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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 1O-KSB
[X] 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.
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SALIVA DIAGNOSTIC SYSTEMS, INC.
FORM 10-KSB INDEX
Page
PART I
Item 1 Business 1
Item 2 Properties 11
Item 3 Legal Proceedings 11
Item 4 Submission of Matters to a Vote of Security Holders 12
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 13
Item 6 Management's Discussion and Analysis or Plan of Operation 14
Item 7 Financial Statements 16
Item 8 Changes in and Disagreements with Accountants on Accounting and 17
Financial Disclosure
PART III
Item 9 Directors and Executive Officers of the Registrant 17
Item 10 Executive Compensation 17
Item 11 Security Ownership of Certain Beneficial Owners and Management 17
Item 12 Certain Relationships and Related Transactions 17
Item 13 Exhibits and Reports on Form 8-K 18
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PART I
ITEM 1. BUSINESS
This annual report on Form 10-KSB 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
development of new products, the ability to obtain new distribution agreements
and increase distribution for products under existing distribution agreements,
approval of Saliva Diagnostic Systems, Inc.'s (the "Company") 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 in this
Business section and under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" below.
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. 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
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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 has developed rapid immunoassays
utilizing immunochromatography for the detection of antibodies to selected
pathogens, such as the Human Immunodeficiency Virus ("HIV"), the virus that
causes Acquired Immune Deficiency Syndrome ("AIDS"), and Helicobacter pylori
("H. pylori"), a bacteria linked to peptic ulcers and gastric cancer.
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 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
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currently designed for single use and incorporates Omni-SAL, 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(R) ("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 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,
Saliva.Sampler and Omni-Swab.
Omni-SAL is a saliva collection device with a patented volume indicator
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 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 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 development agreement with US
Naval Research Unit No. 2 in Bethesda, Maryland to develop rapid tests for
certain tropical diseases, including dengue fever, leptospirosis,
schistosomiasis, 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. When the Company commences work under
this development agreement, it is obligated to provide remuneration of up to
$19,000 annually to the Navy in exchange for its services.
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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 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 from the FDA which allows the Company to conduct clinical trials in the
United States for the purposes of determining whether Omni-SAL 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 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, respectively, in fiscal years 1996 and 1995. (See Note 1
of Notes to Consolidated Financial Statements contained in Item 7).
MARKETING, SALES AND DISTRIBUTION
The Company is currently marketing its medical specimen collection
devices (Omni-SAL, 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.
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", below.) The
Company intends to file with the FDA for approval of its HIV products 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.
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 technology, and may use, sell, or license such
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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
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 technology. In the event the Company ceases
production of Omni-SAL, Orgenics, Ltd. has the option, pursuant to the License
Agreement, to purchase from the Company the molds and equipment necessary to
produce Omni- SAL and would thereafter pay to the Company 6% royalties on sales
of Omni-SAL products produced and sold by Orgenics, Ltd. The Company understands
that Orgenics is not currently exploiting its rights under the Company's
license.
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. 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 the Company's products
in selected geographic regions outside the United States. 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.
In a separate letter of intent, BioChem ImmunoSystems Inc. and APS
Canada agreed to coordinate their distribution efforts for the Company's
products and to assist the Company in obtaining regulatory approvals for its
products in each of their respective distribution territories.
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.
Three other companies with similar products also submitted bids; no decision has
been made to date by WHO.
Sales to three customers, Fitzco, Inc., Osborn Laboratories and Beacon
Diagnostics, Inc. accounted for 21%, 19%, 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
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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 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.
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.
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 by May 1997, and believes it can reach full capacity of an estimated
three to six million tests manufactured per year (depending upon demand for the
products and the number of work shifts) later in 1997. The Company believes it
will be able to increase its capacity further if needed. 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.
As a result of the Export, Reform and Enhancement Act of 1996, a
company may manufacture products that have not yet received FDA approval for
sale in the United States within the United States for export to regions outside
the United States as long as such products have been approved by a country
designated by the FDA to be a "Tier One" country. In order for the Company to
export its HIV test products from its Vancouver facility to countries outside
the United States, the Company must obtain approval of its product from a Tier
One country and then must notify the FDA of such approval and of all intended
countries of export. The Company believes it can obtain such approval for its
Omni-SAL and Sero.Strip products which have already been approved in England, an
FDA-designated Tier One country. The Company has also recently submitted
Hema.Strip for approval in England.
In addition, the Company's manufacturing facility will be subject to
FDA regulations for GMP. If these conditions are met, the FDA will allow the
Company to export the medical device to
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countries outside the United States. Additionally, the Company may be required
to obtain permits in the countries where the products are intended for
distribution. Approval pursuant to the Export, Reform and Enhancement Act of
1996 does not allow the Company to sell those products within the United States.
The Company must obtain separate FDA approvals for sales within the United
States. (See "Regulation- Domestic Regulation", below).
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 have received FDA clearance for domestic distribution for certain
limited purposes. These include Omni-Swab and Saliva.Sampler. (See also
"Manufacturing and Supply", above.) 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 1994, the FDA classified Omni-Swab as a Class I medical device. In
May 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,
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Omni-SAL, if marketed as a specimen collection device for HIV testing. The
Company believes its proposed assay for H. pylori, however, could be approved as
a Class II device. 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
under the IDE provisions of the FDC Act, allowing the Company to manufacture and
distribute Omni-SAL for the limited purpose of demonstrating the efficacy of
using saliva as a diagnostic medium for HIV antibody testing.
In 1995, the FDA authorized the Company to begin clinical trials in the
United States to determine whether Omni-SAL 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 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.
CLINICAL LABORATORY IMPROVEMENT ACT. In 1988, Congress passed the
Clinical Laboratory Improvement Act ("CLIA '88"). CLIA '88 greatly expanded the
number of laboratories that are subject to regulation. CLIA '88 sets forth
performance standards that apply to subject laboratories. In February 1992,
final regulations implementing CLIA '88 were issued. The Company believes these
complex regulations may have a significant effect on diagnostic testing in the
United States.
While it is difficult to predict the ultimate impact of CLIA '88 on the
Company, it is possible that it may make it more costly and difficult for
physicians to operate their own office laboratories, resulting in closure of
some of these small private laboratories. This may reduce demand for some of the
Company's products.
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New guidelines established by the FDA to implement CLIA '88 may also require the
Company to generate additional testing data to support a PMA or 510(k) Notice.
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. Evaluation by WHO of Sero.Strip has
been completed.
The following lists the Company's products, where the products are
distributed and where regulatory approval is pending if required.
1. Omni-SAL is being distributed or has been approved as a sample
collection device for HIV testing and other uses in the following countries:
Argentina, Bahamas, Brazil, Canada, China, Denmark, England, Finland, Greece,
Ireland, Israel, Luxembourg, Mexico, Malaysia, New Zealand, Norway, Peru,
Philippines, Singapore, Switzerland, Thailand, and Turkey. The Company has
submitted Omni-SAL for approval as a sample collection device for HIV testing
and other uses in France and South Africa, and plans to apply for approval in
several other European and Middle Eastern nations.
2. Omni-Swab is distributed in the United States and in many of the
countries in which Omni-SAL 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 the
United Kingdom. It is currently being distributed in Brazil, Malaysia, and
Turkey. 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.trip and ordered more of the tests
for research use in Atlanta and epidemiological purposes overseas.
5. Hema.Strip has been approved for use and sale in Russia, is pending
approval in India and the United Kingdom, and is being evaluated by several
health institutes in Malaysia. In April 1996, Hema.Strip received a certificate
of free sale from Singapore. Like Sero.trip, Hema.Strip can be manufactured in
and distributed from Singapore to other countries. The Company intends to submit
Hema.Strip to many if not all of the regions where its other products are
distributed or pending approval.
6. Saliva.Strip is in final stages of development in its current form.
When completed, the Company intends to submit the device for approval (if
needed) and distribution in the same areas where its other products are sold.
There is no assurance, however, that any such approvals will be timely obtained
or obtained at all.
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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, a saliva collection device,
and Omni-Swab, a medical specimen collection device. To date, nine such patents
have been awarded, four in the United States, and five 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 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
10
<PAGE>
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 December 31, 1996, the Company employed forty full-time persons,
including eight engaged in research and development, three in regulatory
affairs, sixteen in manufacturing, four in sales and marketing, and nine in
administration. None of the Company's employees are covered by collective
bargaining agreements, and the Company believes its relations with its employees
are good.
ITEM 2. PROPERTIES
The Company's executive offices and laboratory facility are located at
11719 NE 95th Street, Vancouver, Washington in an approximately 10,500 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.
ITEM 3. 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 Mr. 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 amount. The Company believes this complaint is without
merit as it believes Mr. Hardy was terminated for
11
<PAGE>
cause. The Company 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.
Meritxell Ltd. v. Saliva Diagnostic Systems, Inc., filed in the United
States District Court for the Southern District of New York, 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 in the State of Washington by Mr. Ronald Lealos,
former CEO of the Company. 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 Mr. Lealos and the Company
currently in the process of being documented.
Other than that set forth above, to the best knowledge of the Company,
no other material legal proceedings are pending or have been threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
quarter ended December 31, 1996.
12
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's 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
----- -----
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 approximately 1.4 million shares of the Company's
common stock at $3.00 per share, which expire on June 30, 1997, trade on the
Nasdaq Small Cap Market under the symbol "SALVW".
There were approximately 401 shareholders of record of the Company's
common stock at March 15, 1997. The Company believes there are approximately
9,148 beneficial owners of the Company's 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.
If the Company should continue to experience losses from operations, it
may be unable to maintain the standards for continued quotation on Nasdaq and
the common stock could be subject to removal from the Nasdaq system. Trading, if
any, in the common stock would thereafter be conducted in the over-the-counter
market on an electronic bulletin board established for securities that do not
meet the Nasdaq listing requirements or in what are commonly referred to as the
"pink sheets". As a result, an investor would find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, the Company's
securities. In addition, if the Company's securities were removed from the
Nasdaq system, they would be subject to so-called "penny stock" rules that
impose additional sales practice requirements on broker-dealers who sell such
securities. Consequently, removal from the Nasdaq system, if it were to occur,
could affect the ability or willingness of broker-dealers to sell the Company's
securities and the ability of purchasers of the Company's securities to sell
their securities in the secondary market.
13
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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. 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 "Business- General" and Note 2 of
Notes to Consolidated Financial Statements).
RESULTS OF OPERATIONS
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, 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
14
<PAGE>
management's assessment, that the Company's deferred tax assets will be
realized. (See Note 7 of Notes to Consolidated Financial Statements.)
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 in 1996 was $4,065,470. This was
primarily a result of a net loss of $5,152,399, 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. The Company has no material
commitments for the capital expenditures at December 31, 1996.
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.
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 $1,370,000 from the
private sale of 7.5% convertible debentures due February 28, 1999 (the
"Debentures"), pursuant to a Regulation D offering on terms as specified in the
Convertible Securities Purchase Agreement (the "Agreement"). Holders of the
Debentures have the right to convert up to (i) 33 1/3% of the Debentures at any
time from and after the 90th day following the date of the Debentures, (ii) 66
2/3% of the Debentures at any time from and after the 120th day following the
date of the
15
<PAGE>
Debentures and (iii) 100% of the Debentures at any time from and after the 150th
day following the date of the Debentures. The number of shares of the Company's
common stock issuable upon conversion is determined by the conversion price
defined in the Agreement as the lesser of 115% of the Company's common stock
market price at issuance of the Debenture (i.e., $2.0125 per share) or 80% of
the Company's common stock market price at conversion of the Debenture. In the
event the current market price of the Company's common stock falls below $0.70
per share, the Company may, at its option, redeem all or part of the Debentures
for 125% of the principal amount of the Debenture plus all accrued and unpaid
interest thereon.
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.
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
16
<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 ................................................. 21,370 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)
---------- --------- ----------- ---------- ----------- ------------ ---------
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)
----------- --------- ----------- ---------- ----------- ----------- -----------
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>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included in the Company's definitive
proxy statement for its 1997 Annual Meeting of Shareholders under the captions
"Executive Officers of the Registrant" and "Election of Directors" and is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is included in the Company's definitive
proxy statement for its 1997 Annual Meeting of Shareholders under the caption
"Executive Compensation and Other Matters" and is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Company's definitive
proxy statement for its 1997 Annual Meeting of Shareholders under the caption
"Security Ownership of Certain Beneficial Owners and Management" and is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in the Company's definitive
proxy statement for its 1997 Annual Meeting of Shareholders under the caption
"Certain Relationships and Related Transactions" and is incorporated herein by
reference.
17
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits included herein:
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------
2.1 Certificate of Incorporation, as amended, incorporated by
reference to Exhibits 2.1 through 2.6 of the Company's
Registration Statement No. 33-46648 filed on Form S-1 (the
"Form S-1") and to Exhibit 2.7 of the Company's Annual Report
on Form 10-KSB for its fiscal year ended December 31, 1995
(the "1995 10- KSB").
2.2 Certificate of Amendment, dated February 25, 1997. *
3.1 Company's By-laws, incorporated by reference to Exhibit 3.1 of
the Form S-1.
4.1 Form of Underwriter's Warrant, incorporated by reference to
Exhibit 4.2 of 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
Registration Statement No. 33-95172 filed on Form SB-2 ("Form
SB-2").
10.1 Consulting Agreement, dated May 20, 1996, between the Company
and International Business Consultants Limited. *#
10.2 Consulting Agreement, dated January 27, 1994, between the
Company and Duke Van Kalken, incorporated by reference to
Exhibit 10.16 of the Company's Annual Report on Form 10-KSB
for its fiscal year ended December 31, 1993 (the "1993
10-KSB"). #
10.3 Employment Agreement, dated August 9, 1994, between the
Company and David Barnes. *#
10.4 1992 Stock Option Plan, incorporated by reference to Exhibit
10.1 of the Form S-1. #
10.5 1994 Stock Option Plan, incorporated by reference to Exhibit A
of 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 of 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. *
18
<PAGE>
10.8 Lease Agreement between the Company and East Ridge Business
Park, incorporated by reference to Exhibit 10.14 on 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 on Form SB-2.
10.10 Amendment, dated June 14, 1996, to Lease Agreement between the
Company and East Ridge Business Park.*
10.11 License Agreement, dated March 22, 1994, between the Company
and Orgenics, Ltd., incorporated by reference to Exhibit 10.7
of 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")
21 List of Significant Subsidiaries, incorporated by reference to
Exhibit 21.1 of Form S-1.
27 Financial Data Schedule. *
- ---------------
* Filed herewith.
# Denotes officer/director compensation plan or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1996.
19
<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: March 26, 1997
SALIVA DIAGNOSTIC SYSTEMS, INC.
By: /s/ KENNETH J. MCLACHLAN
------------------------------------
Kenneth J. McLachlan
President and Chief Executive
Officer (and Director)
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
- ------------------------ -------------------------------------- --------------
/s/ KENNETH J. MCLACHLAN Director, President and Chief March 26, 1997
- ------------------------ Executive Officer
Kenneth J. McLachlan
/s/ KENNETH J. MCLACHLAN Chief Financial Officer March 26, 1997
- ------------------------
Kenneth J. McLachlan
/s/ DELORIS SCHNEIDER Controller March 25, 1997
- ------------------------
Deloris Schneider
/s/ DR. DAVID BARNES Director March 26, 1997
- ------------------------
Dr. David Barnes
/s/ DR. HANS VAUTHIER Director March 26, 1997
- ------------------------
Dr. Hans Vauthier
20
EXHIBIT 2.2
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 02/25/1997
971062067 - 2284576
CERTFICATE OF AMENDMENT
OF
THE CERTIFICATE OF INCORPORATION
OF
SALIVA DIAGNOSTIC SYSTEMS, INC.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Adopted in accordance with the provisions
of Section 242 of the General Corporation
Law of the State of Delaware
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
We, Kenneth J. McLachlan, President, and Richard S. Kalin, Assistant
Secretary, of SALIVA DIAGNOSTIC SYSTEMS, INC., a corporation organized and
existing under the laws of the State of Delaware, do hereby affirm under
penalties of perjury as follows:
FIRST, that the Certificate of Incorporation of said corporation be
amended as follows:
1. By striking out the whole of ARTICLE FOURTH, as it now exists and inserting
in lieu and instead thereof a new ARTICLE FOURTH, reading as follows:
"The number of shares which the corporation shall
have authority to issue is Thirty Three Million (33,000,000).
The par value of each such share is one cent. All such shares
are of one class and are shares of Common Stock."
SECOND, that such amendment has been duly adopted in accordance with
the provisions of the General Corporation Law of the State of Delaware by the
vote of not less than a majority of the outstanding stock entitled to vote at a
special meeting of the stockholders and that valid notice of the special meeting
was given to the stockholders, all in accordance with the provisions of Sections
222 and 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, we have signed this certificate this 20th day of
February, 1997.
/s/ KENNETH J.MCLACHLAN
--------------------------------------
Kenneth J. McLachlan, President
/s/ RICHARD S.KALIN
--------------------------------------
Richard S. Kalin, Assistant
Secretary
EXHIBIT 10.1
P.O. BOX 98
ST. PETER'S PORT
GUERNSEY
CHANNEL ISLANDS
20th May, 1996
Saliva Diagnostic Systems Inc.
11719 NE 95th Street
Vancouver WA 98682
USA
FAO: Mr. Ronald L. Lealos
President
Dear Gentlemen
CHIEF FINANCIAL OFFICER
I am pleased to set forth and confirm the terms of engagement of International
Business Consultants Limited ("IBCO") ("Consultant") by Saliva Diagnostics
Systems, Inc., ("SDS") to consult with and advise SDS through the services of
its principal Kenneth J. McLachlan (KJM) who will act as Chief Financial Officer
of SDS.
1. SERVICES TO BE PERFORMED
In assisting SDS, KJM will advise SDS as to financial matters generally, the
preparation and submission of filings required with respect to its products
under applicable rules and regulations of the SEC and any other regulatory or
governmental authorities, relationships with firms in the financial and
securities industries and acquisitions, joint ventures and other strategic
alliances. In addition, KJM will represent SDS in its dealings with the
financial and securities industries and in connection with any acquisition or
strategic partnering activities it chooses to pursue and the structuring and
negotiation of any transactions which occur as a result, such services are to be
performed on the date or dates and at the location or locations agreed upon.
In performing the above services Consultant would expect to develop a
comprehensive knowledge of SDS, its operations, corporate philosophy, strategies
and objectives. Subject to the completion of the evaluative process described
above, Consultant would expect to continue to assist SDS in implementing any of
the actions it chooses to pursue.
<PAGE>
-2-
In performing the services for SDS KJM will act as Chief Financial Officer of
SDS and should spend up to seven working days per month (approx. 25% of his
time) or such other agreed upon project time commitments.
2. COMPENSATION AND EXPENSES
For services rendered hereunder, SDS will pay Consultant as follows:
a. A fee of $102, 000 per annum, to be paid in cash in twelve monthly
instalments of $8,500. In addition SDS will issue to Consultant a minimum
of $50,000 of Common Stock of SDS at the average of bid or offer price per
share at the close of business on the last day of the SDS financial year or
nearest working day thereto. In no event less than ,2.50 per share and no
higher than $8.00 per share.
b. SDS will reimburse Consultant promptly, for all reasonable meal, lodging,
travel and other out-of-pocket expenses incurred (including fees and
expenses of other consultants and advisors retained with SDS's consent, if
billed initially to Consultant), in connection with the services to be
provided by KJM.
3. TERM
The term of this Agreement shall be one year subject to renewal for an
additional one year if services rendered by Consultant are satisfactory. This
agreement will be effective from 1st June, 1996.
4. STATUS
Consultant shall be an independent contractor.
5. CONFIDENTIALITY
Consultant agrees to abide by any designation or determination by SDS that
information provided to Consultant is confidential and to standard
confidentiality undertakings with respect to that information.
6. TRAVEL
Unless otherwise agreed, air fare for travel within the continental United
States for flights more than three hours in duration will be reimbursed at the
club class fare, or first class rate when this service is used, and transoceanic
and other flights will be billed at the club
<PAGE>
-3-
fare, or business club rate. Consideration will be given to using hotels or
accommodations at which the SDS enjoys a company discount, but Consultant will
not be required to use them.
Yours faithfully
/s/ KENNETH J. MCLACHLAN
KENNETH J. MCLACHLAN
Confirmed to as of the date hereof:
Saliva Diagnostics Systems, Inc.
By: Ronald L. Lealos
President
EXHIBIT 10.3
DATED 9th August 1994
SALIVA DIAGNOSTIC SYSTEMS INTERNATIONAL
LIMITED
and
DAVID BARNES
EMPLOYMENT
AGREEMENT
Messrs. Carter Lemon
11 Breams Buildings,
London EC4A 1HB
Ref: I:\SB\SDS.CON
AS/SB 25.7.94
<PAGE>
THIS AGREEMENT is made the 9th day of August One thousand nine hundred and
ninety-four BETWEEN SALIVA DIAGNOSTIC SYSTEMS INTERNATIONAL LIMITED (Registered
No. 2783190) whose registered office is at 11 Sovereign Close Sovereign Court
London E1 9HW (hereinafter called "the Company" which expression shall include
its successors and assigns) of the one part and DAVID BARNES of 9 Darren Close
Ossian Road London N4 4EF (hereinafter called "the Appointee") of the other
part.
1. Interpretation
1.1 The headings and marginal headings to the Clauses are for convenience only
and have no legal effect.
1.2 Any reference in this Agreement to any Act or delegated legislation includes
any statutory modification or re-enactment of it or the provision referred to.
1.3 In this Agreement:
"the Board" means the Board of Directors of the
Company and includes any committee of
the Board duly appointed by it
"Group Company" means any company which for the time
being is a company having an ordinary
share capital (as defined in Section
832 of the Income and Corporation Taxes
Act 1988) of which not less than 25
percent is owned directly or indirectly
by the Company applying the provisions
of Section 838 of
2
<PAGE>
the Income and Corporation Taxes Act
1988 in the determination of ownership
"Recognised Investment Exchange" means any body of persons which is for
the time being a Recognised Investment
Exchange for the purposes of the
Financial Services Act 1986
2. Appointment and duration
2.1 The Company appoints the Appointee and the Appointee agrees to act as
Managing Director of the Company and in such other appointment as the Board may
from time to time direct The Appointee accepts that the Company may at its
discretion require him to perform other reasonable duties or tasks not within
the scope of his normal duties and the Appointee agrees to perform those duties
or undertake those tasks as if they were specifically required under this
Agreement.
2.2 The appointment shall commence on ____________________ 1994 and shall
continue (subject to earlier termination as provided in this Agreement) for a
period of three years from then and afterwards until terminated by either party
giving to the other not less than twenty-four calendar months prior notice
expiring on or at any time after the end of the said period of three years.
2.3 With the prior written consent of the Appointee the Company may from time to
time appoint any other person or persons to act jointly with the Appointee in
his appointment.
2.4 The Appointee warrants that by virtue of entering into this Agreement he
will not be in breach of any express or implied terms of any contract with or of
any other obligation to any third party binding upon him.
3
<PAGE>
3. Duties of Appointee
3.1 The Appointee shall at all times during the period of this Agreement:
3.1.1 devote the whole of his time attention and ability to the duties of his
appointment
3.1.2 faithfully and diligently perform those duties and exercise such powers
consistent with them which are from time to time assigned to or vested in
him
3.1.3 obey all lawful and reasonable directions of the Board
3.1.4 use his best endeavours to promote the interests of the Company and its
Group Companies
3.1.5 keep the Board promptly and fully informed (in writing if so requested) of
his conduct of the business or affairs of the Company and its Group
Companies and provide such explanations as the Board may reasonably
require
3.2 The Appointee shall (without further remuneration) if and for so long as the
Company reasonably requires:
3.2.1 carry out duties on behalf of any Group Company
3.2.2 act as an officer of any Group Company or hold any other appointment or
office as nominee or representative of the Company or any Group Company
3.2.3 carry out such duties and the duties attendant on any such appointment as
if they were duties to be performed by him on behalf of the Company
4. Place of Work
4.1 The Appointee shall perform his duties at the head office of the Company
and/or such other place of business of the Company or of any Group Company as
the Company reasonably requires whether inside or outside the United Kingdom but
the Company shall not without his prior consent (and subject to reasonable
amendment to this Agreement to provide for return by
4
<PAGE>
the Appointee to the UK at the Company's expense on visits not less than three
times a year and other reasonable provisions in relation to overseas
accommodation and perquisites) require him to go to or reside anywhere outside
the United Kingdom except for visits in the ordinary course of his duties.
5. Conflict of Interest
5.1 During this Agreement the Appointee shall not (except as a representative or
nominee of the Company or any Group Company or otherwise in the prior consent in
writing of the Board) be directly or indirectly engaged, concerned or interested
in any other business which:
5.1.1 is wholly or partly in competition with any business carried on by the
Company or any Group Companies or any of the foregoing by itself or
themselves or in partnership common ownership or as a joint venture with
any third party or
5.1.2 as regards any goods or services is a supplier to or customer of any such
company Provided that the Appointee may hold (directly or through
nominees) any units of any authorised unit trust and up to Ten percent of
the issued shares debentures or other securities of any class of any
company whose shares are listed on a Recognised Investment Exchange or in
respect of which dealing takes place in The International Stock Exchange
of the United Kingdom and Republic of Ireland or the Unlisted Securities
Market or the Third Market. The prior written consent of the Board shall
be required before the Appointee shall hold in excess of Ten percent of
the issued shares debentures or other securities of any class of any one
such company.
5.2 Subject to any regulations from time to time issued by the Company which may
apply to him the Appointee shall not receive or obtain directly or indirectly
any discount rebate
5
<PAGE>
commission or other inducement in respect of any sale or purchase of any goods
or services effected or other business transacted (whether or not by him) by or
on behalf of the Company or any Group Company and if he (or any firm or company
in which he is directly or indirectly engaged concerned or interested) shall
obtain any such discount rebate commission or inducement he shall immediately
account to the Company for the amount received by him or the amount received by
such firm or company. For the purpose of this Clause the Appointee shall be
deemed not to be engaged concerned or interested in such a company as is
referred to in the proviso to Clause 5.1.
6. Confidentiality
6.1 The Appointee shall not either during his appointment or at any time after
its termination:
6.1.1 disclose to any person or persons (except to those authorized by the
Company to know)
6.1.2 use for his own purposes or for any purposes other than those of the
Company
6.1.3 through any failure to exercise all due care and diligence cause any
unauthorised disclosure of any private confidential or secret information
of the Company (including in particular lists or details of customers of
the Company which he as obtained by virtue of his appointment or before
his appointment or in respect of which the Company is bound by an
obligation of confidence to a third party. These restrictions shall cease
to apply to information or knowledge which may (otherwise than through the
default of the Appointee) become available to the public generally.
6.2 The provisions of Clause 6.1 shall apply mutatis mutandis in relation to the
private confidential or secret information of each Group Company which the
Appointee may have
6
<PAGE>
received or obtained during or before his appointment and the Appointee shall
upon request enter into an enforceable agreement with any such company to the
like effect.
6.3 All notes memoranda records and writing made by the Appointee relating to
the business of the Company or its Group Companies shall be and remain the
property of the Company or Group Company to whose business they relate and shall
be delivered by him to the company to which they belong forthwith upon request.
7. Statements
The Appointee shall not at any time make any untrue or misleading
statement in relation to the Company or any Group Company.
8. PAY
8.1 During the appointment the Company shall pay to the Appointee a basic salary
at the rate of SEVENTY-NINE THOUSAND TWO HUNDRED POUNDS ((Pound Symbol)79,200)
per year which shall accrue day-to-day and be payable by equal monthly
installments in arrears on or about the Twenty-eighth day of each month. The
salary shall be deemed to include any fees receivable by the Appointee as a
Director of the Company or any Group Company.
8.2 The Appointee's basic salary shall be reviewed by the Board from time to
time and in any event in March each year in line with the Retail Prices Index
and the rate of basic salary may be further increased by the Company with effect
from such date and by such amount if any as it shall think fit.
8.3 Notwithstanding the provisions of sub-clause 8.2 the Company shall not be
required to increase the Appointee's salary if and to the extent only that the
increased payment would be unlawful under the provisions of any legislation then
in force during his appointment or if the
7
<PAGE>
increased payment would not be an allowable cost for the purpose of increasing
prices under the provisions of any legislation controlling prices or price
increases.
9. Car
9.1 Subject to the Appointee holding a current full driving licence the Company
shall provide the Appointee for his sole business use and private use by him
with a car of a make model and specification of his choice provided that its
manufacturer's list price (including Car Tax Value Added Tax extras delivery and
other similar charges) shall not be more than TWENTY-FIVE THOUSAND POUNDS
((Pound Symbol)25,000) (such limit to be reviewed by the Company from time to
time) and subject to the Board approving such choice as commensurate with both
the status of the Appointee and the image of the Company (which approval shall
not be withheld unreasonably).
9.2 The Company shall bear all standing and running expenses of the car except
for fuel consumed during private use of the car and any additional insurance
costs incurred to permit the Appointee to use the car outside the United Kingdom
for private purposes and shall replace such car with the same or equivalent
model when it has travelled 60,000 miles.
9.3 The Appointee shall always comply with all regulations laid down by the
Company from time to time with respect to company cars; shall forthwith notify
the Appointee of any accidents involving his company car and of any charges of
driving offenses which are brought against him and on the termination of his
appointment whether lawfully or unlawfully shall forthwith return his company
car to the Company at its head office.
10. Expenses
10.1 The Company shall reimburse to the Appointee on a monthly basis all
travelling hotel entertainment and other expenses reasonably incurred by him in
the proper performance of his
9
<PAGE>
duties subject to the Appointee complying with such guidelines or regulations
issued by the Company from time to time in this respect and to the production to
the Company of such vouchers or other evidence of actual payment of the expenses
as the Company may reasonably require.
10.2 Where the Company issues a company sponsored credit or charge card to the
Executive he shall use such card only for expenses reimbursable under Clause
10.1 above and shall return it to the Company forthwith on the termination of
his employment.
11. Holiday
11.1 In addition to public holidays the Appointee is entitled to Twenty-one
working days' paid holiday in each holiday a year from the First day of January
to the Thirty-first day of December to be taken at such time or times as are
agreed with the Board. The Appointee shall not without the consent of the Board
carry forward any unused part of his holiday entitlement to a subsequent holiday
year.
11.2 For the holiday year during which his appointment commences or terminates
the Appointee is entitled to 1 1/2 working days holiday for each complete
calendar month of his employment by the Company during that holiday year. On the
termination of his appointment for whatever reason the Appointee shall either be
entitled to pay in lieu of outstanding holiday entitlement or be required to
repay to the Company any salary received for holiday taken in excess of his
actual entitlement. The basis for payment and repayment shall be 1/253 of the
Appointee's annual basic salary for each day.
12. Incapacity
12.1 If the Appointee shall be prevented by illness (including mental disorder)
accident or other incapacity from properly performing his duties hereunder he
shall report this fact forthwith
9
<PAGE>
to the Company's Secretary's office and if the Appointee is so prevented for
seven or more consecutive days he shall provide a medical practitioner's
statement on the eighth day and weekly thereafter so that the whole period of
incapacity is certified by such statements. Immediately following his return to
work after a period of absence due to incapacity the Appointee shall complete a
Self-Certification form available from the Company Secretary's office detailing
the reason for his absence.
12.2 If the Appointee shall be absent from his duties hereunder due to illness
(including mental disorder) accident or other incapacity duly certified in
accordance with the provisions of sub-clause 12.1 hereof he shall be paid his
full remuneration hereunder for up to Thirty working days' absence in any period
of Twelve consecutive months and thereafter such remuneration if any as the
Board shall determine from time to time provided that such remuneration shall be
inclusive of any Statutory Sick Pay to which the Appointee is entitled under the
provisions of the Social Security and Housing Benefit Act 1982 and any Social
Security Sickness Benefit or other benefits recoverable by the Appointee
(whether or not recovered) may be deducted therefrom.
12.3 For Statutory Sick Pay purposes the Appointee's qualifying days shall be
his normal working days.
12.4 At any time during the period of his appointment the Appointee shall at the
request and expense of the Company permit himself to be examined by a registered
medical practitioner to be selected by the Company and shall authorise such
medical practitioner to disclose to and discuss with the Company's medical
adviser the results of such examination and any matters which arise from it in
order that the Company's medical adviser can notify the Company of any matters
which in his opinion might hinder or prevent the Appointee (if during a period
of incapacity)
10
<PAGE>
from returning to work for any period or (in other circumstances) from properly
performing any duties of his appointment at any time.
13. Termination of agreement
13.1 Automatic termination
This Agreement shall automatically terminate:
13.1.1 if the Appointee becomes prohibited by law from being a director or
13.1.2 on the Appointee reaching his 70th birthday or
13.1.3 if he resigns his office
13.2 Suspension
In order to investigate a complaint against the Appointee of misconduct the
Company is entitled to suspend the Appointee on full pay so long as may be
necessary to carry out a proper investigation and hold a disciplinary hearing.
13.3 Immediate Dismissal
The Company may by notice terminate this Agreement with immediate effect if
the Appointee:
13.3.1 commits any act of gross misconduct or repeats or continues (after
written warning) any other serious breach of his obligations under this
Agreement or
13.3.2 is convicted of any criminal offence punishable with 6 months or more
imprisonment (excluding an offence under road traffic legislation in the
United Kingdom or elsewhere for which he is not sentenced to any term of
imprisonment whether immediate or suspended) or
13.3.3 commits any act of dishonesty whether relating to the Company any Group
Company any of its or their employees or otherwise or becomes bankrupt or
11
<PAGE>
13.3.4 makes any arrangement or composition with his creditors generally.
13.4 Dismissal on short notice
The Company may terminate this Agreement as follows:
13.4.1 notwithstanding Clause 12.2 by not less than 3 months' prior notice given
at any time while the Appointee is incapacitated by ill-heath or accident
from performing his duties under this Agreement and has been so
incapacitated for a period or periods aggregating sixty days in the
preceding Twelve months. Provided that the Company shall withdraw any
such notice if during the currency of the notice the Appointee returns to
full time duties and provides a medical practitioner's certificate
reasonably satisfactory to the Board to the effect that he has fully
recovered his health and that no recurrence of his illness or incapacity
can reasonably be anticipated.
13.4.2 By not less than one month's prior notice if the Appointee has been
offered but has refused to agree to the transfer of this Agreement by way
of notation to a person firm or company which has acquired or agreed to
acquire the whole or substantially the whole of any undertaking (as
defined in the Transfer of Undertakings (Protection of Employment)
Regulations 1981) in which he is employed to any extent.
13.5 Pay in lieu
On serving notice for any reason to terminate this Agreement or at any time
thereafter during the currency of such notice the Company shall be entitled to
pay to the Appointee his basic salary (at the rate then payable under Clause 8
hereof) for the unexpired portion of the duration of his appointment or
entitlement to notice as may be the case.
12
<PAGE>
13.6 Miscellaneous
On the termination of this Agreement for whatever reason the Appointee
shall at the request of the Company resign (without prejudice to any claims
which the Appointee may have against any company arising out of this Agreement
or the termination thereof) from all and any offices which he may hold as a
Director of the Company or of any Group Company and from all other appointments
or offices which he holds as nominee or representative of the Company or any
Group Company and if he should fail to do so within seven days the Company is
hereby irrevocably authorised to appoint some person in his name and on his
behalf to sign any documents or do any things necessary or requisite to effect
such resignation(s).
13.7 On the termination of this Agreement for whatever reason the Appointee
shall immediately deliver or cause to be delivered to the Company or to its
order all books documents papers (including copies) materials credit cards keys
and other property of or relating to the business of the Company or its Group
Companies then in his possession or which are or were last under this power or
control.
14. Reconstruction or amalgamation
If by reason of the liquidation of the Company for the purposes of
amalgamation or reconstruction or as part of any arrangement for the
amalgamation or reconstruction of the Company not involving liquidation the
employment of the Appointee shall be terminated but the Appointee shall be
offered substantially similar employment with any concern or undertaking
resulting from such amalgamation or reconstruction on terms and conditions which
taken as a whole are no less favourable than the terms of this Agreement then
the Appointee shall have no claim against the Company in respect of the
termination of his employment by the Company.
15. Post termination obligations of the Appointee
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<PAGE>
15.1 Non-solicitation
The Appointee shall not for a period of two years after the termination of
his employment hereunder directly or indirectly and whether on his own behalf or
on behalf of any other business concern person partnership firm company or other
body which is wholly or partly in competition with any business carried on by
the Company or the Group Company.
15.1.1 Canvass solicit or approach or cause to be canvassed or solicited or
approached for orders in respect of any services provided or any goods
dealt in by the Company and/or the Group Company any person or persons
who at the date of the termination of the Appointee's appointment was
negotiating with the Company for the supply of services or goods or
within two years prior to such date is or was a client or customer of the
Company or the Group Company.
15.1.2 Interfere or seek to interfere or take such steps as may interfere with
the continuance of supplies to the Company and/or the Group Company (or
the terms relating to such supplies) from any suppliers who have been
supplying components materials or services to the Company and/or the
Group Company at any time during the last two years of his employment
hereunder.
15.1.3 Solicit or entice or endeavour to solicit or entice away from the Company
or the Group Company any person employed by the Company or the Group
Company at the date of such termination.
15.2 The parties agree that the covenants set out in Clause 15.1 above are
separate and severable and enforceable accordingly and whilst the restrictions
are considered by the parties to be reasonable in the circumstances as at the
date hereof it is acknowledged that restrictions of such a nature may be invalid
because of changing circumstances or other unforeseen reasons and
14
<PAGE>
accordingly if any of the restrictions shall be adjudged to be void or
ineffective for whatever reason but would be adjudged to be valid and effective
if part of the wording thereof were deleted or the periods thereof reduced or
the area thereof reduced in scope they shall apply with such modifications as
may be necessary to make them valid and effective.
16. General
16.1 Other Terms
The provisions of the Company's standard terms and conditions of employment
(as amended from time to time) shall be terms of the Appointee's employment
except to the extent that they are inconsistent with this Agreement.
16.2 Statutory particulars
The further particulars of terms of employment not contained in the body of
this Agreement which must be given to the Appointee in compliance with Part 1 of
the Employment Protection (Consolidation) Act 1978 are given in Schedule 1
hereto.
16.3 Prior Agreements
This Agreement sets out the entire agreement and understanding of the
parties and is in substitution for any previous contracts of employment or for
services between the Company or any of its Group Companies and the Appointee
(which shall be deemed to have been terminated by mutual consent).
16.4 Accrued rights
The expiration or termination of this Agreement however arising shall not
operate to affect such of the provisions of this Agreement as are expressed to
operate or have effect after then and shall be without prejudice to any accrued
rights or remedies of the parties.
16.5 Proper law
15
<PAGE>
The validity construction and performance of this Agreement shall be
governed by English Law.
16.6 Acceptance of jurisdiction
All disputes claims or proceedings between the parties relating to the
validity construction or performance of this Agreement shall be subject to the
jurisdiction of the High Court of Justice in England and Wales ("the High
Court") to which the parties irrevocably submit. Each party irrevocably consents
to the award or grant of any relief in any such proceedings before the High
Court and either party shall be entitled to take proceedings in any other
jurisdiction to enforce a judgment or order of the High Court.
16.7 Notices
Any notice to be given by a party under this Agreement must be in writing
in the English Language and must be given by delivery at or sending first class
post or other faster postal service or telex facsimile transmission or other
means of telecommunication in permanent written form (provided the addressee has
his or its own facilities for receiving such transmissions) to the last known
postal address or relevant telecommunications number of the other party. Where
notice is given by sending in a prescribed manner it shall be deemed to have
been received when in the ordinary course of the means of transmission it would
be received by the addressee. To provide the giving of a notice it shall be
sufficient to show it was despatched. A notice shall have effect from the sooner
of its actual or deemed receipt by the addressee.
IN WITNESS whereof the parties hereto have duly executed this document as a
deed the day and year first before written.
SCHEDULE 1
Employment Protection (Consolidation) Act 1978
16
<PAGE>
The following information is given to supplement the information given in
the body of the Agreement in order to comply with the requirements of Part 1 of
the Act.
1. The Appointee's employment by the Company commenced on the First day of June
One thousand nine hundred and ninety-two.
2. No employment of the Appointee with a previous employer counts as part of the
Appointee's continuous employment with the Company.
3. The Appointee's hours of work are the normal hours of the Company from 9:00
am to 5:30 pm Monday to Friday each week together with such reasonable
additional hours as may be necessary so as properly to fulfil his duties.
4. No Contracting-Out Certificate pursuant to the provisions of the Social
Security Pensions Act 1975 is held by the Company in respect of the Appointee's
employment.
5. The Appointee is subject to the Company's Disciplinary Rules and Disciplinary
Procedures as decided by the Board from time to time.
6. If the Appointee has any grievance relating to his employment (other than one
relating to a disciplinary decision) he should refer such grievance to the
Board.
/s/ RONALD L. LEALOS
Signed as a Deed by ) /s/ ELIZABETH ANN McCOY
and for and on behalf of ) /s/ DAVID BARNES
SALIVA DIAGNOSTIC SYSTEMS INTERNATIONAL ) /s/ MICHAEL GRANT
LIMITED in the presence of: ) Michael Grant
3719 Edgewood Drive
Vancouver, WA 78661
SIGNED as a Deed by DAVID BARNES ) /s/ DAVID POLLARD
in the presence of: ) David Pollard
/s/ DAVID BARNES 934 Balls Pond Rd.
London
Consultant
17
<PAGE>
EXHIBIT 10.7
Technology Parks Pte Ltd
77 Science Park Drive: #04-01/06 CINTECH III: Singapore Science Park:
Singapore 118256
Tel: (65) 774 1033 Fax: (65) 778 4761
VIA MAIL & FAX NO : 773-6742
Our Ref : TP(M)12/203/AW
20 February 1997
Mr. Duke Van Kalken
Managing Director
Saliva Diagnostic Systems (S) Pte Ltd
12 Science Park Drive #02-01
The Mendel
Singapore Science Park
Singapore 118225
Dear Mr Van Kalken
OFFER OF TENANCY FOR #02-01 THE MENDEL
We refer to our letter of offer dated 23 January 1997 and our teleconversation
on 17 February 1997 requesting for a renewal lease term of 1 year instead of 3
years.
As discussed, we usually charge a premium of $2.00 psm/mth for short term
tenancies. However, as a gesture of goodwill, we will waive the premium for you
for your renewal tenancy in view of our good working relationship.
The lease term will thus be amended to 1 June 1997 to 31 May 1998. All other
terms as per our letter of offer remain unchanged. We certainly hope that you
will continue your tenancy at the Science Park.
We trust that the above meets your requirement and look forward to receiving
your acceptance latest by 25 FEBRUARY 1997. If you need further assistance in
this matter, please do not hesitate to contact me at Tel: 774-9042.
With warmest regards.
Yours sincerely,
/s/ ALISON WONG
ALISON WONG (MS)
Senior Marketing Executive
<PAGE>
EXHIBIT 10.10
SECOND AMENDMENT OF LEASE AGREEMENTS
BY AND BETWEEN
EASTRIDGE BUSINESS PARK
AND SALIVA DIAGNOSTIC SYSTEMS
Those certain leases dated JANUARY 13, 1992, OCTOBER 2, 1992, MAY 19, 1994 and
the First Amendment Dated SEPTEMBER 6, 1995, by and between EastRidge Business
Park, as Landlord, and Saliva Diagnostic Systems as Tenant, for the premises
located at 11719 NE. 95th ST., Suite(s) #A, F, G & H, and 11800 NE. 95th ST.,
Suite 230, Vancouver, WA 98682 is hereby amended solely as hereinafter
described:
Effective the following lease provisions are amended as follows:
d. Suite(s) 11719 NE. 95th ST., A, F, G, H & K and 11800 NE. 95th ST., Suite 230
e. Premises Area: (Exhibit A) 12,153 square feet
Office: 9133 square feet Warehouse: 3,020 square feet
f. Project area: 49,207 square feet
g. Premises Percent of Project: 8.14%
h. Term of Lease: Commencement: June 22, 1996
Expiration: August 31, 2002
Number of Months: 74.5
Due date of first payment: Upon commencement of lease
i. Base Monthly Rent: $10,492.00
j. Rent Adjustment (initial one):
2) Step Increase. The step adjustment provisions of 4.2.2 apply as follows:
Effective Date of Rent Increase: New Base Monthly Rent:
September 1, 1996 $11,017.00
September 1, 1997 11,567.00
September 1, 1998 12,146.00
September 1, 1999 12,753.00
k. Tenant's Estimated Monthly Expense:
Expense Rate per Square Foot $.18
Premises Area in Square Feet 12,153
---------
Tenant's Estimated Monthly Expenses $2,188.00
l. Prepaid Rent (Section 5):
First Month's Rent $10,492.00
One Month's Estimated Expenses 2,188.00
----------
TOTAL PREPAID RENT, DUE JULY 1, 1996 $12,680.00
n. Deposit Due Upon Execution of Lease:
Total Prepaid Rent N/A $0
Total Security Deposit on File $12,604.00
Non-refundable Cleaning Fee $1,200.00
----------
Total deposit $13,804.00
Less previous security deposit (12,604.00)
Less previous cleaning deposit ($1,000.00)
TOTAL AMOUNT DUE UPON LEASE EXECUTION $200.00
Except as herein amended, all other terms and conditions of the original lease
and all other amendments to the lease shall remain in full force.
Agreed this 14th day of June, 1996.
LANDLORD TENANT
Orville D. and Alberta J. Yearout Saliva Diagnostic Systems, Inc.
dba Eastridge Business Park
/s/ ORVILLE D. YEAROUT /s/ RONALD L. LEALOS
- --------------------------------------- ---------------------------------------
Orville D. Yearout Ronald Lealos - President
/s/ ALBERTA J. YEAROUT
- ---------------------------------------
Alberta J. Yearout
By: /s/ PATRICIA J. BISHOP
- ---------------------------------------
Patricia J. Bishop
ATTORNEY IN FACT
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR SALIVA DIAGNOSTIC SYSTEMS, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> SALIVA DIAGNOSTIC SYSTEMS, INC.
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
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0
0
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<INCOME-PRETAX> (5,152)
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<INCOME-CONTINUING> (5,152)
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