As filed with the Securities and Exchange Commission on July 14, 1997
Registration No. 333-26795
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1
TO REGISTRATION STATEMENT
ON FORM SB-2
UNDER THE SECURITIES ACT OF 1933
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SALIVA DIAGNOSTIC SYSTEMS, INC.
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(Name of Small Business Issuer as Specified in its Charter)
Delaware
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(State of Incorporation)
3841
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(Primary Standard Industrial Classification Code Number)
91-154-9305
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(I.R.S. Employer Identification Number)
11719 NE 95th Street
Vancouver, Washington 98682
(360) 696-4800
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(Address and telephone number of registrant's principal executive office)
and principal place of business)
Kenneth J. McLachlan, President
Saliva Diagnostic Systems, Inc.
11719 NE 95th Street
Vancouver, Washington 98682
(360)696-4800
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(Name, address and telephone number of agent for service)
Please send a copy of all communications to:
LaDawn Naegle
Bryan Cave LLP
700 13th Street, N.W.
Washington, DC 20005
(202) 508-6046
<PAGE>
Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this Registration Statement.
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]
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. [ ]
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.
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<PAGE>
PROSPECTUS
SALIVA DIAGNOSTIC SYSTEMS, INC.
2,457,974 SHARES OF COMMON STOCK
Saliva Diagnostic Systems, Inc. (the "Company") is registering for
resale 2,457,974 shares of common stock, $.01 par value (the "Common Stock"),
which include (i) 2,368,422 shares which have been and may be issued in
connection with the conversion of $1,500,000 in principal amount of the
Company's 7.5% Convertible Debentures due February 28, 1999 (the "Debentures");
and (ii) 89,552 shares which may be issued upon the exercise of warrants granted
to Grayson & Associates, Inc. (the "Grayson Warrants"). All of the Common Stock
offered hereby is being offered for the account of certain shareholders of the
Company which acquired their securities as a result of certain private
placements conducted by the Company. See "Selling Shareholders" and "Description
of Securities." Additional shares that may become issuable as a result of the
anti-dilution provisions of the Debentures and the Grayson Warrants are offered
hereby pursuant to Rule 416 under the Securities Act of 1933, as amended (the
"Securities Act"). The Company will not receive any of the proceeds from the
sale of the Common Stock being offered hereby (the "Offering"), but will receive
the exercise price payable upon the exercise of the Grayson Warrants. There can
be no assurance that all or any part of the Grayson Warrants will be exercised
or that they will be exercised for cash.
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. PROSPECTIVE PURCHASERS SHOULD CAREFULLY CONSIDER THE MATTERS
DISCUSSED UNDER "RISK FACTORS" BEGINNING ON PAGE 6.
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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 July __, 1997
Proceeds to
Price to Public(1) Selling Shareholders(1)(2)
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Per share of Common Stock....... $1.00 $1.00
Total(3)........................ $2,457,974 $2,457,974
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(1) Estimated based upon the average of the high and low sales prices for the
Common Stock on July 10, 1997 as reported by Nasdaq.
(2) Excludes regular brokerage commissions and other expenses, including
expenses of counsel, if any, for the Selling Shareholders, which will be paid by
the Selling Shareholders. The other expenses of the offering are estimated to be
approximately $41,000, all of which will be paid by the Company.
(3) Assumes all shares registered will be issued to the Selling Shareholders and
will be sold in this offering.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Such reports and other information
can be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; and the
Commission's regional offices at Room 1204, 219 South Dearborn Street, Chicago,
Illinois 60604; Room 1028, 7 World Trade Center, New York, New York 10007; and
Suite 500 East, 5757 Wilshire Boulevard, Los Angeles, California 90036. Copies
of such material can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549 at prescribed rates. The Commission maintains
an internet web site that contains reports, proxy statements and other materials
filed electronically by the Company through the Commission's Electronic Data,
Gathering, Analysis and Retrieval (EDGAR) system. This web site can be accessed
at http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on
Form SB-2 (the "Registration Statement") under the Securities Act with respect
to the shares of Common Stock offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement or the exhibits
thereto. As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information contained or incorporated by reference in
the Registration Statement. For further information, reference is hereby made to
the Registration Statement and exhibits thereto, copies of which may be
inspected at the offices of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 or obtained from the Commission at the same address at
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.
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<PAGE>
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 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 a limited operating history and has incurred
significant operating losses to date.
The Company has two categories of products: medical specimen collection
devices and rapid antibody immunoassays. The Company's product, Omni-SAL(R), an
on-site, easy-to-use medical collection device, utilizes saliva as a diagnostic
tool to detect the presence of the HIV virus, other infectious diseases and
tobacco use. The Company manufactures Omni-SAL(R) through its foreign subsidiary
in Singapore and distributes Omni-SAL(R) to customers located outside the United
States. 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
ejectable head, which can be used to collect various body fluids and cells,
primarily for the purposes of DNA identification. See "The Company -- Products."
The Company has developed rapid immunoassays for the detection of
antibodies to selected pathogens, such as the HIV virus, and Helicobacter
pylori, a bacteria linked to peptic ulcers and gastric cancer. The Company's
immunoassays are designed to require only a few simple steps to use and to
provide results in minutes. To date, the Company has developed three rapid HIV
tests: Sero*Strip HIV, Hema*Strip HIV and Saliva*Strip HIV and a rapid H. pylori
test: Stat*Simple. The Company has under development several rapid tests for
hepatitis and tuberculosis. See "The Company -- Products."
The Company is currently marketing its medical specimen collection
devices (Omni-SAL(R), Saliva*Sampler and Omni-Swab) in many countries and is
currently marketing two of its three HIV rapid tests (Sero*Strip HIV and
Hema*Strip HIV) outside the United States. These HIV rapid tests are not yet
approved for marketing in the United States. The Company believes Saliva*Strip
HIV and Stat*Simple will be ready for marketing outside the United States in
1997. See "The Company - Marketing, Sales and Distribution."
The Company was incorporated in California in 1986 as E&J Systems, Inc.
In January 1992 the Company merged with and into a Delaware corporation and
changed its name to Saliva Diagnostic Systems, Inc. The Company completed an
initial public offering of its common stock in March 1993. Unless otherwise
indicated, all references to the Company include the Company and its wholly
owned subsidiaries, SDS International, Ltd., Saliva Diagnostic Systems (Asia)
Ltd. and Saliva Diagnostic Systems (Singapore) Pte.
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<PAGE>
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, WITHIN THE MEANING
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING
STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THOSE STATEMENTS RELATING TO THE
INTERIM FINANCIAL RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1997, DEVELOPMENT
OF NEW PRODUCTS, THE ABILITY TO OBTAIN NEW DISTRIBUTION AGREEMENTS AND INCREASE
DISTRIBUTION FOR PRODUCTS UNDER EXISTING DISTRIBUTION AGREEMENTS, APPROVAL OF
THE COMPANY'S PRODUCTS AS AND WHEN REQUIRED BY THE FOOD AND DRUG ADMINISTRATION
("FDA") IN THE UNITED STATES AND SIMILAR REGULATORY BODIES IN OTHER COUNTRIES,
AND THE SCALE-UP OF MANUFACTURING IN THE UNITED STATES. THESE FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO THE BUSINESS AND ECONOMIC RISKS FACED BY THE COMPANY
AND THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING
THOSE SET FORTH UNDER "RISK FACTORS," "THE COMPANY" AND "MANAGEMENT'S DISCUSSION
AND ANALYSIS" BELOW.
THE OFFERING
Securities Offered..................... 2,457,974 shares of Common Stock.
See "Description of Securities."
Common Stock outstanding after the
Offering(1)............................ 24,548,759
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 symbol.......................... Common Stock - SALV
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(1) Estimated. Does not include (i) 392,250 shares of Common Stock reserved for
issuance upon exercise of outstanding options under the Company's Stock Option
Plans (the "Stock Option Plans"), (ii) 153,500 shares of Common Stock reserved
for issuance upon exercise of options available for future grant under the Stock
Option Plans, and (iii) 2,933,500 shares of Common Stock reserved for issuance
upon exercise of other warrants and options.
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SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the
financial statements appearing elsewhere in this Prospectus. Such information
should be read in conjunction with such financial statements, including the
notes thereto.
Balance Sheet Data
------------------
December 31, 1996 Three Months Ended
March 31, 1997
(unaudited)
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Working capital (deficit) .... $ 336,302 $ 567,208
Total assets ................. $ 2,178,201 $ 2,748,027
Total liabilities ............ $ 1,017,569 $ 2,397,762
Shareholders' equity ......... $ 1,160,632 $ 350,265
Income Statement Data
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Year Ended Three Months Ended
December 31, 1996 March 31
(unaudited)
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1996 1997
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Net revenues ................. $ 840,068 $ 193,721 $ 227,034
Net (loss) ................... $ (5,152,399) $ (1,004,591) $ (1,174,901)
Net (loss) per common share .. $ (0.26) $ (.07) $ (.05)
Number of common shares used
in per share calculations .. 20,100,000 15,039,334 22,040,784
INTERIM FINANCIAL INFORMATION
The Company expects revenues for the second quarter ended June 30, 1997
to be in the range of $380,000 to $400,000, an amount which exceeds total
revenues from product sales for any one quarter of the Company's history. While
the Company continues to operate at a deficit, it expects losses for the second
quarter ended June 30, 1997 to fall below those recorded in the first quarter
ended March 31, 1997.
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<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 primarily in research and development activities focused on developing
proprietary collection devices and rapid assays. To date, sales of the Company's
products 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. 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 $21,914,246 and $23,089,147 at December 31, 1996 and
March 31, 1997, respectively, and a shareholders' equity of $1,160,632 and
$350,265 at December 31, 1996 and March 31, 1997, respectively. The Company has
incurred additional operating 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 significant
operating losses and significant capital requirements raise substantial doubt
about the Company's ability to continue as a going concern.
3. 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. The Company is dependent upon its other efforts to raise capital
resources, including proceeds received from the exercise of warrants, 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. 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 additional capital resources necessary to permit the
Company to implement or continue its programs. There can be no assurance that
such financing will be available on commercially reasonable terms or at all. Any
additional equity
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<PAGE>
financing may involve substantial dilution to the interests of the Company's
shareholders, which dilution has periodically occurred in the past.
4. Uncertain Acceptance of Saliva-Based Tests and Rapid Tests as
Diagnostic Tools. 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. Political and social factors may create
impediments to the use of rapid tests as diagnostic tools. These factors include
whether certain diagnostic tests, such as HIV antibody tests, should be
conducted without trained specialists and whether rapid tests in nontraditional
testing environments will lead to invasions of privacy. Although the Company
acknowledges the existence of such considerations, it is committed to developing
rapid testing devices as useful diagnostic tools. Limitations on the Company's
ability to market rapid tests caused by political and social factors could have
a material adverse effect on the Company's operations.
5. Uncertainty of New Product Development. The design and development
of the Company's rapid testing platforms in their current designs have been
completed and limited revenues have been generated from sales thereof. The
Company will be required to devote considerable additional efforts to finalize
the evaluation of its products. Satisfactory completion of development, testing,
evaluations, obtaining regulatory approvals and achieving sufficient production
levels of such products will be required prior to their being available for
commercial sale. The Company's products remain subject to all the risks inherent
in the introduction of new diagnostic products, including unanticipated
problems, as well as the possible insufficiency of funds to continue design and
development which could result in abandonment of or substantial change in the
design or development of such products. There can be no assurance that such
products will be successfully developed, be developed on a timely basis or prove
to be as effective as products based on existing or newly developed
technologies. The inability to successfully complete development, or a
determination by the Company, for financial or other reasons, not to undertake
to complete development of any product, particularly in instances in which the
Company has made significant capital expenditures, could have a material adverse
effect on the Company.
6. Competition. The market in which the Company operates, saliva and
blood-based collection and diagnostic testing, is highly competitive. The
Company is aware of certain entities, including ChemTrak, Inc., Epitope, Inc.,
Quidel, Inc. 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(R)
and the Company's products under development. Many of these competitors are
established and have substantially greater research, marketing and financial
resources than the Company. The Company expects that the number of products
competing with its products will increase as the perceived benefits of
saliva-based testing become more widely recognized. There can be no assurance
the Company will be able to compete successfully.
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<PAGE>
7. Technological Change and Risk of Technological Obsolescence. The
biotechnology industry, and, in particular, saliva and blood-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 prior to the Company or that they will not develop technologies and
products that are more effective than any which have been or are being developed
by the Company. In addition, the diagnostic products market is characterized by
changing technology and developing industry standards sometimes resulting in
product obsolescence or short product life cycles. Accordingly, the ability of
the Company to compete will be dependent on its introducing products to the
marketplace in a timely manner and enhancing and improving such products. There
can be no assurance that the Company will be able to keep pace with
technological developments or that its products will not become obsolete.
8. 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
not yet approved 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. 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 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. 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. See "The Company -
Regulation."
9. 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.
10. Uncertainty of Market Acceptance; Dependence Upon Third Party
Distributors. The Company has limited marketing capabilities and resources.
Achieving market acceptance will require substantial marketing efforts and the
expenditure of significant funds to inform potential consumers and the public of
the perceived benefits of the Company's current and proposed products. Moreover,
the Company does not have the financial or other resources to undertake
extensive marketing and advertising activities. The Company has recently begun
to
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develop strategic alliances and marketing arrangements, including joint
ventures, license or distribution arrangements. The Company's prospects will be
significantly affected by its ability to successfully develop and maintain its
relationships with its joint venturers, licensors and distributors and upon the
marketing efforts of such third parties. While the Company believes that any
independent distributors and sales representatives with whom it enters into such
arrangements will have an economic motivation to commercialize the Company's
products, the time and resources devoted to those activities generally will be
controlled by such entities and not by the Company. There can be no assurance
that the Company will be able, for financial or other reasons, to develop and
maintain any third party distribution or marketing arrangements or that such
arrangements, if established, will result in the successful commercialization of
any of the Company's products.
11. Dependence on Manufacturers. The Company relies on arrangements
with third parties for the manufacture of some 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. MML Diagnostic Packaging,
Inc. ("MML") manufactures Omni-Swab and Saliva*Sampler for the Company in the
United States and has advised the Company that it is in compliance with all
applicable FDA requirements for such manufacturing. 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 or
secure agreements with such manufacturers on terms acceptable to the Company.
There can be no assurance that MML will be able to meet the Company's
requirements or that MML will continue to manufacture Omni-Swab or
Saliva*Sampler on terms acceptable to the Company. See "The Company -
Manufacturing and Supply."
12. 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. See "The Company - Manufacturing and Supply."
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<PAGE>
13. Dependence on Small Number of Customers. The Company derives a
large portion of its revenues from sales to a small number of customers. Sales
to three customers accounted for approximately 49% of total product revenues in
1996. Sales to two customers accounted for approximately 50% of total product
revenues in 1995. The loss of sales to any of the Company's major customers
could have a material adverse effect on the Company's financial condition and
results of operations. See "The Company - Marketing, Sales and Distribution."
14. Dependence on Key Personnel. The success of the Company will be
largely dependent on the personal efforts of Kenneth J. McLachlan, its
President, Chief Executive Officer, Chief Financial Officer and Chief Accounting
Officer, and certain key management and scientific personnel. The loss of Mr.
McLachlan's services or the services of other key management or scientific
personnel would have a material adverse effect on the Company's business and
prospects. Competition among biotechnology companies for qualified employees is
intense, and the loss of key personnel or the inability to attract and retain
the additional highly skilled employees required for the Company's activities
could adversely affect its business. There can be no assurance that the Company
will be able to hire or retain such necessary personnel. See "Management."
15. Uncertainty of Patent Protection; Proprietary Information. The
Company has applied for United States patents on certain aspects of its saliva
collection and diagnostic testing devices and has been awarded four 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
- - Intellectual Property."
16. Product Liability; Insurance Coverage. The Company may be exposed
to potential product liability claims by consumers. The Company maintains
product liability insurance coverage in an amount up to $1,000,000 per
occurrence, up to a maximum of $2,000,000 in the aggregate, with excess umbrella
liability insurance coverage of $4,000,000. In the event of a product liability
claim, there can be no assurance that such insurance will be
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sufficient to cover all possible liabilities. In the event of a successful suit
against the Company, insufficiency of insurance coverage would have a material
adverse effect on the Company.
17. Possible Removal of Securities from Nasdaq System; Disclosure
Relating to Low-Priced Stocks. 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. Upon the filing by the Company of its Form 10-QSB for the period
ended March 31, 1997, Nasdaq issued a letter to the Company asking the Company
to demonstrate that it currently meets all Nasdaq listing requirements and can
continue to meet those requirements. 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 Company's total capital and surplus was
$1,160,632 at December 31, 1996 and $350,265 at March 31, 1997. On June 5, 1997,
the Company caused the early conversion of $800,000 of the 7.5% Convertible
Debentures due February 28, 1999 to Common Stock to demonstrate current
compliance with the Nasdaq continued inclusion requirements and submitted to
Nasdaq on June 4, 1997, its plan to sustain compliance with the Nasdaq continued
inclusion requirements with Nasdaq requirements. The Company is awaiting a
Nasdaq response to its submission. If the Company is removed 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 inclusion 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. There is
no assurance that the Company will continue to remain eligible for continued
inclusion of the Common Stock on Nasdaq.
18. No Dividends. To date, the Company has not paid any dividends on
its Common Stock and does not expect to declare or pay any dividends in the
foreseeable future.
19. Significant Outstanding Options and Warrants. As of June 30, 1997,
there were outstanding (i) stock options to purchase an aggregate of 1,430,750
shares of Common Stock at exercise prices ranging from $0.43 to $5.50 per share;
(ii) warrants to purchase 1,380,000 shares of Common Stock which were issued in
the Company's initial public offering, are exercisable at $3.00 per share, and
expire December 31, 1997 unless extended by the Company; and (iii) warrants to
purchase 533,104 shares which are exercisable at prices ranging from $1.00 to
$4.00 per share.
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To the extent that outstanding options or warrants are exercised,
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.
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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
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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.
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THE COMPANY
GENERAL
The Company is primarily engaged in 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 was incorporated in California in 1986 as E&J Systems, Inc.
In January 1992, the Company merged with and into a Delaware corporation and
changed its name to Saliva Diagnostic Systems, Inc. The Company completed an
initial public offering of its common stock in March 1993. In 1994, the
Company's 90% owned subsidiary, Saliva Diagnostic Systems (Asia) Ltd. ("SDS
Asia"), formed Saliva Diagnostic Systems (Singapore) Pte. ("SDS Singapore"). In
1995, the Company purchased the minority interest (10%) in SDS Asia and the
outstanding minority interest (19%) in SDS Singapore. As a result, SDS Asia and
SDS Singapore became wholly owned subsidiaries of the Company. Additionally in
1995, the Company purchased the minority interest (10%) in Saliva Diagnostic
Systems, UK, Ltd., and as a result this entity became a wholly owned subsidiary
of the Company and was renamed SDS International, Ltd. Unless otherwise
indicated, all references to the Company include the Company and its wholly
owned subsidiaries, SDS International, Ltd., SDS Asia and SDS Singapore. The
Company's principal executive offices are located at 11719 NE 95th Street,
Vancouver, Washington, 98682.
The Company has incurred significant operating losses since its
inception, resulting in an accumulated deficit of $21,914,246 at December 31,
1996 and $23,089,147 at March 31, 1997. Such losses are expected to continue
through 1997. 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 its common stock in March 1993
to fund its capital requirements. The Company is dependent upon its efforts to
raise capital to finance the cost of development, manufacturing and marketing of
its products, to conduct clinical trials and submissions for FDA approval of its
products and to design and develop new products. Marketing, manufacturing and
clinical testing may require capital resources substantially greater than the
resources which will be available to the Company. There can be no assurance that
the Company will be able to obtain the additional capital resources necessary to
implement or continue its programs, or that such financing will be available on
commercially reasonable terms or at all. See Note 2 of Notes to Consolidated
Financial Statements.
PRODUCTS
RAPID IMMUNOASSAYS. The Company continues to develop rapid immunoassays
utilizing immunochromatography for the detection of antibodies to selected
pathogens, such as the HIV, the virus that causes AIDS, and Helicobacter pylori
("H. pylori"), a bacteria linked to peptic ulcers and gastric cancer.
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The Company's immunoassays are designed to require only a few simple
steps and minutes to use. The tests produce visual results in under 20 minutes,
and may be used without special equipment, storage or training. The Company's
data and independent evaluations demonstrate that its Hema*Strip HIV and
Sero*Strip HIV tests are generally equivalent in performance to widely used
FDA-licensed tests for HIV.
The Company's rapid tests utilize a capillary flow assay in which all
reagents are provided on solid phases in a dried format (test strip). Buffer
solution is introduced after sample collection. The resulting mixture of sample
and buffer migrate along the test strip by capillary action, reconstituting a
dye conjugate. A red control line will develop at a designated point on the
upper portion of the strip if the assay has been performed properly and if all
reagents are functionally active. The conjugate binds in the presence of
antibodies to pre-applied antigen to form a second red line (positive) at a
designated point on the lower portion of the strip. In the absence of specific
antibodies, a second line does not develop.
To date, the Company has developed three rapid HIV tests: Sero*Strip
HIV, Hema*Strip HIV and Saliva*Strip HIV, and a rapid H. pylori test:
Stat*Simple. The Company has under development several rapid tests for
hepatitis.
Sero*Strip HIV ("Sero*Strip") analyzes a small amount of serum or
plasma to detect HIV antibodies. Sero*Strip is packaged as a multiple-use kit
designed for professional health care settings where many patients are tested
and specimens may be stored. Results are available in 5 to 15 minutes. The test
kit may be stored without refrigeration for up to 18 months after the date of
manufacture.
Hema*Strip HIV ("Hema*Strip") is a single use test kit that collects,
processes and analyzes a minute amount of whole blood to detect HIV antibodies.
Sample collection requires only a few seconds. The principles used in the
Hema*Strip test strip are identical to that utilized in Sero*Strip; however, an
added filter traps red blood cells from the whole blood sample permitting the
migration of serum to flow onto the strip and negating the need for the user to
separate serum from the whole blood sample. The test kit may be stored without
refrigeration for up to 18 months after the date of manufacture.
Saliva*Strip HIV ("Saliva*Strip") is a rapid testing system that
collects, processes and analyzes saliva to detect HIV antibodies. Principles of
the test strip are similar to that used in Sero*Strip and Hema*Strip. The
Company expects to complete development of Saliva*Strip in 1997. The test is
currently designed for single use and incorporates Omni-SAL(R), the Company's
saliva collection device. The test is currently designed to obtain results in
between 10 and 20 minutes. The Company believes Saliva*Strip's temperature
stability is similar to Sero*Strip and Hema*Strip.
Stat*Simple ("Stat*Simple") is the Company's rapid assay for H. pylori
antibody detection. The device is a modification of Hema*Strip HIV and uses
whole blood for analysis. Results are available in 5 to 20 minutes. Stat*Simple
is currently undergoing pre-clinical data
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collection in the United States prior to submission for review by the Food and
Drug Administration.
MEDICAL SPECIMEN COLLECTION DEVICES. The Company has commenced
production and marketing of three medical specimen collectors: Omni-SAL(R),
Saliva*Sampler and Omni-Swab.
Omni-SAL(R) is a saliva collection device with a patented volume
indicator that is sold to several commercial companies for use with their
laboratory assays for the detection of HIV infection and cigarette smoking. It
is also used in research to collect saliva samples for studies of infectious
diseases such as Hepatitis, tuberculosis, schistosomiasis and leptospirosis.
Saliva*Sampler is a saliva collection device cleared for marketing in
the United States for the collection of saliva samples for purposes not related
to HIV testing.
Omni-Swab is a sample collection device comprised of a serrated cotton
swab with an ejectable head. It is used to collect various body fluids and
cells, primarily for the purposes of DNA identification.
Saliva Filter is a component of the Omni-SAL(R) and Saliva*Sampler that
extracts saliva from the devices' collection pads and also removes debris from
the samples. Due to limited production capability, the Company does not
currently manufacture Saliva Filter and thus, has elected to use filters of
other manufacturers for the Omni-SAL(R) and Saliva*Sampler.
PRODUCT DEVELOPMENT
The Company is currently engaged in the development of rapid
immunoassays to detect antibodies to Hepatitis. In 1996, the Company entered
into a codevelopment agreement for rapid hepatitis tests with a European vaccine
manufacturer, which supplies antigen to the Company for product development. If
a product is ultimately developed, the Company will jointly market such product
and share profits on sales with its European partner.
In 1996, the Company also entered into a cooperative research and
development agreement (CRADA) with the Naval Medical Research and Development
Command, acting through US Navy Medical Research Unit No. 2, to develop rapid
tests for certain tropical diseases, including dengue virus, leptospirosis and
scrub typhus, to which US Naval personnel are exposed in overseas assignments.
Under the agreement, the Company will use antigen supplied by the US Navy to
develop the tests, while the Navy will provide laboratory space and staff
devoted to the project. The Company is obligated to provide funding of
approximately $19,000 to the Navy in exchange for its services.
The Company has conducted preliminary research that indicates its rapid
test format may be expanded to detect other diseases, such as tuberculosis,
measles, malaria, rubella, tetanus, herpes, chlamydia, mumps, influenza,
parvovirus, pertussis, certain cancers, tumor markers and cardiac disease.
Additionally, the Company believes that, in many cases, its tests may be able to
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use saliva for analysis as well as blood and serum, although research has not
been completed on this.
The Company has received an Investigational Device Exemption for
Omni-SAL(R) from the FDA which allows the Company to conduct clinical trials in
the United States for the purposes of determining whether Omni-SAL(R) may be
used for collecting saliva samples for HIV testing in conjunction with certain
laboratory assays. The Company is considering partnering relationships to enable
it to pursue such regulatory approval and subsequently to market Omni-SAL(R) in
the United States as part of a home collection testing system for HIV infection.
The Company expended approximately $1,040,000 and $903,000 in research
and development costs in fiscal years 1996 and 1995, respectively, and $194,700
and $257,600 in the first fiscal quarters of 1997 and 1996, respectively. See
Note 1 of Notes to Consolidated Financial Statements.
MARKETING, SALES AND DISTRIBUTION
The Company is currently marketing its medical specimen collection
devices (Omni-SAL(R), Saliva*Sampler and Omni-Swab) in many countries and is
currently marketing two of its three HIV rapid tests (Sero*Strip HIV and
Hema*Strip HIV) outside the United States. These HIV rapid tests are not
approved for marketing in the United States. The Company believes Saliva*Strip
HIV and Stat*Simple will be ready for marketing outside the United States in
1997.
The Company has directed its initial primary marketing and distribution
efforts for its HIV-related products to international markets, principally in
Asia, Latin America, Eastern Europe, the Middle East and Africa. The reported
success in 1996 of certain therapies for AIDS and HIV infection, such as
protease inhibitors and immune boosters, has caused the Company to include the
United States in its primary marketing strategy. Despite the lower rate of HIV
infection in the United States, the Company believes the reported benefits of
early medical intervention for those who can afford treatment will spur demand
for HIV test products in the United States. Sales of the Company's HIV-related
products in the United States are subject to obtaining FDA approval. See
"Manufacturing and Supply" and "Regulation--Domestic Regulation." The Company
intends to file applications for approval of its HIV products with the FDA in
1997, and is seeking an alliance with a strategic partner for marketing and
distribution of such products in the United States.
For international distribution of its products, the Company's strategy
has been to form direct relationships with in-country distributors of medical
products for both distribution and assistance in obtaining local regulatory
approval. This strategy proved satisfactory in smaller countries and in Brazil
and Russia but was less so in other markets, such as China, Thailand and Mexico.
In 1996, the Company appointed its first Sales and Marketing Director to
represent the Company internationally.
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In March 1994, the Company granted a non-exclusive, worldwide license
to Orgenics, Ltd., an Israeli corporation ("Orgenics"), pursuant to which
Orgenics may make or have made diagnostic products incorporating the Company's
Omni-SAL(R) technology, and may use, sell, or license such products worldwide
(the "License Agreement"). The License Agreement expires the later of January
31, 2111 or the date on which any patents for the Omni-SAL(R) technology expire.
Orgenics has paid the Company an initial licensing fee of $200,000 and will pay
4% royalties on sales of Orgenics' products which incorporate the Company's
Omni-SAL(R) technology. In the event the Company ceases production of
Omni-SAL(R), Orgenics has the option, pursuant to the License Agreement, to
purchase from the Company the molds and equipment necessary to produce
Omni-SAL(R) and would thereafter pay to the Company 6% royalties on sales of
Omni-SAL(R) products produced and sold by Orgenics. The Company understands that
Orgenics is not currently exploiting its rights under the Company's license. The
Company is pursuing its rights to cancel the license and is considering a new
distribution agreement with Orgenics. There can be no assurance that Orgenics
will manufacture or sell any products which will generate royalties for the
Company.
In January 1997, the Company signed a letter of intent to enter into a
distribution agreement with BioChem ImmunoSystems, Inc., a division of BioChem
Pharma, Inc., a Montreal-based conglomerate with significant international sales
in infectious disease therapies and diagnostics, for international distribution
of the Company's rapid tests for HIV infection. The parties are currently
negotiating the terms of definitive agreements pursuant to such letter of
intent. BioChem ImmunoSystems, Inc. is a Canadian research and development
organization specializing in the manufacture of diagnostic products. With the
support of BioChem Pharma, Inc., BioChem ImmunoSystems, Inc. has become a major
international distributor of diagnostics products, currently distributing
products in over 70 countries
In November 1996, the Company signed a letter of intent to enter into a
distribution agreement with another Canadian company, Advanced Pathology
Services Canada, Inc. ("APS Canada"), for distribution of all of the Company's
current products except Stat*Simple in selected geographic regions outside the
United States. On May 15, 1997, the parties entered into a definitive agreement
pursuant to the letter of intent. The agreement grants to APS Canada a five-year
exclusive distributorship for the designated territory. APS Canada is a division
of The APS Group of Companies, based in London, England. APS Canada provides
specialized human and veterinary medical testing services and maintains a
laboratory exclusively devoted to saliva testing.
The Company has submitted certain of its products for evaluation to the
World Health Organization ("WHO"), a division of the United Nations that
maintains an inventory of medical goods for impoverished nations and
non-governmental health organizations. Certain smaller countries without their
own regulatory agencies rely on results of WHO evaluations as part of their
approval of products for use and sale in their countries. In 1996 the Company
bid for a contemplated bulk purchase by WHO of the Company's Sero*Strip HIV. In
April 1997, WHO notified the Company that the Sero*Strip HIV was evaluated by
the United Nations AIDS Program and found to conform with its minimum
requirements. Accordingly, WHO has agreed
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to include the Company's Sero*Strip HIV among the approved products for WHO bulk
purchases during the year ending February 28, 1998.
Sales to three customers, Fitzco, Inc., Osborn Laboratories and Beacon
Diagnostics, Inc. accounted for approximately 20%, 18% and 11%, respectively, of
total product sales in 1996. Sales to Fitzco, Inc. and Osborn Laboratories
accounted for 50% of total revenues in 1995. The loss of sales to Fitzco, Inc.,
Osborn Laboratories and Beacon Diagnostics, Inc. could have a material adverse
effect on the Company's financial condition and results of operations. See Note
10 of Notes to Consolidated Financial Statements.
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.
MANUFACTURING AND SUPPLY
Omni-SAL(R) 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 and Hema*Strip HIV 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 the FDA's 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 other FDA regulations.
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 believes such equipment will be fully installed and
functioning in late 1997. The Company is required to meet certain conditions,
including compliance with FDA requirements (such as GMP), 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.
In addition, the Company must obtain separate FDA product approvals for sales
within the United States. See "-- Regulation -Domestic Regulation."
The Company believes that most 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,
however, that certain components are available only 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.
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REGULATION
DOMESTIC REGULATION
FOOD AND DRUG ADMINISTRATION. In the United States, under the Federal
Food, Drug, and Cosmetics Act (the "FDC Act"), the FDA regulates 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, Omni-Swab and Saliva*Sampler, have received FDA clearance for domestic
distribution for certain limited purposes. See also "Manufacturing and Supply."
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 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
premarket approval application ("PMA") can seek FDA marketing clearance for the
device by filing a 510(k) Premarket Notification ("510(k) Notice"). The 510(k)
Notice 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 review of
its products not already approved or cleared for domestic distribution. These
strategies include alliances with other companies and selling limited licensing
rights to the Company's products to companies who agree to seek FDA approval for
them. The Company may also directly apply for FDA approval of those products.
In January 1995, the FDA classified Omni-Swab as a Class I medical
device. In August 1995, in response to a 510(k) Notice made by the Company, the
FDA approved Saliva*Sampler as a Class II device, accepting the Company's
contention that, under the 510(k) 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(R), if marketed as a specimen
collection device for HIV testing. The
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Company believes its proposed assay for H. pylori, however, could be approved as
a Class II device. 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 Investigational Device Exemption ("IDE") 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 are 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 granted the Company's request to classify Omni-SAL(R)
under the IDE provisions of the FDC Act, allowing the Company to manufacture and
distribute Omni-SAL(R) for the limited purpose of demonstrating the efficacy of
using saliva as a diagnostic medium for HIV antibody testing.
In 1995, the FDA authorized the Company to begin clinical trials in the
United States to determine whether Omni-SAL(R) could be used as a saliva
collection device for HIV testing in conjunction with certain laboratory assays.
The Company has not conducted any clinical trials for Omni-SAL(R) 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 GMP
(see discussion above), 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.
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OVERSEAS REGULATION AND DISTRIBUTION
Regulatory approval for medical devices vary 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 agencies such as the
WHO. The Company has submitted Sero*Strip to WHO for evaluation, and intends to
submit its other HIV tests to WHO as well. WHO's evaluation of Sero*Strip has
been completed and WHO has found that Sero*Strip meets its standards for rapid
test performance.
The following lists the Company's products, where the products are
distributed and where regulatory approval is pending if required.
1. Omni-SAL(R) is being distributed as a sample collection device for
HIV testing and other uses in the United Kingdom and various other countries.
The Company has submitted Omni-SAL(R) for approval as a sample collection device
for HIV testing and other uses in South Africa, and plans to apply for such
approval in several other European and Middle Eastern nations where such
approval is required.
2. Omni-Swab is distributed in the United States and in many of the
countries in which Omni-SAL(R) is distributed.
3. Saliva*Sampler is distributed mainly in 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, which allows Sero*Strip to be manufactured
in Singapore and exported to other countries. Sero*Strip is also approved in
India. It is currently registered in Brazil. Sero*Strip 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 for
epidemiological purposes overseas.
5. Hema*Strip has been approved for use and sale in Russia. In April
1996, Hema*Strip received a certificate of free sale from Singapore. Like
Sero*Strip, Hema*Strip can be manufactured in and distributed from Singapore to
other countries. The Company intends to submit Hema*Strip for approval in 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.
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7. Stat*Simple is currently undergoing preclinical data collection in
the United States prior to its submission for review by the FDA.
COMPETITION
The saliva and blood-based collection and diagnostic testing market is
highly competitive. As the advantages of rapid and saliva-based tests have
become apparent, more companies have entered the field, including ChemTrak,
Inc., Quidel, Inc., Trinity Biotech plc, Epitope, Inc., and several universities
and research institutes. The Company expects that competition will increase as
the advantages of saliva-based testing become more widely recognized.
Many of the Company's competitors are more established, benefit from
greater name recognition and have significantly greater financial,
technological, production and marketing resources than the Company. The market
acceptance of certain competing products that are based on different
technologies or approaches could have the effect of reducing the size of the
market for the Company's products, resulting in lower prices and erosion of the
Company's gross profit.
In the biotechnology industry, technological change and obsolescence is
rapid and frequent. There can be no assurance that the Company can keep pace
with such changes or avoid product obsolescence.
INTELLECTUAL PROPERTY
The Company has applied for patents in the United States and other
countries on certain aspects relating to Omni-SAL(R), a saliva collection
device, and Omni-Swab, a medical specimen collection device. To date, ten such
patents have been awarded, four in the United States, and six in other
countries. Expiration dates for the patents range from 2008 to 2012. The Company
intends to seek other patent protections in the United States and other
countries for certain aspects relating to its collection devices and rapid test
technology. No assurance can be given that patents will be issued to the Company
pursuant to its patent applications in the United States and abroad, or that the
Company's patent portfolio will provide the Company with a meaningful level of
commercial protection.
The Company also depends on trade secrets and proprietary information
to protect much of the technology that it has developed. The Company has entered
into confidentiality agreements with its employees, certain third party
suppliers, potential customers, joint venture partners, distributors and
consultants. Despite such efforts, there can be no assurance that such
confidentiality and the protection it may afford can be maintained.
The Company believes that patent and trade secret protection are
important to its business. However, the issuance of a patent and the existence
of trade secret protection does not in itself ensure the Company's success.
Competitors may be able to produce products competing
24
<PAGE>
with a patented Company product without infringing on the Company's patent
rights. Issuance of a patent in one country generally does not prevent
manufacture or sale of the patented products in other countries. The issuance of
a patent to the Company is not conclusive as to validity or as to the
enforceable scope of the patent. The validity or enforceability of a patent can
be challenged by litigation after its issuance, and if the outcome of such
litigation is adverse to the owner of the patent, the owner's rights could be
diminished or withdrawn. Additionally, trade secret protection does not prevent
independent discovery and exploitation of a secret product or technique by other
parties.
A large number of individuals and commercial enterprises seek patent
protection for technologies, products and processes in fields related to the
Company's area of product development. To the extent such efforts are
successful, the Company may be required to obtain licenses in order to
accomplish certain of its product strategies. There can be no assurance that
such licenses will be available to the Company or available on acceptable terms.
The Company is aware of certain filed patents issued to developers of diagnostic
products with potential applicability to the Company's diagnostic technology.
There can be no assurance that the Company would prevail if a patent
infringement claim were to be asserted against it.
EMPLOYEES
As of June 30, 1997, the Company employed thirty-seven full-time
persons, including those engaged in research and development, regulatory
affairs, manufacturing, sales and marketing, and administration. None of the
Company's employees are covered by collective bargaining agreements, and the
Company believes its relations with its employees are good.
PROPERTIES
The Company's executive offices and laboratory facility are located at
11719 NE 95th Street, Vancouver, Washington in an approximately 12,000 square
foot facility. The premises are occupied pursuant to a lease with an
unaffiliated party which expires in August 2002.
The Company leases from an unaffiliated party approximately 4,500
square feet in Singapore which it uses for offices and manufacturing facilities.
The lease, which was set to expire in June 1997, has been extended to May 1998.
LEGAL PROCEEDINGS
Hardy v. Saliva Diagnostic Systems, Inc., Ronald L. Lealos, Eugene
Seymour and Richard S. Kalin, was filed in United States District Court,
District of Connecticut in August 1994 by Luc Hardy, a former director and
officer of the Company. The complaint alleges several causes of action against
the Company and individual defendants, including former directors and officers
of the Company, 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
25
<PAGE>
amount. The Company believes this complaint is without merit as it believes
Mr. Hardy was terminated for cause. The Company intends to vigorously defend
itself.
Meritxell Ltd. v. Saliva Diagnostic Systems, Inc., filed in the United
States District Court for the Southern District of New York in April 1996,
involves a dispute with respect to the conversion rate of a convertible
debenture issued to Meritxell by the Company. The Company believes the suit is
without merit inasmuch as it believes the plaintiff failed to comply with the
terms of the convertible debenture at the time of conversion. Plaintiff is
seeking damages in an unspecified amount. Discovery is ongoing and management of
the Company intends to vigorously defend the Company.
In January 1997, Lealos v. Saliva Diagnostic Systems, Inc. was filed in
Superior Court in Clark County, Washington by Ronald Lealos, the former Chief
Executive Officer of the Company. The complaint in the lawsuit alleged various
breach of contract claims. This lawsuit was dismissed without prejudice as a
prerequisite to a settlement agreement between Mr. Lealos and the Company
currently in the process of being documented. There can be no assurance that a
final settlement acceptable to the Company will be concluded with Mr. Lealos, or
that if new litigation ensues and is decided adverse to the Company, that it
would not have a material adverse effect on 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Since July 1990, the Company has been engaged almost exclusively in
research and development activities focused on developing proprietary saliva
based collection devices and rapid assays for infectious diseases. 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
$21,914,246 at December 31, 1996 and $23,089,147 at March 31, 1997. Such losses
are expected to continue through at least 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.
See "The Company -- General" and Note 2 of Notes to Consolidated Financial
Statements.
26
<PAGE>
RESULTS OF OPERATIONS
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
REVENUES. The Company's revenues consist primarily of product sales and
license revenue. Revenues from product sales increased 37% to $715,800 in 1996
from $522,800 in 1995. The increase in product sales revenue was primarily
attributable to increased sales of Omni-SAL(R), Omni-Swab, Sero*Strip HIV and
Hema*Strip HIV. License revenue decreased to $25,000 in 1996 from $60,000 in
1995. The decrease in license revenue was attributable to fewer licensing
agreements in 1996.
COST OF PRODUCTS SOLD. Costs of products sold increased to $472,100
(66% of product sales) in 1996 from $149,600 (29% of product sales) in 1995.
Cost of products sold increased as a percentage of product sales resulting from
additional costs to produce the products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development ("R&D")
expenses increased 15% to $1,040,000 in 1996 from $903,000 in 1995, primarily as
a result of expanded R&D for product development for Saliva*Strip HIV,
Stat*Simple (a H.pylori rapid test) and rapid tests for hepatitis.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased slightly to $3,911,600 in 1996 from $3,608,400
in 1995, primarily as a result of increased workforce and facilities.
INTEREST EXPENSE AND LOAN FEES. Interest expense and loan fees
decreased to $28,000 in 1996 from $557,700 in 1995, primarily as a result of the
Company engaging in fewer financial loan transactions requiring fees and
interest.
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. See Note 7
of Notes to Consolidated Financial Statements.
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.
27
<PAGE>
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.
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.
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 private sales of convertible debentures in 1992 through 1995 and 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 was $4,065,470 in 1996 and $735,800
in the first quarter of 1997. This was primarily a result of net losses of
$5,152,399 and $1,175,000, respectively, and adjustments for depreciation and
amortization and the write-off of goodwill. See Note 3 of Notes to Consolidated
Financial Statements.
Cash used in investing activities in 1996 was $453,400. This was
primarily a result of the placement of restricted cash as collateral for bank
borrowings, and purchase of manufacturing equipment. 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
the capital expenditures at March 31, 1997.
Cash provided by financing activities in 1996 was $2,607,000. This was
primarily a result of proceeds of $2,547,400 from the exercise of options and
warrants to purchase common stock. Cash provided by financing activities in the
first quarter of 1997 was $1,371,600. This was primarily a result of net
proceeds of $1,380,000 from the sale of convertible debentures.
28
<PAGE>
In 1995, the Company purchased the minority interest in its 90% owned
subsidiary, SDS Asia and the minority interest in SDS Asia's 83% owned
subsidiary. Excess purchase price over net assets acquired of $600,000 was
recorded. At December 31, 1996, the Company recorded a charge of $540,000, which
represented the balance of the goodwill associated with this transaction. See
Note 3 of Notes to Consolidated Financial Statements.
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 securities and corporate partners to develop products.
In March 1997, the Company raised net proceeds of approximately
$1,380,000 (net of issuance costs of $120,000) from the private sale of
$1,500,000 in principal amount of the Company's 7.5% Convertible Debentures due
February 28, 1999 (the "Debentures"), in a offering conducted pursuant to
Regulation D. Holders of the Debentures originally had the right to convert up
to (i) 33 1/3% of the Debentures at any time from and after June 10, 1997, (ii)
66 2/3% of the Debentures at any time from and after July 9, 1997 and (iii) 100%
of the Debentures at any time from and after August 8, 1997. Pursuant to two
subsequent agreements among the Company and the Debenture holders, the parties
agreed to an acceleration of conversion of the Debentures. As of June 5, 1997,
the holders converted an aggregate of $800,000, and as of June 30, 1997, the
holders converted the remaining aggregate of $700,000 of the Debentures. The
number of shares of Common Stock issuable upon conversion is determined by the
conversion price defined in the Debentures as the lesser of 115% of the market
price for a share of Common Stock at the time of issuance of the Debenture
(i.e., $1.9191 per share) or 80% of the market price for a share of Common Stock
at the time of conversion of the Debenture. A total of 1,736,824 shares of
Common Stock, representing the $1,500,000 aggregate principal amount divided by
the applicable conversion prices, were issued upon the conversions. See
"Description of Securities - Debentures."
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.
29
<PAGE>
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Common Stock is quoted on the Nasdaq Small Cap Market under the
symbol "SALV." The following table sets forth the high and low bid quotations as
reported by the Nasdaq Small Cap Market for the periods indicated. The market
quotations represent prices between dealers, do not include retail markup,
markdown or commissions, and may not represent actual transactions.
High Low
----------- ----------
1997
----
First Quarter ...... $ 2.02 $ 1.25
Second Quarter ..... 1.72 0.94
1996
----
First Quarter ...... $ 2.44 $ 0.47
Second Quarter ..... 5.00 1.63
Third Quarter ...... 3.13 1.31
Fourth Quarter ..... 2.34 1.06
1995
----
First Quarter ...... $ 2.88 $ 0.56
Second Quarter ..... 4.13 2.31
Third Quarter ...... 4.50 2.81
Fourth Quarter ..... 3.19 0.69
Warrants to purchase 1,380,000 shares of Common Stock at $3.00 per
share, which expire on December 31, 1997 unless extended by the Company, trade
on the Nasdaq Small Cap Market under the symbol "SALVW".
There were approximately 406 shareholders of record of Common Stock at
June 30, 1997. The Company believes there are approximately 9,148 beneficial
owners of Common Stock. There were no cash dividends declared or paid in fiscal
years 1996 or 1995. The Company does not anticipate declaring such dividends in
the foreseeable future.
Upon the filing by the Company of its Form 10-QSB for the period ended
March 31, 1997, Nasdaq issued a letter to the Company asking the Company to
demonstrate that it currently meets all Nasdaq listing requirements and can
continue to meet those requirements. The Company caused the conversion of
$800,000 principal amount of the Convertible Debentures to Common Stock to
demonstrate current compliance and submitted to Nasdaq on June 4, 1997, its plan
to sustain compliance with Nasdaq requirements. The Company is awaiting a Nasdaq
response to its submission. 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
30
<PAGE>
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.
31
<PAGE>
MANAGEMENT
The names, ages and positions of the Company's directors and executive
officers are as follows:
Name Age Current Position(s) with Company
- ----------------------- --- --------------------------------------------------
Kenneth J. McLachlan 50 Director, President, Chief Executive Officer,
Chief Financial Officer and Chief Accounting
Officer
David Barnes 52 Managing Director of SDS International, Ltd.
Eric F. Stoer 52 Director
Hans R. Vauthier 72 Director
Michael A. Grant 52 Vice President, Operations
Paul D. Slowey, Ph.D. 41 Chief Operating Officer and
Vice President of Marketing
Kenneth J. McLachlan has served on the Board of Directors since
December 1995. In December 1996, Mr. McLachlan was appointed by the Board to
serve as the Company's President and Chief Executive Officer. Mr. McLachlan has
served as the Company's Chief Financial Officer since June 1996. In 1993, Mr.
McLachlan founded an international finance and consulting firm in the
Netherlands. From 1988 to 1993, Mr. McLachlan served as Chief Financial Officer
and Executive Vice President of Corange - Boehringer Mannheim, a privately owned
multinational health care group.
David Barnes, M.D., served on the Board of Directors of the Company
from November 1993 to May 1997. Dr. Barnes has been the Managing Director of
SDS International, Ltd. (UK) ("SDS-UK") since commencement of its operations.
Prior to his position as Managing Director of SDS-UK, Dr. Barnes was Director of
Medical Services for Hemotex Ltd., a laboratory service primarily involved with
the insurance industry in the United Kingdom.
Eric F. Stoer was elected to the Board of Directors of the Company in
May 1997. He has been a partner in the Washington, DC office of the law firm of
Bryan Cave LLP since 1990. His practice is concentrated in the areas of
corporate and business law with an international focus. Mr. Stoer has served on
the boards of directors of a number of pharmaceutical testing and consulting
companies, including Boehringer Mannheim Pharmaceuticals.
Hans R. Vauthier, Ph.D. was appointed to the Board of Directors in May
1996 to fill the vacancy created by the resignation of Dr. Eugene Seymour. Since
1981, Dr. Vauthier has been a principal of Vauthier & Partner A.G., a consulting
firm located in Basle, 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 Bern in
Switzerland.
Michael A. Grant has been Vice President of Operations of the Company
since January 1996. From February 1992 until January 1996, Mr. Grant served as
Design Manager for the Company. He is the former President of Hema-Scientific, a
company that developed an HIV screening product for home use. He is the inventor
of the Company's Omni-Swab product.
32
<PAGE>
Paul D. Slowey, Ph.D., began employment as Director of Sales and
Marketing at the Company in August 1996. In May 1997, Dr. Slowey was promoted to
Chief Operating Officer and Vice President of Sales and Marketing of the
Company. From February 1990 until he joined the Company, Dr. Slowey was employed
at INCSTAR Corp., a Minnesota manufacturer of diagnostic products, as
International Marketing Manager and Director of International Sales.
33
<PAGE>
EXECUTIVE COMPENSATION AND OTHER MATTERS
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information for the 1994,
1995 and 1996 fiscal years concerning compensation awarded to, earned by or paid
the Company's current Chief Executive Officer, former Chief Executive Officer
and each of the other executive officers of the Company whose total annual
salary and bonus exceeded $100,000 (collectively, the "named executive
officers") for the fiscal year ended December 31, 1996.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
- -------------------------------------------------------------------------------------------
Long Term
Annual Compensation(1) Compensation
---------------------- ---------------------
Securities Underlying
Other Annual Options
Name and Principal Position Year Salary Compensation (#)
($)(1) ($)
- -------------------------------------- ---- ------- ------------- ---------------------
<S> <C> <C> <C> <C>
Kenneth J. McLachlan 1996 -- 51,000 --
President, Chief Executive Officer and 1995 -- -- --
Chief Financial Officer (2) 1994 -- -- --
David Barnes, M.D. 1996 135,000 -- --
Managing Director, 1995 131,750 -- 175,000
SDS International, Ltd. (UK) 1994 110,000 -- 105,000
Willfried Schramm, Ph.D. 1996 139,700 -- --
Vice President of Research and 1995 100,000 -- 125,000
Development (3) 1994 100,000 -- 100,000
Ronald L. Lealos 1996 86,600 -- --
Former President(4) 1995 31,925 130,000(5) 400,000
1994 106,200 -- 130,000
- -------------------------------------------------------------------------------------------
<FN>
(1) Amounts shown include compensation earned in each respective fiscal year. No
bonuses were paid in any of the fiscal years reported.
(2) Includes amounts paid to Mr. McLachlan pursuant to a consulting contract which
commenced in June 1996. Mr. McLachlan has served as the Company's Chief
Financial Officer since June 1996 and was appointed by the Board of
Directors to be President and Chief Executive Officer in December 1996.
(3) Does not reflect one option grant covering 50,000 shares which was granted in
1996 subject to shareholder approval of an increase in the authorized
number of the Company's common
34
<PAGE>
shares; such approval was obtained on February 20, 1997. Dr. Schramm
terminated his employment in January 1997, and thereby forfeited such
option to purchase 50,000 shares. The options to purchase 75,000 and 50,000
shares which were granted in 1995 are currently exercisable and expire
March 2, 1998 and March 25, 1999, respectively. An option to acquire
100,000 shares was also forfeited upon the termination of Dr. Schramm's
employment.
(4) Mr. Lealos resigned as an officer of the Company in December 1996. The options
reflected on the table are the subject of the Settlement Agreement (see "Certain
Relationships and Related Transactions").
(5) Consists of 230,000 shares of Common Stock of the Company issued to Mr. Lealos
as compensation.
</TABLE>
EMPLOYMENT AGREEMENT
In August 1994, the Company entered into a three year employment
agreement with Dr. David Barnes for the position of Managing Director of SDS
International, Ltd. (UK). The employment agreement provides for an annual base
salary of 79,200(pound) (approximately US $135,000.00) plus the use of a car and
travel allowances. If the agreement is terminated for any reason, Dr. Barnes is
entitled to receive his base salary for the remaining term of the agreement.
COMPENSATION OF DIRECTORS
Directors do not receive any fees for serving on the Company's Board of
Directors or any committee thereof.
OPTIONS GRANTED IN LAST FISCAL YEAR
The Company granted no stock options to the named executive officers
during the fiscal year ended December 31, 1996.
35
<PAGE>
OPTION EXERCISE AND HOLDINGS
The following table provides certain information concerning the value
of unexercised options held as of the end of the fiscal year with respect to the
named executive officers. There were no options exercised by the named executive
officers in the last fiscal year. All options held by the named executive
officers are currently exercisable.
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
- ------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised Options in-the-money Options at
at December 31, 1996(#) December 31, 1996 (1)
------------------------------ -----------------------
Name Exercisable Exercisable
- --------------------------- ------------------------------ -----------------------
<S> <C> <C>
Kenneth J. McLachlan -- --
David Barnes, M.D.(2) 3,000 --
105,000 $43,750
175,000
Willfried Schramm, Ph.D.(3) 100,000 $65,000
75,000 $18,750
50,000 $41,000
Ronald L. Lealos(4) 130,000 --
400,000 $100,000
- ------------------------------------------------------------------------------------
<FN>
(1) The market value of the underlying securities at December 31, 1996, $1.25 per
share, minus exercise price of the unexercised options.
(2) Does not reflect options granted to acquire 175,000 shares issued in fiscal
year 1995 subject to shareholder approval of an increase in the Company's
authorized number of common shares; such approval was obtained on February
20, 1997.
(3) Does not reflect one option grant covering 50,000 shares which was granted in
1996 subject to shareholder approval of an increase in the authorized
number of the Company's common shares; such approval was obtained on
February 20, 1997. Dr. Schramm terminated his employment in January 1997,
and thereby forfeited such option to purchase 50,000 shares. The options to
purchase 75,000 and 50,000 shares which were granted in 1995 are currently
exercisable and expire March 2, 1998 and March 25, 1999, respectively. An
option to acquire 100,000 shares was also forfeited upon the termination of
Dr. Schramm's employment.
36
<PAGE>
(4) Mr. Lealos resigned as an officer of the Company in December 1996. The options
reflected on the table are the subject of the Settlement Agreement (see
"Certain Relationships and Related Transactions").
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1997, subsequent to his resignation as President of the
Company in December 1996, Ronald L. Lealos filed a lawsuit against the Company
in Superior Court in Clark County in the State of Washington alleging the
existence of an employment agreement and various breach of contract claims. This
lawsuit was dismissed without prejudice as a prerequisite to settlement
negotiations. A settlement agreement (the "Settlement Agreement") between Mr.
Lealos and the Company is currently in the process of being documented. There
can be no assurance that a final settlement acceptable to the Company will be
concluded with Mr. Lealos, or that a resulting lawsuit, if decided adverse to
the Company, would not have a material adverse effect.
In 1992, the Company loaned $83,000 to Mr. Lealos who was, at the time,
President and a Director of the Company. The interest rate on the loan is 6% per
year and the loan was to be repaid over five years. This loan is currently being
renegotiated pursuant to the Settlement Agreement with Mr. Lealos. The Company
has paid Mr. Lealos additional sums of money in the approximate amount of
$280,000. These payments are currently in dispute. In addition, there are
certain option grants to Mr. Lealos which are the subject of disputes with the
Company. These payments and option grants are the subjects of the Settlement
Agreement.
During the four fiscal years ended December 31, 1995, Dr. Seymour, a
former director and a former officer of the Company, lent the Company
substantial amounts of money to fund its operations. During fiscal year 1995,
the Company converted the loans it received from Dr. Seymour into shares of
Common Stock at the rate of $1.00 per share. Dr. Seymour received 231,120 shares
in exchange for his loan. 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 year 1994 and fiscal year 1995, the Company conducted a
private placement of its securities (the "Private Placement") whereby it sold
4,545,000 shares for approximately $2,200,000. A pension plan affiliated with
Dr. Seymour (the "Pension Plan") acquired 540,000 shares and a warrant to
purchase 80,000 shares at an exercise price of $3.50 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 after
January 1, 1995. Dr. M.J. Scheinbaum, a former director of the Company, and Dr.
Scheinbaum's pension plan purchased an aggregate of 360,000 shares in this
Private Placement and received a three year Warrant to purchase an additional
100,000 shares at a purchase price of $2.00 per share.
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
37
<PAGE>
Nasdaq on the date the holder elects to exercise his warrant. In January 1996,
holders of an aggregate of 345,000 warrants 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, former directors of the Company, each purchased one
Unit and each exercised his warrant to purchase an additional 150,000 shares of
Common Stock.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Common Stock of the Company as of June 30, 1997, except
where otherwise noted, as to (i) each person who is known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock, (ii) each
director of the Company, (iii) each of the executive officers named in the
Summary Compensation Table herein and (iv) all directors and executive officers
as a group. Except as otherwise noted, the Company believes the persons listed
below have sole investment and voting power with respect to the Common Stock
owned by them. There were issued and outstanding on June 30, 1997, taking into
account the conversion of all of the principal of the Debentures, a total of
23,827,609 shares of Common Stock.
38
<PAGE>
- --------------------------------------------------------------------------------
Common Stock
-----------------------------------------------
Number of Shares % Shares
Name and Address Beneficially Owned(1) Beneficially Owned
- ------------------------------- --------------------- ------------------------
Kenneth J. McLachlan 700,000(2) 2.91%
c/o SDS International Ltd. (UK)
11 Sovereign Close
Sovereign Court
London, England E1 9HW, UK
Hans R. Vauthier -- --
Steinengraben 28
Ch-4051
Basle, Switzerland
David Barnes, M.D. 470,000(3) 1.95%
c/o SDS International Ltd. (UK)
11 Sovereign Close
Sovereign Court
London, England E1 9HW, UK
Willfried Schramm, Ph.D. 125,000(4) 5.22%
23000 Schauer Road
Battleground, WA 98604
Ronald L. Lealos 1,181,912(5) 4.85%
1477 SE Columbia Shores
Vancouver, WA 98662
Eric F. Stoer -- --
700 Thirteenth Street, N.W.
Washington, D.C. 20005
The Tail Wind Fund Ltd. 1,689,644(6) 6.97%
Windermere House
404 East Bay Street
PO Box SS-5539
Nassau, Bahamas
- --------------------------------------------------------------------------------
All Executive Officers and
Directors as a group
(6 persons)(7) 1,087,666(8) 4.49%
- --------------------------------------------------------------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting power and
investment power with respect to shares. Shares issuable upon the exercise
of outstanding stock options that are currently exercisable or become
exercisable within 60 days from June 30, 1997 are considered outstanding
for the purpose of calculating the percentage of Common Stock owned by such
person but not for the purpose of calculating the percentage of Common
Stock owned by any other person.
39
<PAGE>
(2) Includes 200,000 shares which are the subject of a subscription agreement
dated as of June 30, 1997 among the Company and certain investors, and of
which Mr. McLachlan may be deemed to be the beneficial owner. Also includes
500,000 shares registered in the name of Reads Trust Company Limited,
trustee of an irrevocable trust established for the benefit of
Mr. McLachlan's children. Mr. McLachlan has no power to vote or dispose of
these shares pursuant to the terms of the trust.
(3) Includes options to purchase 283,000 shares of the Company's Common Stock.
(4) Includes options to purchase 125,000 shares of the Company's Common Stock.
(5) Includes options to purchase 530,000 shares of the Company's Common Stock
which were granted to Mr. Lealos, and options to purchase 10,000 shares of
the Company's Common Stock which were granted to Mr. Lealos' wife. The
options reflected in the table for Mr. Lealos are the subject of the
Settlement Agreement (see "Certain Relationships and Related
Transactions").
(6) Includes 412,905 shares which are the subject of a subscription agreement
dated as of June 30, 1997 between the Company and TailWind.
(7) Includes Kenneth J. McLachlan, Hans R. Vauthier, Eric F. Stoer, Paul D.
Slowey, Michael Grant and David Barnes, the current directors and executive
officers of the Company.
(8) Includes options to purchase an aggregate of 382,166 shares of the
Company's Common Stock.
SELLING SHAREHOLDERS
The Selling Shareholders are (i) the Tail Wind Fund Limited ("Tail
Wind") and Joseph Kaufman, the purchasers of $1,100,000 and $400,000,
respectively, in principal amount of the Company's 7.5% Convertible Debentures
due February 28, 1999 (the "Debentures"); and (ii) Grayson & Associates, Inc.
("Grayson"), the owner of warrants to purchase 89,552 shares of Common Stock
(the "Grayson Warrants"). The foregoing entities and individual are collectively
referred to as the "Selling Shareholders."
All of the shares of Common Stock that have been or may be acquired by
the Selling Shareholders upon conversion of the Debentures or exercise of the
Grayson Warrants are being registered pursuant to the Registration Statement of
which this Prospectus forms a part, and are being offered hereby. See
"Description of Securities -- Debentures" and "-- Grayson Warrants."
The Company will not receive any proceeds from the sale of the Selling
Shareholders' Common Stock. Sales of any shares of Common Stock by the Selling
Shareholders, or even the existence of the right to convert the Debentures into
shares of Common Stock, or to acquire Common Stock upon the exercise of the
Grayson Warrants, may depress the price of the Common Stock.
As of the date of this Prospectus, TailWind has converted $1,000,000 in
principal amount of the Debentures for a total of 1,276,739 shares of Common
Stock and Joseph Kaufman has converted $400,000 in principal amount of the
Debentures for a total of 460,085 shares of
40
<PAGE>
Common Stock. The Selling Shareholders own no other shares of Common Stock,
although each of Tail Wind and Grayson are participants in a private placement
by the Company pursuant to which Tail Wind has committed to purchase 412,905
shares of Common Stock for an aggregate purchase price of $300,000 and Grayson
has committed to purchase 200,000 shares of Common Stock for an aggregate
purchase price of $100,000. Each of Tail Wind and Grayson will acquire certain
common stock purchase warrants in connection with this private placement. None
of the Selling Shareholders nor any of their affiliates has held any position or
office within the Company or has had any other material relationship with the
Company, except that Grayson received a cash fee in the amount of $120,000 and
the Grayson Warrants as compensation for assisting the Company in the $1,500,000
Debenture financing. In addition, Grayson has been engaged by the Company to
provide certain capital raising services through September 1997.
The Selling Shareholders may sell the shares in one or more
transactions (which may involve one or more block transactions) on the
over-the-counter markets on the Nasdaq and upon terms then prevailing or at
prices related to the then current market price, or in separately negotiated
transactions or in a combination of such transactions. The Common Stock offered
hereby may be sold by one or more of the following methods, without limitation:
(a) a block trade in which a broker or dealer so engaged will attempt to sell
the shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction; (b) purchases by a broker or dealer as
principal and resale by such broker or dealer for its account pursuant to this
Prospectus; (c) ordinary brokerage transactions and transactions in which the
broker solicits purchasers; and (d) face-to-face transactions between sellers
and purchasers without a broker-dealer. The Selling Shareholders may be deemed
to be underwriters of the shares offered hereby within the meaning of the
Securities Act of 1933, as amended (the "Securities Act").
In effecting sales, brokers or dealers engaged by the Selling
Shareholders may arrange for other brokers or dealers to participate. Such
broker or dealers may receive commissions or discounts from the Selling
Shareholders in amounts to be negotiated. All other expenses incurred in
connection with this offering will be borne by the Company other than the
Selling Shareholders' legal fees, except that the Company has agreed to pay the
first $10,000 of Tail Wind's legal fees. Such brokers and dealers and any other
participating brokers or dealers may, in connection with such sales, be deemed
to be underwriters within the meaning of the Securities Act. Any discounts or
commissions received by any such brokers or dealers may be deemed to be
underwriting discounts and commissions under the Securities Act.
The Company has agreed to indemnify Tail Wind, Kaufman and Grayson, and
Tail Wind, Kaufman and Grayson have agreed to indemnify the Company against
certain civil liabilities, including certain liabilities under the Securities
Act.
41
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The Company's Certificate of Incorporation authorizes the Company to
issue up to 33,000,000 shares of Common Stock, par value $.01 per share. As of
June 30, 1997, taking into account the conversion of all of the Debentures,
there were approximately 23,827,609 shares of Common Stock outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by stockholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voted for the election of
directors can elect all of the directors. The holders of Common Stock are
entitled to receive dividends when, as and if declared by the Board of Directors
out of funds legally available therefor. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining available for distribution to
them after payment of liabilities and after provision has been made for each
class of stock, if any, having preference over the Common Stock. Holders of
shares of Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
Common Stock. All of the outstanding shares of Common Stock are, and the shares
of Common Stock offered hereby, when issued against the consideration set forth
in this Prospectus, will be, fully paid and nonassessable.
On June 30, 1997, the Company entered into two separate common stock
subscription agreements, one with Tail Wind and one with certain other
investors, providing for the issuance and sale of shares of Common Stock for an
aggregate purchase price of $300,000 and $650,000, respectively. The Company
expects the closing on these subscription agreements to occur on or about July
11, 1997. Under the terms of the agreement between the Company and Tail Wind,
Tail Wind also is entitled to receive additional shares of Common Stock if the
average market price of the Common Stock on a designated 5-day trading period is
less than 133.33% of the original per share purchase price paid by Tail Wind.
DEBENTURES
The Company issued to Tail Wind $1,500,000 in principal amount of the
Company's 7.5% Convertible Debentures due February 28, 1999 in a private
placement completed in March 1997. Tail Wind subsequently sold and transferred
$400,000 principal amount of the Debentures to Joseph Kaufman. Pursuant to the
original terms of the Debentures, the holder of the Debentures had the right,
exercisable at one or more times, at its option, to convert up to (i) 33 1/3% of
the Debentures at any time on or after June 10, 1997, (ii) up to an aggregate of
66 2/3% of the Debentures at any time on or after July 9, 1997, and (iii) 100%
of the Debentures on or after August 8, 1997.
42
<PAGE>
Pursuant to two subsequent agreements among the Company, Tail Wind and
Kaufman, the parties agreed to an accelleration of conversion. Specifically,
Tail Wind and Kaufman agreed to convert an aggregate of $800,000 of Debentures
on or prior to June 5, 1997, and an aggregate of $700,000 of Debentures on or
prior to June 30, 1997, and to hold the Common Stock issued pursuant to such
conversions (the "Early Conversion Shares") in accordance generally with the
original conversion schedule (i.e., selling or transferring no more than
one-third of the Early Conversion Shares from June 12, 1997 to July 12, 1997; no
more than an aggregate of two-thirds of the Early Conversion Shares from July
12, 1997 to August 12, 1997; and then all of the Early Conversion Shares at any
time after August 12, 1997). Neither Tail Wind nor Kaufman are required to sell
any of the Early Conversion Shares. In addition, the Company agreed to certain
conversion reset provisions, pursuant to which Tail Wind and Kaufman may receive
additional shares of Common Stock if, (i) in the case of the conversion on or
prior to June 5, 1997, at any time during the 120-day period (and only one time
for each of Tail Wind and Kaufman) following effectiveness of the Registration
Statement (of which this Prospectus is a part), the Conversion Price at that
time is less than the early Conversion Price; and (ii) in the case of the
conversion on or prior to June 30, 1997, during any monthly period prior to
January 1, 1998, the average daily bid price for each day during such period is
less than the early Conversion Price. The number of shares of Common Stock
issuable upon the conversion of the Debentures was determined by dividing the
principal amount of the Debentures converted by the Conversion Price (as defined
below) in effect on the conversion date. The "Conversion Price" is the lesser of
(i) $1.9191, and (ii) 80% of the Current Market Price (as defined below) on the
applicable conversion date. The "Current Market Price" per share of Common Stock
on any date is the average of the closing bid prices of the Common Stock for the
five consecutive trading days ending on the trading day immediately prior to the
date in question, as reported by Nasdaq.
Interest on the Debentures converted on June 5, 1997 was $10,375 to
Tail Wind and $3,416 to Kaufman. Interest on the Debentures converted on June
30, 1997 was $11,146 to Tail Wind and $4,458 to Kaufman. The Company intends to
issue to each of Tail Wind and Kaufman 20,242 and 7,362 shares of Common Stock,
respectively, in payment of such interest.
GRAYSON WARRANTS
In March 1997, the Company issued the Grayson Warrants to Grayson in
consideration of certain financial consulting services performed on behalf of
the Company. The Grayson Warrants entitle the holder thereof to purchase 89,552
shares of Common Stock from the Company for a purchase price of $1.34 per share
on or before March 14, 2002. The warrantholder has certain demand and piggyback
registration rights with respect to the shares that may be issued upon exercise
of the Grayson Warrants. The Grayson Warrants have customary provisions
regarding the adjustment of the number of warrants and the exercise price upon
the occurrence of certain extraordinary events. Grayson exercised its piggyback
registration right in connection with the registration of the shares issued and
to be issued on conversion of the Debentures.
43
<PAGE>
LEGAL MATTERS
The validity of the securities being offered will be passed upon for
the Company by Bryan Cave LLP, 700 Thirteenth Street, Washington, D.C. 20005.
EXPERTS
The financial statements of the Company for the fiscal years ended
December 31, 1995 and 1996 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
44
<PAGE>
PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT IN THE OPINION OF THE SECURITIES
AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION IS AGAINST PUBLIC POLICY AS
EXPRESSED IN THE SECURITIES ACT AND IS THEREFORE UNENFORCEABLE.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a Registration Statement on Form SB-2 (the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered by this Prospectus. This Prospectus, filed as part of such
Registration Statement, does not contain all of the information set forth in, or
annexed as exhibits to, the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and this offering, reference is
made to the Registration Statement, including the exhibits filed therewith,
which may be inspected without charge at the Office of the Commission, 450 Fifth
Street, NW, Washington, DC, 20549. Copies of the Registration Statement may
obtained from the Commission at its principal office upon payment of prescribed
fees. Statements contained in this Prospectus as to the contents of any contract
or other document are not necessarily complete and, where the contract or other
document has been filed as an exhibit to the Registration Statement, each
statement is qualified in all respects by reference to the applicable document
filed with the Commission.
45
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the years ended F-5
December 31, 1996 and 1995
Consolidated Statement of Stockholders' Equity for the years F-7
ended December 31, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended F-8
December 31, 1996 and 1995
Notes to Audited Consolidated Financial Statements F-10
Consolidated Balance Sheets as of March 31, 1997 and F-15
December 31, 1996 (unaudited)
Consolidated Statements of Operations for the three months F-16
ended March 31, 1997 and 1996 (unaudited)
Consolidated Statements of Cash Flows for the three months F-17
ended March 31, 1997 and 1996 (unaudited)
Notes to Unaudited 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 accompanying consolidated balance sheets of Saliva
Diagnostic Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Saliva Diagnostic
Systems, Inc. and subsidiaries as of December 31, 1996 and 1995 and the results
of operations, stockholders' equity and cash flows for the years then ended, in
conformity with generally accepted accounting principles.
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 21, 1997
F-2
<PAGE>
<TABLE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash .......................................................................... $ 776,380 $ 2,688,014
Accounts receivable ........................................................... 178,436 43,291
Inventories (Note 4) .......................................................... 268,431 300,161
Prepaid expenses .............................................................. 34,425 28,956
------------ ------------
TOTAL CURRENT ASSETS ...................................................... 1,257,672 3,060,422
------------ ------------
PROPERTY AND EQUIPMENT, Net (Note 5) .............................................. 493,649 470,593
------------ ------------
OTHER ASSETS
Deposits ...................................................................... 188,647 70,019
Restricted cash (Note 8) ...................................................... 120,500
Patents and trademarks, net of accumulated
amortization of $39,183 in 1996 and $29,983 in 1995 ......................... 117,733 127,057
Goodwill, net of accumulated amortization
of $15,000 in 1995 (Note 3) ................................................. 585,000
Prepaid loan fees (Note 6) .................................................... 45,367
------------ ------------
TOTAL OTHER ASSETS ........................................................ 426,880 827,443
------------ ------------
$ 2,178,201 $ 4,358,458
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses ......................................... $ 818,073 $ 500,078
Accrued interest payable ...................................................... 68,240 49,703
Current portion of long-term debt and
obligations under capital leases (Note 8) ................................... 35,057 15,869
Convertible debentures (Note 6) ............................................... 2,785,000
------------ ------------
TOTAL CURRENT LIABILITIES ................................................. 921,370 3,350,650
------------ ------------
LONG-TERM DEBT AND OBLIGATIONS UNDER
CAPITAL LEASES, net of current portion (Note 8) ................................. 96,199 30,497
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 8 and 9)
STOCKHOLDERS' EQUITY (Note 6)
Common stock - authorized 25,000,000 shares, $.01 par value,
issued and outstanding 22,040,785 in 1996 and 13,126,366 in 1995 ............ 220,408 131,264
Additional paid-in capital .................................................... 22,998,552 17,726,578
Note receivable related to sale of stock ...................................... (83,825) (83,825)
Cumulative foreign translation adjustment ..................................... (60,257) (34,859)
Accumulated deficit ........................................................... (21,914,246) (16,761,847)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ................................................ 1,160,632 977,311
------------ ------------
$ 2,178,201 $ 4,358,458
============ ============
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
F-3
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
------------ ------------
REVENUES
Product sales .......................... $ 715,780 $ 522,814
Technology licensing income ............ 24,870 59,855
Other fees and interest income ......... 99,418 38,630
------------ ------------
TOTAL REVENUES ...................... 840,068 621,299
------------ ------------
COSTS AND EXPENSES
Cost of product sold ................... 472,142 149,629
Research and development ............... 1,040,057 903,386
Selling, general and administrative .... 3,911,587 3,608,353
Write-off of Goodwill .................. 540,000
Interest expense and loan fees ......... 28,681 557,701
------------ ------------
TOTAL COSTS AND EXPENSES ............ 5,992,467 5,219,069
------------ ------------
NET LOSS ..................................... $ (5,152,399) $ (4,597,770)
============ ============
NET LOSS PER SHARE ........................... $ (0.26) $ (0.46)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING. 20,100,000 9,900,000
============ ============
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
<TABLE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<CAPTION>
Common Stock Note Cumulative
----------------------- Additional Receivable Foreign
Shares Paid-in (Sale of Translation Accumulated
Outstanding Amount Capital Stock) Adjustment Deficit Total
------------- -------- ----------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994............... 6,304,332 $ 63,043 $12,434,356 $ (83,825) $ (32,644) $(12,164,077) $ 216,853
Sale of common stock in private
offerings.............................. 3,715,000 37,150 1,935,350 1,972,500
Issuance of shares to officer for
compensation........................... 230,000 2,300 127,700 130,000
Convertible debentures converted into
common shares.......................... 1,726,572 17,266 945,234 962,500
Issuance of warrants to consultants...... 780,000 780,000
Issuance of options in settlement
agreement.............................. 88,750 88,750
Issuance of shares to consultants........ 100,000 1,000 149,000 150,000
Options exercised........................ 170,000 1,700 154,300 156,000
Underwriter's warrants exercised......... 180,462 1,805 268,888 270,693
Consulting warrants exercised............ 250,000 2,500 247,500 250,000
Issuance of shares to acquire minority
interest in subsidiaries............... 450,000 4,500 595,500 600,000
Foreign translation adjustment........... (2,215) (2,215)
Net loss for the year.................... (4,597,770) (4,597,770)
------------- -------- ----------- ---------- ----------- ------------- -----------
BALANCE, December 31, 1995............... 13,126,366 131,264 17,726,578 (83,825) (34,859) (16,761,847) 977,311
Warrants exercised....................... 2,580,861 25,807 2,444,711 2,470,518
Options exercised........................ 104,750 1,048 75,802 76,850
Issuance of shares in settlement
agreement.............................. 16,500 166 53,584 53,750
Convertible debentures payable
converted into common shares........... 6,212,308 62,123 2,697,877 2,760,000
Foreign translation adjustment........... (25,398) (25,398)
Net loss for the year.................... (5,152,399) (5,152,399)
------------- -------- ----------- ---------- ----------- ------------- -----------
BALANCE, December 31, 1996............... 22,040,785 220,408 $22,998,552 $ (83,825) $ (60,257) $(21,914,246) $1,160,632
============= ======== =========== ========== =========== ============= ===========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
F-5
<PAGE>
<TABLE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ............................................ $(5,152,399) $(4,597,770)
Adjustments to reconcile net loss
to net cash used by operating activities:
Cumulative foreign translation adjustment ....... (25,398) (2,215)
Depreciation and amortization ................... 290,929 749,750
Expenses satisfied with issuance of shares ...... 53,750 1,148,750
Write-off of goodwill ........................... 540,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ... (135,145) 3,748
(Increase) decrease in inventories ........... 31,730 (207,561)
(Increase) decrease in prepaid expenses ...... (5,469) (28,956)
Increase (decrease) in accounts payable
and accrued expenses ....................... 336,532 (65,317)
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES .......... (4,065,470) (2,999,571)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Placement of restricted cash ........................ (120,500)
Patents and trademarks .............................. 124 (4,310)
Deposits ............................................ (118,628) (5,863)
Purchase of equipment ............................... (214,418) (118,295)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES ........ (453,422) (128,468)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Convertible debentures .............................. 3,128,900
Repayments of convertible debentures ................ (25,000) (37,500)
Sale of stock - private placement and exempt offering 1,972,500
Proceeds from long-term debt ........................ 109,476
Repayment of long-term and obligations
under capital leases .............................. (24,586) (20,971)
Stock warrants and options exercised ................ 2,547,368 676,693
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .... 2,607,258 5,719,622
----------- -----------
NET INCREASE (DECREASE) IN CASH ......................... (1,911,634) 2,591,583
CASH BALANCE, Beginning of period ....................... 2,688,014 96,431
----------- -----------
CASH BALANCE, End of period ............................. $ 776,380 $ 2,688,014
=========== ===========
INTEREST AND LOAN FEES PAID ............................. $ 10,144 $ 565,035
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Shares issued in lieu of fees and expenses .......... $ 53,750 $ 1,148,750
Acquisition of minority interest .................... $ 600,000
</TABLE>
F-6
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - The Company is primarily engaged in the
development, manufacture and marketing of rapid immunoassays for use in the
detection of infectious diseases and other conditions. The Company has also
developed and distributes medical specimen collection devices.
Principles of Consolidation - The financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and balances 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.
Impairment of Long-Lived Assets - The Company periodically assesses the
recoverability of the carrying amounts of long-lived assets, including
intangible assets. A loss is recognized when expected undiscounted future
cash flows are less than the carrying amount of the asset. The impairment
loss is the difference by which the carrying amount of the asset exceeds its
fair value. As a result of its review, the Company wrote-off goodwill at
December 31, 1996 in the amount of $540,000.
Stock-Based Compensation - The Company has adopted the disclosure-only
provisions of SFAS No. 123, which retains the original accounting prescribed
by APB Opinion No. 25. As a result, options granted at fair value will not
result in charges to earnings. Disclosures are made, however, of
compensation costs determined under SFAS No. 123's fair value methodology.
Inventories - Inventories are stated at the lower of cost or market
determined on a first-in, first-out (FIFO) basis.
Property and Equipment - Property and equipment is stated at cost.
Depreciation is computed on the straight-line method based upon the
estimated useful life of the asset. Useful lives are generally as follows;
Office furniture & equipment 5 to 7 years
Machinery and Equipment 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 reflect no instance of problems with
liability.
Income Taxes - The Company utilizes the asset and liability approach for
financial accounting and reporting for income taxes. If it is more likely
than not that some portion or all of a deferred tax asset will not be
realized, a valuation allowance is recognized.
F-7
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Loss Per Share - Loss per share is based upon the weighted average number of
common shares and common share equivalents outstanding during the periods.
Common share equivalents are not included as they are anti-dilutive.
Revenues - The Company derived revenues from two sources: sale of product
and licensing. Revenues are recognized as the service or product has been
delivered.
Research and Development - Research and development expenditures include
those costs associated with the Company's own on-going research and
development activities. All research and development costs are expensed as
incurred.
The Company has entered into various informal arrangements with certain
laboratories/manufacturers of assay kits whereby these
laboratories/manufacturers will share certain unspecified costs of research
and development. However, the Company has no obligation to perform research
and development for these entities.
Currency Fluctuations - Foreign currency transactions and financial
statements are to be translated into U.S. dollars at current rates, except
that revenues, costs and expenses are translated at average current rates
during each reporting period. The resulting translation adjustments are
recorded directly into a separate component of stockholders' equity. Gains
and losses resulting from foreign currency transactions, which are
insignificant, are included in income currently.
Reclassifications - Certain 1995 balances have been reclassified to conform
with the current year's presentation.
2. GOING CONCERN
Significant Operating Losses - Accumulated Deficit - The Company has
incurred significant operating losses since its inception, resulting in an
accumulated deficit of $21,914,246 and $16,761,847, at December 31, 1996 and
December 31, 1995, respectively. Such losses are expected to continue
through 1997 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. The Company is dependent upon its other
efforts to raise capital resources, including proceeds received from the
exercise of Warrants to finance the cost of manufacturing, marketing and
conducting clinical trials and submissions for FDA approval of its products
and continuing the design and development of the Company's new products
which utilize its rapid testing format. Marketing, manufacturing and
clinical testing may require capital resources substantially greater than
the resources currently available to the Company. There can be no assurance
that the Company will be able to obtain the 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. (See Note 11).
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
F-8
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 $45,000 in 1996 and $15,000 in 1995. At December 31,
1996, the Company assessed the recoverability of the Goodwill that resulted
to the write-off of the Goodwill in the amount of $540,000.
Management of the Company has reviewed the need for the Singapore operations
as were originally anticipated and have concluded that use of this location
as their primary manufacturing source is no longer required and as such have
deemed it appropriate to write off the remaining Goodwill associated with
this location.
4. INVENTORIES
Inventories consisted of the following at December 31, 1996 and 1995:
1996 1995
-------- --------
Raw materials ...................................... $253,000 $186,492
Work in process .................................... 2,495 66,807
Finished goods ..................................... 12,936 46,862
-------- --------
$268,431 $300,161
======== ========
5. PROPERTY AND EQUIPMENT
Property and Equipment consisted of the following at December 31, 1996 and
1995:
1996 1995
---------- ----------
Office Furniture & Equipment ..................... $ 114,041 $ 76,711
Machinery, Laboratory Equipment and Tooling ...... 861,957 806,918
Leasehold Improvements ........................... 97,582 38,727
Vehicle .......................................... 181,423 126,388
Exhibits ......................................... 30,955 60,710
---------- ----------
1,285,958 1,109,454
Less: accumulated depreciation and amortization... 792,309 638,861
---------- ----------
$ 493,649 $ 470,593
========== ==========
6. STOCKHOLDERS' EQUITY
Increase in Authorized Capital Stock - On February 20, 1997, the
stockholders of the Company approved an amendment to the Company's
Certificate of Incorporation to increase the authorized number of shares of
stock from 25,000,000 to 33,000,000 shares.
F-9
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Public Offering - In March 1993 the Company closed a public offering in
which it sold 1,300,000 shares of its common stock at $6.00 per share and
1,380,000 warrants to purchase 1,380,000 shares of the Company's common
stock for $7.20 per share, at $.10 per warrant. The Company received net
proceeds of $6,364,630 after expenses related to the offering of $1,573,490.
The warrants have been extended to June 30, 1997 and the exercise price has
been reduced from $7.20 to $3.00 per share.
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, 1995 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. During 1996, the underwriter exercised
the remaining warrants and purchased 756,361 shares at $1.00 per share.
During 1996, the Company granted new warrants to the underwriter to purchase
1,000,000 shares of common stock at $1.00 per share, all of which have been
exercised by the underwriter in 1996.
Note Receivable Related to Sale of Stock - In January 1992 the Company sold
to its President, who resigned in December 1996, 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 (see Note 8).
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.
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 and $45,367 was charged to expense
in 1995 and 1996, respectively. During 1996, certain debenture holders
converted $2,760,000 principal amount of debentures into 6,212,308 shares of
common stock. All of the convertible debentures in these transactions have
been converted to common stock as of December 31, 1996.
F-10
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Private Placements - 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 November 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 stock on the exercise date. All of the warrants
were exercised in 1996.
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, 1996, 327,500
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 Agreements - 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. As
of December 31, 1996, all of these options have been exercised.
During 1996, the Company issued a total of 12,500 shares of common stock
valued at approximately $43,750 to certain unrelated individuals to settle a
dispute. Also during 1996, the Company issued 4,000 shares of common stock
valued at $10,000 as a consideration for extension of a previous note
payable to an individual.
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 such purchase.
Shares Issued to Officer - During 1995, the Company issued 230,000 shares of
common stock to its former President valued at $130,000 as additional
compensation for the year 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 of 3,000 shares of common stock at the
date of the 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.
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
F-11
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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.
On March 2, 1995, the Company's Board of Directors granted options to
purchase 997,000 shares, including 400,000 shares to its former 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.
The following table summarizes the stock options activity for the years 1996
and 1995:
Number Option Price
of Shares Range
---------- ------------------
Outstanding at December 31, 1994 ..... 660,000 $.60 to $6.875
Options granted .................. 997,000 $1.00
Options exercised ................ (170,000) $.60 to $1.375
Options expired or canceled ...... (53,000) $1.00 to $6.875
----------
Outstanding at December 31, 1995 ..... 1,434,000 $.60 to $5.50
Options granted .................. 302,500 $.43 to $2.38
Options exercised ................ (104,750) $.60 to $1.00
Options expired or canceled ...... (1,000) $.60
----------
Outstanding at December 31, 1996 ..... 1,630,750 $.60 to $5.50
==========
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". Accordingly, no compensation cost has been recognized for the
stock options. Had compensation cost for the Company's stock options been
determined based on the fair value at the grant date for options granted in
1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's
net loss and loss per common share would have been increased to the pro
forma amounts indicated below:
1996 1995
------------ ------------
Net loss - as reported ............... $(5,152,399) $(4,497,770)
Net loss - pro forma ................. $(5,518,599) $(5,325,580)
Loss per common share - as reported .. $ (0.26) $ (0.46)
Loss per common share - pro forma .... $ (0.27) $ (0.54)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
1996 1995
------ ------
Expected dividend yield ................................ 0% 0%
Expected stock price volatility ........................ 150% 106%
Risk-free interest rate ................................ 6% 6%
Expected life of options - years ....................... 3 3
The weighted average fair value of options granted during 1996 and 1995 was
$1.21 and $0.73, respectively.
F-12
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. INCOME TAXES
The Company has a net operating loss carryforward of approximately $17.5
million which is available to offset future taxable income, if any, expiring
through the year 2011. 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 $65,000 and $126,000. In
addition, each employment agreement provides for bonuses, cost of living
increases, reimbursement of business expenses, health insurance and related
benefits.
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.
Long-Term Debt and Obligations under Capital Leases - The Company borrowed
$109,476 from a certain bank in 1996. The note carried an interest rate of
6.940% and is payable $2,162.54 per month for 60 months. The note is secured
by a time deposit in the amount of $120,500. 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.
The following represents the maturity schedule as of December 31, 1996:
1997................. $ 35,057
1998................. 36,792
1999................. 22,536
2000................. 24,151
2001................. 12,720
--------
Total................ 121,256
Less current portion. 35,057
--------
$ 96,199
========
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, 1996:
F-13
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Year Ended December 31,
-----------------------
1997................... $199,101
1998................... 150,552
1999................... 148,180
2000................... 153,036
2001................... 153,036
Thereafter............. 102,024
--------
$905,929
========
Rent expense for the years ended December 31, 1996 and 1995 was $301,016 and
$237,855, respectively.
10. SEGMENT INFORMATION
Information about the Company's operations in different geographic areas
follows:
1996 1995
----------- -----------
Product sales:
United States ............ $ 393,635 $ 317,812
Asia ..................... 79,218 70,696
United Kingdom ........... 242,927 134,306
----------- -----------
Total ............. $ 715,780 $ 522,814
=========== ===========
Operating profit (loss)
United States ............ $(4,407,954) $(3,959,955)
Asia ..................... (621,958) (497,969)
United Kingdom ........... (122,487) (139,846)
----------- -----------
Total ............. $(5,152,399) $(4,597,770)
=========== ===========
Identifiable assets
United States ............ $ 1,687,866 $ 3,342,815
Asia ..................... 368,562 955,776
United Kingdom ........... 121,773 59,867
----------- -----------
Total ............. $ 2,178,201 $ 4,358,458
=========== ===========
Customer Concentration - During 1996, three customers accounted for
approximately 20%, 18% and 11% of total sales, respectively. During 1995,
two customers accounted for approximately 40% and 10% of total sales,
respectively.
11. BORROWINGS SUBSEQUENT TO YEAR-END
In March 1997, the Company raised net proceeds of $1,370,000 from private
placement of 7.5% convertible debentures. The principal amounts of the
debentures are due on February 28, 1999.
F-14
<PAGE>
<TABLE>
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
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
============ ============
The accompanying notes are an integral part of these balance sheets.
</TABLE>
F-15
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended
March 31,
---------------------------
1997 1996
------------ ------------
Revenues:
Product sales .................................. $ 227,034 $ 171,379
Technology license income ...................... -- 22,342
------------ ------------
227,034 193,721
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.
F-16
<PAGE>
<TABLE>
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<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
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-17
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC.
NOTES TO UNAUDITED 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
============ ============
F-18
<PAGE>
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, 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.
F-19
<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.............................................................3
Risk Factors...................................................................6
The Company...................................................................15
Management's Discussion and Analysis..........................................26
Market for Registrant's Common Equity and Related
Stockholder Matters........................................................30
Management....................................................................32
Executive Compensation and Other Matters......................................34
Security Ownership of Certain Beneficial Owners and Management................38
Selling Shareholders..........................................................40
Description of Securities.....................................................42
Legal Matters.................................................................44
Experts.......................................................................44
Indemnification of Directors and Officers.....................................44
Additional Information........................................................45
Index to Financial Statements................................................F-1
Until August __, 1997 (40 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.
SALIVA DIAGNOSTIC SYSTEMS, INC.
2,457,974 SHARES OF COMMON STOCK
PROSPECTUS
JULY __, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the
securities being registered hereby will be borne by the Company and are
estimated to be as follows:
Registration Fee.....................................................$ 733.13
Legal Fees........................................................... 30,000.00*
Accounting Fees...................................................... 5,000.00*
Miscellaneous........................................................ 5,000.00*
-----------
Total...........................................................$40,733.13*
===========
- ---------------
* Estimated
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 Ten 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.
II-1
<PAGE>
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 ACT AND IS THEREFORE UNENFORCEABLE.
EXHIBITS.
Exhibit No. Description
- ----------- ---------------------------------------------------------
2.1 Certificate of Incorporation, as amended, incorporated by
reference to Exhibits 2.1 through 2.6 to the Company's
Registration Statement on Form S-1 (Registration No.
33-46648) (the "Form S-1") and to Exhibit 2.7 to the
Company's Annual Report on Form 10-KSB for its fiscal
year ended December 31, 1995 (the "1995 10-KSB").
2.2 Certificate of Amendment to the Company's Certificate of
Incorporation, dated February 25, 1997, incorporated by
reference to Exhibit 2.2 to the Company's Annual Report
on Form 10-KSB for its fiscal year ended December 31,
1996 (the "1996 10-KSB").
3.1 Company's By-laws, incorporated by reference to Exhibit
3.1 to the Form S-1.
4.1 Form of Underwriter's Warrant, incorporated by reference
to Exhibit 4.2 to the Form S-1.*
4.2 Warrant issued to Whale Securities Co., L.P. for
1,000,000 shares, incorporated by reference to Exhibit
4.3 to the Company's Registration Statement on Form SB-2
(Registration No. 33-95172).*
4.3 7.5% Convertible Debenture due February 28, 1999, issued
by the Company to The Tail Wind Fund, Ltd. on March 11,
1997, incorporated by reference to Exhibit 4 to the
Company's Quarterly Report on Form 10-QSB for its fiscal
quarter ended March 31, 1997.
4.4 Common Stock Purchase Warrant for 89,552 shares, issued
by the Company to Grayson & Associates on March 14,
1997.*
5 Opinion of Bryan Cave LLP*
10.1 Consulting Agreement, dated May 20, 1996, between the
Company and International Business Consultants Limited,
incorporated by reference to Exhibit 10.1 to the 1996
10-KSB.
II-2
<PAGE>
10.2 Consulting Agreement, dated January 27, 1994, between the
Company and Duke Van Kalken, incorporated by reference to
Exhibit 10.16 to the Company's Annual Report on Form
10-KSB for its fiscal year ended December 31, 1993 (the
"1993 10-KSB").
10.3 Employment Agreement, dated August 9, 1994, between the
Company and David Barnes, incorporated by reference to
Exhibit 10.3 to the 1996 10-KSB.
10.4 1992 Stock Option Plan, incorporated by reference to
Exhibit 10.1 to the Form S-1.
10.5 1994 Stock Option Plan, incorporated by reference to
Exhibit A to the Proxy Statement for the Company's 1994
Annual Meeting.
10.6 Lease Agreement, dated June 13, 1994, between Technology
Parks Private Limited and Saliva Diagnostic Systems
(Singapore) Pte. Ltd., incorporated by reference to
Exhibit 10.2 to the 1995 10-KSB.
10.7 Amendment, dated February 20, 1997, to Lease Agreement,
dated June 13, 1994, between Technology Parks Private
Limited and Saliva Diagnostic Systems (Singapore) Pte.
Ltd., incorporated by reference to Exhibit 10.7 to the
1996 10-KSB.
10.8 Lease Agreement between the Company and East Ridge
Business Park, incorporated by reference to Exhibit 10.14
to the Form S-1.
10.9 Lease Agreement for additional premises between the
Company and East Ridge Business Park, incorporated by
reference to Exhibit 10.4 to the Company's Registration
Statement on Form SB-2 (Registration No. 33-95172).
10.10 Amendment, dated June 14, 1996, to Lease Agreement
between the Company and East Ridge Business Park,
incorporated by reference to Exhibit 10.10 to the 1996
10-KSB.
10.11 License Agreement, dated March 22, 1994, between the
Company and Orgenics, Ltd., incorporated by reference to
Exhibit 10.7 to the 1993 10-KSB.
10.12 License Agreement between Saliva Diagnostic Systems, Inc.
and Saliva Diagnostic Systems (Singapore) Pte. Ltd.,
incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-KSB for its fiscal
year ended December 31, 1994 (the "1994 10-KSB")
10.13 Convertible Securities Subscription Agreement, dated as
of March 11, 1997, between the Company and The Tail Wind
Fund Ltd.*
II-3
<PAGE>
10.14 Registration Rights Agreement, dated as of March 11,
1997, between the Company and The Tail Wind Fund Ltd.*
21 List of Significant Subsidiaries, incorporated by
reference to Exhibit 21.1 to the Form S-1.
23.1 Consent of Hollander, Gilbert & Company.
23.2 Consent of Bryan Cave LLP (included in Exhibit 5).
- ---------------
* Previously filed.
UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions or otherwise, the
Company has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(b) The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10 (a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in this Registration Statement;
II-4
<PAGE>
(iii) include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of a
Registration Statement in reliance upon Rule 430A and contained in the form of
Prospectus filed by Registrant pursuant to Rule 424 (b)(1) or (4) under the
Securities Act shall be deemed to be part of the Registration Statement as of
the time it was declared effective.
(5) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
RECENT SALES OF UNREGISTERED SECURITIES.
In April 1995, the Company sold an aggregate of 4,545,000 shares of
Common Stock to the following persons, in the amount set forth opposite their
names below in consideration for an aggregate of approximately $2,200,000.
Name Number of Shares
- -------------------------------------------------------------- ----------------
Wilshire Center Geriatrics 540,000
G&G Diagnostics LP 100,000
Etek Electronics Corp. 100,000
Oppenheimer & Co., as trustee for Joel Scheinbaum, M.D. 180,000
Pension Plan
Joel Scheinbaum 210,000
Gary Nathanson 95,000
Barry Coe 100,000
Jan Gilbert 200,000
Harris Cahn Employee Retirement Plan 100,000
Ronald Lealos 200,000
Richard Kalin 50,000
Millard Zimet 50,000
Douglas Becker 50,000
II-5
<PAGE>
Name Number of Shares
- -------------------------------------------------------------- ----------------
Ceppos Group 100,000
Dr. Mailman 50,000
Frank Kohner 50,000
Lynn Hargrave 50,000
Havens Partners LP 25,000
Peterson Machine Products Corp. Retirement Trust 50,000
Alain Levi 360,000
Slate Daiagi Realty Inc. 50,000
Handcar Ltd. Pension Plan 100,000
John St. John 40,000
Nora Eskes 25,000
Brad Beidner 100,000
George Stanton 80,000
Reads Trust Co., Ltd. 500,000
Stuart Miller 50,000
Larry Saliterman 50,000
Trinet International Fund 25,000
Gerald Grayson 50,000
Jim Furmston 50,000
Yuan Lin 180,000
Umbria Ltd. 300,000
Jeff Tipton 50,000
Berman Group 50,000
Stephen Horowitz 50,000
Robert Shemian 25,000
In April 1995, the Company issued an option to purchase 100,000 shares
of Common Stock to Dr. Chyang Fang, a former director and employee of the
Company, in connection with the termination of Dr. Fang's employment contract
with the Company.
From October 1995 through November 1995, the Company issued 8%
convertible debentures in an aggregate principal amount of $3,685,000 to the
following persons pursuant to Regulation S under the Securities Act of 1933, as
amended. These convertible debentures were ultimately converted into 7,901,380
shares of Common Stock.
Principal Amount
Name of 9% Convertible Debenture
- --------------------------------------------------- ---------------------------
RBB Bank AG $850,000
Chumuel Lubkowski 200,000
Yacov Barber 250,000
Panshore Services, SA 500,000
Tula Businesses 500,000
International Entertainment Ventures, Ltd. 60,000
II-6
<PAGE>
Principal Amount
Name of 9% Convertible Debenture
- --------------------------------------------------- ---------------------------
Shulamit Pritzker 600,000
EBC Zurich AG 50,000
Rafael Lapidus 175,000
R. Gukovitzky 200,000
Meritxell Ltd. 100,000
Yechiel Herzl 200,000
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. The persons to whom the Company sold the
Units are as set forth below:
Name Number of Units
- --------------------------------------------------------------- ---------------
Eugene Seymour 1
Joel Scheinbaum 1
Ronald Lealos .3
Brian Bramell .45
Gary Nathanson .125
George Stanton .125
In April 1996, the Company issued to Whale Securities Co., L.P.
("Whale") warrants to purchase 1,000,000 shares of Common Stock for $1.00 per
share, in settlement of a dispute between Whale and the Company. All of such
warrants have been exercised.
In May 1996, the Company issued 6,250 shares of Common Stock to each of
Jack Wolff and Peter Lange, in full settlement of various claims Messrs. Wolff
and Lange had against the Company.
In March 1997, the Company sold $1,500,000 in principal amount of its
7.5% Convertible Debentures due February 28, 1999 (the "Debentures") to The Tail
Wind Fund Ltd. Net cash proceeds to the Company were approximately $1,380,000.
Holders of the Debentures originally had the right to convert up to (i) 33 1/3%
of the Debentures at any time from and after June 10, 1997, (ii) 66 2/3% of the
Debentures at any time from and after July 9, 1997 and (iii) 100% of the
Debentures at any time from and after August 8, 1997. As of June 30, 1997, an
aggregate of $1,500,000 of the Debentures were converted to 1,736,824 shares of
Common Stock.
In March 1997, the Company issued to Grayson & Associates, Inc. a
five-year warrant to purchase 89,552 shares of Common Stock for an exercise
price of $1.34 per share in consideration of certain financial consulting
services performed on behalf of the Company.
II-7
<PAGE>
Except for the sales pursuant to Regulation S, which were made in
compliance with Regulation S, the sales of the aforementioned securities were
made in reliance upon the exemption from the registration provisions of the
Securities Act afforded by Section 4(2) thereof and/or Regulation D promulgated
thereunder, as transactions by an issuer not involving a public offering. The
purchasers of these securities described above acquired them for their own
account and not with a view to any distribution thereof to the public. The
certificates evidencing the securities bear legends stating that the shares may
not be offered, sold or transferred other than pursuant to an effective
Registration Statement under the Securities Act, or an exemption from such
registration requirements. The Company placed stop transfer instructions with
its transfer agent with respect to all such securities.
II-8
<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 SB-2 and has duly caused this
Post-Effective Amendment No. 1 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Vancouver, State of Washington, on
July 14, 1997.
SALIVA DIAGNOSTIC SYSTEMS, INC.
By: /s/ Kenneth J. McLachlan
-------------------------------------
Kenneth J. McLachlan
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Efffective Amendment No. 1 has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
- ------------------------ --------------------------------------- -------------
/s/ Kenneth J. McLachlan
- ------------------------ Director, President, Chief Executive July 14, 1997
Kenneth J. McLachlan Officer and Chief Financial Officer
/s/ Eric F. Stoer
- ------------------------ Controller July 14, 1997
Eric F. Stoer
/s/ Hans Vauthier
- ------------------------ Director July 14, 1997
Hans Vauthier
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- ----------------------------------------------------------------
23.1 Consent of Hollander, Gilbert & Company.
EXHIBIT 23.1
Consent of Independent Accountants
To the Board of Directors
Saliva Diagnostic Systems, Inc.
We consent to the use in the Post-Effective Amendment No. 1 to Registration
Statement on Form SB-2 of Saliva Diagnostic Systems, Inc. (Registration No.
333-26795), of our report dated March 21, 1997 relating to the consolidated
financial statements of Saliva Diagnostic Systems, Inc. and its subsidiaries,
and to the reference to our Firm under the caption "Experts" in the Prospectus.
/s/ Hollander, Gilbert & Co.
Hollander, Gilbert & Co.
Los Angeles, California
July 14, 1997
