------- ----------
4. CONTINGENCIES
As discussed in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996 ("Form 10-KSB") , in January 1997, a lawsuit was filed by the
former President of the Company, who resigned in December 1996. The complaint in
the lawsuit alleged various breach of contract claims. This lawsuit was recently
dismissed without prejudice as a prerequisite to a settlement agreement between
the former President and the Company currently in the process of being
documented.
As also discussed in the Company's Form 10-KSB, a former director and officer
of the Company filed a complaint in Federal court listing several causes of
action against the Company and the individual defendants,
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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. Discovery
has been completed and a motion to dismiss various aspects of the complaint, and
all claims against the individual defendants, is now pending.
5. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128") and Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129"), which are effective for
fiscal years ending after December 15, 1997. The Company believes the
implementation of these statements will not have a material effect on its
results of operations or financial statement disclosures.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Since its founding, the Company has been engaged almost exclusively in
research and development activities focused on the development, manufacturing
and marketing of rapid in vitro assays for use in the detection of infectious
diseases and other conditions, proprietary specimen collection devices and other
diagnostic devices..
The Company has incurred significant operating losses since its inception,
resulting in an accumulated deficit of $23,089,147 at March 31, 1997. Such
losses are expected to continue through 1997. There can be no assurance that the
Company will achieve or maintain profitability in the future. The Company's
significant operating losses and significant capital requirements raise
substantial doubt about the Company's ability to continue as a going concern.
RESULTS OF OPERATIONS
FIRST QUARTER OF 1997 COMPARED TO FIRST QUARTER OF 1996
REVENUES. The Company's revenues consist primarily of product sales and
license revenue. Revenues from product sales increased 33% to $227,000 in the
first quarter of 1997 from $171,400 in the first quarter of 1996. The increase
in product sales revenue was primarily attributable to first time sales in Japan
and sales in Russia of the Company's Hema-Strip product. License revenue
decreased to $0 in the first quarter of 1997 from $22,300 in the first quarter
of 1996, as there were no revenues received under license agreements in the
first quarter of 1997.
In 1996, the Company began to design and build equipment for automated
production of its rapid tests at its Vancouver, Washington facility in the
United States. The Company now believes such equipment will be fully installed
and functioning by late 1997. The Company is required to meet certain
conditions, including compliance with Food and Drug Administration requirements
(such as good manufacturing practices), in order to manufacture its tests at its
Vancouver facility and to export its products from there. The Company is
currently addressing compliance with those requirements.
The Company has limited marketing resources. Achieving market acceptance will
require substantial marketing efforts and capabilities. The Company relies in
large part on forming partnerships with other companies for marketing and
distribution of its products. There can be no assurance that the Company will
form alliances with potential distributors or that these distributors will be
successful in promoting the Company's products.
6
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COST OF PRODUCTS SOLD. Costs of products sold increased to $259,600 (114%
of product sales) in the first quarter of 1997 from $120,500 (70% of product
sales) in the first quarter of 1996. Costs of products sold increased as a
percentage of product sales due to increased manufacturing overhead, larger
square footage of manufacturing facilities and an increase in the number of
manufacturing personnel.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased
24% to $194,700 in the first quarter of 1997 from $257,600 in the first quarter
of 1996, primarily as a result of reduced payroll and related expenses.
Additionally, in the first quarter of 1996, there were clinical studies being
performed in Mexico City, which, due to budget constraints, were curtailed in
the first quarter of 1997.
Many of the Company's competitors are more established and have significantly
greater financial and technological resources than the Company. In the
biotechnology industry technological change and obsolescence are rapid and
frequent. There can be no assurance that the Company can keep pace with such
changes or avoid product obsolescence.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 27% to $954,000 in the first quarter of 1997
from $751,200 in the first quarter of 1996, primarily as a result of increased
legal fees related to litigation matters, and increased accounting and legal
fees related to various securities filings.
INTEREST EXPENSE AND LOAN FEES. Interest expense decreased to $8,600 in the
first quarter of 1997 from $69,000 in the first quarter of 1996. In the first
quarter of 1996, interest was accrued on certain convertible debentures, whereas
in the first quarter of 1997, convertible debentures were only outstanding for a
limited time during the quarter.
INCOME TAXES. The Company is in a net deferred tax asset position and has
generated net operating losses to date. Accordingly, no provision for or benefit
from income taxes has been recorded in the accompanying statements of
operations. The Company will continue to provide a valuation allowance for its
deferred tax assets until it becomes more likely than not, in management's
assessment, that the Company's deferred tax assets will be realized.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its capital requirements through
proceeds from its public offering of stock in March 1993 and the exercise of
common stock purchase warrants pursuant to such offering, proceeds from sales of
convertible debentures in 1992 through 1995 and in 1997, proceeds from private
placements of common stock in 1994 and 1995, and the exercise of common stock
purchase warrants and stock options in 1996.
Cash used in operating activities in the first quarter of 1997 was
$735,800. This was primarily a result of a net loss of $1,175,000, and
adjustments for depreciation and amortization, as well as a decrease in accounts
receivable and an increase in accounts payable and accrued expenses, primarily
the result of timing.
Cash used in investing activities in the first quarter of 1997 was
$19,000, which represented the purchase of manufacturing equipment. The Company
has no material commitments for capital expenditures at March 31, 1997.
Cash provided by financing activities in 1996 was $1,371,600. This was
primarily a result of net proceeds of $1,380,000 from the sale of convertible
debentures.
In March 1997, the Company raised net proceeds of approximately $1,380,000
(net of issuance costs of $120,000) from the private sale, to an accredited
investor, of 7.5% convertible debentures, due February 28, 1999 (the
"Debentures"), pursuant to a Rule 506 Regulation D offering on terms as
specified in the Debentures. Holders of the Debentures have the right to
convert up to (i) 33 1/3% of the debentures at any time from and after the
90th day following the date of the Debentures, (ii) 66 2/3% of the debentures
at any time from and after the 120th day
7
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following the date of the Debentures and (iii) 100% of the debentures at any
time from and after the 150th day following the date of the Debentures. The
number of shares of the Company's common stock issuable upon conversion is
defined in the Agreement as the lesser of 115% of Company's common stock
market price at issuance of the Debenture (i.e. $1.9191 per share) or 80% of the
Company's common stock market price at conversion of the Debenture. In the event
the current market price of the Company's common stock falls below $0.70 per
share, the Company may at its option, redeem all or part of the Debentures for
125% of the principal amount of the Debenture plus all accrued and unpaid
interest thereon. A discount was recorded at the date of issuance of the
Debentures, resulting from an allocation of proceeds to the beneficial
conversion feature. The discount will be amortized to interest expense over
the conversion period. Financing costs related to these Debentures are
deferred and amortized, using the effective interest method, over the term of
the Debentures.
The Company's capital requirements have been and will continue to be
significant. The Company's capital base is smaller than that of many of its
competitors, and there can be no assurance that the Company's cash resources
will be able to sustain its business. The Company currently has an accumulated
deficit due to its history of losses. The Company is dependent upon its effort
to raise capital to finance its future operations, including the cost of
manufacturing and marketing of its products, to conduct clinical trials and
submissions for FDA approval of its products and to continue the design and
development of its new products. Marketing, manufacturing and clinical testing
may require capital resources substantially greater than the resources available
to the Company. The Company will continue to seek public or private placement of
its equity and debt securities and corporate partners to develop products.
The Company's future capital needs will depend upon numerous factors,
including the progress of the approval for sale of the Company's products in
various countries, including the United States, the extent and timing of the
acceptance of the Company's products, the cost of marketing and manufacturing
activities and the amount of revenues generated from operations, none of which
can be predicted with certainty.
If the Company should continue to experience losses from operations, it may be
unable to maintain the standards for continued quotation on Nasdaq and the
common stock could be subject to removal from the Nasdaq system. Trading, if
any, in the common stock would thereafter be conducted in the over-the-counter
market on an electronic bulletin board established for securities that do not
meet the Nasdaq listing requirements or in what are commonly referred to as the
"pink sheets". As a result, an investor would find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, the Company's
securities. In addition, if the Company's securities were removed from the
Nasdaq system, they would be subject to so-called "penny stock" rules that
impose additional sales practice requirements on broker-dealers who sell such
securities. Consequently, removal from the Nasdaq system, if it were to occur,
could affect the ability or willingness of broker-dealers to sell the Company's
securities and the ability of purchasers of the Company's securities to sell
their securities in the secondary market.
8
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) On March 11, 1997, the Company raised net proceeds of approximately
$1,380,000 from the private sale of a total of $1,500,000 of convertible
debentures to an accredited investor, pursuant to a Rule 506 Regulation D
offering. See "Management's Discussion and Analysis or Plan of Operation -
Liquidity and Capital Resources" for additional information about the
convertible debentures.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the shareholders of the Company was held on February 20,
1997. The following matter was submitted to the Company's shareholders for their
consideration:
Approval of an amendment to the Company's Certificate of
Incorporation to increase the authorized number of shares of stock
from 25,000,000 shares to 33,000,000 shares, an increase of 8,000,000
shares, all of which shares shall be Common Stock, par value $.01 per
share. On this matter, 17,518,615 votes were cast for, and 1,127,123
votes were cast against the increase in authorized shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this report are listed below:
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation, as amended, incorporated by
reference to Exhibits 2.1 through 2.6 of the Company's
Registration Statement No. 33-46648 filed on Form S-1 (the
Form 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;
and to Exhibit 2.2 of the Company's Annual Report on Form
10-KSB for its fiscal year ended December 31, 1996.
3.2 Company's By-laws, incorporated by reference to Exhibit 3.1
of the Form S-1.
4 7.5% Convertible Debenture Due February 28, 1999, dated
March 11, 1997. *
27 Financial Data Schedule *
* Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
1997.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 15, 1997
SALIVA DIAGNOSTIC SYSTEMS, INC.
By: /s/ KENNETH J. McLACHLAN
--------------------
Kenneth J. McLachlan
President and Chief Executive Officer and Director
(Principal Executive Officer)
(Principal Financial Officer)
<PAGE>
EXHIBIT 4
THE SECURITIES REPRESENTED HEREBY ARE RESTRICTED SECURITIES WITHIN THE
MEANING OF THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH SUCH
ACT AND THE RULES AND REGULATIONS THEREUNDER AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS. THE ISSUER OF THESE SECURITIES WILL NOT
TRANSFER SUCH SECURITIES EXCEPT UPON RECEIPT OF EVIDENCE SATISFACTORY TO THE
ISSUER THAT THE REGISTRATION PROVISIONS OF SUCH ACT HAVE BEEN COMPLIED WITH
OR THAT SUCH REGISTRATION IS NOT REQUIRED AND THAT SUCH TRANSFER WILL NOT
VIOLATE ANY APPLICABLE STATE SECURITIES LAWS.
7.5% CONVERTIBLE DEBENTURE DUE FEBRUARY 28, 1999
$100,000 March 11, 1997
FOR VALUE RECEIVED, SALIVA DIAGNOSTIC SYSTEMS, INC., a Delaware
corporation (the "Company"), hereby promises to pay to the order of The Tail
Wind Fund Ltd., or its registered assigns (the "Holder") on February 28, 1999
(the "Maturity Date"), the principal amount of One Hundred Thousand Dollars
($100,000) and to pay interest on the principal amount hereof, in such
amounts, at such times and on such terms and conditions as are specified
herein. This Debenture (the "Debenture") has been issued pursuant to that
certain Convertible Securities Subscription Agreement executed between the
Holder and the Company, dated March 11, 1997 (the "Agreement").
ARTICLE 1. INTEREST.
The Company shall pay interest on the unpaid principal amount of this
Debenture at the rate equal to Seven and One-half Percent (7.5%) per year,
compounded annually, payable upon conversion or redemption of the Debenture
as set forth below, until the principal hereof is paid in full or has been
converted. Interest shall be payable, at the option of the Company, in cash
or by issuing such number of additional shares of common stock of the
Company, par value $.01 per share (the "Common Stock"), as is determined by
dividing the total dollar amount of interest due and payable by the Current
Market Price (as defined in SECTION 3.7 below) of the Common Stock on the
date of such interest payment. All Common Stock issued as interest in
respect of the Debenture will be, when so issued, duly authorized, validly
issued, fully paid and non-assessable and free of all liens and charges.
Interest on this Debenture shall accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from March 11, 1997.
Interest shall be computed on the basis of a 360-day year of twelve 30-day
months.
ARTICLE 2. METHOD OF PAYMENT.
This Debenture must be surrendered to the Company in order for the
Holder to receive payment of the principal amount hereof. The Company shall
pay the principal of and interest on this Debenture in United States dollars.
Interest and principal payments shall be subject to withholding (if any)
under applicable United States Federal Internal Revenue Service Regulations.
<PAGE>
ARTICLE 3. CONVERSION.
SECTION 3.1. CONVERSION PRIVILEGE
(a) The Holder of this Debenture shall have the right, exercisable at
one or more times, at its option, to convert up to (i) Thirty-Three and
One-Third percent (33 1/3%) of the Debentures originally issued to the Holder
at any time from and after the ninetieth (90th) day following the date of the
Debentures, (ii) up to an aggregate of Sixty-Six and Two-Thirds percent (66
2/3%) of the Debentures originally issued to the Holder at any time from and
after the one hundred twentieth (120th) day following the date of the
Debentures, and (iii) One Hundred percent (100%) of the Debentures originally
issued to the Holder at any time from and after the one hundred fiftieth
(150th) day following the date of the Debentures. The number of shares of
Common Stock issuable upon the conversion of this Debenture is determined by
dividing the principal amount hereof to be converted by the Conversion Price
(as defined in paragraph (b) of this SECTION 3.1 below) in effect on the
Conversion Date (as defined below) and rounding the result to the nearest
1/100th of a share. Upon conversion, all accrued and unpaid interest on the
amount so converted will be paid to the Holder in cash or Common Stock, as
specified in ARTICLE 1 above. Less than all of the principal amount of this
Debenture may be converted into Common Stock if the portion converted is
$1,000 or a whole multiple of $1,000, and the provisions of this ARTICLE 3
that apply to the conversion of this Debenture also apply to the conversion
of a portion of it.
(b) Subject to ARTICLE 5 below, the Conversion Price (defined below)
shall be the LESSER of (i) the Current Market Price as of the date of
issuance of the Debenture MULTIPLIED BY 115% (the "Fixed Conversion Price"),
or (ii) the product of the Current Market Price with respect to the
applicable conversion date MULTIPLIED BY 80% (the "Floating Conversion
Price"). The applicable price shall be referred to herein as the "Conversion
Price."
(c) Notwithstanding anything contained herein to the contrary, if the
Company would be obligated to issue, upon conversion of this Debenture, more
than that aggregate number of shares of Common Stock equal to 20% of the
Company's outstanding Common Stock as of March 11, 1997 (the "Maximum Number
of Shares of Common Stock"), then the Company may in its sole discretion
redeem out of funds legally available therefor such amount of this Debenture,
for the price set forth in Article 4(a) until the number of shares of Common
Stock previously issued and outstanding and issuable upon conversion of this
Debenture is equal to the Maximum Number of Shares of Common Stock (the
"Dilution Redemption"). The Company shall pay in full the applicable
redemption amount by wire transfer within five business days of the Company's
notice of its election to effect a redemption under this SECTION 3.1(c).
Until such payment, the Company shall comply with all terms, conditions and
covenants of this Debenture. Nothing herein shall affect the Company's
obligation to convert this Debenture upon presentation for conversion by the
Holder, except that the Company may, following its notice of its election to
redeem, convert only such portion of the Debentures as it shall have elected
not to redeem.
(d) Subject to the provisions of SECTION 3.1(c), in the event any, or any
portion of this, Debenture remains outstanding on the second anniversary of the
date hereof, the unconverted portion of this Debenture will automatically be
converted into Common Stock on such date in the manner set forth in this SECTION
3.1; provided (i) an Event of Default does not then exist under this Debenture
and (ii) a registration statement as contemplated by ARTICLE 4 of the Agreement
is effective with respect to the sale by the Holder of Common Stock issuable
upon conversion of this Debenture.
SECTION 3.2. CONVERSION PROCEDURE. To convert this Debenture into Common
Stock the Holder must (a) complete and sign the Notice of Conversion attached
hereto and (b) surrender the Debenture to
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the Company. Except as otherwise provided herein, the date upon which the
Company receives the completed Notice of Conversion (by recognized overnight
courier, hand-delivery, facsimile or otherwise) is the Conversion Date,
provided that the Company shall not be required to deliver a certificate for
shares of Common Stock unless and until the Company receives the original
Debenture. Within three (3) business days after receipt of the Notice of
Conversion as aforesaid, provided the Company has received the original
Debenture from the Holder, the Company shall deliver a certificate with a
restrictive legend as specified in the Agreement for the number of full
shares of Common Stock issuable upon the conversion and a check for any
fraction of a share. The person in whose name the certificate representing
shares of Common Stock is to be registered shall be treated as a stockholder
of record on and after the Conversion Date. Upon conversion, unpaid interest
on the Debenture shall be paid in cash or Common Stock by the Company as set
forth in Section 1 above. If one person converts more than one Debenture at
the same time, the number of full shares issuable upon the conversion shall
be based on the total principal amount of Debentures converted. Upon
surrender of a Debenture that is to be converted in part, the Company shall
issue to the Holder a new Debenture equal in principal amount to the
unconverted portion of the Debenture surrendered. Notwithstanding the
foregoing, the conversion right of the Holder set forth herein shall be
limited, solely to the extent required, from time to time, such that in no
instance shall the maximum number of shares of Common Stock into which the
Holder may convert this Debenture, at any one time, exceed an amount equal to
(i) 4.9999% of the then issued and outstanding shares of Common Stock of the
Company following such conversion (such percentage to be calculated in
accordance with Rule 13d-3, promulgated under the Securities Exchange Act of
1934), minus (ii) the number of shares of Common Stock of the Company then
held by the Holder.
SECTION 3.3. FRACTIONAL SHARES. The Company shall not issue any
fractional shares of Common Stock upon the conversion of this Debenture.
Instead, the Company shall pay in lieu of any fractional shares the cash value
thereof at the then Current Market Price of the Common Stock as determined under
SECTION 3.7 below.
SECTION 3.4. TAXES ON CONVERSION. The Company shall pay any documentary,
stamp or similar issue or transfer tax due on the issue of Common Stock upon the
conversion of this Debenture. However, the Holder shall pay any such tax which
is due because such shares are issued in a name other than its name.
SECTION 3.5. COMPANY TO RESERVE STOCK. The Company shall reserve out of
its authorized but unissued Common Stock enough shares of Common Stock to permit
the conversion in full of this Debenture. All shares of Common Stock issuable
upon the conversion hereof shall be, when issued in accordance herewith, duly
authorized, validly issued, fully-paid and nonassessable.
SECTION 3.6. RESTRICTIONS ON TRANSFER. This Debenture and the Common
Stock issuable upon the conversion hereof have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and have been sold
pursuant to an exemption under the Securities Act. The Debenture and such
Common Stock may not be transferred or resold except pursuant to registration
under or an exemption from the Securities Act.
SECTION 3.7. CURRENT MARKET PRICE.
(a) As used herein, the "Current Market Price" per share of Common
Stock on any date is the average of the quoted bid prices of the Common Stock
for the five (5) consecutive trading days ending on the trading day immediately
prior to the date in question.
-3-
<PAGE>
(b) As used in this SECTION 3.7, the term "quoted bid price" shall
mean the closing bid price thereof on any such trading date, as reported by the
Nasdaq Stock Market.
ARTICLE 4. REDEMPTION
(a) If the Current Market Price is less than $0.70 per share (subject to
recapitalizations, reclassifications and other similar events), then the Company
may, at its option, by delivering notice as set forth below, redeem all or part
this Debenture for an amount equal to the product of (x) the principal amount so
to be redeemed multiplied by (y) 125%, plus all accrued and unpaid interest
thereon.
(b) Any notice of exercise of the Company's redemption option pursuant to
ARTICLE 4 shall be delivered in writing to Holder and shall be irrevocable when
delivered (an "Article 4 Notice"). The Company shall pay in full the applicable
redemption amount by wire transfer within five business days of the delivery of
an Article 4 Notice. Until such payment, the Company shall comply with all
terms, conditions and covenants of the Debenture, including without limitation,
timely payment of accrued and unpaid interest. If the Company fails to pay in
full such applicable redemption amount within such five business day period, the
Company's Article 4 Notice with respect to such redemption shall be deemed void
and the Company shall no longer be entitled to redeem the Debentures prior to
their maturity. Subject to the foregoing, Holder's right to convert this
Debenture (or such portion hereof as the Company shall have elected to redeem)
shall be suspended but solely with respect to the portion of the Debentures to
be redeemed after delivery of the Article 4 Notice.
ARTICLE 5. RECAPITALIZATIONS, MERGERS, ETC.
SECTION 5.1. RECAPITALIZATIONS GENERALLY. In case the Company shall
(i) subdivide its outstanding Common Stock (including by means of a dividend or
distribution on the Common Stock payable in Common Stock), (ii) combine its
outstanding Common Stock into a smaller number of shares, or (iii) issue by
capital reorganization or reclassification of its Common Stock or otherwise
(other than a subdivision or combination of its shares provided for above, or a
reorganization, merger, consolidation or sale of assets provided for elsewhere
in this ARTICLE 5) any shares of capital stock of the Company, the Fixed
Conversion Price and the Maximum Number of Shares of Common Stock in effect
immediately prior to such action, shall be adjusted so that the Holder of this
Debenture thereafter surrendered for conversion shall be entitled to receive the
number of shares of capital stock of the Company which such holder would have
owned immediately following such action had this Debenture been converted
immediately prior thereto. An adjustment made pursuant to this subsection shall
become effective retroactively immediately after the effective date in the case
of a subdivision, combination or reclassification.
SECTION 5.2. CERTAIN OTHER RECAPITALIZATIONS. In case the Company shall,
during the five consecutive trading day period applicable (pursuant to SECTION
3.7(a)) in determining the Current Market Price per share of Common Stock with
respect to any conversion date, (i) subdivide its outstanding Common Stock
(including by means of a dividend or distribution on the Common Stock payable in
Common Stock), (ii) combine its outstanding Common Stock into a smaller number
of shares or, (iii) issue by capital reorganization or reclassification of its
Common Stock or otherwise (other than a subdivision or combination of its shares
provided for above, or a reorganization, merger, consolidation or sale of assets
provided for elsewhere in this ARTICLE 5) any shares of capital stock of the
Company, then, for purposes of calculating the Floating Conversion Price
applicable to such conversion, the closing bid price for the Company's Common
Stock as reported by the Nasdaq Stock Market for any day prior to such action
which falls within such five trading day period applicable to such conversion
shall be adjusted to a price per share giving effect to such action.
-4-
<PAGE>
SECTION 5.3. MERGERS. Until the Debentures are paid in full or have
been converted into Common Stock, the Company shall not consolidate or merge
into, or transfer all or substantially all of its assets to, any person,
unless such person assumes all of the obligations of the Company under this
Debenture and immediately after such transaction no Event of Default exists.
Any reference herein to the Company shall refer to such surviving or
transferee corporation and the obligations of the Company shall terminate
upon such assumption. If the Company merges or consolidates with another
corporation or sells or transfers all or substantially all of its assets to
another person and the holders of the Common Stock are entitled to receive
stock, securities or property in respect of or in exchange for Common Stock,
then as a condition of such merger, consolidation, sale or transfer, either
(i) the Company and any such successor, purchaser or transferee shall amend
this Debenture to provide that it may thereafter be converted on the terms
and subject to the conditions set forth above into the kind and amount of
stock, securities or property receivable upon such merger, consolidation,
sale or transfer by a holder of the number of shares of Common Stock into
which this Debenture might have been converted immediately before such
merger, consolidation, sale or transfer, or (ii) if the Company is not the
surviving entity in such merger, consolidation, sale or transfer, the Company
shall give the Holder at least 30 days prior written notice of the expected
closing date of such transaction, and if any portion of this Debenture has
not been converted into Common Stock at the election of the Holder prior to
such closing, then the remaining principal amount of this Debenture may, at
the option of the successor, purchaser or transferee, be converted into
shares of Common Stock at the closing of such transaction. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this ARTICLE 5 with respect to the rights of the Holder after such merger,
consolidation, sale or transfer to the end that the provisions of this
ARTICLE 5 (including adjustment of the Conversion Price then in effect and
the number of shares issuable upon conversion of this Debenture) shall be
applicable after that event as nearly equivalently as may be practicable.
Except as otherwise provided herein, the Conversion Price shall be the same
as the applicable Conversion Price defined in ARTICLE 3 above.
ARTICLE 6. REPORTS.
The Company shall mail to the Holder hereof at its address as shown on
the Register (as defined in SECTION 8.2) a copy of any annual, quarterly or
current report that it files with the Securities and Exchange Commission
promptly after the filing thereof and a copy of any annual, quarterly or
other report or proxy statement that it gives to its stockholders generally
at the time such report or statement is sent to stockholders.
ARTICLE 7. DEFAULTS AND REMEDIES.
SECTION 7.1. EVENTS OF DEFAULT. An "Event of Default" occurs if any of
the following occur: (a) the Company does not make the payment of the
principal of this Debenture when the same becomes due and payable at
maturity, upon redemption or otherwise, (b) the Company does not make a
payment of interest when such interest becomes due and payable and such
default continues for a period of seven (7) days thereafter, (c) the Company
fails to issue Common Stock upon conversion, within the time period specified
in SECTION 3.2, (d) the Company fails to comply with any of its other
agreements in this Debenture and such failure continues for the period and
after the notice specified below, (e) the Company's Common Stock ceases to be
quoted on any of the New York Stock Exchange, American Stock Exchange, the
Nasdaq National Market or Nasdaq SmallCap Market for a period in excess of 10
calendar days, (f) any of the representations or warranties made by the
Company herein, in the Agreement, or in any historical financial statements
heretofore furnished by the Company in connection with the execution and
delivery of this Debenture or the Agreement shall be false or misleading in
any material respect as of the date made (it being understood that this
SECTION 7.1(f) shall not apply to any financial projections or other forward -
-5-
<PAGE>
looking information), (g) the Company shall default on the payment of any
debts in excess of $100,000 beyond any applicable grace period, (h) any
judgments, levies or attachments shall be rendered against the Company or any
of its assets or properties in an aggregate amount in excess of $100,000 and
such judgments, levies or attachments shall not be dismissed, stayed, bonded
or discharged within thirty (30) days of the date of entry thereof, or (i)
the Company pursuant to or within the meaning of any Bankruptcy Law (as
hereinafter defined): (i) commences a voluntary case; (ii) consents to the
entry of an order for relief against it in an involuntary case; (iii)
consents to the appointment of a Custodian (as hereinafter defined) of it or
for all or substantially all of its property; (iv) makes a general assignment
for the benefit of its creditors; or (v) a court of competent jurisdiction
enters an order or decree under any Bankruptcy Law that: (A) is for relief
against the Company in an involuntary case; (B) appoints a Custodian of the
Company or for all or substantially all of its property; or (C) orders the
liquidation of the Company, and the order or decree remains unstayed and in
effect for 60 days. As used in this SECTION 7.1, the term "Bankruptcy Law"
means Title 11 of the United States Code or any similar Federal or State law
for the relief of debtors or such other applicable laws and the term
"Custodian" means any receiver, trustee, assignee, liquidator or similar
official under any Bankruptcy Law.
SECTION 7.2. ACCELERATION. If an Event of Default occurs and is
continuing, the Holder hereof by notice to the Company may declare the
principal of and accrued interest on this Debenture to be due and payable.
Upon such declaration, the principal and interest hereof shall be due and
payable immediately without presentment, demand, protest or notice of any
kind, all of which are hereby expressly waived, anything herein or in any
note or other instruments contained to the contrary notwithstanding, and the
Holder may immediately, and without expiration of any period of grace,
enforce any and all of the Holder's rights or remedies afforded by law. The
Company expressly waives demand and presentment for payment, notice of
nonpayment, protest, notice of protest, notice of dishonor, notice of
acceleration or intent to accelerate, bringing of suit and diligence in
taking any action to collect amounts called for hereunder and the Company
shall be directly and primarily liable for the payment of all sums owing and
to be owing hereon, regardless of and without any notice, diligence, act or
omission as or with respect to the collection of any amount called for
hereunder.
ARTICLE 8. REGISTERED DEBENTURES.
SECTION 8.1. SERIES. This Debenture is one of a numbered series of
Debentures issued to the Holder and designated as "7.5% Convertible
Debentures Due February 28, 1999." Such Debentures are referred to herein
collectively as the "Debentures."
SECTION 8.2. RECORD OWNERSHIP. The Company shall maintain a register
of the holders of the Debentures (the "Register") showing their names and
addresses and the serial numbers and principal amounts of Debentures issued
to or transferred of record by them from time to time. The Register may be
maintained in electronic, magnetic or other computerized form. The Company
may treat the person named as the Holder of this Debenture in the Register as
the sole owner of the Debenture. The Holder of the Debenture is the person
exclusively entitled to receive payments of interest and principal on the
Debenture, receive notifications with respect to the Debenture, convert it
into Common Stock and otherwise exercise all of the rights and powers as the
absolute owner hereof.
SECTION 8.3. REGISTRATION OF TRANSFER. Transfers of this Debenture
may be registered on the books of the Company maintained for such purpose
pursuant to SECTION 8.2 above (i.e., the Register). Transfers shall be
registered when this Debenture is presented to the Company with a request to
register the transfer hereof and the Debenture is duly endorsed by the
appropriate person, reasonable assurances are given that the endorsements are
genuine and effective, and the Company has received evidence
-6-
<PAGE>
satisfactory to it that such transfer is rightful and in compliance with all
applicable laws, including tax laws and State and Federal securities laws.
When this Debenture is presented for transfer and duly transferred hereunder,
it shall be canceled and a new Debenture showing the name of the transferee
as the record holder thereof shall be issued in lieu hereof. When this
Debenture is presented to the Company to exchange it for an equal aggregate
principal amount of Debentures of other denominations, the Company shall make
such exchange and shall cancel this Debenture and issue in lieu thereof
Debentures having a total principal amount equal to this Debenture in the
denominations requested by the Holder.
SECTION 8.4. WORN AND LOST DEBENTURES. If this Debenture becomes
worn, defaced or mutilated but is still substantially intact and
recognizable, the Company or its agent may issue a new Debenture in lieu
hereof upon its surrender. Where the Holder of this Debenture claims that
the Debenture has been lost, destroyed or wrongfully taken, the Company shall
issue a new Debenture in place of the original Debenture if the Holder so
requests by written notice to the Company actually received by the Company
before it is notified that the Debenture has been acquired by a bona fide
purchaser and the Holder has delivered to the Company an indemnity bond in
such amount and issued by such surety as the Company deems satisfactory
together with an affidavit of the Holder setting forth the facts concerning
such loss, destruction or wrongful taking and such other information in such
form with such proof or verification as the Company may request.
ARTICLE 9. NOTICES.
All notices and other communications provided for or permitted hereunder
shall be made in writing by hand delivery, registered first class mail,
overnight courier, or telecopied, initially to the address set forth below,
and thereafter at such other address, notice of which is given in accordance
with the provisions of this ARTICLE 9.
All notices to Holders are to be directed to each holder at such address
as is listed for such Holder on the Register.
All notices to the Company are to be directed to:
Saliva Diagnostic Systems, Inc.
11719 NE 95th Street
Vancouver, Washington 98682
Attn: Chief Executive Officer
Telephone: (360) 696-4800
Telecopier: (360) 254-7942
ARTICLE 10. TIMES.
Where this Debenture authorizes or requires the payment of money or the
performance of a condition or obligation on a Saturday or Sunday or a public
holiday, or authorizes or requires the payment of money or the performance of
a condition or obligation within, before or after a period of time computed
from a certain date, and such period of time ends on a Saturday or a Sunday
or a public holiday, such payment may be made or condition or obligation
performed on the next succeeding business day, and if the period ends at a
specified hour, such payment may be made or condition performed, at or before
the same hour of such next succeeding business day, with the same force and
effect as if made or performed in accordance with the terms of this
Debenture. Where time is extended by virtue of the provisions of this
ARTICLE 10, such extended time shall not be included in the computation of
interest.
-7-
<PAGE>
ARTICLE 11. RULES OF CONSTRUCTION.
In this Debenture, unless the context otherwise requires, words in the
singular number include the plural, and in the plural include the singular,
and words of the masculine gender include the feminine and the neuter, and
when the sense so indicates, words of the neuter gender may refer to any
gender. The numbers and titles of articles and sections contained in this
Debenture are inserted for convenience of reference only, and they neither
form a part of this Debenture nor are they to be used in the construction or
interpretation hereof. Wherever, in this Debenture, a determination of the
Company is required or allowed, such determination shall be made by a
majority of the Board of Directors of the Company and if it is made in good
faith, it shall be conclusive and binding upon the Company and the Holder of
this Debenture.
ARTICLE 12. NATURE OF OBLIGATION; RANK.
No provision of this Debenture shall alter or impair the obligation of
the Company, which is absolute and unconditional, to pay the principal of,
and interest on, this Debenture at the time, place, and rate, and in the coin
or currency, herein prescribed. This Debenture and all other Debentures now
or hereafter issued of similar terms are direct obligations of the Company.
This Debenture ranks equally with all other Debentures now or hereafter
issued under the terms set forth herein.
ARTICLE 13. GOVERNING LAW.
The validity, terms, performance and enforcement of this Debenture shall
be governed and construed by the provisions hereof and in accordance with the
laws of the State of Delaware.
IN WITNESS WHEREOF, the Company has duly executed this Debenture as of
the date first written above.
SALIVA DIAGNOSTIC SYSTEMS, INC.
By:
------------------------------
(Corporate Seal) Name:
----------------------------
Title:
---------------------------
-8-
<PAGE>
NOTICE OF CONVERSION
[To be completed and signed only upon conversion of Debenture]
The undersigned, the Holder of this Debenture, hereby irrevocably elects
to exercise the right to convert it into Common Stock, par value $.01 per
share, of Saliva Diagnostic Systems, Inc. as follows:
[Complete if less than _________________________________ Dollars ($__________)*
all of ($1,000 or integral
multiples of $1,000)
principal amount
is to be converted]
[Signature must be
guaranteed if ________________________________________________________
registered holder (Name of Holder of shares if different than registered
Holder of Debenture)
of stock differs
from registered ________________________________________________________
Holder of (Address of Holder of shares if different than address of
Debenture] registered Holder of Debenture)
________________________________________________________
(Social Security or EIN of Holder of shares if different
than Holder of Debenture)
* If the principal amount of the Debenture to be converted is less than the
entire principal amount thereof, a new Debenture for the balance of the
principal amount shall be returned to the Holder of the Debenture. All
notices to be transmitted by hand delivery, facsimile or overnight courier.
Date: Sign:
---------------------- --------------------------------------------
(Signature must conform in all respects to name
of Holder shown on face of the Debenture)
Print Name:
--------------------------------------
Print Title, if applicable:
----------------------
-9-
<PAGE>
ASSIGNMENT OF DEBENTURE
The undersigned hereby sell(s) and assign(s) and transfer(s) unto
- --------------------------------------------------------------------------------
(name, address and SSN or EIN of assignee)
Dollars ($ )
- --------------------------------------------------------------------------------
(principal amount of Debenture, $1,000 or integral multiples of $1,000)
of principal amount of the Debenture together with all accrued interest hereon.
Date: Sign:
---------------------- --------------------------------------------
(Signature must conform in all respects to name
of Holder shown on face of Debenture)
Print Name:
--------------------------------------
Print Title, if applicable:
----------------------
-10-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements found in the Company's Report on Form 10-QSB
for the quarter ended March 31, 1997, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,393,237
<SECURITIES> 0
<RECEIVABLES> 41,793
<ALLOWANCES> 0
<INVENTORY> 275,735
<CURRENT-ASSETS> 1,748,902
<PP&E> 1,302,651
<DEPRECIATION> 851,573
<TOTAL-ASSETS> 2,748,027
<CURRENT-LIABILITIES> 1,181,694
<BONDS> 0
0
0
<COMMON> 220,408
<OTHER-SE> 129,857
<TOTAL-LIABILITY-AND-EQUITY> 2,748,027
<SALES> 227,034
<TOTAL-REVENUES> 227,034
<CGS> 259,641
<TOTAL-COSTS> 259,641
<OTHER-EXPENSES> 1,148,625
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,578
<INCOME-PRETAX> (1,174,901)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,174,901)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,174,901)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
