U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 1O-KSB/A
[X] AMENDMENT TO ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number : 0-21284
SALIVA DIAGNOSTIC SYSTEMS, INC.
(Name of small business issuer in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
91-1549305
(IRS Employer Identification No.)
11719 NE 95TH STREET
VANCOUVER, WA 98682
(Address of principal executive offices and zip code)
(360) 696-4800
(Issuer's telephone number)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT: COMMON STOCK, PAR
VALUE $.01 PER SHARE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $ 840,068.
The aggregate market value of voting stock held by non-affiliates of the
Registrant at March 14, 1997 was $33,945,110, computed by reference to the last
traded sale price as reported on the Nasdaq Small Cap Market on such date.
The number of shares outstanding of the Registrant's Common Stock as of March
14, 1997 was 22,040,785 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
The issuer has incorporated into Part III of Form 10-KSB, by reference, portions
of its Proxy Statement for its 1997 Annual Meeting of Shareholders.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements, together with the report thereon of
Hollander, Gilbert & Co. are included in this report as follows:
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
Report of Independent Auditors F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-2
Consolidated Statements of Operations - F-3
For the Years Ended December 31, 1996 and 1995
Consolidated Statement of Stockholders' Equity - F-4
For the Years Ended December 31, 1996 and 1995
Consolidated Statements of Cash Flows - F-5
For the Years Ended December 31, 1996 and 1995
Notes to Consolidated Financial Statements F-6
<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-1
<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
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT 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 OUTSANDING ............................ 20,100,000 9,900,000
============ ============
See accompanying Notes to Consolidated Financial Statements.
F-3
<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
========== ========= =========== ========== =========== ============ ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<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-5
<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-6
<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-7
<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-8
<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-9
<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-10
<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-11
<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-12
<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-13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: June 10, 1997
SALIVA DIAGNOSTIC SYSTEMS, INC.
By: /s/ KENNETH J. MCLACHLAN
------------------------------------
Kenneth J. McLachlan
President and Chief Executive
Officer (and Director)
(Principal Executive Officer)
