As filed with the Securities and Exchange Commission on June 13, 1997
Registration No. 333-26795
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
ON FORM SB-2
UNDER THE SECURITIES ACT OF 1933
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SALIVA DIAGNOSTIC SYSTEMS, INC.
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(Name of Small Business Issuer as Specified in its Charter)
Delaware
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(State of Incorporation)
3841
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(Primary Standard Industrial Classification Code Number)
91-1549305
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(IRS Employer Identification Number)
11719 NE 95th Street
Vancouver, Washington 98682
(360) 696-4800
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(Address and telephone number of registrant's principal executive offices
and principal place of business)
Kenneth J. McLachlan, President
Saliva Diagnostic Systems, Inc.
11719 NE 95th Street
Vancouver, Washington 98682
(360) 696-4800
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(Name, address and telephone number of agent for service
Please send a copy of all communications to:
LaDawn Naegle, Esq.
Bryan Cave LLP
700 13th Street, N.W.
Washington, DC 20005
(202) 508-6000
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<PAGE>
Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this form is registering additional securities pursuant to Rule 462(b)
under the Securities Act please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the offering [ ].
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
please check the following box. [ ]
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
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Proposed Proposed
Title of each maximum maximum
class of securities Amount to be offering price per aggregate Amount of
to be registered registered(1) unit (2) offering price (2) registration fee(3)
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<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share 2,457,974 shares $1.109 $2,725,893 $265.31
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<FN>
(1) A total of 1,668,500 shares were the subject of the initial filing. This Amendment No. 1 seeks to register an
additional 789,474 shares, for a total of 2,457,974 shares.
(2) Estimated solely for purposes of determining the registration fee pursuant to Rule 457(c), based upon the
average of the high and low sales prices for 1,668,500 shares of the Common Stock of $1.45 on May 8, 1997 and for
789,474 shares of $1.109 on June 9, 1997, as reported by Nasdaq.
(3) A filing fee of $733.13 on 1,668,500 shares of the securities being registered on this form was paid on a previous
filing.
</TABLE>
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
PROSPECTUS
SALIVA DIAGNOSTIC SYSTEMS, INC.
2,457,974 SHARES OF COMMON STOCK
Saliva Diagnostic Systems, Inc. (the "Company") is registering for resale
2,457,974 shares of common stock, $.01 par value (the "Common Stock"), which
include (i) 2,368,422 shares which have been and may be issued upon the
conversion of $1,500,000 in principal amount of the Company's 7.5% Convertible
Debentures due February 28, 1999 (the "Debentures"); and (ii) 89,552 shares
which may be issued upon the exercise of warrants granted to Grayson &
Associates, Inc. (the "Grayson Warrants"). All of the Common Stock offered
hereby is being offered for the account of certain shareholders of the Company
which acquired their securities in certain private placements conducted by the
Company. See "Selling Shareholders" and "Description of Securities." Additional
shares that may become issuable as a result of the anti-dilution provisions of
the Debentures and the Grayson Warrants are offered hereby pursuant to Rule 416
under the Securities Act of 1933, as amended (the "Securities Act"). The Company
will not receive any of the proceeds from the sale of the Common Stock being
offered hereby (the "Offering"), but will receive the exercise price payable
upon the exercise of the Grayson Warrants. There can be no assurance that all or
any part of the Grayson Warrants will be exercised or that they will be
exercised for cash.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SHOULD NOT
BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
PROSPECTIVE PURCHASERS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER
"RISK FACTORS" BEGINNING ON PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is June __, 1997
<PAGE>
Proceeds to
Price to Public(1) Selling Shareholders(1)(2)
------------------ ---------------------------------
Per share of Common Stock $ 1.109 $ 1.109
Total(3) $2,725,893 $2,725,893
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(1) Estimated based upon the average of the high and low sales prices for the
Common Stock on June 9, 1997 as reported by Nasdaq.
(2) Excludes regular brokerage commissions and other expenses, including
expenses of counsel, if any, for the Selling Shareholders, which will be paid by
the Selling Shareholders. The other expenses of the offering are estimated to be
approximately $41,000, all of which will be paid by the Company.
(3) Assumes all shares registered will be issued to the Selling Shareholders and
will be sold in this offering.
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<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Such reports and other information
can be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; and the
Commission's regional offices at Room 1204, 219 South Dearborn Street, Chicago,
Illinois 60604; Room 1028, 7 World Trade Center, New York, New York 10007; and
Suite 500 East, 5757 Wilshire Boulevard, Los Angeles, California 90036. Copies
of such material can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549 at prescribed rates. The Commission maintains
an internet web site that contains reports, proxy statements and other materials
filed electronically by the Company through the Commission's Electronic Data,
Gathering, Analysis and Retrieval (EDGAR) system. This web site can be accessed
at http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on
Form SB-2 (the "Registration Statement") under the Securities Act with respect
to the shares of Common Stock offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement or the exhibits
thereto. As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information contained or incorporated by reference in
the Registration Statement. For further information, reference is hereby made to
the Registration Statement and exhibits thereto, copies of which may be
inspected at the offices of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 or obtained from the Commission at the same address at
prescribed rates.
The Company furnishes Annual Reports to the holders of its securities
which contain financial information which have been examined and reported upon,
with an opinion expressed by, its independent certified public accountants.
INFORMATION INCORPORATED BY REFERENCE
The Company will furnish, without charge, to each person, including any
beneficial owners, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any or all of any documents
which may have been incorporated herein by reference (other than exhibits to
such documents unless such exhibits are specifically incorporated by reference
into the document that this Prospectus incorporates by reference). Requests for
such documents should be directed to Shareholder Relations, Saliva Diagnostic
Systems, Inc., 11719 NE 95th Street, Vancouver, Washington 98682; telephone
number (360) 696-4800.
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety.
Saliva Diagnostic Systems, Inc., a Delaware corporation (the "Company")
is primarily engaged in the development, manufacturing and marketing of rapid in
vitro assays for use in the detection of infectious diseases and other
conditions, proprietary specimen collection devices and other diagnostic
devices. The Company has a limited operating history and has incurred
significant operating losses to date.
The Company has two categories of products: medical specimen collection
devices and rapid antibody immunoassays. The Company's product, Omni-SAL(R), an
on-site, easy-to-use medical collection device, utilizes saliva as a diagnostic
tool to detect the presence of the HIV virus, other infectious diseases and
tobacco use. The Company manufactures Omni-SAL(R) through its foreign subsidiary
in Singapore and distributes Omni-SAL(R) to customers located outside the United
States. The Company's other collection devices include Saliva.Sampler, which is
used to collect saliva specimens, and Omni-Swab, a serrated cotton swab with an
ejectable head, which can be used to collect various body fluids and cells,
primarily for the purposes of DNA identification. See "The Company -- Products."
The Company has developed rapid immunoassays for the detection of
antibodies to selected pathogens, such as the HIV virus, and Helicobacter
pylori, a bacteria linked to peptic ulcers and gastric cancer. The Company's
immunoassays are designed to require only a few simple steps to use and to
provide results in minutes. To date, the Company has developed three rapid HIV
tests: Sero.Strip HIV, Hema.Strip HIV and Saliva.Strip HIV and a rapid H. pylori
test: Stat.Simple. The Company has under development several rapid tests for
hepatitis and tuberculosis. See "The Company -- Products."
The Company is currently marketing its medical specimen collection
devices (Omni-SAL(R), Saliva.Sampler and Omni-Swab) in many countries and is
currently marketing two of its three HIV rapid tests (Sero.Strip HIV and
Hema.Strip HIV) outside the United States. These HIV rapid tests are not yet
approved for marketing in the United States. The Company believes Saliva.Strip
HIV and Stat.Simple will be ready for marketing outside the United States in
1997. See "The Company - Marketing, Sales and Distribution."
The Company was incorporated in California in 1986 as E&J Systems, Inc.
In January 1992 the Company merged with and into a Delaware corporation and
changed its name to Saliva Diagnostic Systems, Inc. The Company completed an
initial public offering of its common stock in March 1993. Unless otherwise
indicated, all references to the Company include the Company and its wholly
owned subsidiaries, SDS International, Ltd., Saliva Diagnostic Systems (Asia)
Ltd. and Saliva Diagnostic Systems (Singapore) Pte.
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<PAGE>
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, WITHIN THE MEANING
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING
STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THOSE STATEMENTS RELATING TO
DEVELOPMENT OF NEW PRODUCTS, THE ABILITY TO OBTAIN NEW DISTRIBUTION AGREEMENTS
AND INCREASE DISTRIBUTION FOR PRODUCTS UNDER EXISTING DISTRIBUTION AGREEMENTS,
APPROVAL OF THE COMPANY'S PRODUCTS AS AND WHEN REQUIRED BY THE FOOD AND DRUG
ADMINISTRATION ("FDA") IN THE UNITED STATES AND SIMILAR REGULATORY BODIES IN
OTHER COUNTRIES, AND THE SCALE-UP OF MANUFACTURING IN THE UNITED STATES. THESE
FORWARD- LOOKING STATEMENTS ARE SUBJECT TO THE BUSINESS AND ECONOMIC RISKS FACED
BY THE COMPANY AND THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS," "THE COMPANY" AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS" BELOW.
THE OFFERING
Securities Offered .................... 2,457,974 shares of Common Stock.
See "Description of Securities."
Common Stock outstanding after the
Offering(1) ......................... 25,382,357
Risk Factors .......................... The securities offered hereby involve a
high degree of risk and should not be
purchased by investors who cannot
afford the loss of their entire
investment. See "Risk Factors."
Nasdaq symbol ......................... Common Stock - SALV
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(1) Estimated. Does not include (i) 392,250 shares of Common Stock reserved for
issuance upon exercise of outstanding options under the Company's Stock Option
Plans (the "Stock Option Plans"), (ii) 153,500 shares of Common Stock reserved
for issuance upon exercise of options available for future grant under the Stock
Option Plans, and (iii) 2,933,500 shares of Common Stock reserved for issuance
upon exercise of other warrants and options.
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the
financial statements appearing elsewhere in this Prospectus. Such information
should be read in conjunction with such financial statements, including the
notes thereto.
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<PAGE>
Balance Sheet Data
Three Months Ended
March 31, 1997
December 31, 1996 (unaudited)
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Working capital (deficit) .............. $ 336,302 $ 567,208
Total assets ........................... $ 2,178,201 $ 2,748,027
Total liabilities ...................... $ 1,017,569 $ 2,397,762
Shareholders' equity ................... $ 1,160,632 $ 350,265
Income Statement Data
Three Months Ended
March 31
(unaudited)
Year Ended -------------------------
December 31, 1996 1996 1997
------------------ ----------- -----------
Net revenues .................. $ 715,780 $ 193,721 $ 227,034
Net (loss) .................... $ (5,152,399) $(1,004,591) $(1,174,901)
Net (loss) per common share ... $ (0.26) $ (.07) $ (.05)
Number of common shares used in
per share calculations ...... 20,100,000 15,039,334 22,040,784
RISK FACTORS
The securities offered hereby are speculative and involve a high degree
of risk, including, but not limited to, the risk factors described below. Each
prospective investor should carefully consider the following risk factors
inherent in and affecting the business of the Company and this offering before
making an investment decision.
1. Limited Operating History. Since July 1990, the Company has been
engaged primarily in research and development activities focused on developing
proprietary collection devices and rapid assays. To date, sales of the Company's
products have been to a limited customer base. The Company has a limited
operating history upon which an evaluation of the Company's prospects can be
made. Such prospects must be considered in light of the risks, expenses and
difficulties frequently encountered in the establishment of a new business in a
continually evolving, heavily regulated industry, characterized by an increasing
number of market entrants and intense competition, as well as the risks,
expenses and difficulties encountered in the shift from development to
commercialization of new products based on innovative technology. There can be
no assurance that the Company will be able to implement successfully its
marketing strategy, obtain necessary regulatory approval, generate increased
revenues or ever achieve profitable operations.
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<PAGE>
2. Significant Operating Losses; Accumulated Deficit; Explanatory
Paragraph in Report of Independent Certified Public Accountants. The Company has
incurred significant operating losses since its inception, resulting in an
accumulated deficit of $21,914,246 and $23,089,147 at December 31, 1996 and
March 31, 1997, respectively, and a shareholders' equity of $1,160,632 and
$350,265 at December 31, 1996 and March 31, 1997, respectively. The Company has
incurred additional operating losses through the date of this Prospectus. Such
losses are expected to continue for the foreseeable future and until such time,
if ever, as the Company is able to attain sales levels sufficient to support its
operations. The Company's independent certified public accountants have included
an explanatory paragraph in their report stating that the Company's significant
operating losses and significant capital requirements raise substantial doubt
about the Company's ability to continue as a going concern.
3. Significant Capital Requirements; Need for Additional Financing. The
Company's capital requirements have been and will continue to be significant.
The Company has been dependent on private placements of its debt and equity
securities and on a public offering of securities in March 1993 to fund such
requirements. The Company is dependent upon its other efforts to raise capital
resources, including proceeds received from the exercise of warrants, to finance
the costs of manufacturing, marketing and conducting clinical trials and
submissions for FDA approval of its products and continuing the design and
development of the Company's new products. Marketing, manufacturing and clinical
testing may require capital resources substantially greater than the resources
currently available to the Company. There can be no assurance that the Company
will be able to obtain additional capital resources necessary to permit the
Company to implement or continue its programs. There can be no assurance that
such financing will be available on commercially reasonable terms or at all. It
is not anticipated that any of the officers, directors or shareholders of the
Company will provide any portion of the Company's future financing requirements.
Any additional equity financing may involve substantial dilution to the
interests of the Company's shareholders, which dilution has periodically
occurred in the past.
4. Uncertain Acceptance of Saliva-Based Tests and Rapid Tests as
Diagnostic Tools. The human specimens traditionally used for the diagnostic
testing and quantitative measurement of most physiologically active substances,
drugs and toxins in the body, are blood and urine. Substantially all of the
assay-based diagnostic test kits currently available were approved by the FDA
for use with these testing specimens. Political and social factors may create
impediments to the use of rapid tests as diagnostic tools. These factors include
whether certain diagnostic tests, such as HIV antibody tests, should be
conducted without trained specialists and whether rapid tests in nontraditional
testing environments will lead to invasions of privacy. Although the Company
acknowledges the existence of such considerations, it is committed to developing
rapid testing devices as useful diagnostic tools. Limitations on the Company's
ability to market rapid tests caused by political and social factors could have
a material adverse effect on the Company's operations.
5. Uncertainty of New Product Development. The design and development
of the Company's rapid testing platforms in their current designs have been
completed and limited revenues have been generated from sales thereof. The
Company will be required to devote
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<PAGE>
considerable additional efforts to finalize the evaluation of its products.
Satisfactory completion of development, testing, evaluations, obtaining
regulatory approvals and achieving sufficient production levels of such products
will be required prior to their being available for commercial sale. The
Company's products remain subject to all the risks inherent in the introduction
of new diagnostic products, including unanticipated problems, as well as the
possible insufficiency of funds to continue design and development which could
result in abandonment of or substantial change in the design or development of
such products. There can be no assurance that such products will be successfully
developed, be developed on a timely basis or prove to be as effective as
products based on existing or newly developed technologies. The inability to
successfully complete development, or a determination by the Company, for
financial or other reasons, not to undertake to complete development of any
product, particularly in instances in which the Company has made significant
capital expenditures, could have a material adverse effect on the Company.
6. Competition. The market in which the Company operates, saliva and
blood-based collection and diagnostic testing, is highly competitive. The
Company is aware of certain entities, including ChemTrak, Inc., Epitope, Inc.,
Quidel, Inc. and Trinity Biotech, plc and specialized biotechnology firms, as
well as universities and other research institutions, which have developed or
are developing technologies and products which are competitive with Omni-SAL(R)
and the Company's products under development. Many of these competitors are
established and have substantially greater research, marketing and financial
resources than the Company. The Company expects that the number of products
competing with its products will increase as the perceived benefits of
saliva-based testing become more widely recognized. There can be no assurance
the Company will be able to compete successfully.
7. Technological Change and Risk of Technological Obsolescence. The
biotechnology industry, and, in particular, saliva and blood-based diagnostic
testing, is subject to rapid and significant technological change. There can be
no assurance that the Company's competitors will not succeed in developing
technologies and products relating to the collection of saliva for diagnostic
testing prior to the Company or that they will not develop technologies and
products that are more effective than any which have been or are being developed
by the Company. In addition, the diagnostic products market is characterized by
changing technology and developing industry standards sometimes resulting in
product obsolescence or short product life cycles. Accordingly, the ability of
the Company to compete will be dependent on its introducing products to the
marketplace in a timely manner and enhancing and improving such products. There
can be no assurance that the Company will be able to keep pace with
technological developments or that its products will not become obsolete.
8. Government Regulation. The development, manufacture and sale of the
Company's products in the United States are subject to regulation by the FDA and
other governmental agencies. The process of obtaining FDA approval is costly and
time-consuming, and there can be no assurance that any of the Company's products
not yet approved will be approved by the FDA or other regulatory agencies.
Delays in obtaining regulatory approvals may adversely affect the development,
testing or marketing of the Company's products and the ability
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<PAGE>
of the Company to generate product revenues therefrom. If and when the Company's
products are approved by the FDA, they will be subject to continuing regulation
by the FDA and state and local agencies. The FDA has established a number of
requirements for manufacturers and requirements regarding labeling and
reporting. The failure to comply with these requirements can result in
regulatory action, including warning letters, product seizure, injunction,
product recalls, civil fines and prosecution. An FDA enforcement action could
have a material adverse effect on the Company. The Company is subject to
regulation in certain foreign markets. There can be no assurance that regulatory
approvals for any of the Company's products will be obtained in a timely manner,
or at all. See "The Company - Regulation."
9. Risks Related to Foreign Activities. The Company and its
manufacturers may be subject to various import duties imposed by foreign
governments applicable to both finished products and components and may be
affected by various other import and export restrictions or duties as well as
other developments having an impact upon international trade. These factors
could, under certain circumstances, have an impact both on the manufacturing
cost and the wholesale and retail prices of such products. To the extent that
transactions relating to foreign sales, manufacturing of the Company's products
and purchases of components involve currencies other than United States dollars,
the operating results of the Company could be adversely impacted by fluctuations
in foreign currency exchange rates.
10. Uncertainty of Market Acceptance; Dependence Upon Third Party
Distributors. The Company has limited marketing capabilities and resources.
Achieving market acceptance will require substantial marketing efforts and the
expenditure of significant funds to inform potential consumers and the public of
the perceived benefits of the Company's current and proposed products. Moreover,
the Company does not have the financial or other resources to undertake
extensive marketing and advertising activities. The Company has recently begun
to develop strategic alliances and marketing arrangements, including joint
ventures, license or distribution arrangements. The Company's prospects will be
significantly affected by its ability to successfully develop and maintain its
relationships with its joint venturers, licensors and distributors and upon the
marketing efforts of such third parties. While the Company believes that any
independent distributors and sales representatives with whom it enters into such
arrangements will have an economic motivation to commercialize the Company's
products, the time and resources devoted to those activities generally will be
controlled by such entities and not by the Company. There can be no assurance
that the Company will be able, for financial or other reasons, to develop and
maintain any third party distribution or marketing arrangements or that such
arrangements, if established, will result in the successful commercialization of
any of the Company's products.
11. Dependence on Manufacturers. The Company relies on arrangements
with third parties for the manufacture of some of its products. Such
manufacturers, if located in the United States or if manufacturing products to
be sold in the United States, must comply with the FDA's good manufacturing
practices ("GMP") and pass pre-approval inspections by the FDA and periodic GMP
inspections. MML Diagnostic Packaging, Inc. ("MML") manufactures Omni-Swab and
Saliva.Sampler for the Company in the United States and has advised the Company
that it is in compliance with all
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<PAGE>
applicable FDA requirements for such manufacturing. There can be no assurance
that the Company's manufacturer will continue to comply with GMP, that the
Company will be able to locate additional manufacturers that comply with GMP or
secure agreements with such manufacturers on terms acceptable to the Company.
There can be no assurance that MML will be able to meet the Company's
requirements or that MML will continue to manufacture Omni-Swab or
Saliva.Sampler on terms acceptable to the Company. See "The Company -
Manufacturing and Supply."
12. Dependence Upon Third-Party Suppliers. The Company believes that
most of the components used in the manufacture of its proposed products are
currently available from numerous suppliers located in the United States, Europe
and Asia. The Company believes, however, that certain components are available
from a limited number of suppliers. Although the Company believes that it will
not encounter difficulties in obtaining these components, there can be no
assurance that the Company will be able to enter into satisfactory agreements or
arrangements for the purchase of commercial quantities of such components. The
failure to enter into agreements or otherwise arrange for adequate or timely
supplies of components and the possible inability to secure alternative sources
of components could have a material adverse effect on the Company's ability to
manufacture its products. In addition, development and regulatory approval of
the Company's products in the United States are dependent upon the Company's
ability to procure certain components and certain packaging materials from FDA-
approved sources. Since the FDA approval process requires manufacturers to
specify their proposed suppliers of certain components in their PMAs, if any
such component were no longer available from the specified supplier, FDA
approval of a new supplier would be required, resulting in potential
manufacturing delays. See "The Company - Manufacturing and Supply."
13. Dependence on Small Number of Customers. The Company derives a
large portion of its revenues from sales to a small number of customers. Sales
to three customers accounted for approximately 49% of total product revenues in
1996. Sales to two customers accounted for approximately 50% of total product
revenues in 1995. The loss of sales to any of the Company's major customers
could have a material adverse effect on the Company's financial condition and
results of operations. See "The Company - Marketing, Sales and Distribution."
14. Dependence on Key Personnel. The success of the Company will be
largely dependent on the personal efforts of Kenneth J. McLachlan, its
President, Chief Executive Officer, Chief Financial Officer and Chief Accounting
Officer, and certain key management and scientific personnel. The loss of Mr.
McLachlan's services or the services of other key management or scientific
personnel would have a material adverse effect on the Company's business and
prospects. Competition among biotechnology companies for qualified employees is
intense, and the loss of key personnel or the inability to attract and retain
the additional highly skilled employees required for the Company's activities
could adversely affect its business. There can be no assurance that the Company
will be able to hire or retain such necessary personnel. See "Management."
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15. Uncertainty of Patent Protection; Proprietary Information. The
Company has applied for United States patents on certain aspects of its saliva
collection and diagnostic testing devices and has been awarded four of these
patents. To the extent possible, the Company also anticipates filing patent
applications for protection on future products and technology which it develops.
There can be no assurance that patents applied for will be obtained, that any
such patents will afford the Company commercially significant protection of its
technology or that the Company will have adequate resources to enforce its
patents. Inasmuch as the Company intends to sell its products in foreign
markets, it is in the process of seeking foreign patent protection on its
current products and technologies. The patent laws of other countries may differ
from those of the United States as to the patentability of the Company's
products and technologies and the degree of protection afforded. Other companies
may independently develop equivalent or superior products and technologies and
may obtain patent or similar rights with respect thereto. Although the Company
believes that its products and technologies have been independently developed
and do not infringe on the patents of others, there can be no assurance that the
Company's products and technologies do not and will not infringe on the patents
of others. In the event of infringement, the Company would, under certain
circumstances, be required to modify its device or obtain a license. There can
be no assurance that the Company will be able to do either of the foregoing in a
timely manner or upon acceptable terms and conditions, and the failure to do so
could have a material adverse effect on the Company. There can be no assurance
that the Company will have the financial or other resources necessary to
successfully defend a claim of violation of proprietary rights. See "The Company
- - Intellectual Property."
16. Product Liability; Insurance Coverage. The Company may be exposed
to potential product liability claims by consumers. The Company maintains
product liability insurance coverage in an amount up to $1,000,000 per
occurrence, up to a maximum of $2,000,000 in the aggregate, with excess umbrella
liability insurance coverage of $4,000,000. In the event of a product liability
claim, there can be no assurance that such insurance will be sufficient to cover
all possible liabilities. In the event of a successful suit against the Company,
insufficiency of insurance coverage would have a material adverse effect on the
Company.
17. Possible Removal of Securities from Nasdaq System; Disclosure
Relating to Low-Priced Stocks. If the Company should continue to experience
losses from operations, it may be unable to maintain the standards for continued
quotation on Nasdaq and the Common Stock could be subject to removal from the
Nasdaq system. Upon the filing by the Company of its Form 10-QSB for the period
ended March 31, 1997, Nasdaq issued a letter to the Company asking the Company
to demonstrate that it currently meets all Nasdaq listing requirements and can
continue to meet those requirements. In order to continue to be included in
Nasdaq, a company must maintain $2,000,000 in total assets, a $200,000 market
value of the public float and $1,000,000 in total capital and surplus. In
addition, continued inclusion requires two market-makers and a minimum bid price
of $1.00 per share; provided, however, that if a company falls below such
minimum bid price, it will remain eligible for continued inclusion in Nasdaq if
the market value of the public float is at least $1,000,000 and the Company has
$2,000,000 in capital and surplus. The Company's total capital and surplus was
$1,160,632 at December 31, 1996 and $350,265 at March 31, 1997. On June 5, 1997,
the Company caused the early conversion of $800,000 of the 7.5% Convertible
Debentures due February 28, 1999
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to Common Stock to demonstrate current compliance with the Nasdaq continued
inclusion requirements and submitted to Nasdaq on June 4, 1997, its plan to
sustain compliance with the Nasdaq requirements. The Company is awaiting a
Nasdaq response to its submission. If the Company is removed from the Nasdaq
system, trading, if any, in the Common Stock would thereafter be conducted in
the over-the-counter market on an electronic bulletin board established for
securities that do not meet the Nasdaq inclusion requirements or in what are
commonly referred to as the "pink sheets". As a result, an investor would find
it more difficult to dispose of, or to obtain accurate quotations as to the
price of, the Company's securities. In addition, if the Company's securities
were removed from the Nasdaq system, they would be subject to so-called "penny
stock" rules that impose additional sales practice requirements on
broker-dealers who sell such securities. Consequently, removal from the Nasdaq
system, if it were to occur, could affect the ability or willingness of
broker-dealers to sell the Company's securities and the ability of purchasers of
the Company's securities to sell their securities in the secondary market. There
is no assurance that the Company will continue to remain eligible for continued
inclusion of the Common Stock on Nasdaq.
18. No Dividends. To date, the Company has not paid any dividends on
its Common Stock and does not expect to declare or pay any dividends in the
foreseeable future.
19. Significant Outstanding Options and Warrants. As of the date of
this Prospectus, there were outstanding (i) stock options to purchase an
aggregate of 1,630,750 shares of Common Stock at exercise prices ranging from
$0.43 to $5.50 per share; (ii) warrants to purchase 1,380,000 shares of Common
Stock which were issued in the Company's initial public offering, are
exercisable at $3.00 per share, and expire June 30, 1997 unless extended by the
Company; (iii) warrants to purchase 443,552 shares which are exercisable at
prices ranging from $1.00 to $4.00 per share; and (iv) $700,000 in principal
amount of the Company's 7.5% Convertible Debentures due February 28, 1999 (the
"Debentures"), which are convertible into shares of Common Stock at a conversion
price equal to the lesser of $1.9191 per share or 80% of the market price for a
share of Common Stock at the time of conversion. All of the shares of Common
Stock which have been and may be issued by the Company in connection with the
conversion of the Debentures are being registered under the Registration
Statement of which this Prospectus is a part. See "Description of Securities -
Debentures."
To the extent that outstanding options or warrants are exercised,
dilution to the Company's shareholders may occur. Moreover, the terms upon which
the Company will be able to obtain additional equity capital may be adversely
affected since the holders of outstanding options and warrants can be expected
to exercise them at a time when the Company would, in all likelihood, be able to
obtain any needed capital on terms more favorable to the Company than the
exercise terms provided by such outstanding securities.
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GLOSSARY OF CERTAIN TECHNICAL TERMS
AIDS .................................. Acquired Immunodeficiency Syndrome.
AIDS is caused by the Human
Immunodeficiency Virus, HIV.
ANTIBODY .............................. A protein which is a natural part of
the human immune system produced by
specialized cells to neutralize
antigens, including viruses and
bacteria, that invade the body. Each
antibody producing cell manufactures a
unique antibody that is directed
against, binds to and eliminates one,
and only one, specific type of
antigen.
ANTIGEN ............................... Any substance which, upon entering the
body, stimulates the immune system
leading to the formation of
antibodies. Among the more common
antigens are bacteria, pollens,
toxins, and viruses.
ASSAY ................................. In medicine, a means of measuring a
substance of clinical interest. The
results may be either qualitative, as
in "yes/no" (such as pregnant/not
pregnant) or quantitative, as in
determining the number of red blood
cells in a sample.
BIOTECHNOLOGY ......................... The commercial application of
bioscience, representing the
disciplines of molecular biology, cell
biology, genetics, enzymology,
immunology, bacteriology, biochemistry
and fermentation processes through the
use of living organisms.
DIAGNOSTIC ............................ Pertaining to the determination of the
nature or cause of a disease or
condition. Also refers to reagents or
procedures used in diagnosis to
measure proteins in a clinical sample.
ELISA ................................. Enzyme Linked Immunoabsorbent Assays.
Assays in which an enzyme is employed
to produce a color change indication
for a reaction endpoint.
ENZYME ................................ A protein that facilitates specific
chemical reactions.
HIV ................................... Human Immunodeficiency Virus. HIV
(also called HIV-1), a retrovirus,
causes AIDS. A similar retrovirus,
HIV-2, causes a variant disease,
sometimes referred to as West African
AIDS. HIV infection leads to the
destruction of the immune system.
IMMUNOASSAY ........................... An assay which exploits antigen-
antibody reactions.
IMMUNOLOGY ............................ The study of immunity to diseases.
IMMUNODIAGNOSTICS ..................... Diagnostic tests which use antigen/
antibody reactions to determine the
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presence of a disease, disorder or
condition.
PATHOGEN .............................. A microorganism or substance which
produces a disease.
PROTOCOL .............................. A procedure pursuant to which an
immunodiagnostic test is performed on
a particular specimen in order to
obtain the desired reaction.
REAGENT ............................... A chemical added to a sample under
investigation in order to cause a
chemical or biological reaction which
will enable measurement or
identification of a target substance.
RETROVIRUS ............................ A type of virus which contains the
enzyme Reverse Transcriptase and is
capable of transforming infected cells
to produce diseases in the host such
as AIDS.
SENSITIVITY ........................... Refers to the ability of an assay to
detect and measure small quantities of
a substance of interest. The greater
the sensitivity, the smaller the
quantity of the substance of interest
the assay can detect. Also refers to
the likelihood of detecting the
antigen when present.
SPECIFICITY ........................... The ability of an assay to distinguish
between similar materials. The greater
the specificity, the better an assay
is at identifying a substance in the
presence of substances of similar
makeup.
VIRUS ................................. A parasitic microorganism not visible
by light microscopy and dependent on
host cells for its reproductive and
metabolic needs.
THE COMPANY
GENERAL
The Company is primarily engaged in the development, manufacturing and
marketing of rapid in vitro assays for use in the detection of infectious
diseases and other conditions, proprietary specimen collection devices and other
diagnostic devices.
The Company was incorporated in California in 1986 as E&J Systems, Inc.
In January 1992, the Company merged with and into a Delaware corporation and
changed its name to Saliva Diagnostic Systems, Inc. The Company completed an
initial public offering of its common stock in March 1993. In 1994, the
Company's 90% owned subsidiary, Saliva Diagnostic Systems (Asia) Ltd. ("SDS
Asia"), formed Saliva Diagnostic Systems (Singapore) Pte. ("SDS Singapore"). In
1995, the Company purchased the minority interest (10%) in SDS Asia and the
outstanding minority interest (19%) in SDS Singapore. As a result, SDS Asia and
SDS Singapore became wholly owned subsidiaries of the Company. Additionally in
1995, the Company purchased the minority interest (10%) in Saliva Diagnostic
Systems, UK, Ltd., and as
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a result this entity became a wholly owned subsidiary of the Company and was
renamed SDS International, Ltd. Unless otherwise indicated, all references to
the Company include the Company and its wholly owned subsidiaries, SDS
International, Ltd., SDS Asia and SDS Singapore. The Company's principal
executive offices are located at 11719 NE 95th Street, Vancouver, Washington,
98682.
The Company has incurred significant operating losses since its
inception, resulting in an accumulated deficit of $21,914,246 at December 31,
1996 and $23,089,147 at March 31, 1997. Such losses are expected to continue
through 1997. The Company's capital requirements have been and will continue to
be significant. The Company has been dependent on private placements of its debt
and equity securities and on a public offering of its common stock in March 1993
to fund its capital requirements. The Company is dependent upon its efforts to
raise capital to finance the cost of development, manufacturing and marketing of
its products, to conduct clinical trials and submissions for FDA approval of its
products and to design and develop new products. Marketing, manufacturing and
clinical testing may require capital resources substantially greater than the
resources which will be available to the Company. There can be no assurance that
the Company will be able to obtain the additional capital resources necessary to
implement or continue its programs, or that such financing will be available on
commercially reasonable terms or at all. See Note 2 of Notes to Consolidated
Financial Statements.
PRODUCTS
RAPID IMMUNOASSAYS. The Company continues to develop rapid immunoassays
utilizing immunochromatography for the detection of antibodies to selected
pathogens, such as the HIV, the virus that causes AIDS, and Helicobacter pylori
("H. pylori"), a bacteria linked to peptic ulcers and gastric cancer.
The Company's immunoassays are designed to require only a few simple
steps and minutes to use. The tests produce visual results in under 20 minutes,
and may be used without special equipment, storage or training. The Company's
data and independent evaluations demonstrate that its Hema.Strip HIV and
Sero.Strip HIV tests are generally equivalent in performance to widely used
FDA-licensed tests for HIV.
The Company's rapid tests utilize a capillary flow assay in which all
reagents are provided on solid phases in a dried format (test strip). Buffer
solution is introduced after sample collection. The resulting mixture of sample
and buffer migrate along the test strip by capillary action, reconstituting a
dye conjugate. A red control line will develop at a designated point on the
upper portion of the strip if the assay has been performed properly and if all
reagents are functionally active. The conjugate binds in the presence of
antibodies to pre-applied antigen to form a second red line (positive) at a
designated point on the lower portion of the strip. In the absence of specific
antibodies, a second line does not develop.
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To date, the Company has developed three rapid HIV tests: Sero.Strip
HIV, Hema.Strip HIV and Saliva.Strip HIV, and a rapid H. pylori test:
Stat.Simple. The Company has under development several rapid tests for
hepatitis.
Sero.Strip HIV ("Sero.Strip") analyzes a small amount of serum or
plasma to detect HIV antibodies. Sero.Strip is packaged as a multiple-use kit
designed for professional health care settings where many patients are tested
and specimens may be stored. Results are available in 5 to 15 minutes. The test
kit may be stored without refrigeration for up to 18 months after the date of
manufacture.
Hema.Strip HIV ("Hema.Strip") is a single use test kit that collects,
processes and analyzes a minute amount of whole blood to detect HIV antibodies.
Sample collection requires only a few seconds. The principles used in the
Hema.Strip test strip are identical to that utilized in Sero.Strip; however, an
added filter traps red blood cells from the whole blood sample permitting the
migration of serum to flow onto the strip and negating the need for the user to
separate serum from the whole blood sample. The test kit may be stored without
refrigeration for up to 18 months after the date of manufacture.
Saliva.Strip HIV ("Saliva.Strip") is a rapid testing system that
collects, processes and analyzes saliva to detect HIV antibodies. Principles of
the test strip are similar to that used in Sero.Strip and Hema.Strip. The
Company expects to complete development of Saliva.Strip in 1997. The test is
currently designed for single use and incorporates Omni-SAL(R), the Company's
saliva collection device. The test is currently designed to obtain results in
between 10 and 20 minutes. The Company believes Saliva.Strip's temperature
stability is similar to Sero.Strip and Hema.Strip.
Stat.Simple ("Stat.Simple") is the Company's rapid assay for H.
pylori antibody detection. The device is a modification of Hema.Strip HIV and
uses whole blood for analysis. Results are available in 5 to 20 minutes.
Stat.Simple is currently undergoing pre-clinical data collection in the United
States prior to submission for review by the Food and Drug Administration.
MEDICAL SPECIMEN COLLECTION DEVICES. The Company has commenced
production and marketing of three medical specimen collectors: Omni-SAL(R),
Saliva.Sampler and Omni-Swab.
Omni-SAL(R) is a saliva collection device with a patented volume
indicator that is sold to several commercial companies for use with their
laboratory assays for the detection of HIV infection and cigarette smoking. It
is also used in research to collect saliva samples for studies of infectious
diseases such as Hepatitis, tuberculosis, schistosomiasis and leptospirosis.
Saliva.Sampler is a saliva collection device cleared for marketing in
the United States for the collection of saliva samples for purposes not related
to HIV testing.
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Omni-Swab is a sample collection device comprised of a serrated cotton
swab with an ejectable head. It is used to collect various body fluids and
cells, primarily for the purposes of DNA identification.
Saliva Filter is a component of the Omni-SAL(R) and Saliva.Sampler that
extracts saliva from the devices' collection pads and also removes debris from
the samples. Due to limited production capability, the Company does not
currently manufacture Saliva Filter and thus, has elected to use filters of
other manufacturers for the Omni-SAL(R) and Saliva.Sampler.
PRODUCT DEVELOPMENT
The Company is currently engaged in the development of rapid
immunoassays to detect antibodies to Hepatitis. In 1996, the Company entered
into a codevelopment agreement for rapid hepatitis tests with a European vaccine
manufacturer, which supplies antigen to the Company for product development. If
a product is ultimately developed, the Company will jointly market such product
and share profits on sales with its European partner.
In 1996, the Company also entered into a cooperative research and
development agreement (CRADA) with the Naval Medical Research and Development
Command, acting through US Navy Medical Research Unit No. 2, to develop rapid
tests for certain tropical diseases, including dengue virus, leptospirosis and
scrub typhus, to which US Naval personnel are exposed in overseas assignments.
Under the agreement, the Company will use antigen supplied by the US Navy to
develop the tests, while the Navy will provide laboratory space and staff
devoted to the project. The Company is obligated to provide funding of
approximately $19,000 to the Navy in exchange for its services.
The Company has conducted preliminary research that indicates its rapid
test format may be expanded to detect other diseases, such as tuberculosis,
measles, malaria, rubella, tetanus, herpes, chlamydia, mumps, influenza,
parvovirus, pertussis, certain cancers, tumor markers and cardiac disease.
Additionally, the Company believes that, in many cases, its tests may be able to
use saliva for analysis as well as blood and serum, although research has not
been completed on this.
The Company has received an Investigational Device Exemption for
Omni-SAL(R) from the FDA which allows the Company to conduct clinical trials in
the United States for the purposes of determining whether Omni-SAL(R) may be
used for collecting saliva samples for HIV testing in conjunction with certain
laboratory assays. The Company is considering partnering relationships to enable
it to pursue such regulatory approval and subsequently to market Omni-SAL(R) in
the United States as part of a home collection testing system for HIV infection.
The Company expended approximately $1,040,000 and $903,000 in research
and development costs in fiscal years 1996 and 1995, respectively, and $194,700
and $257,600 in the
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first fiscal quarters of 1997 and 1996, respectively. See Note 1 of Notes to
Consolidated Financial Statements.
MARKETING, SALES AND DISTRIBUTION
The Company is currently marketing its medical specimen collection
devices (Omni-SAL(R), Saliva.Sampler and Omni-Swab) in many countries and is
currently marketing two of its three HIV rapid tests (Sero.Strip HIV and
Hema.Strip HIV) outside the United States. These HIV rapid tests are not
approved for marketing in the United States. The Company believes Saliva.Strip
HIV and Stat.Simple will be ready for marketing outside the United States in
1997.
The Company has directed its initial primary marketing and distribution
efforts for its HIV-related products to international markets, principally in
Asia, Latin America, Eastern Europe, the Middle East and Africa. The reported
success in 1996 of certain therapies for AIDS and HIV infection, such as
protease inhibitors and immune boosters, has caused the Company to include the
United States in its primary marketing strategy. Despite the lower rate of HIV
infection in the United States, the Company believes the reported benefits of
early medical intervention for those who can afford treatment will spur demand
for HIV test products in the United States. Sales of the Company's HIV-related
products in the United States are subject to obtaining FDA approval. See
"Manufacturing and Supply" and "Regulation--Domestic Regulation." The Company
intends to file applications for approval of its HIV products with the FDA in
1997, and is seeking an alliance with a strategic partner for marketing and
distribution of such products in the United States.
For international distribution of its products, the Company's strategy
has been to form direct relationships with in-country distributors of medical
products for both distribution and assistance in obtaining local regulatory
approval. This strategy proved satisfactory in smaller countries and in Brazil
and Russia but was less so in other markets, such as China, Thailand and Mexico.
In 1996, the Company appointed its first Sales and Marketing Director to
represent the Company internationally.
In March 1994, the Company granted a non-exclusive, worldwide license
to Orgenics, Ltd., an Israeli corporation ("Orgenics"), pursuant to which
Orgenics may make or have made diagnostic products incorporating the Company's
Omni-SAL(R) technology, and may use, sell, or license such products worldwide
(the "License Agreement"). The License Agreement expires the later of January
31, 2111 or the date on which any patents for the Omni-SAL(R) technology expire.
Orgenics has paid the Company an initial licensing fee of $200,000 and will pay
4% royalties on sales of Orgenics' products which incorporate the Company's
Omni-SAL(R) technology. In the event the Company ceases production of
Omni-SAL(R), Orgenics has the option, pursuant to the License Agreement, to
purchase from the Company the molds and equipment necessary to produce
Omni-SAL(R) and would thereafter pay to the Company 6% royalties on sales of
Omni-SAL(R) products produced and sold by Orgenics. The Company understands that
Orgenics is not currently exploiting its rights under the Company's license.
The Company is pursuing its rights to cancel the license and is considering
a new distribution
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agreement with Orgenics. There can be no assurance that such an agreement will
be concluded or that Orgenics will manufacture or sell any product which
will generate royalties for the Company.
In January 1997, the Company signed a letter of intent to enter into a
distribution agreement with BioChem ImmunoSystems, Inc., a division of BioChem
Pharma, Inc., a Montreal-based conglomerate with significant international sales
in infectious disease therapies and diagnostics, for international distribution
of the Company's rapid tests for HIV infection. The parties are currently
negotiating the terms of definitive agreements pursuant to such letter of
intent. BioChem ImmunoSystems, Inc. is a Canadian research and development
organization specializing in the manufacture of diagnostic products and is an
international distributor of diagnostic products.
In November 1996, the Company signed a letter of intent to enter into a
distribution agreement with another Canadian company, Advanced Pathology
Services Canada, Inc. ("APS Canada"), for distribution of all of the Company's
current products except Stat.Simple in selected geographic regions outside the
United States. On May 15, 1997, the parties entered into a definitive agreement
pursuant to the letter of intent. The agreement grants to APS Canada a five-year
exclusive distributorship for the designated territory. APS Canada is a division
of The APS Group of Companies, based in London, England. APS Canada provides
specialized human and veterinary medical testing services and maintains a
laboratory exclusively devoted to saliva testing.
The Company has submitted certain of its products for evaluation to the
World Health Organization ("WHO"), a division of the United Nations that
maintains an inventory of medical goods for impoverished nations and
non-governmental health organizations. Certain smaller countries without their
own regulatory agencies rely on results of WHO evaluations as part of their
approval of products for use and sale in their countries. In 1996 the Company
bid for a contemplated bulk purchase by WHO of the Company's Sero.Strip HIV. In
April 1997, WHO notified the Company that the Sero.Strip HIV was evaluated by
the United Nations AIDS Program and found to conform with its minimum
requirements. Accordingly, WHO has agreed to include the Company's Sero.Strip
HIV among the approved products for WHO bulk purchases during the year ending
February 28, 1998.
Sales to three customers, Fitzco, Inc., Osborn Laboratories and Beacon
Diagnostics, Inc. accounted for approximately 20%, 18% and 11%, respectively, of
total product sales in 1996. Sales to Fitzco, Inc. and Osborn Laboratories
accounted for 50% of total revenues in 1995. The loss of sales to Fitzco, Inc.,
Osborn Laboratories and Beacon Diagnostics, Inc. could have a material adverse
effect on the Company's financial condition and results of operations. See Note
10 of Notes to Consolidated Financial Statements.
The Company has limited marketing resources. Achieving market
acceptance will require substantial marketing efforts and capabilities. The
Company relies in large part on forming partnerships with other companies for
marketing and distribution of its products. There
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can be no assurance that the Company will form alliances with potential
distributors or that these distributors will be successful in promoting the
Company's products.
MANUFACTURING AND SUPPLY
Omni-SAL(R) is manufactured and distributed from the Company's
manufacturing facility in Singapore, while Omni-Swab and Saliva.Sampler are
manufactured at MML Diagnostic Packaging, Inc. ("MML") in the United States and
distributed by the Company. Sero.Strip HIV and Hema.Strip HIV are also
manufactured and distributed from the Company's facility in Singapore.
Manufacturers, if located in the United States or if manufacturing products
which are to be sold in the United States, must comply with the FDA's good
manufacturing practices ("GMP") and pass pre-approval inspections by the FDA and
periodic GMP inspections. The Company has been advised by MML that MML is in
compliance with GMP and other FDA regulations.
In 1996, the Company began to design and build equipment for automated
production of its rapid tests at its Vancouver, Washington facility in the
United States. The Company believes such equipment will be fully installed and
functioning in late 1997. The Company is required to meet certain conditions,
including compliance with FDA requirements (such as GMP), in order to
manufacture its tests at its Vancouver facility and to export its products from
there. The Company is currently addressing compliance with those requirements.
In addition, the Company must obtain separate FDA product approvals for sales
within the United States. See "-- Regulation--Domestic Regulation."
The Company believes that most components used in the manufacture of
its current and proposed products are currently available from numerous
suppliers located in the United States, Europe and Asia. The Company believes,
however, that certain components are available only from a limited number of
suppliers. Although the Company believes that it will not encounter difficulties
in obtaining these components, there can be no assurance that the Company will
be able to enter into satisfactory agreements or arrangements for the purchase
of commercial quantities of such components.
REGULATION
DOMESTIC REGULATION
FOOD AND DRUG ADMINISTRATION. In the United States, under the Federal
Food, Drug, and Cosmetics Act (the "FDC Act"), the FDA regulates all aspects,
including manufacture, testing, and marketing of medical devices that are made
or distributed domestically. The Company's domestically made and/or distributed
products, Omni-Swab and Saliva.Sampler, have received FDA clearance for domestic
distribution for certain limited purposes. See also "Manufacturing and Supply."
The Company has not yet initiated activities for FDA approval of its products
that are manufactured and distributed outside the United States.
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All medical devices are categorized by the FDA as Class I, Class II, or
Class III. Class I devices are subject only to general control provisions of the
FDC Act, such as purity, labeling and GMP. Class II devices are required to also
ensure reasonable safety and efficacy through performance standards and other
controls. Class III devices must, in addition to fulfilling all other provisions
of the FDC Act, meet extensive and rigorous FDA standards that may require
clinical trials.
A manufacturer of medical devices which can establish that a new device
is "substantially equivalent" to a legally marketed Class I or Class II medical
device or to a Class III medical device for which the FDA has not required a
premarket approval application ("PMA") can seek FDA marketing clearance for the
device by filing a 510(k) Premarket Notification ("510(k) Notice"). The 510(k)
Notice may have to be supported by various types of information, including
performance data, indicating that the device is as safe and effective for its
intended use as a legally marketed predicate device.
The Company is pursuing several strategies for initiating FDA review of
its products not already approved or cleared for domestic distribution. These
strategies include alliances with other companies and selling limited licensing
rights to the Company's products to companies who agree to seek FDA approval for
them. The Company may also directly apply for FDA approval of those products.
In January 1995, the FDA classified Omni-Swab as a Class I medical
device. In August 1995, in response to a 510(k) Notice made by the Company, the
FDA approved Saliva.Sampler as a Class II device, accepting the Company's
contention that, under the 510(k) application guidelines, Saliva.Sampler
demonstrated "substantial equivalency" to other non-saliva collection devices
already in use for general purposes.
The Company believes that all of its HIV products would, if submitted
to the FDA, fall under the Class III category of medical devices. This includes
the Company's saliva collection device, Omni-SAL(R), if marketed as a specimen
collection device for HIV testing. The 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.
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In 1994, the FDA granted the Company's request to classify Omni-SAL(R)
under the IDE provisions of the FDC Act, allowing the Company to manufacture and
distribute Omni-SAL(R) for the limited purpose of demonstrating the efficacy of
using saliva as a diagnostic medium for HIV antibody testing.
In 1995, the FDA authorized the Company to begin clinical trials in the
United States to determine whether Omni-SAL(R) could be used as a saliva
collection device for HIV testing in conjunction with certain laboratory assays.
The Company has not conducted any clinical trials for Omni-SAL(R) in the United
States, although preclinical data has been generated for the device in the
United States and foreign countries. The Company would be required to use other,
FDA- approved confirmatory testing procedures during the trials.
If and when the Company's products are approved by the FDA, they will
be subject to continuing regulation by the FDA and state and local agencies. The
FDA has established a number of requirements for manufacturers, including GMP
(see discussion above), and requirements regarding labeling and reporting. The
failure to comply with these requirements can result in regulatory action,
including warning letters, product seizure, injunction, product recalls, civil
fines and prosecution. An FDA enforcement action could have a material adverse
effect on the Company. To date, the Company has not been the subject of any FDA
enforcement actions. The FDA also audits clinical studies for compliance with
applicable requirements.
OVERSEAS REGULATION AND DISTRIBUTION
Regulatory approval for medical devices vary from country to country.
Some countries do not require regulatory approval when registering a product for
sale to the private sector. Others rely on evaluations by agencies such as the
WHO. The Company has submitted Sero.Strip to WHO for evaluation, and intends to
submit its other HIV tests to WHO as well. WHO's evaluation of Sero.Strip has
been completed and WHO has found that Sero.Strip meets its standards for rapid
test performance.
The following lists the Company's products, where the products are
distributed and where regulatory approval is pending if required.
1. Omni-SAL(R) is being distributed as a sample collection device for
HIV testing and other uses in the United Kingdom and various other countries.
The Company has submitted Omni-SAL(R) for approval as a sample collection device
for HIV testing and other uses in South Africa, and plans to apply for such
approval in several other European and Middle Eastern nations where such
approval is required.
2. Omni-Swab is distributed in the United States and in many of the
countries in which Omni-SAL(R) is distributed.
3. Saliva.Sampler is distributed mainly in the United States.
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4. Sero.Strip was approved for use and sale in Russia by the Russian
Ministry of Health in 1996, and has received a certificate of free sale from
Singapore, where it is manufactured, which allows Sero.Strip to be manufactured
in Singapore and exported to other countries. Sero.Strip is also approved in
India. It is currently registered in Brazil. Sero.Strip is pending approval
(where needed) in other Asian, European and Latin American countries. The Center
for Disease Control in Atlanta, Georgia has concluded a preliminary study using
Sero.Strip and ordered more of the tests for research use in Atlanta and for
epidemiological purposes overseas.
5. Hema.Strip has been approved for use and sale in Russia. In April
1996, Hema.Strip received a certificate of free sale from Singapore. Like
Sero.Strip, Hema.Strip can be manufactured in and distributed from Singapore to
other countries. The Company intends to submit Hema.Strip for approval in many
if not all of the regions where its other products are distributed or pending
approval.
6. Saliva.Strip is in final stages of development in its current form.
When completed, the Company intends to submit the device for approval (if
needed) and distribution in the same areas where its other products are sold.
There is no assurance, however, that any such approvals will be timely obtained
or obtained at all.
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.
23
<PAGE>
INTELLECTUAL PROPERTY
The Company has applied for patents in the United States and other
countries on certain aspects relating to Omni-SAL(R), a saliva collection
device, and Omni-Swab, a medical specimen collection device. To date, ten such
patents have been awarded, four in the United States, and six in other
countries. Expiration dates for the patents range from 2008 to 2012. The Company
intends to seek other patent protections in the United States and other
countries for certain aspects relating to its collection devices and rapid test
technology. No assurance can be given that patents will be issued to the Company
pursuant to its patent applications in the United States and abroad, or that the
Company's patent portfolio will provide the Company with a meaningful level of
commercial protection.
The Company also depends on trade secrets and proprietary information
to protect much of the technology that it has developed. The Company has entered
into confidentiality agreements with its employees, certain third party
suppliers, potential customers, joint venture partners, distributors and
consultants. Despite such efforts, there can be no assurance that such
confidentiality and the protection it may afford can be maintained.
The Company believes that patent and trade secret protection are
important to its business. However, the issuance of a patent and the existence
of trade secret protection does not in itself ensure the Company's success.
Competitors may be able to produce products competing with a patented Company
product without infringing on the Company's patent rights. Issuance of a patent
in one country generally does not prevent manufacture or sale of the patented
products in other countries. The issuance of a patent to the Company is not
conclusive as to validity or as to the enforceable scope of the patent. The
validity or enforceability of a patent can be challenged by litigation after its
issuance, and if the outcome of such litigation is adverse to the owner of the
patent, the owner's rights could be diminished or withdrawn. Additionally, trade
secret protection does not prevent independent discovery and exploitation of a
secret product or technique by other parties.
A large number of individuals and commercial enterprises seek patent
protection for technologies, products and processes in fields related to the
Company's area of product development. To the extent such efforts are
successful, the Company may be required to obtain licenses in order to
accomplish certain of its product strategies. There can be no assurance that
such licenses will be available to the Company or available on acceptable terms.
The Company is aware of certain filed patents issued to developers of diagnostic
products with potential applicability to the Company's diagnostic technology.
There can be no assurance that the Company would prevail if a patent
infringement claim were to be asserted against it.
24
<PAGE>
EMPLOYEES
As of May 30, 1997, the Company employed forty full-time persons,
including those engaged in research and development, regulatory affairs,
manufacturing, sales and marketing, and administration. None of the Company's
employees are covered by collective bargaining agreements, and the Company
believes its relations with its employees are good.
PROPERTIES
The Company's executive offices and laboratory facility are located at
11719 NE 95th Street, Vancouver, Washington in an approximately 12,000 square
foot facility. The premises are occupied pursuant to a lease with an
unaffiliated party which expires in August 2002.
The Company leases from an unaffiliated party approximately 4,500
square feet in Singapore which it uses for offices and manufacturing facilities.
The lease, which was set to expire in June 1997, has been extended to May 1998.
LEGAL PROCEEDINGS
Hardy v. Saliva Diagnostic Systems, Inc., Ronald L. Lealos, Eugene
Seymour and Richard S. Kalin, was filed in United States District Court,
District of Connecticut in August 1994 by Luc Hardy, a former director and
officer of the Company. The complaint alleges several causes of action against
the Company and individual defendants, including former directors and officers
of the Company, including breach of Mr. Hardy's employment agreement with the
Company, intentional interference with contract by the individual defendants,
slander and deceptive trade practices. The complaint seeks damages and punitive
damages in an unspecified amount. The Company believes this complaint is without
merit as it believes Mr. Hardy was terminated for cause. The Company intends to
vigorously defend itself. 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 in April 1996,
involves a dispute with respect to the conversion rate of a convertible
debenture issued to Meritxell by the Company. The Company believes the suit is
without merit inasmuch as it believes the plaintiff failed to comply with the
terms of the convertible debenture at the time of conversion. Plaintiff is
seeking damages in an unspecified amount. Discovery is ongoing and management of
the Company intends to vigorously defend the Company.
In January 1997, Lealos v. Saliva Diagnostic Systems, Inc. was filed in
Superior Court in Clark County, Washington by Ronald Lealos, the former Chief
Executive Officer of the Company. The complaint in the lawsuit alleged various
breach of contract claims. This lawsuit was recently dismissed without prejudice
as a prerequisite to a settlement agreement between Mr. Lealos and the Company
currently in the process of being documented. There can be no assurance that a
final settlement acceptable to the Company will be concluded with Mr. Lealos,
25
<PAGE>
or that if new litigation ensues and is decided adverse to the Company, that it
would not have a material adverse effect on the Company.
Other than that set forth above, to the best knowledge of the Company,
no other material legal proceedings are pending or have been threatened.
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Since July 1990, the Company has been engaged almost exclusively in
research and development activities focused on developing proprietary saliva
based collection devices and rapid assays for infectious diseases. Other than
sales of the Company's collection devices, the Company has not yet commenced any
significant product commercialization. The Company has incurred significant
operating losses since its inception, resulting in an accumulated deficit of
$21,914,246 at December 31, 1996 and $23,089,147 at March 31, 1997. Such losses
are expected to continue through at least 1997. There can be no assurance that
the Company will achieve or maintain profitability in the future. The Company's
significant operating losses and significant capital requirements raise
substantial doubt about the Company's ability to continue as a going concern.
See "The Company -- General" and Note 2 of Notes to Consolidated Financial
Statements.
RESULTS OF OPERATIONS
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
REVENUES. The Company's revenues consist primarily of product sales and
license revenue. Revenues from product sales increased 37% to $715,800 in 1996
from $522,800 in 1995. The increase in product sales revenue was primarily
attributable to increased sales of Omni-SAL(R), Omni-Swab, Sero.Strip HIV and
Hema.Strip HIV. License revenue decreased to $25,000 in 1996 from $60,000 in
1995. The decrease in license revenue was attributable to fewer licensing
agreements in 1996.
COST OF PRODUCTS SOLD. Costs of products sold increased to $472,100
(66% of product sales) in 1996 from $149,600 (29% of product sales) in 1995.
Cost of products sold increased as a percentage of product sales resulting from
additional costs to produce the products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development ("R&D")
expenses increased 15% to $1,040,000 in 1996 from $903,000 in 1995, primarily as
a result of expanded R&D for product development for Saliva.Strip HIV,
Stat.Simple (a H.pylori rapid test) and rapid tests for hepatitis.
26
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased slightly to $3,911,600 in 1996 from $3,608,400
in 1995, primarily as a result of increased workforce and facilities.
INTEREST EXPENSE AND LOAN FEES. Interest expense and loan fees
decreased to $28,000 in 1996 from $557,700 in 1995, primarily as a result of the
Company engaging in fewer financial loan transactions requiring fees and
interest.
INCOME TAXES. The Company is in a net deferred tax asset position and
has generated net operating losses to date. Accordingly, no provision for or
benefit from income taxes has been recorded in the accompanying statements of
operations. The Company will continue to provide a valuation allowance for its
deferred tax assets until it becomes more likely than not, in management's
assessment, that the Company's deferred tax assets will be realized. See Note 7
of Notes to Consolidated Financial Statements.
FIRST QUARTER OF 1997 COMPARED TO FIRST QUARTER OF 1996
REVENUES. The Company's revenues consist primarily of product sales and
license revenue. Revenues from product sales increased 33% to $227,000 in the
first quarter of 1997 from $171,400 in the first quarter of 1996. The increase
in product sales revenue was primarily attributable to first time sales in Japan
and sales in Russia of the Company's Hema.Strip product. License revenue
decreased to $0 in the first quarter of 1997 from $22,300 in the first quarter
of 1996, as there were no revenues received under license agreements in the
first quarter of 1997.
COST OF PRODUCTS SOLD. Costs of products sold increased to $259,600
(114% of product sales) in the first quarter of 1997 from $120,500 (70% of
product sales) in the first quarter of 1996. Costs of products sold increased as
a percentage of product sales due to increased manufacturing overhead, larger
square footage of manufacturing facilities and an increase in the number of
manufacturing personnel.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased 24% to $194,700 in the first quarter of 1997 from $257,600 in the
first quarter of 1996, primarily as a result of reduced payroll and related
expenses. Additionally, in the first quarter of 1996, there were clinical
studies being performed in Mexico City, which, due to budget constraints, were
curtailed in the first quarter of 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 27% to $954,000 in the first quarter of 1997
from $751,200 in the first quarter of 1996, primarily as a result of increased
legal fees related to litigation matters, and increased accounting and legal
fees related to various securities filings.
INTEREST EXPENSE AND LOAN FEES. Interest expense decreased to $8,600 in
the first quarter of 1997 from $69,000 in the first quarter of 1996. In the
first quarter of 1996, interest was accrued on certain convertible debentures,
whereas in the first quarter of 1997, convertible debentures were only
outstanding for a limited time during the quarter.
27
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its capital requirements
through proceeds from its public offering of stock in March 1993 and the
exercise of common stock purchase warrants pursuant to such offering, proceeds
from private sales of convertible debentures in 1992 through 1995 and 1997,
proceeds from private placements of common stock in 1994 and 1995, and the
exercise of common stock purchase warrants and stock options in 1996.
Cash used in operating activities was $4,065,470 in 1996 and $735,800
in the first quarter of 1997. This was primarily a result of net losses of
$5,152,399 and $1,175,000, respectively, and adjustments for depreciation and
amortization and the write-off of goodwill. See Note 3 of Notes to Consolidated
Financial Statements.
Cash used in investing activities in 1996 was $453,400. This was
primarily a result of the placement of restricted cash as collateral for bank
borrowings, and purchase of manufacturing equipment. Cash used in investing
activities in the first quarter of 1997 was $19,000, which represented the
purchase of manufacturing equipment. The Company has no material commitments for
the capital expenditures at March 31, 1997.
Cash provided by financing activities in 1996 was $2,607,000. This was
primarily a result of proceeds of $2,547,400 from the exercise of options and
warrants to purchase common stock. Cash provided by financing activities in the
first quarter of 1997 was $1,371,600. This was primarily a result of net
proceeds of $1,380,000 from the sale of convertible debentures.
In 1995, the Company purchased the minority interest in its 90% owned
subsidiary, SDS Asia and the minority interest in SDS Asia's 83% owned
subsidiary. Excess purchase price over net assets acquired of $600,000 was
recorded. At December 31, 1996, the Company recorded a charge of $540,000, which
represented the balance of the goodwill associated with this transaction. See
Note 3 of Notes to Consolidated Financial Statements.
The Company's capital requirements have been and will continue to be
significant. The Company's capital base is smaller than that of many of its
competitors, and there can be no assurance that the Company's cash resources
will be able to sustain its business. The Company currently has an accumulated
deficit due to its history of losses. The Company is dependent upon its effort
to raise capital to finance its future operations, including the cost of
manufacturing and marketing of its products, to conduct clinical trials and
submissions for FDA approval of its products and to continue the design and
development of its new products. Marketing, manufacturing and clinical testing
may require capital resources substantially greater than the resources available
to the Company. The Company will continue to seek public or private placement of
its equity securities and corporate partners to develop products.
In March 1997, the Company raised net proceeds of approximately
$1,380,000 (net of issuance costs of $120,000) from the private sale of
$1,500,000 in principal amount of the Company's 7.5% Convertible Debentures due
February 28, 1999 (the "Debentures"), in a
28
<PAGE>
offering conducted pursuant to Regulation D. Holders of the Debentures
originally had the right to convert up to (i) 33 1/3% of the Debentures at
any time from and after June 10, 1997, (ii) 66 2/3% of the Debentures at any
time from and after July 9, 1997 and (iii) 100% of the Debentures at any time
from and after August 8, 1997. Pursuant to a subsequent agreement among the
Company and the Debenture holders, the parties agreed to a partial acceleration
of conversion. As of June 5, 1997, the holders converted an aggregate of
$800,000 of the Debentures. The number of shares of Common Stock issuable upon
conversion is determined by the conversion price defined in the Debentures as
the lesser of 115% of the market price for a share of Common Stock at the time
of issuance of the Debenture (i.e., $1.9191 per share) or 80% of the market
price for a share of Common Stock at the time of conversion of the Debenture.
The Debentures are redeemable by the Company in certain circumstances. See
"Description of Securities - Debentures."
The Company's future capital needs will depend upon numerous factors,
including the progress of the approval for sale of the Company's products in
various countries, including the United States, the extent and timing of the
acceptance of the Company's products, the cost of marketing and manufacturing
activities and the amount of revenues generated from operations, none of which
can be predicted with certainty.
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Common Stock is quoted on the Nasdaq Small Cap Market under the
symbol "SALV." The following table sets forth the high and low bid quotations as
reported by the Nasdaq Small Cap Market for the periods indicated. The market
quotations represent prices between dealers, do not include retail markup,
markdown or commissions, and may not represent actual transactions.
High Low
--------- ---------
1997
- ----
First Quarter ............................................ $ 2.02 $ 1.25
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
29
<PAGE>
Warrants to purchase 1,380,000 shares of Common Stock at $3.00 per
share, which expire on June 30, 1997 unless extended by the Company, trade on
the Nasdaq Small Cap Market under the symbol "SALVW".
There were approximately 401 shareholders of record of Common Stock at
March 15, 1997. The Company believes there are approximately 9,148 beneficial
owners of Common Stock. There were no cash dividends declared or paid in fiscal
years 1996 or 1995. The Company does not anticipate declaring such dividends in
the foreseeable future.
Upon the filing by the Company of its Form 10-QSB for the period ended
March 31, 1997, Nasdaq issued a letter to the Company asking the Company to
demonstrate that it currently meets all Nasdaq listing requirements and can
continue to meet those requirements. The Company caused the conversion of
$800,000 principal amount of the Debentures to Common Stock to demonstrate
current compliance and submitted to Nasdaq on June 4, 1997, its plan to sustain
compliance with the Nasdaq requirements. The Company is awaiting a Nasdaq
response to its submission. If the Company should continue to experience losses
from operations, it may be unable to maintain the standards for continued
quotation on Nasdaq and the 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.
MANAGEMENT
The names, ages and positions of the Company's directors and executive
officers are as follows:
Name Age Current Position(s) with Company
- --------------------------------------------------------------------------------
Kenneth J. McLachlan 50 Director, President, Chief Executive Officer and
Chief Financial Officer
David Barnes 52 Managing Director of SDS International, Ltd.
Eric F. Stoer 52 Director
Hans R. Vauthier 72 Director
30
<PAGE>
Michael A. Grant 52 Vice President, Operations
Paul D. Slowey, Ph.D. 41 Chief Operating Officer and Vice President of
Marketing
Kenneth J. McLachlan has served on the Board of Directors since
December 1995. In December 1996, Mr. McLachlan was appointed by the Board to
serve as the Company's President and Chief Executive Officer. Mr. McLachlan has
served as the Company's Chief Financial Officer since June 1996. In 1993, Mr.
McLachlan founded an international finance and consulting firm in the
Netherlands. From 1988 to 1993, Mr. McLachlan served as Chief Financial Officer
and Executive Vice President of Corange - Boehringer Mannheim, a privately owned
multinational health care group.
David Barnes, M.D., served on the Board of Directors of the Company
from November 1993 to May 1997. Dr. Barnes has been the Managing Director of SDS
International, Ltd. (UK) ("SDS-UK") since commencement of its operations. Prior
to his position as Managing Director of SDS-UK, Dr. Barnes was Director of
Medical Services for Hemotex Ltd., a laboratory service primarily involved with
the insurance industry in the United Kingdom.
Eric F. Stoer was elected to the Board of Directors of the Company in
May 1997. He has been a partner in the Washington, DC office of the law firm of
Bryan Cave LLP since 1990. His practice is concentrated in the areas of
corporate and business law with an international focus. Mr. Stoer has served on
the boards of directors of a number of pharmaceutical testing and consulting
companies, including Boehringer Mannheim Pharmaceuticals.
Hans R. Vauthier, Ph.D. was appointed to the Board of Directors in May
1996 to fill the vacancy created by the resignation of Dr. Eugene Seymour. Since
1981, Dr. Vauthier has been a principal of Vauthier & Partner A.G., a consulting
firm located in Basle, Switzerland which assists pharmaceutical companies in
discovering and developing new products. Dr. Vauthier received his doctorate in
economics and business administration from the University of Bern in
Switzerland.
Michael A. Grant has been Vice President of Operations of the Company
since January 1996. From February 1992 until January 1996, Mr. Grant served as
Design Manager for the Company. He is the former President of Hema-Scientific, a
company that developed an HIV screening product for home use. He is the inventor
of the Company's Omni-Swab product.
Paul D. Slowey, Ph.D. began employment as Director of Sales and
Marketing at the Company in August 1996. In May 1997, Dr. Slowey was promoted to
Chief Operating Officer and Vice President of Sales and Marketing of the
Company. From February 1990 until he joined the Company, Dr. Slowey was employed
at INCSTAR Corp., a Minnesota manufacturer of diagnostic products, as
International Marketing Manager and Director of International Sales.
31
<PAGE>
EXECUTIVE COMPENSATION AND OTHER MATTERS
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information for the 1994,
1995 and 1996 fiscal years concerning compensation awarded to, earned by or paid
the Company's current Chief Executive Officer, former Chief Executive Officer
and each of the other executive officers of the Company whose total annual
salary and bonus exceeded $100,000 (collectively, the "named executive
officers") for the fiscal year ended December 31, 1996.
32
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Compensation(1) Long Term Compensation
---------------------------------------- ---------------------------
Securities
Other Annual Underlying
Name and Principal Position Year Salary Compensation Options
($)(1) ($) (#)
- ------------------------------------------------- ---------- ---------------- ---------------------- ---------------------------
<S> <C> <C> <C> <C>
Kenneth J. McLachlan 1996 -- 51,000 --
President, Chief Executive Officer and 1995 -- -- --
Chief Financial Officer (2) 1994 -- -- --
David Barnes, M.D. 1996 135,000 -- --
Managing Director, 1995 131,750 -- 175,000
SDS International, Ltd. (UK) 1994 110,000 -- 105,000
Willfried Schramm, Ph.D. 1996 139,700 -- --
Vice President of Research and 1995 100,000 -- 125,000
Development (3) 1994 100,000 -- 100,000
Ronald L. Lealos 1996 86,600 -- --
Former President(4) 1995 31,925 130,000(5) 400,000
1994 106,200 -- 130,000
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Amounts shown include compensation earned in each respective fiscal year. No bonuses were paid in any of the fiscal years
reported.
(2) Includes amounts paid to Mr. McLachlan pursuant to a consulting contract which commenced in June 1996. Mr. McLachlan has
served as the Company's Chief Financial Officer since June 1996 and was appointed by the Board of Directors to be President
and Chief Executive Officer in December 1996.
(3) Does not reflect one option grant covering 50,000 shares which was granted in 1996 subject to shareholder approval of an
increase in the authorized number of the Company's common shares; such approval was obtained on February 20, 1997. Dr. Schramm
terminated his employment in January 1997, and thereby forfeited such option to purchase 50,000 shares. The options to
purchase 75,000 and 50,000 shares which were granted in 1995 are currently exercisable and expire March 2, 1998 and March 25,
1999, respectively. An option to acquire 100,000 shares was also forfeited upon the termination of Dr. Schramm's employment.
(4) Mr. Lealos resigned as an officer of the Company in December 1996. The options reflected on the table are the subject of the
Settlement Agreement (see "Certain Relationships and Related Transactions").
33
<PAGE>
(5) Consists of 230,000 shares of Common Stock of the Company issued to Mr. Lealos as compensation.
</TABLE>
EMPLOYMENT AGREEMENT
In August 1994, the Company entered into a three year employment
agreement with Dr. David Barnes for the position of Managing Director of SDS
International, Ltd. (UK). The employment agreement provides for an annual base
salary of 79,200(pound) (approximately US $135,000.00) plus the use of a car and
travel allowances. If the agreement is terminated for any reason, Dr. Barnes is
entitled to receive his base salary for the remaining term of the agreement.
COMPENSATION OF DIRECTORS
Directors do not receive any fees for serving on the Company's Board of
Directors or any committee thereof.
OPTIONS GRANTED IN LAST FISCAL YEAR
The Company granted no stock options to the named executive officers
during the fiscal year ended December 31, 1996.
OPTION EXERCISE AND HOLDINGS
The following table provides certain information concerning the value
of unexercised options held as of the end of the fiscal year with respect to the
named executive officers. There were no options exercised by the named executive
officers in the last fiscal year. All options held by the named executive
officers are currently exercisable.
34
<PAGE>
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
- ------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised Options in-the-money Options at
at December 31, 1996(#) December 31, 1996 (1)
------------------------------ -----------------------
Name Exercisable Exercisable
- --------------------------- ------------------------------ -----------------------
<S> <C> <C>
Kenneth J. McLachlan -- --
David Barnes, M.D.(2) 3,000 --
105,000 $43,750
175,000
Willfried Schramm, Ph.D.(3) 100,000 $65,000
75,000 $18,750
50,000 $41,000
Ronald L. Lealos(4) 130,000 --
400,000 $100,000
- ------------------------------------------------------------------------------------
<FN>
(1) The market value of the underlying securities at December 31, 1996, $1.25
per share, minus exercise price of the unexercised options.
(2) Does not reflect options granted to acquire 175,000 shares issued in fiscal
year 1995 subject to shareholder approval of an increase in the Company's
authorized number of common shares; such approval was obtained on February
20, 1997.
(3) Does not reflect one option grant covering 50,000 shares which was granted
in 1996 subject to shareholder approval of an increase in the authorized
number of the Company's common shares; such approval was obtained on
February 20, 1997. Dr. Schramm terminated his employment in January 1997,
and thereby forfeited such option to purchase 50,000 shares. The options to
purchase 75,000 and 50,000 shares which were granted in 1995 are currently
exercisable and expire March 2, 1998 and March 25, 1999, respectively. An
option to acquire 100,000 shares was also forfeited upon the termination of
Dr. Schramm's employment.
(4) Mr. Lealos resigned as an officer of the Company in December 1996. The
options reflected on the table are the subject of the Settlement Agreement
(see "Certain Relationships and Related Transactions").
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1997, subsequent to his resignation as President of the
Company in December 1996, Ronald L. Lealos filed a lawsuit against the Company
in Superior Court in Clark County in the State of Washington alleging the
existence of an employment agreement and various breach
35
<PAGE>
of contract claims. This lawsuit was dismissed without prejudice as a
prerequisite to settlement negotiations. A settlement agreement (the "Settlement
Agreement") between Mr. Lealos and the Company is currently in the process of
being documented. There can be no assurance that a final settlement acceptable
to the Company will be concluded with Mr. Lealos, or that a resulting lawsuit,
if decided adverse to the Company, would not have a material adverse effect.
In 1992, the Company loaned $83,000 to Mr. Lealos who was, at the time,
President and a Director of the Company. The interest rate on the loan is 6% per
year and the loan was to be repaid over five years. This loan is currently being
renegotiated pursuant to the Settlement Agreement with Mr. Lealos. The Company
has paid Mr. Lealos additional sums of money in the approximate amount of
$280,000. These payments are currently in dispute. In addition, there are
certain option grants to Mr. Lealos which are the subject of disputes with the
Company. These payments and option grants are the subjects of the Settlement
Agreement.
During the four fiscal years ended December 31, 1995, Dr. Seymour, a
former director and a former officer of the Company, lent the Company
substantial amounts of money to fund its operations. During fiscal year 1995,
the Company converted the loans it received from Dr. Seymour into shares of
Common Stock at the rate of $1.00 per share. Dr. Seymour received 231,120 shares
in exchange for his loan. The Company also terminated Dr. Seymour's employment
contract, and issued Dr. Seymour 75,000 shares as consideration for the
termination and as settlement of amounts due under the employment agreement.
During fiscal year 1994 and fiscal year 1995, the Company conducted a
private placement of its securities (the "Private Placement") whereby it sold
4,545,000 shares for approximately $2,200,000. A pension plan affiliated with
Dr. Seymour (the "Pension Plan") acquired 540,000 shares and a warrant to
purchase 80,000 shares at an exercise price of $3.50 per share in the Private
Placement. The Pension Plan acquired the securities on the same terms as the
other investors in the Private Placement who acquired their securities after
January 1, 1995. Dr. M.J. Scheinbaum, a former director of the Company, and Dr.
Scheinbaum's pension plan purchased an aggregate of 360,000 shares in this
Private Placement and received a three year Warrant to purchase an additional
100,000 shares at a purchase price of $2.00 per share.
In November 1995, the Company received gross proceeds of $300,000 from
a private offering of its securities. The offering consisted of Units; each Unit
cost $100,000 and contained 100,000 shares of Common Stock and warrants to
purchase an additional 150,000 shares at an exercise price of 50% of the closing
bid price of the shares of Common Stock as reported by Nasdaq on the date the
holder elects to exercise his warrant. In January 1996, holders of an aggregate
of 345,000 warrants elected to exercise their warrants for an aggregate purchase
price of $101,952. Mr. Lealos purchased 0.3 Units and exercised his warrant to
purchase 45,000 shares of Common Stock. Drs. Eugene Seymour and M.J. Scheinbaum,
former directors of the Company, each purchased one Unit and each exercised his
warrant to purchase an additional 150,000 shares of Common Stock.
36
<PAGE>
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Common Stock of the Company as of May 30, 1997, except
where otherwise noted, as to (i) each person who is known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock, (ii) each
director of the Company, (iii) each of the executive officers named in the
Summary Compensation Table herein and (iv) all directors and executive officers
as a group. Except as otherwise noted, the Company believes the persons listed
below have sole investment and voting power with respect to the Common Stock
owned by them. There were issued and outstanding on May 30, 1997 a total of
22,090,785 shares of Common Stock.
37
<PAGE>
<TABLE>
<CAPTION>
Common Stock
--------------------------------------------
Number of Shares % Shares Beneficially
Name and Address Beneficially Owned(1) Owned
- ----------------------------------------- --------------------- ---------------------
<S> <C> <C>
Kenneth J. McLachlan 500,000(2) 2.26%
c/o SDS International Ltd. (UK)
11 Sovereign Close
Sovereign Court
London, England E1 9HW, UK
Hans R. Vauthier -- --
Steinengraben 28
Ch-4051
Basle, Switzerland
David Barnes, M.D. 470,000(3) 2.10%
c/o SDS International Ltd. (UK)
11 Sovereign Close
Sovereign Court
London, England E1 9HW, UK
Willfried Schramm, Ph.D. 125,000(4) .56%
23000 Schauer Road
Battleground, WA 98604
Ronald L. Lealos 1,181,912(5) 5.22%
1477 SE Columbia Shores
Vancouver, WA 98662
Eric F. Stoer -- --
700 Thirteenth Street, NW
Washington, DC 20005
- ---------------------------------------------------------------------------------------
All Executive Officers and Directors
as a group (7 persons). 2,276,912(6) 9.88%
- ---------------------------------------------------------------------------------------
<FN>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting power and investment
power with respect to shares. Shares issuable upon the exercise of
outstanding stock options that are currently exercisable or become
exercisable within 60 days from May 30, 1997 are considered outstanding
for the purpose of calculating the percentage of Common Stock owned by such
person but not for the purpose of calculating the percentage of Common Stock
owned by any other person.
38
<PAGE>
(2) These shares are registered in the name of Reads Trust Company Limited,
trustee of an irrevocable trust established for the benefit of Mr.
McLachlan's children. Mr. McLachlan has no power to vote or dispose of these
shares pursuant to the terms of the trust.
(3) Includes options to purchase 283,000 shares of the Company's Common Stock.
(4) Includes options to purchase 125,000 shares of the Company's Common Stock.
(5) Includes options to purchase 530,000 shares of the Company's Common Stock
which were granted to Mr. Lealos, and options to purchase 10,000 shares of
the Company's Common Stock which were granted to Mr. Lealos' wife. The
options reflected in the table for Mr. Lealos are the subject of the
Settlement Agreement (see "Certain Relationships and Related Transactions").
(6) Includes options to purchase an aggregate of 953,416 shares of the Company's
Common Stock.
</TABLE>
SELLING SHAREHOLDERS
The Selling Shareholders are (i) the Tail Wind Fund Limited ("Tail
Wind") and Joseph Kaufman, the purchasers of $1,100,000 and $400,000,
respectively, in principal amount of the Company's 7.5% Convertible Debentures
due February 28, 1999 (the "Debentures"); and (ii) Grayson & Associates, Inc.
("Grayson"), the owner of warrants to purchase 89,552 shares of Common Stock
(the "Grayson Warrants"). The foregoing entities and individual are collectively
referred to as the "Selling Shareholders."
All of the shares of Common Stock that have been or may be acquired by
the Selling Shareholders upon conversion of the Debentures or exercise of the
Grayson Warrants are being registered pursuant to the Registration Statement of
which this Prospectus forms a part, and are being offered hereby. See
"Description of Securities -- Debentures" and "-- Grayson Warrants."
The Company will not receive any proceeds from the sale of the Selling
Shareholders' Common Stock. Sales of any shares of Common Stock by the Selling
Shareholders, or even the existence of the right to convert the Debentures into
shares of Common Stock, or to acquire Common Stock upon the exercise of the
Grayson Warrants, may depress the price of the Common Stock.
As of the date of this Prospectus, Tail Wind has converted $600,000 in
principal amount of the Debentures for a total of 631,578 shares of Common Stock
and Joseph Kaufman has converted $200,000 in principal amount of the Debentures
for a total of 202,020 shares of Common Stock. Tail Wind currently holds
$500,000 in principal amount of the Debentures, and Kaufman currently holds
$200,000 in principal amount of the Debentures. The Selling Shareholders own no
other shares of Common Stock. None of the Selling Shareholders nor any of their
affiliates has held any position or office within the Company or has had any
other material relationship with the Company, except that Grayson received a
cash fee in the amount of $120,000 and the Grayson Warrants as compensation for
assisting the Company in the
39
<PAGE>
$1,500,000 Debenture financing. In addition, Grayson has been engaged by the
Company to provide certain capital raising services through September 1997.
The Selling Shareholders may sell the shares in one or more
transactions (which may involve one or more block transactions) on the
over-the-counter markets on the Nasdaq and upon terms then prevailing or at
prices related to the then current market price, or in separately negotiated
transactions or in a combination of such transactions. The Common Stock offered
hereby may be sold by one or more of the following methods, without limitation:
(a) a block trade in which a broker or dealer so engaged will attempt to sell
the shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction; (b) purchases by a broker or dealer as
principal and resale by such broker or dealer for its account pursuant to this
Prospectus; (c) ordinary brokerage transactions and transactions in which the
broker solicits purchasers; and (d) face-to-face transactions between sellers
and purchasers without a broker-dealer. The Selling Shareholders may be deemed
to be underwriters of the shares offered hereby within the meaning of the
Securities Act of 1933, as amended (the "Securities Act").
In effecting sales, brokers or dealers engaged by the Selling
Shareholders may arrange for other brokers or dealers to participate. Such
broker or dealers may receive commissions or discounts from the Selling
Shareholders in amounts to be negotiated. All other expenses incurred in
connection with this offering will be borne by the Company other than the
Selling Shareholders' legal fees, except that the Company has agreed to pay the
first $10,000 of Tail Wind's legal fees. Such brokers and dealers and any other
participating brokers or dealers may, in connection with such sales, be deemed
to be underwriters within the meaning of the Securities Act. Any discounts or
commissions received by any such brokers or dealers may be deemed to be
underwriting discounts and commissions under the Securities Act.
The Company has agreed to indemnify Tail Wind, Kaufman and Grayson, and
Tail Wind, Kaufman and Grayson have agreed to indemnify the Company against
certain civil liabilities, including certain liabilities under the Securities
Act.
DESCRIPTION OF SECURITIES
GENERAL
The Company's Certificate of Incorporation authorizes the Company to
issue up to 33,000,000 shares of Common Stock, par value $.01 per share. As of
the date of this Prospectus, 22,924,383 shares of Common Stock were outstanding.
40
<PAGE>
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by stockholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voted for the election of
directors can elect all of the directors. The holders of Common Stock are
entitled to receive dividends when, as and if declared by the Board of Directors
out of funds legally available therefor. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining available for distribution to
them after payment of liabilities and after provision has been made for each
class of stock, if any, having preference over the Common Stock. Holders of
shares of Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
Common Stock. All of the outstanding shares of Common Stock are, and the shares
of Common Stock offered hereby, when issued against the consideration set forth
in this Prospectus, will be, fully paid and nonassessable.
DEBENTURES
The Company issued to Tail Wind $1,500,000 in principal amount of the
Company's 7.5% Convertible Debentures due February 28, 1999 in a private
placement completed in March 1997. Tail Wind subsequently sold and transferred
$400,000 principal amount of the Debentures to Joseph Kaufman. Pursuant to the
original terms of the Debentures, the holder of the Debentures has the right,
exercisable at one or more times, at its option, to convert up to (i) 33 1/3% of
the Debentures at any time on or after June 10, 1997, (ii) up to an aggregate of
66 2/3% of the Debentures at any time on or after July 9, 1997, and (iii) 100%
of the Debentures on or after August 8, 1997.
Pursuant to a subsequent agreement among the Company, Tail Wind and
Kaufman, the parties agreed to a partial acceleration of conversion.
Specifically, Tail Wind and Kaufman agreed to convert an aggregate of $800,000
of Debentures and to hold the Common Stock issued pursuant to such conversion
(the "Early Conversion Shares") in accordance generally with the original
conversion schedule (i.e., selling or transferring no more than one-third of the
Early Conversion Shares from June 12, 1997 to July 12, 1997; no more than an
aggregate of two-thirds of the Early Conversion Shares from July 12, 1997 to
August 12, 1997; and then all of the Early Conversion Shares at any time after
August 12, 1997). Neither Tail Wind nor Kaufman are required to sell any of the
Early Conversion Shares. In addition, the Company agreed to certain conversion
reset provisions, pursuant to which Tail Wind and Kaufman may receive additional
shares of Common Stock if, at any time during the 120-day period (and only one
time for each of Tail Wind and Kaufman) following effectiveness of the
Registration Statement (of which this Prospectus is a part), the Conversion
Price at that time is less than the early Conversion Price. The number of shares
of Common Stock issuable upon the conversion of this Debenture is determined by
dividing the principal amount of the Debentures converted by the Conversion
Price (as defined below) in effect on the conversion date. The "Conversion
Price" is the lesser of (i) $1.9191, and (ii) 80% of the Current Market Price
(as defined below) on the applicable conversion date. The "Current Market Price"
per share of Common Stock on any date is the average of the closing bid prices
of the Common Stock for the five consecutive trading days ending on the trading
day immediately prior to the date in question, as reported by Nasdaq. Upon
conversion, all accrued and unpaid
41
<PAGE>
interest on the amount so converted will be paid to the holder in cash or Common
Stock, at the option of the Company. In the event any portion of the Debentures
remain outstanding on March 11, 1999, the unconverted portion of the Debentures
will automatically be converted into Common Stock on such date in the manner set
forth above.
Interest on the Debentures is payable at the option of the Company in
cash or in additional shares of Common Stock, as is determined by dividing the
total dollar amount of interest due and payable by the Current Market Price of
the Common Stock on the date of such interest payment.
The Company has the right to redeem all or a portion of the Debentures
if the Current Market Price is less than $0.70 per share (subject to adjustment
for any recapitalizations, reclassifications and other similar events). The
redemption price would be 125% of the principal amount of Debentures so
redeemed, plus accrued and unpaid interest thereon.
GRAYSON WARRANTS
In March 1997, the Company issued the Grayson Warrants to Grayson in
consideration of certain financial consulting services performed on behalf of
the Company. The Grayson Warrants entitle the holder thereof to purchase 89,552
shares of Common Stock from the Company for a purchase price of $1.34 per share
on or before March 14, 2002. The warrantholder has certain demand and piggyback
registration rights with respect to the shares that may be issued upon exercise
of the Grayson Warrants. The Grayson Warrants have customary provisions
regarding the adjustment of the number of warrants and the exercise price upon
the occurrence of certain extraordinary transactions. Grayson exercised its
piggyback registration right in connection with the registration of the shares
issued and to be issued on conversion of the Debentures.
LEGAL MATTERS
The validity of the securities being offered will be passed upon for
the Company by Bryan Cave LLP, 700 Thirteenth Street, Washington, D.C. 20005.
EXPERTS
The financial statements of the Company for the fiscal years ended
December 31, 1995 and 1996 included in this Prospectus and in the Registration
Statement have been audited by Hollander, Gilbert & Co., independent certified
public accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of said firm as experts in
auditing and accounting.
42
<PAGE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law empowers a
corporation to indemnify its directors and officers and to purchase insurance
with respect to liability arising out of their capacity or status as directors
and officers provided that this provision shall not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) arising under Section 174 of the General Corporation Law of Delaware, or
(iv) for any transaction from which the director derived an improper personal
benefit.
The Delaware Corporation Law provides further that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors and officers may be entitled under the corporation's by-laws, any
agreement, vote of shareholders or otherwise.
Article tenth of the Company's Certificate of Incorporation eliminates
the personal liability of directors to the fullest extent permitted by Section
145 of the Delaware Corporation Law.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such persons
in their official capacities if such person acted in good faith and in a manner
that he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES
ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE
COMPANY PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT
IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION
IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT AND IS THEREFORE
UNENFORCEABLE.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a Registration Statement on Form SB-2 (the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered by this Prospectus. This Prospectus, filed as part of such
Registration Statement, does not contain all of the information set forth in, or
annexed as exhibits to, the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and this offering, reference is
made to the Registration Statement, including the exhibits filed therewith,
which may be inspected without charge at the Office of the Commission, 450 Fifth
Street, NW, Washington, DC, 20549. Copies of the Registration Statement may
obtained from the Commission at its principal office upon payment of prescribed
fees. Statements contained in this Prospectus as to the contents of any contract
or other document are not necessarily complete and, where the contract or other
document has been filed as an exhibit to the Registration Statement, each
statement is qualified in all respects by reference to the applicable document
filed with the Commission.
* * *
43
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the years ended F-5
December 31, 1996 and 1995
Consolidated Statement of Stockholders' Equity for the years F-7
ended December 31, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended F-8
December 31, 1996 and 1995
Notes to Audited Consolidated Financial Statements F-10
Consolidated Balance Sheets as of March 31, 1997 and F-15
December 31, 1996 (unaudited)
Consolidated Statements of Operations for the three months F-16
ended March 31, 1997 and 1996 (unaudited)
Consolidated Statements of Cash Flows for the three months F-17
ended March 31, 1997 and 1996 (unaudited)
Notes to Unaudited Consolidated Financial Statements F-18
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Saliva Diagnostic Systems, Inc.
We have audited the accompanying consolidated balance sheets of Saliva
Diagnostic Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Saliva Diagnostic
Systems, Inc. and subsidiaries as of December 31, 1996 and 1995 and the results
of operations, stockholders' equity and cash flows for the years then ended, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's significant operating losses and significant
capital requirements raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Hollander, Gilbert & Co.
Los Angeles, California
March 21, 1997
F-2
<PAGE>
<TABLE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash .......................................................................... $ 776,380 $ 2,688,014
Accounts receivable ........................................................... 178,436 43,291
Inventories (Note 4) .......................................................... 268,431 300,161
Prepaid expenses .............................................................. 34,425 28,956
------------ ------------
TOTAL CURRENT ASSETS ...................................................... 1,257,672 3,060,422
------------ ------------
PROPERTY AND EQUIPMENT, Net (Note 5) .............................................. 493,649 470,593
------------ ------------
OTHER ASSETS
Deposits ...................................................................... 188,647 70,019
Restricted cash (Note 8) ...................................................... 120,500
Patents and trademarks, net of accumulated
amortization of $39,183 in 1996 and $29,983 in 1995 ......................... 117,733 127,057
Goodwill, net of accumulated amortization
of $15,000 in 1995 (Note 3) ................................................. 585,000
Prepaid loan fees (Note 6) .................................................... 45,367
------------ ------------
TOTAL OTHER ASSETS ........................................................ 426,880 827,443
------------ ------------
$ 2,178,201 $ 4,358,458
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses ......................................... $ 818,073 $ 500,078
Accrued interest payable ...................................................... 68,240 49,703
Current portion of long-term debt and
obligations under capital leases (Note 8) ................................... 35,057 15,869
Convertible debentures (Note 6) ............................................... 2,785,000
------------ ------------
TOTAL CURRENT LIABILITIES ................................................. 921,370 3,350,650
------------ ------------
LONG-TERM DEBT AND OBLIGATIONS UNDER
CAPITAL LEASES, net of current portion (Note 8) ................................. 96,199 30,497
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 8 and 9)
STOCKHOLDERS' EQUITY (Note 6)
Common stock - authorized 25,000,000 shares, $.01 par value,
issued and outstanding 22,040,785 in 1996 and 13,126,366 in 1995 ............ 220,408 131,264
Additional paid-in capital .................................................... 22,998,552 17,726,578
Note receivable related to sale of stock ...................................... (83,825) (83,825)
Cumulative foreign translation adjustment ..................................... (60,257) (34,859)
Accumulated deficit ........................................................... (21,914,246) (16,761,847)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ................................................ 1,160,632 977,311
------------ ------------
$ 2,178,201 $ 4,358,458
============ ============
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
F-3
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
------------ ------------
REVENUES
Product sales .......................... $ 715,780 $ 522,814
Technology licensing income ............ 24,870 59,855
Other fees and interest income ......... 99,418 38,630
------------ ------------
TOTAL REVENUES ...................... 840,068 621,299
------------ ------------
COSTS AND EXPENSES
Cost of product sold ................... 472,142 149,629
Research and development ............... 1,040,057 903,386
Selling, general and administrative .... 3,911,587 3,608,353
Write-off of Goodwill .................. 540,000
Interest expense and loan fees ......... 28,681 557,701
------------ ------------
TOTAL COSTS AND EXPENSES ............ 5,992,467 5,219,069
------------ ------------
NET LOSS ..................................... $ (5,152,399) $ (4,597,770)
============ ============
NET LOSS PER SHARE ........................... $ (0.26) $ (0.46)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING. 20,100,000 9,900,000
============ ============
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
<TABLE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<CAPTION>
Common Stock Note Cumulative
----------------------- Additional Receivable Foreign
Shares Paid-in (Sale of Translation Accumulated
Outstanding Amount Capital Stock) Adjustment Deficit Total
------------- -------- ----------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994............... 6,304,332 $ 63,043 $12,434,356 $ (83,825) $ (32,644) $(12,164,077) $ 216,853
Sale of common stock in private
offerings.............................. 3,715,000 37,150 1,935,350 1,972,500
Issuance of shares to officer for
compensation........................... 230,000 2,300 127,700 130,000
Convertible debentures converted into
common shares.......................... 1,726,572 17,266 945,234 962,500
Issuance of warrants to consultants...... 780,000 780,000
Issuance of options in settlement
agreement.............................. 88,750 88,750
Issuance of shares to consultants........ 100,000 1,000 149,000 150,000
Options exercised........................ 170,000 1,700 154,300 156,000
Underwriter's warrants exercised......... 180,462 1,805 268,888 270,693
Consulting warrants exercised............ 250,000 2,500 247,500 250,000
Issuance of shares to acquire minority
interest in subsidiaries............... 450,000 4,500 595,500 600,000
Foreign translation adjustment........... (2,215) (2,215)
Net loss for the year.................... (4,597,770) (4,597,770)
------------- -------- ----------- ---------- ----------- ------------- -----------
BALANCE, December 31, 1995............... 13,126,366 131,264 17,726,578 (83,825) (34,859) (16,761,847) 977,311
Warrants exercised....................... 2,580,861 25,807 2,444,711 2,470,518
Options exercised........................ 104,750 1,048 75,802 76,850
Issuance of shares in settlement
agreement.............................. 16,500 166 53,584 53,750
Convertible debentures payable
converted into common shares........... 6,212,308 62,123 2,697,877 2,760,000
Foreign translation adjustment........... (25,398) (25,398)
Net loss for the year.................... (5,152,399) (5,152,399)
------------- -------- ----------- ---------- ----------- ------------- -----------
BALANCE, December 31, 1996............... 22,040,785 220,408 $22,998,552 $ (83,825) $ (60,257) $(21,914,246) $1,160,632
============= ======== =========== ========== =========== ============= ===========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
F-5
<PAGE>
<TABLE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ............................................ $(5,152,399) $(4,597,770)
Adjustments to reconcile net loss
to net cash used by operating activities:
Cumulative foreign translation adjustment ....... (25,398) (2,215)
Depreciation and amortization ................... 290,929 749,750
Expenses satisfied with issuance of shares ...... 53,750 1,148,750
Write-off of goodwill ........................... 540,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ... (135,145) 3,748
(Increase) decrease in inventories ........... 31,730 (207,561)
(Increase) decrease in prepaid expenses ...... (5,469) (28,956)
Increase (decrease) in accounts payable
and accrued expenses ....................... 336,532 (65,317)
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES .......... (4,065,470) (2,999,571)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Placement of restricted cash ........................ (120,500)
Patents and trademarks .............................. 124 (4,310)
Deposits ............................................ (118,628) (5,863)
Purchase of equipment ............................... (214,418) (118,295)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES ........ (453,422) (128,468)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Convertible debentures .............................. 3,128,900
Repayments of convertible debentures ................ (25,000) (37,500)
Sale of stock - private placement and exempt offering 1,972,500
Proceeds from long-term debt ........................ 109,476
Repayment of long-term and obligations
under capital leases .............................. (24,586) (20,971)
Stock warrants and options exercised ................ 2,547,368 676,693
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .... 2,607,258 5,719,622
----------- -----------
NET INCREASE (DECREASE) IN CASH ......................... (1,911,634) 2,591,583
CASH BALANCE, Beginning of period ....................... 2,688,014 96,431
----------- -----------
CASH BALANCE, End of period ............................. $ 776,380 $ 2,688,014
=========== ===========
INTEREST AND LOAN FEES PAID ............................. $ 10,144 $ 565,035
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Shares issued in lieu of fees and expenses .......... $ 53,750 $ 1,148,750
Acquisition of minority interest .................... $ 600,000
</TABLE>
F-6
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - The Company is primarily engaged in the
development, manufacture and marketing of rapid immunoassays for use in the
detection of infectious diseases and other conditions. The Company has also
developed and distributes medical specimen collection devices.
Principles of Consolidation - The financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
Impairment of Long-Lived Assets - The Company periodically assesses the
recoverability of the carrying amounts of long-lived assets, including
intangible assets. A loss is recognized when expected undiscounted future
cash flows are less than the carrying amount of the asset. The impairment
loss is the difference by which the carrying amount of the asset exceeds its
fair value. As a result of its review, the Company wrote-off goodwill at
December 31, 1996 in the amount of $540,000.
Stock-Based Compensation - The Company has adopted the disclosure-only
provisions of SFAS No. 123, which retains the original accounting prescribed
by APB Opinion No. 25. As a result, options granted at fair value will not
result in charges to earnings. Disclosures are made, however, of
compensation costs determined under SFAS No. 123's fair value methodology.
Inventories - Inventories are stated at the lower of cost or market
determined on a first-in, first-out (FIFO) basis.
Property and Equipment - Property and equipment is stated at cost.
Depreciation is computed on the straight-line method based upon the
estimated useful life of the asset. Useful lives are generally as follows;
Office furniture & equipment 5 to 7 years
Machinery and Equipment 7 years
Exhibits 7 years
Vehicles 5 years
Patents and Trademarks - The costs of patents and trademarks are being
amortized on the straight line method over a 17 year life.
Goodwill - Goodwill represents the excess of the cost of companies acquired
over the fair value of their net assets at the date of acquisition and is
being amortized on the straight-line method over ten years.
Product Liability - The Company has not established any allowance for
product liability at present because of the limited distribution of its
product and limited history which reflect no instance of problems with
liability.
Income Taxes - The Company utilizes the asset and liability approach for
financial accounting and reporting for income taxes. If it is more likely
than not that some portion or all of a deferred tax asset will not be
realized, a valuation allowance is recognized.
F-7
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Loss Per Share - Loss per share is based upon the weighted average number of
common shares and common share equivalents outstanding during the periods.
Common share equivalents are not included as they are anti-dilutive.
Revenues - The Company derived revenues from two sources: sale of product
and licensing. Revenues are recognized as the service or product has been
delivered.
Research and Development - Research and development expenditures include
those costs associated with the Company's own on-going research and
development activities. All research and development costs are expensed as
incurred.
The Company has entered into various informal arrangements with certain
laboratories/manufacturers of assay kits whereby these
laboratories/manufacturers will share certain unspecified costs of research
and development. However, the Company has no obligation to perform research
and development for these entities.
Currency Fluctuations - Foreign currency transactions and financial
statements are to be translated into U.S. dollars at current rates, except
that revenues, costs and expenses are translated at average current rates
during each reporting period. The resulting translation adjustments are
recorded directly into a separate component of stockholders' equity. Gains
and losses resulting from foreign currency transactions, which are
insignificant, are included in income currently.
Reclassifications - Certain 1995 balances have been reclassified to conform
with the current year's presentation.
2. GOING CONCERN
Significant Operating Losses - Accumulated Deficit - The Company has
incurred significant operating losses since its inception, resulting in an
accumulated deficit of $21,914,246 and $16,761,847, at December 31, 1996 and
December 31, 1995, respectively. Such losses are expected to continue
through 1997 and until such time, if ever, as the Company is able to attain
sales levels sufficient to support its operations.
Significant Capital Requirements - Need for Additional Financing - The
Company's capital requirements have been and will continue to be
significant. The Company has been dependent on private placements of its
debt and equity securities and on a public offering of securities in March
1993 to fund such requirements. The Company is dependent upon its other
efforts to raise capital resources, including proceeds received from the
exercise of Warrants to finance the cost of manufacturing, marketing and
conducting clinical trials and submissions for FDA approval of its products
and continuing the design and development of the Company's new products
which utilize its rapid testing format. Marketing, manufacturing and
clinical testing may require capital resources substantially greater than
the resources currently available to the Company. There can be no assurance
that the Company will be able to obtain the additional capital resources
necessary to permit the Company to implement or continue its programs. The
Company has no current arrangements with respect to, or sources of,
additional financing and there can be no assurance that such financing will
be available on commercially reasonable terms or at all. It is not
anticipated that any of the officers, directors or shareholders of the
Company will provide any portion of the Company's future financing
requirements. (See Note 11).
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.
3. ACQUISITIONS
On September 30, 1995, the Company purchased the minority interest in its
90% owned subsidiary, Saliva Diagnostic Systems (Asia) Ltd. and the minority
interest in Asia's 83% owned subsidiary. The Company issued 350,000 shares
of its common stock valued at $500,000 to a director/stockholder of the
foreign subsidiaries and
F-8
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
100,000 shares to unrelated stockholder valued at $100,000. The assets
acquired were valued at fair market value based on the estimates of the
management of the Company which approximate the adjusted fair market value
of the shares issued.
The transaction was accounted for as a purchase and resulted in an excess of
purchase price over net assets acquired of $600,000. Amortization of
goodwill amounted to $45,000 in 1996 and $15,000 in 1995. At December 31,
1996, the Company assessed the recoverability of the Goodwill that resulted
to the write-off of the Goodwill in the amount of $540,000.
Management of the Company has reviewed the need for the Singapore operations
as were originally anticipated and have concluded that use of this location
as their primary manufacturing source is no longer required and as such have
deemed it appropriate to write off the remaining Goodwill associated with
this location.
4. INVENTORIES
Inventories consisted of the following at December 31, 1996 and 1995:
1996 1995
-------- --------
Raw materials ...................................... $253,000 $186,492
Work in process .................................... 2,495 66,807
Finished goods ..................................... 12,936 46,862
-------- --------
$268,431 $300,161
======== ========
5. PROPERTY AND EQUIPMENT
Property and Equipment consisted of the following at December 31, 1996 and
1995:
1996 1995
---------- ----------
Office Furniture & Equipment ..................... $ 114,041 $ 76,711
Machinery, Laboratory Equipment and Tooling ...... 861,957 806,918
Leasehold Improvements ........................... 97,582 38,727
Vehicle .......................................... 181,423 126,388
Exhibits ......................................... 30,955 60,710
---------- ----------
1,285,958 1,109,454
Less: accumulated depreciation and amortization... 792,309 638,861
---------- ----------
$ 493,649 $ 470,593
========== ==========
6. STOCKHOLDERS' EQUITY
Increase in Authorized Capital Stock - On February 20, 1997, the
stockholders of the Company approved an amendment to the Company's
Certificate of Incorporation to increase the authorized number of shares of
stock from 25,000,000 to 33,000,000 shares.
F-9
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Public Offering - In March 1993 the Company closed a public offering in
which it sold 1,300,000 shares of its common stock at $6.00 per share and
1,380,000 warrants to purchase 1,380,000 shares of the Company's common
stock for $7.20 per share, at $.10 per warrant. The Company received net
proceeds of $6,364,630 after expenses related to the offering of $1,573,490.
The warrants have been extended to June 30, 1997 and the exercise price has
been reduced from $7.20 to $3.00 per share.
The Company also sold for $120 to the underwriter a five-year warrant to
purchase up to 120,000 shares of common stock at $9 per share, exercisable
for four years commencing March 3, 1995 at a price of 110% of the public
offering price, as adjusted, of the common stock. During 1995, the
underwriter exercised a portion of its warrants and purchased 180,462 shares
for an aggregate amount of $270,693. During 1996, the underwriter exercised
the remaining warrants and purchased 756,361 shares at $1.00 per share.
During 1996, the Company granted new warrants to the underwriter to purchase
1,000,000 shares of common stock at $1.00 per share, all of which have been
exercised by the underwriter in 1996.
Note Receivable Related to Sale of Stock - In January 1992 the Company sold
to its President, who resigned in December 1996, 366,912 shares of common
stock for $92,970. The officer paid $9,145 and issued a note to the Company
for $83,825, payable in three years with interest of 6% per annum. These
shares were considered outstanding for all periods in the calculation of
earnings per share. The note which was originally due December 1994 was
extended until December 1995. In December 1995, the Company extended the
note for another year (see Note 8).
Convertible Debentures - During 1992, the Company sold privately $630,000 of
its 8% convertible debentures payable in May 1994 to various investors,
including $25,000 to an affiliate of the Company. These debentures can be
converted into the Company's common stock at a rate of $7.00 per share. In
May 1994 certain debenture holders converted $580,000 principal amount of
debentures into an aggregate of 580,000 shares of common stock. In November
1995, the Company repaid $25,000 principal amount of debentures including
all accrued and unpaid interest. In January 1996, the Company repaid the
remaining $25,000 debenture including all accrued and unpaid interest.
The Company raised $75,000 and $324,500 in 1993 and 1994, respectively, in a
combination of common shares, non-negotiable two year 8% convertible
debentures convertible at a rate of $2.00 per share after one year from the
date of issuance and three year warrant to purchase additional shares of
common stock at $3.50 per share. Each $50,000 unit consisted of 12,500
common shares, a $25,000 convertible debenture and a warrant to purchase
5,000 shares of common stock. The Company issued a total of 99,875 shares of
common stock and $199,750 convertible debentures and warrants to purchase a
total of 39,950 shares of common stock. In July 1994, certain debenture
holders converted $149,750 principal amount of debentures into an aggregate
of 149,750 shares of common stock. In September 1995, certain debenture
holders converted $37,500 principal amount of debentures into an aggregate
of 37,500 shares of common stock. In November 1995, the Company repaid
$12,500 principal amount of debentures including all accrued and unpaid
interest.
During 1995, the Company sold privately $3,685,000 of its 9% convertible
debentures payable on October 31, 1996. The holders of the debentures are
entitled, at their option, at any time commencing 45 days after issue to
convert any or all of the original principal amount of the debentures into
shares of common stock of the Company at a conversion price for each share
of common stock equal to seventy percent (70%) of the market price (as
defined in the debenture agreement) of the common stock. In December 1995,
certain debenture holders converted $925,000 principal amount of debentures
into an aggregate of 1,689,072 shares of common stock. The Company incurred
$556,100 in loan fees of which $510,733 and $45,367 was charged to expense
in 1995 and 1996, respectively. During 1996, certain debenture holders
converted $2,760,000 principal amount of debentures into 6,212,308 shares of
common stock. All of the convertible debentures in these transactions have
been converted to common stock as of December 31, 1996.
F-10
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Private Placements - In December 1994 the Company sold 860,000 shares of
common stock for an aggregate consideration of $430,000. During 1995, the
Company, sold an additional 3,645,000 shares of common stock for $1,802,500,
including 200,000 shares issued to its President.
In November 1995, the Company, in a new private placement, sold 300,000
shares of common stock for an aggregate consideration of $300,000, including
30,000 shares to its President. The units sold included warrants to purchase
a total of 450,000 shares of common stock at an exercise price of 50% of the
closing bid price of the stock on the exercise date. All of the warrants
were exercised in 1996.
Warrants and Shares Issued to Consultants - During 1995, the Company issued
warrants to purchase a total of 650,000 shares of common stock at an
exercise price of $1.00 per share for consulting services rendered. The
warrants were valued at $1.20 per share. As of December 31, 1996, 327,500
warrants have been exercised.
In 1995, the Company issued 100,000 shares of common stock to consultants
valued at a total of $150,000.
Settlement Agreements - During 1995, the Company reached a settlement
agreement with a director of its subsidiary whereby the Company granted the
director options to purchase 100,000 shares of common stock at an exercise
price of $.60 per share. The options were valued at a total of $88,750. As
of December 31, 1996, all of these options have been exercised.
During 1996, the Company issued a total of 12,500 shares of common stock
valued at approximately $43,750 to certain unrelated individuals to settle a
dispute. Also during 1996, the Company issued 4,000 shares of common stock
valued at $10,000 as a consideration for extension of a previous note
payable to an individual.
Warrants Issued to Licensee - In March 1994, as a result of entry into a
license agreement with Orgenics, Ltd. Orgenics Ltd. was granted a three year
option, expiring in March 1997, to purchase up to $1,000,000 of shares of
common stock (but not more than 19% of the then-outstanding common stock) at
60% of the average of the closing bid and asked price for the common stock
during the ten trading days prior to such purchase.
Shares Issued to Officer - During 1995, the Company issued 230,000 shares of
common stock to its former President valued at $130,000 as additional
compensation for the year 1995.
Stock Option Plans - In March 1992, the Company established a stock option
plan (1992 Plan). The 1992 Plan, as amended, covers 350,000 shares of its
common stock. Under the terms of the 1992 Plan, the Company is authorized to
issue options to employees and directors of the Company or its subsidiaries.
Decisions such as grants to employees, the selection of recipients, number
of options, the exercise price, duration and other terms, including whether
the options shall be incentive stock options as defined by the Internal
Revenue Code of 1986 or non-qualified options, are subject to the discretion
of the Board of Directors except that the exercise price may not be less
than 110% of the fair market value at the time of grant to holders of in
excess of 10% of the Company's common stock.
In addition, the 1992 Plan provides for automatic grants to each
non-employee director of the Company of 3,000 shares of common stock at the
date of the public offering or, in the case of election to the Board of
Directors after consummation of said offering, upon such election at a price
of 100% of fair market value of the common stock at the time of grant. The
options may be exercised after six months and before five years from the
date of grant.
In July 1994, the Company established a stock option plan (1994 Plan). The
1994 Plan, covers 350,000 shares of its common stock. Under the terms of the
1994 Plan, the Company is authorized to issue incentive and non-statutory
stock options to employees, consultants, advisors and/or directors. Options
shall be exercisable at the fair market value at the date of the grant
except options issued to persons who own in excess of 10% of the Company's
stock may be no less than 110% of the fair market value.
In addition, the 1994 Plan provides for automatic grants to all directors
and advisors who are not employees of the Company or its subsidiaries of
3,000 fully vested non-qualified options at the time this Plan was adopted
by
F-11
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
the Board or upon election or appointment to the Board, if not a member of
the Board at the time this plan was adopted by the Board.
On March 2, 1995, the Company's Board of Directors granted options to
purchase 997,000 shares, including 400,000 shares to its former President,
of the Company's common stock to its employees, outside of the above Stock
Option Plans. Such options are exercisable on March 2, 1995, at $1.00 per
share and expire on March 2, 1998.
The following table summarizes the stock options activity for the years 1996
and 1995:
Number Option Price
of Shares Range
---------- ------------------
Outstanding at December 31, 1994 ..... 660,000 $.60 to $6.875
Options granted .................. 997,000 $1.00
Options exercised ................ (170,000) $.60 to $1.375
Options expired or canceled ...... (53,000) $1.00 to $6.875
----------
Outstanding at December 31, 1995 ..... 1,434,000 $.60 to $5.50
Options granted .................. 302,500 $.43 to $2.38
Options exercised ................ (104,750) $.60 to $1.00
Options expired or canceled ...... (1,000) $.60
----------
Outstanding at December 31, 1996 ..... 1,630,750 $.60 to $5.50
==========
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". Accordingly, no compensation cost has been recognized for the
stock options. Had compensation cost for the Company's stock options been
determined based on the fair value at the grant date for options granted in
1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's
net loss and loss per common share would have been increased to the pro
forma amounts indicated below:
1996 1995
------------ ------------
Net loss - as reported ............... $(5,152,399) $(4,497,770)
Net loss - pro forma ................. $(5,518,599) $(5,325,580)
Loss per common share - as reported .. $ (0.26) $ (0.46)
Loss per common share - pro forma .... $ (0.27) $ (0.54)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
1996 1995
------ ------
Expected dividend yield ................................ 0% 0%
Expected stock price volatility ........................ 150% 106%
Risk-free interest rate ................................ 6% 6%
Expected life of options - years ....................... 3 3
The weighted average fair value of options granted during 1996 and 1995 was
$1.21 and $0.73, respectively.
F-12
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. INCOME TAXES
The Company has a net operating loss carryforward of approximately $17.5
million which is available to offset future taxable income, if any, expiring
through the year 2011. The Company has not recorded any deferred tax asset
as a result of the net operating loss carryforward as it has provided a 100%
allowance against this asset.
8. COMMITMENTS AND CONTINGENCIES
Employment Agreements - The Company has entered into various three year
employment agreements with certain officers. These employment agreements
provide for minimum annual compensation of between $65,000 and $126,000. In
addition, each employment agreement provides for bonuses, cost of living
increases, reimbursement of business expenses, health insurance and related
benefits.
In January 1997, a lawsuit was filed by the former President of the Company,
who resigned in December 1996. The complaint in the lawsuit alleged various
breach of contract claims. This lawsuit was recently dismissed without
prejudice as a prerequisite to a settlement agreement between the former
President and the Company currently in the process of being documented.
Long-Term Debt and Obligations under Capital Leases - The Company borrowed
$109,476 from a certain bank in 1996. The note carried an interest rate of
6.940% and is payable $2,162.54 per month for 60 months. The note is secured
by a time deposit in the amount of $120,500. The Company has acquired
vehicles under notes requiring 48 to 60 payments of $1,842 per month
including interest at 6% to 10% per annum.
The following represents the maturity schedule as of December 31, 1996:
1997................. $ 35,057
1998................. 36,792
1999................. 22,536
2000................. 24,151
2001................. 12,720
--------
Total................ 121,256
Less current portion. 35,057
--------
$ 96,199
========
Litigation - A former director and officer of the Company has filed a
complaint in Federal court listing several causes of action against the
Company and the individual defendants, including breach of employment
agreement with the Company, intentional interference with contract by the
individual defendants, slander and deceptive trade practices. The complaint
seeks damages and punitive damages in an unspecified amount. The Company
believes this complaint is without merit as the plaintiff was fired for
cause and intends to vigorously defend itself.
9. OPERATING LEASES
The Company leases its offices and laboratory spaces, under operating leases
with initial terms of three to seven years. Future minimum lease payments by
year and in the aggregate, under noncancelable operating leases with initial
or remaining lease terms in excess of one year, consisted of the following
at December 31, 1996:
F-13
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Year Ended December 31,
-----------------------
1997................... $199,101
1998................... 150,552
1999................... 148,180
2000................... 153,036
2001................... 153,036
Thereafter............. 102,024
--------
$905,929
========
Rent expense for the years ended December 31, 1996 and 1995 was $301,016 and
$237,855, respectively.
10. SEGMENT INFORMATION
Information about the Company's operations in different geographic areas
follows:
1996 1995
----------- -----------
Product sales:
United States ............ $ 393,635 $ 317,812
Asia ..................... 79,218 70,696
United Kingdom ........... 242,927 134,306
----------- -----------
Total ............. $ 715,780 $ 522,814
=========== ===========
Operating profit (loss)
United States ............ $(4,407,954) $(3,959,955)
Asia ..................... (621,958) (497,969)
United Kingdom ........... (122,487) (139,846)
----------- -----------
Total ............. $(5,152,399) $(4,597,770)
=========== ===========
Identifiable assets
United States ............ $ 1,687,866 $ 3,342,815
Asia ..................... 368,562 955,776
United Kingdom ........... 121,773 59,867
----------- -----------
Total ............. $ 2,178,201 $ 4,358,458
=========== ===========
Customer Concentration - During 1996, three customers accounted for
approximately 20%, 18% and 11% of total sales, respectively. During 1995,
two customers accounted for approximately 40% and 10% of total sales,
respectively.
11. BORROWINGS SUBSEQUENT TO YEAR-END
In March 1997, the Company raised net proceeds of $1,370,000 from private
placement of 7.5% convertible debentures. The principal amounts of the
debentures are due on February 28, 1999.
F-14
<PAGE>
<TABLE>
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash ................................................. $ 1,393,237 $ 776,380
Accounts receivable .................................. 41,793 178,436
Inventories .......................................... 275,735 268,431
Prepaid expenses ..................................... 38,137 34,425
------------ ------------
Total current assets .............................. 1,748,902 1,257,672
Property and equipment, less accumulated
depreciation of $851,573 and $792,309 ............. 451,078 493,649
Deferred financing costs, less accumulated
amortization of $5,200 ............................ 114,800 --
Deposits ............................................. 197,312 188,647
Restricted cash ...................................... 120,500 120,500
Patents and trademarks, less accumulated
amortization of $41,481 and $39,183 ................ 115,435 117,733
------------ ------------
$ 2,748,027 $ 2,178,201
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ................ $ 1,075,080 $ 818,073
Accrued interest payable ............................. 74,802 68,240
Current portion of long-term debt and
obligations under capital leases ................... 31,812 35,057
------------ ------------
Total current liabilities ........................ 1,181,694 921,370
7.5% Convertible debentures, due 1999,
less discount ........................................ 1,125,000 --
Long-term debt and obligations under capital
leases, net of current portion ........................ 91,068 96,199
------------ ------------
Total liabilities ................................ 2,397,762 1,017,569
Stockholders' equity:
Common stock , $.01 par value, 33,000,000
shares authorized, 22,040,785 shares
issued and outstanding ............................. 220,408 220,408
Additional paid-in capital ........................... 23,373,552 22,998,552
Note receivable from shareholder for stock ........... (83,825) (83,825)
Cumulative foreign translation adjustment ............ (70,723) (60,257)
Accumulated deficit .................................. (23,089,147) (21,914,246)
------------ ------------
Total stockholders' equity ........................ 350,265 1,160,632
------------ ------------
$ 2,748,027 $ 2,178,201
============ ============
The accompanying notes are an integral part of these balance sheets.
</TABLE>
F-15
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended
March 31,
---------------------------
1997 1996
------------ ------------
Revenues:
Product sales .................................. $ 227,034 $ 171,379
Technology license income ...................... -- 22,342
------------ ------------
227,034 193,721
Costs and expenses:
Cost of products sold .......................... 259,641 120,510
Research and development expense ............... 194,712 257,587
Selling, general and administrative
expense ...................................... 953,913 751,192
------------ ------------
Loss from operations ....................... (1,181,232) (935,568)
Interest income .................................. 5,679 --
Interest expense ................................. (8,578) (69,023)
Other income ..................................... 9,230 --
------------ ------------
Net loss ................................... $ (1,174,901) $ (1,004,591)
============ ============
Net loss per share ......................... $ (0.05) $ (0.07)
============ ============
Shares used in per share calculations ...... 22,040,784 15,039,334
============ ============
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
<TABLE>
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three months ended
March 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss .................................................... $(1,174,901) $(1,004,591)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Cumulative foreign translation adjustment ............... (10,466) (5,138)
Depreciation and amortization ........................... 69,053 114,590
Shares issued in lieu of fees and expenses .............. -- 11,592
Changes in current assets and liabilities:
Accounts receivable ....................................... 136,643 (72,773)
Inventories ............................................... (7,304) (28,893)
Prepaid expenses and deposits ............................. (12,377) 6,592
Accounts payable and accrued expenses ..................... 263,569 33,216
----------- -----------
Net cash used in operating activities ................... (735,783) (945,045)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to patents and trademarks ........................ -- (134)
Additions to property and equipment ........................ (18,984) (87,653)
Other assets ............................................... -- (3,003)
----------- -----------
Net cash used in investing activities .................... (18,984) (90,790)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible debentures, net of issuance costs 1,380,000 --
Notes payable and interim financing, net .................. (25,000)
Repayment of long term debt and capital lease obligations . (8,376) (5,368)
Exercise of common stock purchase warrants ................ 90,000
----------- -----------
Net cash provided by financing activities ................ 1,371,624 59,632
----------- -----------
Net increase (decrease) in cash and cash equivalents ..... 616,857 (976,203)
Cash and cash equivalents, beginning of period ....... 776,380 2,688,014
----------- -----------
Cash and cash equivalents, end of period ............. $ 1,393,237 $ 1,711,811
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest .................................................. $ 8,578 $ 69,023
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Shares issued in lieu of fees and expenses .................. $ -- $ 11,952
Conversion of debentures into common shares ................. -- 2,760,000
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-17
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements as of and
for the three month periods ended March 31, 1997 and 1996 have been prepared in
conformity with generally accepted accounting principles. The financial
information as of December 31, 1996 is derived from Saliva Diagnostic Systems,
Inc. (the "Company") consolidated financial statements included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1996. Certain
information or footnote disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
accompanying consolidated financial statements include all adjustments necessary
(which are of a normal and recurring nature) for the fair presentation of the
results of the interim periods presented. The accompanying consolidated
financial statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 1996, as included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1996.
Operating results for the three month period ended March 31, 1997 are
not necessarily indicative of the results that may be expected for the entire
fiscal year ending December 31, 1997, or any other portion thereof.
2. RECLASSIFICATIONS
Certain reclassifications have been made to the March 31, 1996
statement of operations to conform with the 1997 presentation. These
reclassifications had no effect on the results of operations in any periods
presented.
3. INVENTORIES
Inventories are stated at the lower of cost or market determined on a
first-in, first-out (FIFO) basis, and consist of the following:
March 31, December 31,
1997 1996
------------ ------------
Raw materials ........... $ 152,879 $ 253,000
Work in process ......... 16,760 2,495
Finished goods .......... 106,096 12,936
------------ ------------
$ 275,735 $ 268,431
============ ============
F-18
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4. CONTINGENCIES
As discussed in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996 ("Form 10-KSB") , in January 1997, a lawsuit was filed
by the former President of the Company, who resigned in December 1996. The
complaint in the lawsuit alleged various breach of contract claims. This lawsuit
was recently dismissed without prejudice as a prerequisite to a settlement
agreement between the former President and the Company currently in the process
of being documented.
As also discussed in the Company's Form 10-KSB, a former director and
officer of the Company filed a complaint in Federal court listing several causes
of action against the Company and the individual defendants, including breach of
employment agreement with the Company, intentional interference with contract by
the individual defendants, slander and deceptive trade practices. The complaint
seeks damages and punitive damages in an unspecified amount. The Company
believes this complaint is without merit as the plaintiff was fired for cause
and intends to vigorously defend itself. Discovery has been completed and a
motion to dismiss various aspects of the complaint, and all claims against the
individual defendants, is now pending.
5. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128") and Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129"), which are effective for
fiscal years ending after December 15, 1997. The Company believes the
implementation of these statements will not have a material effect on its
results of operations or financial statement disclosures.
F-19
<PAGE>
No dealer, sales representative or other individual has been authorized
to give any information or make any representation not contained in this
Prospectus in connection with this offering other than those contained in this
Prospectus and if given or made, such information or representation must not be
relied upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or solicitation of an offer to buy the Common Stock
by anyone in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to any person to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create an implication that the
information contained herein is correct as of any time subsequent to its date.
TABLE OF CONTENTS
Page
Prospectus Summary.............................................................4
Risk Factors...................................................................6
The Company...................................................................14
Management's Discussion and Analysis..........................................26
Market for Registrant's Common Equity and Related
Stockholder Matters........................................................29
Management....................................................................30
Executive Compensation and Other Matters......................................32
Security Ownership of Certain Beneficial Owners and Management................37
Selling Shareholders..........................................................39
Description of Securities.....................................................40
Legal Matters.................................................................42
Experts.......................................................................42
Indemnification of Directors and Officers.....................................43
Additional Information........................................................43
Index to Financial Statements................................................F-1
UNTIL ______, 1997 (40 DAYS AFTER THE DATE OF THE PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
SALIVA DIAGNOSTIC SYSTEMS, INC.
2,457,974 SHARES OF COMMON STOCK
PROSPECTUS
JUNE __, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the
securities being registered hereby will be borne by the Company and are
estimated to be as follows:
Registration Fee....................................................$ 1,002.99
Legal Fees.......................................................... 30,000.00*
Accounting Fees..................................................... 5,000.00*
Miscellaneous....................................................... 5,000.00*
------------
Total..........................................................$ 41,002.99*
============
- ---------------
* Estimated
INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law empowers a
corporation to indemnify its directors and officers and to purchase insurance
with respect to liability arising out of their capacity or status as directors
and officers provided that this provision shall not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) arising under Section 174 of the General Corporation Law of Delaware, or
(iv) for any transaction from which the director derived an improper personal
benefit.
The Delaware Corporation Law provides further that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors and officers may be entitled under the corporation's by-laws, any
agreement, vote of shareholders or otherwise.
Article Ten of the Company's Certificate of Incorporation eliminates
the personal liability of directors to the fullest extent permitted by Section
145 of the Delaware Corporation Law.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such persons
in their official capacities if such person acted in good faith and in a manner
that he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
II-1
<PAGE>
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES
ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE
COMPANY PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT
IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION
IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS THEREFORE UNENFORCEABLE.
EXHIBITS.
Exhibit No. Description
- ----------- -------------------------------------------------------------------
2.1 Certificate of Incorporation, as amended, incorporated by reference
to Exhibits 2.1 through 2.6 to the Company's Registration Statement
on Form S-1 (Registration No. 33-46648) (the "Form S-1") and to
Exhibit 2.7 to the Company's Annual Report on Form 10-KSB for its
fiscal year ended December 31, 1995 (the "1995 10-KSB").
2.2 Certificate of Amendment to the Company's Certificate of
Incorporation, dated February 25, 1997, incorporated by reference
to Exhibit 2.2 to the Company's Annual Report on Form 10-KSB for
its fiscal year ended December 31, 1996 (the "1996 10-KSB").
3.1 Company's By-laws, incorporated by reference to Exhibit 3.1 to the
Form S-1.
4.1 Form of Underwriter's Warrant, incorporated by reference to Exhibit
4.2 to the Form S-1.
4.2 Warrant issued to Whale Securities Co., L.P. for 1,000,000 shares,
incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-95172).
4.3 7.5% Convertible Debenture due February 28, 1999, issued by the
Company to The Tail Wind Fund, Ltd. on March 11, 1997, incorporated
by reference to Exhibit 4 to the Company's Quarterly Report on
Form 10-QSB for its fiscal quarter ended March 31, 1997.
4.4 Common Stock Purchase Warrant for 89,552 shares, issued by the
Company to Grayson & Associates on March 14, 1997.
5 Opinion of Bryan Cave LLP
10.1 Consulting Agreement, dated May 20, 1996, between the Company and
International Business Consultants Limited, incorporated by
reference to Exhibit 10.1 to the 1996 10-KSB.
II-2
<PAGE>
10.2 Consulting Agreement, dated January 27, 1994, between the Company
and Duke Van Kalken, incorporated by reference to Exhibit 10.16 to
the Company's Annual Report on Form 10-KSB for its fiscal year
ended December 31, 1993 (the "1993 10-KSB").
10.3 Employment Agreement, dated August 9, 1994, between the Company and
David Barnes, incorporated by reference to Exhibit 10.3 to the 1996
10-KSB.
10.4 1992 Stock Option Plan, incorporated by reference to Exhibit 10.1
to the Form S-1.
10.5 1994 Stock Option Plan, incorporated by reference to Exhibit A to
the Proxy Statement for the Company's 1994 Annual Meeting.
10.6 Lease Agreement, dated June 13, 1994, between Technology Parks
Private Limited and Saliva Diagnostic Systems (Singapore) Pte.
Ltd., incorporated by reference to Exhibit 10.2 to the 1995 10-KSB.
10.7 Amendment, dated February 20, 1997, to Lease Agreement, dated June
13, 1994, between Technology Parks Private Limited and Saliva
Diagnostic Systems (Singapore) Pte. Ltd., incorporated by reference
to Exhibit 10.7 to the 1996 10-KSB.
10.8 Lease Agreement between the Company and East Ridge Business Park,
incorporated by reference to Exhibit 10.14 to the Form S-1.
10.9 Lease Agreement for additional premises between the Company and
East Ridge Business Park, incorporated by reference to Exhibit 10.4
to the Company's Registration Statement on Form SB-2 (Registration
No. 33-95172).
10.10 Amendment, dated June 14, 1996, to Lease Agreement between the
Company and East Ridge Business Park, incorporated by reference to
Exhibit 10.10 to the 1996 10-KSB.
10.11 License Agreement, dated March 22, 1994, between the Company and
Orgenics, Ltd., incorporated by reference to Exhibit 10.7 to the
1993 10-KSB.
II-3
<PAGE>
10.12 License Agreement between Saliva Diagnostic Systems, Inc. and
Saliva Diagnostic Systems (Singapore) Pte. Ltd., incorporated by
reference to Exhibit 10.10 to the Company's Annual Report on Form
10-KSB for its fiscal year ended December 31, 1994 (the "1994
10-KSB")
10.13 Convertible Securities Subscription Agreement, dated as of
March 11, 1997, between the Company and The Tail Wind Fund, Ltd.
10.14 Registration Rights Agreement, dated as of March 11, 1997, between
the Company and The Tail Wind Fund, Ltd.
21 List of Significant Subsidiaries, incorporated by reference to
Exhibit 21.1 to the Form S-1.
23.1 Consent of Hollander, Gilbert & Company.*
23.2 Consent of Bryan Cave LLP (included in Exhibit 5).
- ---------------
* Previously filed.
UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions or otherwise, the
Company has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(b) The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10 (a)(3) of the
Securities Act;
II-4
<PAGE>
(ii) reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in this Registration Statement;
(iii) include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of a
Registration Statement in reliance upon Rule 430A and contained in the form of
Prospectus filed by Registrant pursuant to Rule 424 (b)(1) or (4) under the
Securities Act shall be deemed to be part of the Registration Statement as of
the time it was declared effective.
(5) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
RECENT SALES OF UNREGISTERED SECURITIES.
In April 1995, the Company sold an aggregate of 4,545,000 shares of
Common Stock to the following persons, in the amount set forth opposite their
names below in consideration for an aggregate of approximately $2,200,000.
Name Number of Shares
- ------------------------------------------------------- -----------------------
Wilshire Center Geriatrics 540,000
G&G Diagnostics LP 100,000
Etek Electronics Corp. 100,000
Oppenheimer & Co., as trustee for Joel Scheinbaum, M.D 180,000
Pension Plan
Joel Scheinbaum 210,000
Gary Nathanson 95,000
Barry Coe 100,000
II-5
<PAGE>
Jan Gilbert 200,000
Harris Cahn Employee Retirement Plan 100,000
Ronald Lealos 200,000
Richard Kalin 50,000
Millard Zimet 50,000
Douglas Becker 50,000
Ceppos Group 100,000
Dr. Mailman 50,000
Frank Kohner 50,000
Lynn Hargrave 50,000
Havens Partners LP 25,000
Peterson Machine Products Corp. Retirement Trust 50,000
Alain Levi 360,000
Slate Daiagi Realty Inc. 50,000
Handcar Ltd. Pension Plan 100,000
John St. John 40,000
Nora Eskes 25,000
Brad Beidner 100,000
George Stanton 80,000
Reads Trust Co., Ltd. 500,000
Stuart Miller 50,000
Larry Saliterman 50,000
Trinet International Fund 25,000
Gerald Grayson 50,000
Jim Furmston 50,000
Yuan Lin 180,000
Umbria Ltd. 300,000
Jeff Tipton 50,000
Berman Group 50,000
Stephen Horowitz 50,000
Robert Shemian 25,000
In April 1995, the Company issued an option to purchase 100,000 shares
of Common Stock to Dr. Chyang Fang, a former director and employee of the
Company, in connection with the termination of Dr. Fang's employment contract
with the Company.
From October 1995 through November 1995, the Company issued 8%
convertible debentures in an aggregate principal amount of $3,685,000 to the
following persons pursuant to Regulation S under the Securities Act of 1933, as
amended. These convertible debentures were ultimately converted into 7,901,380
shares of Common Stock.
II-6
<PAGE>
Principal Amount
Name of 9% Convertible Debenture
- --------------------------------------------------- ---------------------------
RBB Bank AG $850,000
Chumuel Lubkowski 200,000
Yacov Barber 250,000
Panshore Services, SA 500,000
Tula Businesses 500,000
International Entertainment Ventures, Ltd. 60,000
Shulamit Pritzker 600,000
EBC Zurich AG 50,000
Rafael Lapidus 175,000
R. Gukovitzky 200,000
Meritxell Ltd. 100,000
Yechiel Herzl 200,000
In November 1995, the Company received gross proceeds of $300,000 from
a private offering of its securities. The offering consisted of Units; each Unit
cost $100,000 and contained 100,000 shares of Common Stock and warrants to
purchase an additional 150,000 shares at an exercise price of 50% of the closing
bid price of the shares of Common Stock as reported by Nasdaq on the date the
holder elects to exercise his warrant. The persons to whom the Company sold the
Units are as set forth below:
Name Number of Units
- --------------------------------------------------------------- ---------------
Eugene Seymour 1
Joel Scheinbaum 1
Ronald Lealos .3
Brian Bramell .45
Gary Nathanson .125
George Stanton .125
In April 1996, the Company issued to Whale Securities Co., L.P.
("Whale") warrants to purchase 1,000,000 shares of Common Stock for $1.00 per
share, in settlement of a dispute between Whale and the Company. All of such
warrants have been exercised.
In May 1996, the Company issued 6,250 shares of Common Stock to each of
Jack Wolff and Peter Lange, in full settlement of various claims Messrs. Wolff
and Lange had against the Company.
In March 1997, the Company sold $1,500,000 in principal amount of its
7.5% Convertible Debentures due February 28, 1999 (the "Debentures") to The Tail
Wind Fund Ltd. Net cash proceeds to the Company were approximately $1,380,000.
Holders of the Debentures originally had the right to convert up to (i) 33 1/3%
of the Debentures at any time from and after June 10, 1997, (ii) 66 2/3% of the
Debentures at any time from and after July 9, 1997 and (iii)
II-7
<PAGE>
100% of the Debentures at any time from and after August 8, 1997. Pursuant to a
subsequent agreement among the Company and holders of the Debentures, the
parties agreed to a partial acceleration of conversion. As of June 5, 1997 the
holders converted an aggregate of $800,000 of the Debentures for an aggregate of
833,598 shares of Common Stock. The number of shares of Common Stock issuable
upon conversion is determined by the conversion price defined in the Debentures
as the lesser of 115% of the market price for a share of Common Stock at the
time of issuance of the Debenture (i.e., $1.9191 per share) or 80% of the market
price for a share of Common Stock at the time of conversion of the Debenture. In
the event the current market price of the 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.
In March 1997, the Company issued to Grayson & Associates, Inc. a
five-year warrant to purchase 89,552 shares of Common Stock for an exercise
price of $1.34 per share in consideration of certain financial consulting
services performed on behalf of the Company.
Except for the sales pursuant to Regulation S, which were made in
compliance with Regulation S, the sales of the aforementioned securities were
made in reliance upon the exemption from the registration provisions of the
Securities Act afforded by Section 4(2) thereof and/or Regulation D promulgated
thereunder, as transactions by an issuer not involving a public offering. The
purchasers of these securities described above acquired them for their own
account and not with a view to any distribution thereof to the public. The
certificates evidencing the securities bear legends stating that the shares may
not be offered, sold or transferred other than pursuant to an effective
Registration Statement under the Securities Act, or an exemption from such
registration requirements. The Company placed stop transfer instructions with
its transfer agent with respect to all such securities.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has duly caused this
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Vancouver, State of Washington, on June 12, 1997.
SALIVA DIAGNOSTIC SYSTEMS, INC.
By: /s/ Kenneth J. McLachlan
-------------------------------------
Kenneth J. McLachlan
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 has been signed below by the following persons in the
capacities and on the dates indicated. Each of such persons appoints Kenneth J.
McLachlan and Eric F. Stoer or each of them with full power to act without the
other, his true and lawful attorneys-in-fact and agents for him and on his
behalf and in his name, place and stead, and in any and all capacities, with
full and several power of substitution, to sign and file with the proper
authorities any and all documents in connection with the Registration Statement
on Form SB-2, filed with the Securities and Exchange Commission on May 9, 1997,
and this Amendment No. 1, granting unto said attorneys, and each of them, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same
as fully to all intents and purposes as he might or could do if personally
present, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may lawfully do or cause to be done by virtue hereof.
Signature Title Date
- ------------------------ ---------------------------------------- ------------
/s/ Kenneth J. McLachlan
- ------------------------ Director, President, Chief Executive June 12, 1997
Kenneth J. McLachlan Officer, Chief Financial Officer and
Chief Accounting Officer
/s/ Eric F. Stoer
- ------------------------ Director June 12, 1997
Eric F. Stoer
/s/ Hans Vauthier
- ------------------------ Director June 12, 1997
Hans Vauthier
II-9
EXHIBIT 4.4
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED UPON THE
EXERCISE ARE SUBJECT TO THE RESTRICTIONS ON
TRANSFER SET FORTH IN SECTION 4 OF THIS WARRANT
Warrant No. __ Number of Shares: 89,552
(subject to adjustment)
Date of Issuance: March 14, 1997
SALIVA DIAGNOSTIC SYSTEMS, INC.
Common Stock Purchase Warrant
(Void after March 14, 2002)
Saliva Diagnostic Systems, Inc., a Delaware corporation (the
"Company"), for value received, hereby certifies that Grayson & Associates, Inc.
or its registered assigns (the "Registered Holder"), is entitled, subject to the
terms set forth below, to purchase from the Company, at any time or from time to
time on or after the date of issuance and on or before March 14, 2002 at not
later than 5:00 p.m. Vancouver, Washington time), 89,552 shares of Common Stock,
$.01 par value per share (the "Common Stock"), of the Company. The shares
purchasable upon exercise of this Warrant, and the Purchase Price per share
(defined below), each as adjusted from time to time pursuant to the provisions
of this Warrant, are hereinafter referred to as the "Warrant Shares" and the
"Purchase Price," respectively.
1. Exercise.
a. This Warrant may be exercised on or before the expiration
date of March 14, 2002 by the Registered Holder, in whole or in part, by
surrendering this Warrant, with the purchase form appended hereto as Exhibit I
duly executed by such Registered Holder or by such Registered Holder's duly
authorized attorney, at the principal office of the Company, or at such other
office or agency as the Company may designate, accompanied by payment in full,
in lawful money of the United States, of the Purchase Price payable in respect
of the number of Warrant Shares purchased upon such exercise. For purposes
hereof, the Purchase Price shall be equal to $1.34 per share.
b. Notwithstanding any provisions herein to the contrary, if
the Fair Market Value (hereinafter defined) of one share of Common Stock is
greater than the Purchase Price (at the date of calculation as set forth below),
in lieu of exercising this Warrant for cash, the Registered Holder may elect to
receive shares equal to the value (as determined below) of this Warrant (or the
portion thereof being canceled) by surrender of this Warrant at the principal
<PAGE>
office of the Company together with the properly endorsed Notice of Exercise and
notice of such election in which event the Company shall issue to the Registered
Holder the number of shares of Common Stock computed using the following
formula:
Y (A-B)
X = -------
A
Where X = the number of shares of Common Stock to be issued to
the Registered Holder
Y = the number of shares of Common Stock purchasable
under the Warrant or, if only a portion of the
Warrant is being exercised, the portion of the
Warrant being canceled (at the date of such
calculation)
A = the Fair Market Value of one share of the Company's
Common Stock (at the date of such calculation)
B = Purchase Price (as adjusted to the date of such
calculation)
For purposes of the above calculation, if the Common Stock is
listed or quoted on a national securities exchange, the Nasdaq Stock Market, or
another nationally recognized exchange or trading system as of the Exercise
Date, the Fair Market Value per share of the Common Stock shall be deemed to be
the average of the last reported sales price per share of Common Stock thereon
for the five trading days immediately preceding the Exercise Date; provided,
however, that if no such price is reported during such five-day period, or if
the Common Stock is not listed or quoted on a national securities exchange, the
Nasdaq Stock Market, or another nationally recognized exchange or trading system
as of the Exercise Date, the Fair Market Value per share of Common Stock shall
be deemed to be the amount most recently determined by the Board of Directors to
represent the fair market value per share of the Common Stock (including without
limitation a determination for purposes of granting Common Stock options or
issuing Common Stock under an employee benefit plan of the Company); and upon
request of the Registered Holder, the Board of Directors (or a representative
thereof) shall promptly notify the Registered Holder of the Fair Market Value
per share of Common Stock. Notwithstanding the foregoing, if the Board of
Directors has not made such a determination within the three-month period prior
to the Exercise Date, then (A) the Fair Market Value per share of Common Stock
shall be the amount next determined by the Board of Directors to represent the
fair market value per share of the Common Stock (including without limitation a
determination for purposes of granting Common Stock options or issuing Common
Stock under an employee benefit plan of the Company), (B) the Board of Directors
shall make such a determination within 10 days of a request by the Registered
Holder that it do so, and (C) the exercise of this Warrant pursuant to
subsection 1.b. shall be delayed until such determination is made.
2
<PAGE>
c. Each exercise of this Warrant shall be deemed to have been
effected immediately prior to the close of business on the day on which this
Warrant shall have been surrendered to the Company as provided in subsections
1.a. and 1.b. above. At such time, the person or persons in whose name or names
any certificates for Warrant Shares shall be issuable upon such exercise as
provided in subsection 1.d. below shall be deemed to have become the holder or
holders of record of the Warrant Shares represented by such certificates.
d. As soon as practicable after the exercise of this Warrant
in full or in part, and in any event within 10 days thereafter, the Company, at
its expense, will cause to be issued in the name of, and delivered to, the
Registered Holder, or as such Holder (upon payment by such Holder of any
applicable transfer taxes) may direct:
(i) a certificate or certificates for the number of
full Warrant Shares to which such Registered Holder shall be entitled upon such
exercise plus, in lieu of any fractional share to which such Registered Holder
would otherwise be entitled, cash in an amount determined pursuant to Section 3
hereof; and
(ii) in case such exercise is in part only, a new
warrant or warrants (dated the date hereof) of like tenor, calling in the
aggregate on the face or faces thereof for the number of Warrant Shares equal
(without giving effect to any adjustment therein) to the number of such shares
called for on the face of this Warrant minus the number of such shares purchased
by the Registered Holder upon such exercise (and in the case of exercise under
the net exercise provision of Subsection 1.b., minus the number of shares
underlying the Warrant which were surrendered in accordance therewith).
2. Adjustments.
a. If outstanding shares of the Company's Common Stock shall
be subdivided into a greater number of shares or a dividend in Common Stock
shall be paid in respect of Common Stock, the Purchase Price in effect
immediately prior to such subdivision or at the record date of such dividend
shall simultaneously with the effectiveness of such subdivision or immediately
after the record date of such dividend be proportionately reduced. If
outstanding shares of Common Stock shall be combined into a smaller number of
shares, the Purchase Price in effect immediately prior to such combination
shall, simultaneously with the effectiveness of such combination, be
proportionately increased. When any adjustment is required to be made in the
Purchase Price, the number of Warrant Shares purchasable upon the exercise of
this Warrant shall be changed to the number determined by dividing (i) an amount
equal to the number of shares issuable upon the exercise of this Warrant
immediately prior to such adjustment, multiplied by the Purchase Price in effect
immediately prior to such adjustment, by (ii) the Purchase Price in effect
immediately after such adjustment.
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<PAGE>
b. If there shall occur any capital reorganization or
reclassification of the Company's Common Stock (other than a change in par value
or a subdivision or combination as provided for in subsection 2.a. above), or
any consolidation or merger of the Company with or into another corporation, or
a transfer of all or substantially all of the assets of the Company, then, as
part of any such reorganization, reclassification, consolidation, merger or
sale, as the case may be, lawful provision shall be made so that the Registered
Holder of this Warrant shall have the right thereafter to receive upon the
exercise hereof the kind and amount of shares of stock or other securities or
property which such Registered Holder would have been entitled to receive if,
immediately prior to any such reorganization, reclassification, consolidation,
merger or sale, as the case may be, such Registered Holder had held the number
of shares of Common Stock which were then purchasable upon the exercise of this
Warrant. In any such case, appropriate adjustment (as reasonably determined in
good faith by the Board of Directors of the Company) shall be made in the
application of the provisions set forth herein with respect to the rights and
interest thereafter of the Registered Holder of this Warrant, such that the
provisions set forth in this Section 2 (including provisions with respect to
adjustment of the Purchase Price) shall thereafter be applicable, as nearly as
is reasonably practicable, in relation to any shares of stock or other
securities or property thereafter deliverable upon the exercise of this Warrant.
c. When any adjustment is required to be made in the Purchase
Price, the Company shall promptly mail to the Registered Holder a certificate
setting forth the Purchase Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment. Such certificate shall also
set forth the kind and amount of stock or other securities or property into
which this Warrant shall be exercisable following the occurrence of any of the
events specified in subsection 2.a. or b. above.
d. In the event that the Company shall make any distribution
of its assets upon or with respect to its Common Stock, as a liquidating or
partial liquidating dividend, or other than as a dividend payable out of
earnings or any surplus legally available for dividends under the laws of the
state of incorporation of the Company, the Registered Holder shall be entitled
to receive upon exercise of this Warrant the amount of such assets (or, at the
option of the Company, an amount equal to the value thereof at the time of
distribution, as determined by the Company's board of directors in its sole
discretion) which would have been distributed to such Registered Holder if it
had exercised its right to exercise immediately prior to the record date for
such distribution or, in the absence of a record date, immediately prior to the
date of such distribution.
3. Fractional Shares. The Company shall not be required upon the
exercise of this Warrant to issue any fractional shares, but shall make an
adjustment therefor in cash on the basis of the Fair Market Value per share of
Common Stock. For purposes hereof, Fair Market Value shall be determined as set
forth in subsection 1.b. above.
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4. Requirements for Transfer.
a. This Warrant and the Warrant Shares shall not be sold or
transferred unless either (i) they first shall have been registered under the
Securities Act of 1933, as amended (the "Act"), or (ii) the Company first shall
have been furnished with an opinion of legal counsel, reasonably satisfactory to
the Company, to the effect that such sale or transfer is exempt from the
registration requirements of the Act.
b. Notwithstanding the foregoing, no registration or opinion
of counsel shall be required for (i) a transfer by a Registered Holder which is
a partnership to a partner of such partnership or a retired partner of such
partnership who retires after the date hereof, or to the estate of any such
partner or retired partner, if the transferee agrees in writing to be subject to
the terms of this Section 4, or (ii) a transfer made in accordance with Rule 144
under the Act.
c. Each certificate representing Warrant Shares shall bear a
legend substantially in the following form:
The securities represented by this certificate have
not been registered under the Securities Act of 1933,
as amended, and may not be offered, sold or otherwise
transferred, pledged or hypothecated unless and until
such securities are registered under such Act or an
exemption is available therefrom and established
satisfactory to the Company.
The foregoing legend shall be removed from the certificates representing any
Warrant Shares, at the request of the holder thereof, at such time as they
become eligible for resale pursuant to Rule 144(k) under the Act.
5. Demand Registration.
a. Subject to the terms and conditions hereof, within thirty
(30) days after the written request of the holders of a majority of Warrant
Shares plus Warrant Shares issuable upon conversion of then outstanding
Warrants, the Company shall, at the Company's cost and expense (other than the
fees and disbursements of counsel for the Registered Holder and the underwriting
discounts and brokerage commissions, if any, payable in respect of the Warrant
Shares sold by the Registered Holder) prepare and file with the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-3 (if
the same is available), with respect to all of the Warrant Shares and will use
all reasonable efforts to cause such registration statement to become effective
promptly. If Form S-3 is not available to the Company for such registration
statement, the Company shall use such form of registration statement that is
available and appropriate.
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b. Except as set forth below, the Company shall keep effective
the registration statement contemplated by this Section 5 and shall from time to
time amend or supplement such registration statement, for a period of not less
than five (5) years, as extended by any period of time during which the
registration statement is not effective pursuant to Section 5.c. below, unless
all of the Warrant Shares set forth in such registration statement have
theretofore been sold or unless all of the Warrant Shares may be sold at any one
time under Rule 144 of the Act.
c. The Company may terminate or suspend the effectiveness of
any registration statement to be filed pursuant to Section 5.a. one time for a
period of not more than 30 days if the Company shall deliver to the Registered
Holder a certificate signed by the President or Chief Financial Officer of the
Company stating that in the good faith judgment of the Board of Directors of the
Company it would (i) be seriously detrimental to the Company for such
registration statement to be effected or remain effective at such time, (ii)
interfere with any proposed or pending material corporate transaction involving
the Company or any of its subsidiaries or (iii) result in any premature
disclosure thereof.
d. The Company shall not be obligated to file more than one
(1) registration statement under this Section 5.
e. The Company shall furnish to the Registered Holders such
number of copies of a prospectus in conformity with the requirements of the
Securities Act, and such other documents as may reasonably be requested in order
to facilitate the disposition of the Warrant Shares owned by the Registered
Holder.
6. Company Registration.
a. If the Company shall determine to register any of its
securities either for its own account or the account of a security holder or
holders (including The Tail Wind Fund Ltd. and any of its transferees)
exercising their respective demand registration rights, other than a
registration relating solely to employee benefit plans, or a registration
relating to a corporate reorganization or other transaction under Rule 145, or a
registration on any registration form that does not permit secondary sales, the
Company will:
(i) promptly give to each Registered Holder written
notice thereof; and
(ii) use its best efforts to include in such
registration (and any related qualification under blue sky laws or other
compliance), except as set forth in Section 6.b. below, and in any underwriting
involved therein, all the Warrant Shares specified in a written request or
requests, made by any Registered Holder and received by the Company within ten
(10) days after the written notice from the Company described in clause (i)
above is received by the Registered Holder. Such written request may specify all
or a part of a Holder's Warrant Shares.
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<PAGE>
b. If the registration of which the Company gives notice is
for a registered public offering involving an underwriting, the Company shall so
advise the Registered Holders as a part of the written notice given pursuant to
Section 6.a. In such event, the right of any Registered Holder to registration
pursuant to this Section 6 shall be conditioned upon such Registered Holder's
participation in such underwriting and the inclusion of such Registered Holder's
Warrant Shares in the underwriting to the extent provided herein. All Registered
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and the other holders of securities of the Company
with registration rights to participate therein distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the representative of the underwriter or underwriters selected by the
Company.
Notwithstanding any other provision of this Section 6, if the
representative of the underwriters advises the Company in writing that marketing
factors require a limitation on the number of shares to be underwritten, the
representative may (subject to the limitations set forth below) exclude all
Warrant Shares from, or limit the number of Warrant Shares to be included in,
the registration and underwriting. The Company shall so advise all holders of
securities requesting registration, and the number of shares of securities that
are entitled to be included in the registration and underwriting shall be
allocated first to the Company for securities being sold for its own account. If
any person does not agree to the terms of any such underwriting, such person
shall be excluded therefrom by written notice from the Company or the
underwriter. Any Warrant Shares or other securities excluded or withdrawn from
such underwriting shall be withdrawn from such registration.
7. The Company Covenants.
a. In the event of a registration pursuant to the provisions
of Sections 5 or 6, the Company shall use all reasonable efforts to cause the
Warrant Shares so registered to be registered or qualified for sale under the
securities or blue sky laws of such jurisdictions as the Registered Holder may
reasonably request; provided, however, that the Company shall not be required to
qualify to do business in any state by reason of this Section 7.a. in which it
is not otherwise required to qualify to do business.
b. The Company shall notify the Registered Holder promptly
when such registration statement has become effective or a supplement to any
prospectus forming a part of such registration statement has been filed.
c. The Company shall advise the Registered Holder, promptly
after it shall receive notice or obtain knowledge of the issuance of any stop
order by the Commission suspending the effectiveness of such registration
statement, or the initiation or threatening of any proceeding for that purpose,
and promptly use all reasonable efforts to prevent the issuance of any stop
order or to obtain its withdrawal if such stop order should be issued.
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<PAGE>
d. The Company shall promptly notify the Registered Holder, at
any time when a prospectus relating thereto is required to be delivered under
the Securities Act, of the happening of any event of which it has knowledge as a
result of which the prospectus included in such registration statement, as then
in effect, would include an untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing, and at the reasonable request of each Registered Holder prepare and
furnish to them such number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Warrant Shares or securities, such prospectus shall not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances under which they were made.
e. If requested by the underwriter for any underwritten
offering of Warrant Shares on behalf of the Registered Holder pursuant to a
registration requested under Sections 5 or 6, the Company and the Registered
Holder will enter into an underwriting agreement with such underwriter for such
offering, which shall be reasonably satisfactory in substance and form to the
Company, the Registered Holder, and the underwriter, and such agreement shall
contain such representations and warranties by the Company and each Registered
Holder and such other terms and provisions as are customarily contained in an
underwriting agreement with respect to secondary distributions solely by selling
stockholders, including, without limitation, indemnities substantially to the
effect and to the extent provided in Section 8.
To the extent requested by the underwriter, the Registered
Holder agrees not to sell or otherwise transfer or dispose of any Warrant Shares
held by it during the period commencing on its receipt of written notice from
the Company of such underwritten public offering and ending 180 days following
the effective date of a registration statement of the Company filed under the
Act in connection with such firmly underwritten public offering of the Company's
Common Stock, provided that all executive officers and directors of the Company
enter into similar agreements.
8. Indemnification; Miscellaneous Operative Provisions.
a. Subject to the conditions set forth below, the Company
agrees to indemnify and hold harmless the Registered Holder, its respective
officers, directors, partners, employees, agents, shareholders and counsel, and
each person, if any, who controls any such person within the meaning of Section
15 of the Securities Act or Section 20(a) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") from and against any and all loss,
liability, charge, claim, damage, and expense whatsoever (which shall include,
for all purposes of this Section 8, but not be limited to, reasonable attorneys'
fees and any and all reasonable expenses whatsoever incurred in investigating,
preparing, or defending against any litigation, commenced or threatened, or any
claim whatsoever), arising out of, based upon, or in connection
8
<PAGE>
with any untrue statement or alleged untrue statement of a material fact
contained (A) in any registration statement, preliminary prospectus, or final
prospectus (as from time to time amended and supplemented) or any amendment or
supplement thereto, relating to the sale of any of the Warrant Shares, or (B) in
any application or other document or communication (in this Section 8
collectively called an "Application") executed by or on behalf of the Company or
based upon written information furnished by or on behalf of the Company filed in
any jurisdiction in order to register or qualify any of the Warrant Shares under
the securities or blue sky laws thereof or filed with the Commission, the Nasdaq
Stock Market or any securities exchange, or (C) in any reports or documents
filed under the Exchange Act; or any omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
made therein not misleading, unless (x) such statement or omission was made in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of such Registered Holder for inclusion in any
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be, or
(y) such loss, liability, charge, claim, damage or expense arises out of the
Registered Holder's failure to comply with the terms and provisions of this
Agreement. The foregoing agreement to indemnify shall be in addition to any
liability the Company may otherwise have, including liabilities arising under
this Agreement.
If any action is brought against the Registered Holders or any
of their respective officers, directors, partners, employees, agents,
shareholders, or counsel, or any controlling persons of such person (an
"indemnified party") in respect of which indemnity may be sought against the
Company pursuant to the foregoing paragraph, such indemnified party or parties
shall promptly notify the Company in writing of the institution of such action
(but the failure so to notify shall not relieve the Company from any liability
other than pursuant to this Section 8.a. unless, the failure to so notify shall
prejudice any rights or defenses with respect to such claim) and the Company
shall promptly assume the defense of such action, including the employment of
counsel (reasonably satisfactory to such indemnified party or parties) provided
that the indemnified party shall have the right to employ its or their own
counsel in any such case, but the fees and expenses of such counsel shall be at
the expense of such indemnified party or parties unless:
(i) the employment of such counsel shall have been
authorized in writing by the Company in connection with the defense of such
action; or
(ii) such indemnified party or parties shall have
reasonably concluded, based on an opinion of counsel, that there may be one or
more legal defenses available to it or them or to other indemnified parties
which are different from or additional to those available to the Company, in any
material respect, and that as a result thereof a conflict of interest would
arise absent separate representation of the parties.
In the event of clauses (i) or (ii) above, such fees and expenses shall be born
by the Company and the Company shall not have the right to direct the defense of
such action on behalf of the
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<PAGE>
indemnified party or parties. Anything in this Section 8 to the contrary
notwithstanding, the Company shall not be liable for any settlement of any such
claim or action affected without its written consent, which shall not be
unreasonably withheld. The Company shall not, without the prior written consent
of each indemnified party that is not released as described in this sentence,
settle or compromise any action, or permit a default or consent to the entry of
judgment in or otherwise seek to terminate any pending or threatened action, in
respect of which indemnity may be sought hereunder (whether or not any
indemnified party is a party thereto) unless such settlement, compromise,
consent, or termination includes an unconditional release of each indemnified
party from all liability in respect of such action. The Company agrees promptly
to notify each Registered Holder of the commencement of any litigation or
proceedings against the Company or any of its officers or directors in
connection with the sale of any Warrant Shares or any preliminary prospectus,
prospectus, registration statement, or amendment or supplement thereto, or any
application relating to any sale of any Warrant Shares.
b. Each Registered Holder agrees to indemnify and hold
harmless the Company, each director of the Company, each officer of the Company
who shall have signed any registration statement covering Warrant Shares by the
Registered Holder, each other person, if any, who controls the Company within
the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange
Act, and its or their respective counsel, to the same extent as the foregoing
indemnity from the Company to the Registered Holder in Section 8.a. but only
with respect to statements or omissions, if any, made in any registration
statement, preliminary prospectus, or final prospectus (as from time to time
amended and supplemented) or any amendment or supplement thereto, or in any
application, in reliance upon and in conformity with written information
furnished to the Company with respect to the Registered Holder by or on behalf
of the Registered Holder, expressly for inclusion in any registration statement,
preliminary or final prospectus, or application, as the case may be. If any
action shall be brought against the Company or any other person so indemnified
based on any such registration statement, preliminary prospectus, or final
prospectus, or any amendment or supplement thereto, or in any application, and
in respect of which indemnity may be sought against the Registered Holder
pursuant to this Section 8.b., the Registered Holder shall have the rights and
duties given to the Company, and the Company and each other person so
indemnified shall have the rights and duties given to the indemnified parties,
by the provisions of Section 8.a.
c. If the indemnification provided for in this Section 8 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement
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<PAGE>
of a material fact or the omission to state a material fact relates to
information supplied by the indemnifying party or by the indemnified party and
the parties' relative intent, knowledge, access to information, and opportunity
to correct or prevent such statement or omission.
d. In the event of a breach by any party of its obligations
under this Warrant, the other party, in addition to being entitled to exercise
all rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Warrant. Such rights shall be in
addition to, and not in lieu of, the Registered Holder's right to receive
monetary damages.
e. The provisions of this Warrant, including the provisions of
this sentence, may not be amended, modified or supplemented, unless such
amendment, modification or supplement is in writing and signed by the parties
hereto.
f. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand delivery, reputable
overnight courier, registered first-class mail, telex, or telecopied, initially
to the address set forth below, and thereafter at such other address, notice of
which is given in accordance with the provisions of this Section 8.f.
(i) if to the Company:
Saliva Diagnostic Systems, Inc.
11719 NE 95th Street
Vancouver, Washington 98682
Attention: President
Telephone: (360) 696-4800
Facsimile: (360) 254-7942
(ii) if to the Registered Holder at the address
specified from time to time by the Company.
All such notices and communications shall be deemed to have been duly given:
when delivered by hand, if personally delivered or by reputable overnight
courier; two business days after being deposited in the mail, postage prepaid,
if mailed; when answered back, if telexed; and when receipt is acknowledged, if
telecopied.
g. The Registered Holder shall cooperate in all reasonable
respects with the filing of the registration statement contemplated hereby.
Without limiting the foregoing, the Registered Holder shall furnish to the
Company (or any regulatory authority) such written information and
representations that the Company may reasonably request in order to facilitate
any registration of the Warrant Shares hereunder.
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9. No Impairment. The Company will not, by amendment of its
charter documents or through reorganization, consolidation, merger, dissolution,
sale of assets or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, and will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to protect
the rights of the holder of this Warrant against impairment.
10. Notices of Record Date, Etc. In case:
a. the Company shall take a record of the holders of its
Common Stock (or other stock or securities at the time deliverable upon the
exercise of this Warrant) for the purpose of entitling or enabling them to
receive any dividend or other distribution, or to receive any right to subscribe
for or purchase any shares of stock of any class or any other securities, or to
receive any other right; or
b. of any capital reorganization of the Company, any
reclassification of the capital stock of the Company, any consolidation or
merger of the Company with or into another corporation (other than a
consolidation or merger in which the Company is the surviving entity), or any
transfer of all or substantially all of the assets of the Company; or
c. of the voluntary or involuntary dissolution, spin-off,
liquidation or winding-up of the Company,
then, and in each such case, the Company will mail or cause to be mailed to the
Registered Holder of this Warrant a notice specifying, as the case may be, (i)
the date on which a record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, or (ii) the effective date on which such reorganization,
reclassification, consolidation, merger, transfer, dissolution, liquidation or
winding-up is to take place, and the time, if any is to be fixed, as of which
the holders of record of Common Stock (or such other stock or securities at the
time deliverable upon the exercise of this Warrant) shall be entitled to
exchange their shares of Common Stock (or such other stock or securities) for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, transfer, dissolution, liquidation or
winding-up. Such notice shall be mailed at least ten (10) days prior to the
record date or effective date for the event specified in such notice.
11. Reservation of Shares. The Company will at all times reserve
and keep available, solely for issuance and delivery upon the exercise of this
Warrant, such number of Warrant Shares and other stock, securities and property,
as from time to time shall be issuable upon the exercise of this Warrant.
12. Exchange of Warrants. Upon the surrender by the Registered
Holder of any Warrant or Warrants, properly endorsed, to the Company at the
principal office of the Company,
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the Company will, subject to the provisions of Section 4 hereof, issue and
deliver to or upon the order of such Registered Holder, at the Company's
expense, a new Warrant or Warrants of like tenor, in the name of such Registered
Holder or as such Registered Holder (upon payment by such Registered Holder of
any applicable transfer taxes) may direct, representing in the aggregate on the
face or faces thereof for the number of shares of Common Stock represented for
on the face or faces of the Warrant or Warrants so surrendered.
13. Replacement of Warrants. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and (in the case of loss, theft or destruction) upon delivery of an
indemnity agreement in an amount reasonably satisfactory to the Company, or (in
the case of mutilation) upon surrender and cancellation of this Warrant, the
Company will issue, in lieu thereof, a new Warrant of like tenor.
14. Transfers, etc.
a. The Company will maintain a register containing the names
and addresses of the Registered Holders of this Warrant. Any Registered Holder
may change its or his address as shown on the warrant register by written notice
to the Company requesting such change.
b. Subject to the provisions of Section 4 hereof, this Warrant
and all rights hereunder are transferable, in whole or in part, upon surrender
of this Warrant with a properly executed assignment (in the form of Exhibit II
hereto) at the principal office of the Company.
c. Until any transfer of this Warrant is made in the warrant
register, the Company may treat the Registered Holder of this Warrant as the
absolute owner hereof for all purposes; provided, however, that if and when this
Warrant is properly assigned in blank, the Company may (but shall not be
obligated to) treat the bearer hereof as the absolute owner hereof for all
purposes, notwithstanding any notice to the contrary.
15. No Rights as Stockholder. Until the exercise of this Warrant,
the Registered Holder of this Warrant shall not have or exercise any rights by
virtue hereof as a stockholder of the Company.
16. Change or Waiver. Any term of this Warrant may be changed or
waived only by an instrument in writing signed by the party against which
enforcement of the change or waiver is sought.
17. Headings. The headings in this Warrant are for purposes of
reference only and shall not limit or otherwise affect the meaning of any
provision of this Warrant.
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18. Governing Law. This Warrant will be governed by and construed
in accordance with the laws of the State of Delaware.
Saliva Diagnostic Systems, Inc.
By: /S/ KENNETH MCLACHLAN
-----------------------------------
Kenneth McLachlan, President
[Corporate Seal]
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EXHIBIT I
PURCHASE FORM
To: Dated:
--------------------------------------------------- ------------------
The undersigned, pursuant to the provisions set forth in the attached
Warrant (No. ____), hereby irrevocably elects to purchase __________ shares of
Common Stock covered by such Warrant. The undersigned herewith makes payment of
$_______________, representing the full purchase price for such shares at the
price per share provided for in such Warrant. Such payment takes the form of
$_______________ in lawful money of the United States.
Signature:
------------------------------
Address:
--------------------------------
--------------------------------
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EXHIBIT II
ASSIGNMENT FORM
FOR VALUE RECEIVED,________________________________________________________
hereby sells, assigns and transfers all of the rights of the undersigned under
the attached Warrant (No. _____) with respect to the number of shares of Common
Stock covered thereby set forth below, unto:
Name of Assignee Address No. of Shares
- ---------------- ----------------------------------------------- -------------
Dated: Signature:
--------------------- -----------------------------------------
Dated: Signature:
--------------------- -----------------------------------------
16
EXHIBIT 5
June 13, 1997
Saliva Diagnostic Systems, Inc.
11719 NE 95th Street
Vancouver, WA 98682
Ladies and Gentlemen:
We have acted as counsel to Saliva Diagnostic Systems, Inc. (the "Company")
in connection with the registration by the Company of up to 2,457,974 shares of
the Company's common stock, par value $.01 per share (the "Shares"), including
(i) 2,368,422 shares issued or issuable upon conversion of the Company's 7.5%
Convertible Debentures due February 28, 1999 (the "Debentures"), and (ii) 89,552
shares issuable upon exercise of warrants granted to Grayson & Associates, Inc.
(the "Grayson Warrants"). A Registration Statement on Form SB-2 covering the
Shares (Registration No. 333-26795), was filed with the Securities and Exchange
Commission on May 9, 1997, pursuant to the Securities Act of 1933, as amended
(the "Act"). Amendment Number 1 to the Form SB-2 was filed with the Securities
and Exchange Commission on June 13, 1997 pursuant to the Act.
In connection herewith, we have examined and relied as to matters of fact
upon such certificates of public officials, such certificates of officers of the
Company and originals or copies certified to our satisfaction of the Certificate
of Incorporation and Bylaws of the Company (each amended through the date
hereof), proceedings of the Board of Directors of the Company and other
corporate records, documents, certificates and instruments as we have deemed
necessary or appropriate in order to enable us to render the opinion expressed
below.
In rendering the following opinion, we have assumed the genuineness of all
signatures on all documents examined by us, the authenticity of all documents
submitted to us as originals and the conformity to authentic originals of all
documents submitted to us as certified or photostatted copies, and we have
relied as to matters of fact upon statements and certifications of officers of
the Company. In addition, we have assumed that the certificates for the Shares
conform to the specimen thereof examined by us and have been or will be duly
registered and countersigned by the Company's transfer agent, assumptions which
we are not independently verifying by inspection.
Based on the foregoing, we are of the opinion that the Shares are duly and
validly authorized and, when issued upon conversion of the Debentures or the
exercise of the Grayson Warrants, as the case may be, in accordance with their
respective terms, the Shares will be validly issued, fully paid and
non-assessable.
<PAGE>
Saliva Diagnostic Systems, Inc.
June 13, 1997
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
aforesaid Registration Statement on Form SB-2 and to the use of our name under
the caption "Legal Matters" in the Prospectus filed as a part thereof.
Very truly yours,
/S/ Bryan Cave LLP
Bryan Cave LLP
EXHIBIT 10.13
CONVERTIBLE SECURITIES SUBSCRIPTION AGREEMENT
OF SALIVA DIAGNOSTIC SYSTEMS, INC.
THIS CONVERTIBLE SECURITIES SUBSCRIPTION AGREEMENT (the Agreement") is
made and entered into as of this 11th day of March, 1997 by and between SALIVA
DIAGNOSTIC SYSTEMS, INC., a Delaware corporation (the "Company") and The Tail
Wind Fund Ltd. (the "Investor") providing for the purchase and sale of certain
debentures having an aggregate principal amount of One Million Five Hundred
Thousand Dollars ($1,500,000) (the "Debentures"), convertible into shares of
common stock, par value $.01 per share (the "Shares"), of the Company. The
Company and the Investor (collectively, the "Parties") hereby represent,
warrant, covenant and agree as follows:
1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE.
(i) Investor hereby subscribes for the Debentures having a
principal amount of One Million Five Hundred Thousand Dollars
($1,500,000). The Debentures shall be convertible into Shares in
accordance with the terms set forth in the form of Debenture attached
as Exhibit A to this Agreement.
(ii) Investor shall pay the aforesaid principal amount as the
purchase price for the Debentures subscribed for by it by delivering
same-day funds in United States dollars against counter-delivery of
Investors Debentures by the Company, each in accordance with the terms
of the Escrow Agreement of even date herewith and substantially in the
form attached as Exhibit B to this Agreement. The closing of the
purchase and sale of the Debentures (the "Closing") shall take place
promptly following the deposit into escrow of the Debentures subscribed
for and the purchase price therefor and the satisfaction of all of the
conditions set forth in Section 5 hereof. The Parties anticipate that
the date of the Closing (the "Closing Date") shall be March 11, 1997.
2. INVESTOR'S REPRESENTATIONS AND COVENANTS.
Investor represents, warrants and covenants to the Company as
follows:
(i) This Agreement has been duly authorized, validly executed
and delivered on behalf of Investor and is a valid and binding
agreement of Investor in accordance with its terms, subject to general
principles of equity and of bankruptcy or other laws affecting the
enforcement of creditors' rights;
(ii) Investor is purchasing the Debentures for its own account
for investment purposes and not with a view towards distribution.
Investor understands and agrees that it must bear the economic risks of
its investment for an indefinite period of time. Investor has received
and carefully reviewed copies of the Public Documents (as defined
below).
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Investor understands that the offer and sale of the Debentures are
being made only by means of this Agreement. No representations or
warranties have been made to Investor by the Company, the officers or
directors of the Company, or any agent, employee or affiliate of any of
them except as set forth herein. Investor is aware that the purchase of
the Debentures involves a high degree of risk and that it may sustain,
and has the financial ability to sustain, the loss of its entire
investment. Investor has had the opportunity to ask questions of, and
receive answers satisfactory to it from, the Company's management
regarding the Company. Investor understands that no federal or state
governmental authority has made any finding or determination relating
to the fairness of an investment in the Debentures and that no federal
or state governmental authority has recommended or endorsed, or will
recommend or endorse, the investment herein. Investor, in making the
decision to purchase the Debentures subscribed for, has relied upon
independent investigations made by it and has not relied on any
information or representations made by third parties. Investor has
significant assets, and upon consummation of the purchase of the
Debentures, will continue to have significant assets exclusive of the
Debentures. Investor has not been organized for the purpose of
acquiring the Debentures;
(iii) Investor is an "accredited investor" within the meaning
of Rule 501, promulgated under the Securities Act of 1933, as amended
(the "Securities Act");
(iv) Investor understands that the Debentures are being
offered and sold to it in reliance on specific provisions of federal
and state securities laws and that the Company is relying upon the
truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of Investor set forth herein in
order to determine the applicability of such provisions; and
(v) Investor understands that neither the Debentures nor the
Shares have been registered under the Securities Act and therefore it
cannot dispose of any or all of the Debentures or the Shares until such
Debentures or Shares are subsequently registered, as the case may be,
under the Securities Act or exemptions from such registration are
available. Investor acknowledges that, until an effective registration
statement relating to the Shares is effective, a legend substantially
as follows will be placed on the certificates representing the
Debentures and the Shares:
THE SECURITIES REPRESENTED HEREBY ARE RESTRICTED SECURITIES WITHIN THE MEANING
OF THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED,
TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH SUCH ACT AND THE
RULES AND REGULATIONS THEREUNDER AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS. THE ISSUER OF THESE SECURITIES WILL NOT RECOGNIZE A TRANSFER OF
SUCH SECURITIES EXCEPT UPON RECEIPT OF EVIDENCE SATISFACTORY TO THE ISSUER THAT
THE REGISTRATION
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PROVISIONS OF SUCH ACT HAVE BEEN COMPLIED WITH OR THAT SUCH REGISTRATION IS NOT
REQUIRED AND THAT SUCH TRANSFER WILL NOT VIOLATE ANY APPLICABLE STATE SECURITIES
LAWS.
3. THE COMPANY'S REPRESENTATIONS AND COVENANTS.
The Company represents, warrants and covenants to the Investor as
follows:
(i) The Company has been duly incorporated and is validly
existing and in good standing under the laws of the state of Delaware,
with full corporate power and authority to own, lease and operate its
properties and to conduct its business as currently conducted, and is
duly registered and qualified to conduct its business and is in good
standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does
not have a material adverse effect on the condition (financial or
other), business, properties, net worth or operations of the Company.
(ii) The Company has registered its common stock pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), is in full compliance with all reporting requirements
of the Exchange Act, and the Company's common stock is quoted on the
Nasdaq SmallCap Market (trading symbol SALV). The Company has been
subject to the requirements of Section 12 of the Exchange Act for at
least 12 months, and except as disclosed on Schedule 3(ii) hereto, has
filed in a timely manner all reports required to be filed during the
preceding 12 months;
(iii) The Company has furnished Investor with copies of the
Company's most recent Annual Report on Form 10-K filed with the U.S.
Securities and Exchange Commission ("SEC"), all Forms 10-Q and 8-K
filed thereafter and all other filings required under the Exchange Act
made with the SEC after the filing of the most recent Form 10-K
(collectively, the "Public Documents"). The Public Documents at the
time of their filing did not include any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements contained therein, in light of the circumstances under which
they were made, not misleading;
(iv) The authorized capital stock of the Company solely
consists of 33,000,000 shares of common stock, par value $.01 per
share. The Company currently has 22,040,785 shares of common stock
issued and outstanding;
(v) The Debentures shall be duly authorized, validly issued
and enforceable in accordance with their respective terms, and the
Shares, when issued and delivered upon conversion thereof, will be duly
and validly authorized and issued, fully paid and nonassessable, free
from all encumbrances and restrictions other than restrictions on
transfer imposed by applicable securities laws and/or this Agreement,
and will not subject
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the holders thereof to personal liability by reason of being such
holders. The Shares have been duly reserved for issuance upon
conversion of the Debentures. There are no preemptive rights of any
shareholder of the Company with respect to the Debentures or the
Shares;
(vi) This Agreement has been duly authorized, validly executed
and delivered on behalf of the Company and is a valid and binding
agreement of the Company enforceable in accordance with its terms,
subject to general principles of equity and to bankruptcy or other laws
affecting the enforcement of creditors' rights generally, and the
Company has full corporate power and authority to execute and deliver
this Agreement and the other agreements and documents contemplated
hereby and to perform its obligations hereunder and thereunder;
(vii) The Company is not and, upon the execution and delivery
of this Agreement, the issuance of the Debentures, the issuance of
Shares upon conversion thereof, and the transactions contemplated by
this Agreement, will not be in conflict with or in breach of any of the
terms or provisions of, or in default under, the Company's Articles of
Incorporation or Bylaws, or any indenture, mortgage, deed of trust or
other material agreement or instrument to which the Company is a party
or by which it or any of its properties or assets are bound, any law,
statute, rule, regulation, or any existing applicable decree, judgment
or order of any court, federal or state regulatory body, administrative
agency or other governmental body having jurisdiction over the Company
or any of its properties, or assets or will result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of its subsidiaries pursuant to the terms
of any agreement or instrument to which any of them is a party or by
which any of them may be bound or to which any of the property or
assets of any of them is subject;
(viii) No authorization, approval, filing with or consent of
any governmental body is required for the issuance and sale of the
Debentures, or the Shares upon conversion thereof, as contemplated by
this Agreement;
(ix) [Intentionally omitted];
(x) Subject in part to the truth and accuracy of the
Investor's representations and warranties in Section 2, the offer, sale
and issuance of the Debentures are exempt from the registration
requirements of the Securities Act and applicable state securities
laws;
(xi) Except as disclosed on Schedule 3(xi) hereto, there is no
action, suit or proceeding before or by any court or governmental
agency or body, domestic or foreign, now pending or, to the knowledge
of the Company, threatened, against or affecting the Company, or any of
its properties, which could result in any material adverse change in
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the condition (financial or otherwise) or in the earnings, revenues,
business affairs or business prospects of the Company, or which could
materially and adversely affect its properties or assets;
(xii) To the best knowledge of the Company, the Company is not
in default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any indenture, mortgage,
deed of trust or other instrument or agreement to which it is a party
or by which it or its property is bound;
(xiii) To the best knowledge of the Company, there is no fact
known to the Company (other than general economic conditions known to
the public generally) that has not been disclosed in writing to the
Investor that (i) could reasonably be expected to have a material
adverse effect on the condition (financial or otherwise) or in the
earnings, revenues, business affairs, business prospects, properties or
assets of the Company, or (ii) could reasonably be expected to
materially and adversely affect the ability of the Company to perform
its obligations pursuant to this Agreement;
(xiv) The Company shall issue the Debentures in the name of
Investor in the amount specified in Section 1(i) above in denominations
of $100,000. Upon conversion of the Debentures, the Company will issue
one or more certificates representing the Shares in the name of
Investor, with a legend substantially in the form specified by Section
2(v) above, and in such denominations to be specified by Investor prior
to conversion;
(xv) The Company will comply with all applicable securities
laws and regulations with respect to the sale and issuance of the
Debentures (and the Shares into which they are convertible) to the
Investor, including but not limited to the timely filing of all reports
required to be filed in connection therewith with the SEC or Nasdaq or
any other regulatory authority, and shall remain in full compliance
with all of the requirements (including reporting) of the Exchange Act;
(xvi) The Company shall: (i) maintain the inclusion of the
Shares on the Nasdaq Stock Market; and (ii) reserve immediately prior
to the Closing and shall continue to reserve from its authorized common
stock a sufficient number of shares of common stock to permit
conversion in full of all outstanding Debentures in accordance with
their respective terms;
(xvii) Until such time as Investor has converted one hundred
percent (100%) of the Debentures into Shares, the Company shall not
redeem or repurchase more than a de minimis number of shares of its
capital stock; and
(xviii) The Company agrees that it will not issue a press
release to the public containing Investor's name or other identifying
information without the Investor's written
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consent except as may be necessary in connection with the Company's
fulfilling its obligations under the Registration Rights Agreement (as
defined in Section 4). Investor acknowledges that this Agreement and
the related documents may be filed with the SEC.
4. REGISTRATION.
Within 30 days following the Closing, the Company shall, at the
Company's expense, file a registration statement to effect the registration of
all of the Shares issuable upon conversion of the Debentures held by Investor
under the Securities Act, and relevant Blue Sky laws. Such registration shall be
effected in accordance with the terms of the Registration Rights Agreement
attached hereto as Exhibit C (the "Registration Rights Agreement"). In the event
the registration of the Shares issuable upon conversion of the Debentures is not
declared effective by the SEC within 90 days of the Closing Date (the
"Registration Date"), then such failure shall constitute a breach of the
Debentures entitling Investor to be paid by the Company such Investor's pro rata
portion of the "Damage Amount," as liquidated damages and not as a penalty. The
Damage Amount shall mean $1,000 for each $1 million of Debentures for each
calendar day following the Registration Date by which the registration of the
Shares is not effective with the SEC. The Damage Amount shall be payable in cash
as of the end of each calendar week following the Registration Date, and shall
be payable whether or not an Event of Default (as defined in the Debenture) has
occurred.
5. CONDITIONS TO CLOSING.
(i) The Company shall furnish to the Investors a legal opinion
addressed to the Investors and dated as of the Closing Date from Bryan
Cave LLP substantially in the form of Exhibit D attached hereto.
(ii) The Company shall have delivered a certificate executed
by its President, dated the Closing Date, and certifying that all of
the Company's representations and warranties made in this Agreement are
true and correct as of the date of this Agreement and as of the Closing
Date.
6. CERTAIN AGREEMENTS.
The Company covenants and agrees that during the seventy-five days (75)
days immediately following the Closing Date, neither the Company, nor any
affiliate of the Company, nor any person acting on behalf of the Company, shall,
without the prior written consent of the Investor, agree to enter, enter into,
or consummate any subsequent equity securities offering (including any debt
offering convertible into equity securities of the Company) except for: (i) the
issuance of stock or stock options, the purpose of which is not to raise equity
capital; (ii) the issuance of stock options pursuant to the Company's existing
stock option plans and the issuance of Common Stock pursuant to presently
outstanding stock options and convertible securities; (iii) the firmly
underwritten public offering of its equity or debt securities; (iv) the issuance
of equity
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securities in connection with any strategic partnership or joint venture; and
(v) the issuance of shares of its capital stock in consideration in whole or in
part for one or more acquisitions made by the Company. For purposes of this
Section 6, the Investor (whose management company is advised by European
American Securities) and European American Securities clients shall be
considered as one entity.
7. MISCELLANEOUS.
(i) This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Delaware.
(ii) This Agreement may be executed by facsimile signature and
in counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. Facsimile
signatures of this Agreement shall be binding on all parties hereto.
(iii) Each of the Parties agrees to pay its own expenses
incident to this Agreement and the performance of its obligations
hereunder, including, but not limited to, the fees and expenses of each
Party's legal counsel.
(iv) All notices and other communications provided for or
permitted hereunder shall be made in writing by hand delivery, express
overnight courier, registered first class mail, overnight courier, or
telecopied, initially to the address set forth below, and thereafter at
such other address, notice of which is given in accordance with the
provisions of this Section 7.
if to the Company:
Saliva Diagnostic Systems, Inc.
11719 NE 95th Street
Vancouver, WA 96682
Attn: Chief Executive Officer
Telephone: 360-696-4800
Telecopier: 360-254-7942
if to the Investor, at such address as is listed for
such Investor on the signature page hereto.
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; three (3)
business days after being deposited in the mail, postage prepaid, if
mailed; the next business day after being deposited with an overnight
courier, if deposited with an overnight courier service; when receipt
is acknowledged, if telecopied.
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(v) This Agreement constitutes the entire agreement of the
Parties with respect to the subject matter hereof and supersedes all
prior oral or written proposals or agreements relating thereto. This
Agreement may not be amended or any provision hereof waived, in whole
or in part, except by a written amendment signed by both of the
Parties.
(vi) Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration
in accordance with the commercial rules of arbitration of the American
Arbitration Association (the "AAA") and this subparagraph (vi). Both
parties shall endeavor to select by mutual agreement an arbitrator
qualified and approved by the AAA. If the parties shall fail to agree
on an arbitrator, then the AAA shall be requested to submit a list of
five qualified and approved arbitrators. The arbitrator shall then be
selected by each party alternately striking one name at a time from the
list until only one name remains. That person shall be the arbitrator
and it shall be his or her duty promptly to issue a written decision
confined to the issues presented, which shall be final and binding on
all parties to the dispute; provided, however, that the arbitrator
shall have no authority to alter the terms of this Agreement. The
arbitration shall take place in New York, New York. Judgment upon the
award rendered by the arbitrator may be entered in any court having
jurisdiction thereof. In any such arbitration, the prevailing party
shall be entitled to recover all reasonable costs, including reasonable
attorneys' fees, incurred in pursuing or defending any claim in
arbitration.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, this Agreement was duly executed on the date first
written above.
Official Signatory of Company:
SALIVA DIAGNOSTIC SYSTEMS, INC.
By: /S/ KENNETH MCLACHLAN
------------------------------------
Kenneth McLachlan, President
Print Name and Title
INVESTOR:
ON BEHALF OF BRIGHTON HOLDINGS LTD. AS
SOLE DIRECTOR
By: /s/ ANITA M. DONALDSON
/s/ MICHAEL M. DARVILLE
-------------------------------------
Name: Anita M. Donaldson
-----------------------------------
Michael M. Darville
-----------------------------------
Title: Directors
----------------------------------
Address:
--------------------------------
--------------------------------
Telephone:
------------------------------
Fax:
------------------------------------
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EXHIBIT 10.14
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and
entered into as of March 11, 1997 between and among SALIVA DIAGNOSTIC SYSTEMS,
INC., a Delaware corporation (the "Company"), and each of the investors listed
on Exhibit A hereto (collectively, the "Investors").
W I T N E S S E T H:
WHEREAS, pursuant to those certain Convertible Securities Subscription
Agreements dated the date hereof (collectively, the "Subscription Agreement"),
the Investors acquired a series of Debentures, in an aggregate principal amount
of up to $1,500,000 (collectively the "Debentures"), which are convertible into
shares of common stock, par value $.01 per share (the "Common Stock"), of the
Company (the shares into which the Debentures are convertible are collectively
referred to as the "Shares"); and
WHEREAS, the Company has agreed to register the Shares; and
WHEREAS, as used herein, "Registrable Securities" shall mean the shares
of Common Stock issuable by the Company upon conversion of the Debentures or in
payment of interest pursuant to the terms thereof, which have not been
previously sold pursuant to a registration statement or Rule 144 promulgated
under the Securities Act of 1933, as amended (the "Securities Act").
NOW THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the parties agree as follows:
1. REGISTRATION UPON CLOSING.
(a) Subject to the terms and conditions hereof, within thirty (30) days
after the closing of the transactions contemplated by the Subscription Agreement
(the "Closing Date"), the Company shall, at the Company's cost and expense
(other than the underwriting discounts and brokerage commissions, if any,
payable in respect of the Registrable Securities sold by the Investors), prepare
and file with the Securities and Exchange Commission (the "Commission") a
registration statement on Form S-3 (if the same is available), with respect to
all of the Registrable Securities and will use its best efforts to cause such
registration statement to become effective as soon as possible. If Form S-3 is
not available to the Company for such registration statement, the Company shall
file the registration statement on an appropriate alternative form.
(b) Except as set forth below, the Company shall keep effective the
registration statement contemplated by this Section 1 and shall from time to
time amend or supplement such
<PAGE>
registration statement, for a period of not less than two (2) years (although
such period may be reduced to one year provided that all of the Shares may be
sold at one time under Rule 144 under the Exchange Act), as extended by any
period of time during which the registration statement is not effective pursuant
to Section 1(c) below, unless all of the Registrable Securities set forth in
such registration statement have theretofore been sold.
(c) The Company may terminate or suspend the effectiveness of any
registration statement to be filed pursuant to Section 1(a) one time for a
period of not more than 30 days if the Company shall deliver to each Investor a
certificate signed by the President or Chief Financial Officer of the Company
stating that in the good faith judgment of the Board of Directors of the Company
it would (i) be seriously detrimental to the business of the Company for such
registration statement to be effected or remain effective at such time, (ii)
interfere with any proposed or pending material corporate transaction involving
the Company or any of its subsidiaries, or (iii) result in any premature
disclosure thereof.
2. THE COMPANY COVENANTS.
(a) The Company shall furnish to the Investors such number of copies of
a prospectus in conformity with the requirements of the Securities Act, and such
other documents as may reasonably be requested in order to facilitate the
disposition of the Registrable Shares owned by the Investors.
(b) The Company shall use all reasonable efforts to cause the
Registrable Securities so registered to be registered or qualified for sale
under the securities or blue sky laws of such jurisdictions as the Investors may
reasonably request; provided, however, that the Company shall not be required to
qualify to do business in any state by reason of this Section 2(b) in which it
is not otherwise required to qualify to do business.
(c) The Company shall notify the Investors promptly when such
registration statement has become effective or a supplement to any prospectus
forming a part of such registration statement has been filed.
(d) The Company shall advise the Investors, promptly after it shall
receive notice or obtain knowledge, of the issuance of any stop order by the
Commission suspending the effectiveness of such registration statement or the
initiation or threatening of any proceeding for that purpose, and promptly use
all reasonable efforts to prevent the issuance of any stop order or to obtain
its withdrawal if such stop order should be issued.
(e) The Company shall promptly notify each Investor, at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event of which it has knowledge as a result of
which the prospectus included in such registration statement, as then in effect,
would include an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not
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misleading in the light of the circumstances then existing, and at the
reasonable request of each Investor prepare and furnish to them such number of
copies of a supplement to or an amendment of such prospectus as may be necessary
so that, as thereafter delivered to the offerees and purchasers of such
Registrable Securities or securities, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading in
the light of the circumstances under which they were made.
(f) The Company shall pay all expenses incurred by the Company in
complying with Section 1 hereof, including, without limitation, all
registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company and one counsel for the
Investors (the amount of counsel fees for the Investors relating to such
registration shall be $10,000), blue sky fees and expenses, and the expense of
any special audits incident to or required by any such registration, but
excluding all underwriting discounts and brokerage commissions, if any, payable
in respect of the Registrable Securities sold by the Investors.
3. INDEMNIFICATION
(a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless the Investors, their respective officers, directors,
partners, employees, agents, and counsel, and each person, if any, who controls
any such person within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") from and against any and all loss, liability, charge, claim, damage, and
expense whatsoever (which shall include, for all purposes of this Section 3, but
not be limited to, reasonable attorneys' fees and any and all reasonable
expenses whatsoever incurred in investigating, preparing, or defending against
any litigation, commenced or threatened, or any claim whatsoever), arising out
of, based upon, or in connection with any untrue statement or alleged untrue
statement of a material fact contained (A) in any registration statement,
preliminary prospectus, or final prospectus (as from time to time amended and
supplemented) or any amendment or supplement thereto, relating to the sale of
any of the Registrable Securities or (B) in any application or other document or
communication (in this Section 3 collectively called an "Application") executed
by or on behalf of the Company or based upon written information furnished by or
on behalf of the Company filed in any jurisdiction in order to register or
qualify any of the Registrable Securities under the securities or blue sky laws
thereof or filed with the Commission or any securities exchange or the Nasdaq
Stock Market; or any omission or alleged omission to state a material fact
required to be stated therein or necessary to make the statements made therein
not misleading, unless (x) such statement or omission was made in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any of the Investors for inclusion in any registration statement,
preliminary prospectus, or final prospectus, or any amendment or supplement
thereto, or in any application, as the case may be, or (y) such loss, liability,
charge, claim, damage or expense arises out of any Investor's failure to comply
with the terms and provisions of this Agreement. The foregoing agreement to
indemnify
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shall be in addition to any liability the Company may otherwise have, including
liabilities arising under this Agreement.
If any action is brought against the Investors or any of their
respective officers, directors, partners, employees, agents, or counsel, or any
controlling persons or such person (an "indemnified party") in respect of which
indemnity may be sought against the Company pursuant to the foregoing paragraph,
such indemnified party or parties shall promptly notify the Company in writing
of the institution of such action (but the failure so to notify shall not
relieve the Company from any liability other than pursuant to this Section 3(a)
unless, the failure to so notify shall materially and adversely prejudice any
rights or defenses with respect to such claim) and the Company shall promptly
assume the defense of such action, including the employment of counsel
(reasonably satisfactory to such indemnified party or parties) provided that the
indemnified party shall have the right to employ its or their own counsel in any
such case, but the fees and expenses of such counsel shall be at the expense of
such indemnified party or parties unless:
(i) the employment of such counsel shall have been authorized
in writing by the Company in connection with the defense of such action; or
(ii) such indemnified party or parties shall have reasonably
concluded, based on an opinion of counsel, that there may be one or more legal
defenses available to it or them or to other indemnified parties which are
different from or additional to those available to the Company, in any material
respect, and that as a result thereof a conflict of interest would arise absent
separate representation of the parties.
In the event of clauses (i) or (ii) above, such fees and expenses as are
reasonable shall be borne by the Company and the Company shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties. Anything in this Section 3 to the contrary notwithstanding, the Company
shall not be liable for any settlement of any such claim or action effected
without its written consent, which shall not be unreasonably withheld. The
Company shall not, without the prior written consent of each indemnified party
that is not released as described in this sentence, settle or compromise any
action, or permit a default or consent to the entry of judgment in or otherwise
seek to terminate any pending or threatened action, in respect of which
indemnity may be sought hereunder (whether or not any indemnified party is a
party thereto) unless such settlement, compromise, consent, or termination
includes an unconditional release of each indemnified party from all liability
in respect of such action. The Company agrees promptly to notify the Investor of
the commencement of any litigation or proceedings against the Company or any of
its officers or directors in connection with the sale of any Registrable
Securities or any preliminary prospectus, final prospectus, registration
statement, or amendment or supplement thereto, or any application relating to
any sale of any Registrable Securities.
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(b) Each Investor agrees to indemnify and hold harmless the Company,
each director of the Company, each officer of the Company who shall have signed
any registration statement covering Registrable Securities held by the Investor,
each other person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act or Section 20(a) of the Exchange Act, and its
or their respective counsel, to the same extent as the foregoing indemnity from
the Company to the Investors in Section 3(a) but only with respect to statements
or omissions, if any, made in any registration statement, preliminary
prospectus, or final prospectus or any amendment or supplement thereto, or in
any application, in reliance upon and in conformity with written information
furnished to the Company with respect to the Investors by or on behalf of the
Investors, expressly for inclusion in any such registration statement,
preliminary prospectus, or final prospectus, or any amendment or supplement
thereto, or in any application, as the case may be. If any action shall be
brought against the Company or any other person so indemnified based on any such
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, and in respect of which
indemnity may be sought against the Investor pursuant to this Section 3(b) the
Investors shall have the rights and duties given to the Company, and the Company
and each other person so indemnified shall have the rights and duties given to
the indemnified parties, by the provisions of Section 3(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 3(a) or
3(b) (subject to the limitations thereof) but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Securities Act, the Exchange Act or otherwise, then
the Company (including for this purpose any contribution made by or on behalf of
any director of the Company, any officer of the Company who signed any such
registration statement, any controlling person of the Company as one entity, and
the Investors included in such registration in the aggregate (including for this
purpose any contribution by or on behalf of an indemnified party) as a second
entity, shall contribute to the losses, liabilities, claims, damages, and
expenses whatsoever to which any of them may be subject, on the basis of
relevant equitable considerations such as the relative fault of the Company and
the Investors in connection with the facts which resulted in such losses,
liabilities, claims, damages, and expenses. The relative fault, in the case of
an untrue statement, alleged untrue statement, omission, or alleged omission
shall be determined by, among other things, whether such statement, alleged
statement, omission or alleged omission relates to information supplied by the
Company or by the Investors, and the parties' relative intent, knowledge, access
to information, and opportunity to correct or prevent such statement, alleged
statement, omission, or alleged omission. The Company and the Investors agree
that it would be unjust and inequitable if the respective obligations of the
Company and the Investors for contribution were determined by pro rata or per
capita allocation of the aggregate losses, liabilities, claims, damages, and
expenses (even if the Investors and the other indemnified parties were treated
as one entity for such purpose) or by any other method of allocation that does
not reflect the equitable considerations referred to in this Section 3(c). In no
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case shall any Investor be responsible for a portion of the contribution
obligation imposed on all of the Investors in excess of each Investor's pro rata
share based on the number of Registrable Securities owned by each Investor and
included in such registration as compared to the total number of Registrable
Securities owned by all of the Investors and included in such registration.
No person guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation. For purposes of
this Section 3(c), each person, if any, who controls any Investor within the
meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act
and each officer, director, partner, employee, agent, and counsel for any
Investor or control person shall have the same rights to contribution as the
Investor or control person and each person, if any, who controls the Company
within the meaning of Section 15 of the Securities Act of Section 20(a) of the
Exchange Act, each officer of the Company who shall have signed any such
registration statement, each director of the Company, and its or their
respective counsel shall have the same rights to contribution as the Company,
subject to each case to the provisions of this Section 3(c). Anything in this
Section 3(c) to the contrary notwithstanding, no party shall be liable for
contribution with respect to the settlement of any claim or action effected
without its written consent. This Section 3(c) is intended to supersede any
right to contribution under the Securities Act, the Exchange Act or otherwise.
4. MISCELLANEOUS.
(A) REMEDIES. In the event of a breach by any party of its obligations
under this Agreement, the other party, in addition to being entitled to exercise
all rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. Such rights shall be in
addition to, and not in lieu of, the Investors' rights to receive the Damage
Payment as specified in the Subscription Agreement.
(B) AGREEMENTS AND WAIVERS. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
unless such amendment, modification or supplement is in writing and signed by
all of the parties hereto.
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(C) NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing and sent by hand delivery,
registered first class mail, overnight courier, or telecopied, initially to the
address set forth below, and thereafter at such other address, notice of which
is given in accordance with the provisions of this Section 4(c).
if to the Company:
Saliva Diagnostic Systems, Inc.
11719 NE 95th Street
Vancouver, Washington 98682
Attn: Chief Executive Officer
Telephone: (360) 696-4800
Telecopier: (360) 254-7942
if to the Investors, to each investor and at such
address as is listed for such Investor on Exhibit A
hereto.
All such notices and communications shall be deemed to have been duly given:
when delivered by hand, if personally delivered; three (3) business days after
being deposited in the mail, postage prepaid, if mailed; the next business day
after being deposited with an overnight courier, if deposited with an overnight
courier service; and when receipt is confirmed, if telecopied.
(D) REASONABLE COOPERATION OF THE INVESTOR. The Investors shall
cooperate in all reasonable respects with the filing of the registration
statement(s) contemplated hereby. Without limiting the foregoing, each Investor
shall furnish to the Company (or any regulatory authority) such written
information and representations that the Company may reasonably request in order
to facilitate any registration of the Registrable Securities hereunder.
(E) SUCCESSORS AND ASSIGNS. This Agreement may be assigned by an
Investor to any purchaser or transferee of the Debentures.
(F) COUNTERPARTS. This Agreement may be executed by facsimile signature
and in any number of counterparts and by the parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
(G) HEADINGS. The headings in this Agreement are for convenience of
references only and shall not limit or otherwise affect the meaning hereof.
(H) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without reference to its
conflict of laws provisions.
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(I) SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application hereof in any circumstance is held invalid,
illegal or unenforceable, the validity, legality and enforceability of any such
provisions in every other respect and of the remaining provisions contained
herein shall not be affected or impaired thereby.
(J) ENTIRE AGREEMENT. This Agreement is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of this agreement and understanding of the parties hereto in respect
of the subject matter contained herein. There are not any restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein, concerning the registration rights granted by the Company pursuant to
this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGES FOLLOW]
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first written above.
SALIVA DIAGNOSTIC SYSTEMS, INC.
By: /S/ KENNETH MCLACHLAN
------------------------------------
Kenneth McLachlan, President
INVESTORS:
ON BEHALF OF BRIGHTON HOLDINGS, LTD. AS
SOLE DIRECTOR
By: /s/ ANITA M. DONALDSON
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/s/ MICHAEL M. DARVILLE
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Name: Anita M. Donaldson
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Michael M. Darville
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Title: Directors
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By:
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Name:
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Title:
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By:
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Name:
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Title:
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By:
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Name:
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Title:
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