As filed with the Securities and Exchange Commission on May 9, 1997
Registration No. 333-__________
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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
================================================================================
<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 unit (1) offering price (1) registration fee
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share 1,668,500 shares $1.45 $2,419,325 $733.13
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<FN>
(1) 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 the Common Stock on May 8, 1997 as reported by NASDAQ.
</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.
1,668,500 SHARES OF COMMON STOCK
Saliva Diagnostic Systems, Inc. (the "Company") is registering 1,668,500
shares of common stock, $.01 par value (the "Common Stock"), which include (i)
1,578,948 shares which 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." The Company will not receive any
of the proceeds from the sale of the Common Stock being offered hereby (the
"Offering").
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 5.
---------------------
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 May __, 1997
---------------------
Proceeds to
Price to Public(1) Selling Shareholders(1)(2)
------------------ ---------------------------------
Per share of Common Stock $ $
Total $ $
- ---------------
(1) Estimated based upon the average of the high and low sales prices for the
Common Stock on May __, 1997 as reported by NASDAQ.
(2) The expenses of the Offering are estimated to be approximately $40,000,
all of which will be paid by the Company. Regular brokerage commissions and
other expenses, including expenses of counsel, if any, for the Selling
Shareholders, will be paid by the Selling Shareholders.
<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 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.
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.
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<PAGE>
The Company has two categories of products: medical specimen collection
devices and rapid antibody immunoassays. The Company's product, Omni-SAL, 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
nicotine. The Company manufactures Omni-SAL through its foreign subsidiary in
Singapore and distributes Omni-SAL 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
injectable 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 accurate 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: StatoSimple. The Company has under development several rapid
tests for hepatitis. See "The Company -- Products."
The Company is currently marketing its medical specimen collection
devices (Omni- SAL, Saliva.Sampler and Omni-Swab) in many countries and is
currently marketing two of its three HIV rapid tests (Sero.Strip HIV and
Hema.Strip HIV) outside the United States. These HIV rapid tests are not yet
approved for marketing in the United States. The Company believes Saliva.Strip
HIV and Stat.Simple will be ready for marketing outside the United States in
1997. 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.
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.
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<PAGE>
THE OFFERING
Securities Offered .................... 1,668,500 shares of Common Stock.
See "Description of Securities."
Common Stock outstanding after the
Offering(1) ......................... 23,709,285
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.
Balance Sheet Data
December 31, 1996 December 31, 1995
----------------- -----------------
Working capital (deficit) ............... $ 336,302 $ (290,228)
Total assets ............................ $ 2,178,201 $ 4,358,458
Total liabilities ....................... $ 1,017,569 $ 3,381,147
Shareholders' equity .................... $ 1,160,632 $ 977,311
Income Statement Data
Year Ended December 31
------------------------------------
1996 1995
----------------- -----------------
Net revenues ............................ $ 715,780 $ 522,814
Net (loss) .............................. $ (5,152,399) $ (4,597,770)
Net (loss) per common share ............. $ (0.26) $ (0.46)
Weighted average number of
common shares outstanding ............. 20,100,000 9,900,000
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<PAGE>
The Common Stock is traded in the over-the-counter market under the
NASDAQ symbol SALV. The closing bid and ask prices of the Common Stock on May
___, 1997 as reported by NASDAQ were $_______ and $_______, respectively.
RISK FACTORS
The securities offered hereby are speculative and involve a high degree
of risk, including, but not limited to, the risk factors described below. Each
prospective investor should carefully consider the following risk factors
inherent in and affecting the business of the Company and this offering before
making an investment decision.
1. Limited Operating History. Since July 1990, the Company has been
engaged primarily in research and development activities focused on developing
proprietary collection devices and rapid assays. To date, sales of the Company's
products have been to a limited customer base. The Company has a limited
operating history upon which an evaluation of the Company's prospects can be
made. Such prospects must be considered in light of the risks, expenses and
difficulties frequently encountered in the establishment of a new business in a
continually evolving, heavily regulated industry, characterized by an increasing
number of market entrants and intense competition, as well as the risks,
expenses and difficulties encountered in the shift from development to
commercialization of new products based on innovative technology. There can be
no assurance that the Company will be able to implement successfully its
marketing strategy, obtain necessary regulatory approval, generate increased
revenues or ever achieve profitable operations.
2. Significant Operating Losses; Accumulated Deficit; Explanatory
Paragraph in Report of Independent Certified Public Accountants. The Company has
incurred significant operating losses since its inception, resulting in an
accumulated deficit of $21,914,246 and $16,761,847 at December 31, 1996 and
1995, respectively, and a shareholders' equity of $1,160,632 and $977,311 at
December 31, 1996 and 1995, respectively. The Company has incurred additional
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
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<PAGE>
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 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, 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-
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<PAGE>
SAL 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
will be approved by the FDA or other regulatory agencies. Delays in obtaining
regulatory approvals may adversely affect the development, testing or marketing
of the Company's products and the ability of the Company to generate product
revenues therefrom. The Company is subject to regulation in certain foreign
markets. There can be no assurance that regulatory approvals for any of the
Company's products will be obtained in a timely manner, or at all. See "The
Company - Regulation."
9. Risks Related to Foreign Activities. The Company and its
manufacturers may be subject to various import duties imposed by foreign
governments applicable to both finished products and components and may be
affected by various other import and export restrictions or duties as well as
other developments having an impact upon international trade. These factors
could, under certain circumstances, have an impact both on the manufacturing
cost and the wholesale and retail prices of such products. To the extent that
transactions relating to foreign sales, manufacturing of the Company's products
and purchases of components involve currencies other than United States dollars,
the operating results of the Company could be adversely impacted by fluctuations
in foreign currency exchange rates.
10. Uncertainty of Market Acceptance; Dependence Upon Third Party
Distributors. The Company has limited marketing capabilities and resources.
Achieving market acceptance will require substantial marketing efforts and the
expenditure of significant funds to inform potential consumers and the public of
the perceived benefits of the Company's current and proposed products. Moreover,
the Company does not have the financial or other resources to undertake
extensive marketing and advertising activities. The Company has recently begun
to
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develop strategic alliances and marketing arrangements, including joint
ventures, license or distribution arrangements. The Company's prospects will be
significantly affected by its ability to successfully develop and maintain its
relationships with its joint venturers, licensors and distributors and upon the
marketing efforts of such third parties. While the Company believes that any
independent distributors and sales representatives with whom it enters into such
arrangements will have an economic motivation to commercialize the Company's
products, the time and resources devoted to those activities generally will be
controlled by such entities and not by the Company. There can be no assurance
that the Company will be able, for financial or other reasons, to develop and
maintain any third party distribution or marketing arrangements or that such
arrangements, if established, will result in the successful commercialization of
any of the Company's products.
11. Dependence on Manufacturers. The Company relies on arrangements
with third parties for the manufacture of some of its products. Such
manufacturers, if located in the United States or if manufacturing products to
be sold in the United States, must comply with the FDA's good manufacturing
practices ("GMP") and pass pre-approval inspections by the FDA and periodic GMP
inspections. 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 and secure agreements with such manufacturers
on terms acceptable to the Company. MML Diagnostic Packaging, Inc. ("MML"),
manufactures Omni-SWAB and Saliva Sampler for the Company in the United States.
There can be no assurance that MML will be able to meet the Company's
requirements. 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 51% 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
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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, and certain key management and scientific personnel. The loss of Mr.
McLachlan's services or the services of other key management or scientific
personnel would have a material adverse effect on the Company's business and
prospects. Competition among biotechnology companies for qualified employees is
intense, and the loss of key personnel or the inability to attract and retain
the additional highly skilled employees required for the Company's activities
could adversely affect its business. There can be no assurance that the Company
will be able to hire or retain such necessary personnel. See "Management."
15. Uncertainty of Patent Protection; Proprietary Information. The
Company has applied for United States patents on certain aspects of its saliva
collection and diagnostic testing devices and has been awarded four of these
patents. To the extent possible, the Company also anticipates filing patent
applications for protection on future products and technology which it develops.
There can be no assurance that patents applied for will be obtained, that any
such patents will afford the Company commercially significant protection of its
technology or that the Company will have adequate resources to enforce its
patents. Inasmuch as the Company intends to sell its products in foreign
markets, it is in the process of seeking foreign patent protection on its
current products and technologies. The patent laws of other countries may differ
from those of the United States as to the patentability of the Company's
products and technologies and the degree of protection afforded. Other companies
may independently develop equivalent or superior products and technologies and
may obtain patent or similar rights with respect thereto. Although the Company
believes that its products and technologies have been independently developed
and do not infringe on the patents of others, there can be no assurance that the
Company's products and technologies do not and will not infringe on the patents
of others. In the event of infringement, the Company would, under certain
circumstances, be required to modify its device or obtain a license. There can
be no assurance that the Company will be able to do either of the foregoing in a
timely manner or upon acceptable terms and conditions, and the failure to do so
could have a material adverse effect on the Company. There can be no assurance
that the Company will have the financial or other resources necessary to
successfully defend a claim of violation of proprietary rights. See "The Company
- - Intellectual Property."
16. Product Liability; Insurance Coverage. The Company may be exposed
to potential product liability claims by consumers. The Company maintains
product liability insurance coverage in an amount up to $5,000,000 per
occurrence, up to a maximum of $5,000,000 in the aggregate. 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 could 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
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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. 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. 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) $1,500,000 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 $1.98375 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 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. 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 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, the Company's
saliva collection device. The test is currently designed to obtain results in
between 10 and 20 minutes. The Company believes Saliva.Strip's temperature
stability is similar to Sero.Strip and Hema.Strip.
Stat.Simple(R) ("Stat.Simple") is the Company's rapid assay for H.
pylori antibody detection. The device is a modification of Hema.Strip HIV and
uses whole blood for analysis. Results are available in 5 to 20 minutes.
Stat.Simple is currently undergoing pre-clinical data collection in the United
States prior to submission for review by the Food and Drug Administration.
MEDICAL SPECIMEN COLLECTION DEVICES. The Company has commenced
production and marketing of three medical specimen collectors: Omni-SAL,
Saliva.Sampler and Omni-Swab.
Omni-SAL is a saliva collection device with a patented volume indicator
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 injectable head. It is used to collect various body fluids and
cells, primarily for the purposes of DNA identification.
Saliva Filter is a component of the Omni-SAL and Saliva.Sampler that
extracts saliva from the devices' collection pads and also removes debris from
the samples. Due to limited production capability, the Company does not
currently manufacture Saliva Filter and thus, has elected to use filters of
other manufacturers for the Omni-SAL and Saliva.Sampler.
PRODUCT DEVELOPMENT
The Company is currently engaged in the development of rapid
immunoassays to detect antibodies to Hepatitis. In 1996, the Company entered
into a codevelopment agreement for rapid hepatitis tests with a European vaccine
manufacturer, which supplies antigen to the Company for product development. If
a product is ultimately developed, the Company will jointly market such product
and share profits on sales with its European partner.
In 1996, the Company also entered into a development agreement with US
Naval Research Unit No. 2 in Bethesda, Maryland to develop rapid tests for
certain tropical diseases, including dengue fever, leptospirosis,
schistosomiasis, and scrub typhus, to which US Naval personnel are exposed in
overseas assignments. Under the agreement, the Company will use antigen supplied
by the US Navy to develop the tests, while the Navy will provide laboratory
space and staff devoted to the project. When the Company commences work under
this development agreement, it is obligated to provide remuneration of up to
$19,000 annually to the Navy in exchange for its services.
The Company has conducted preliminary research that indicates its rapid
test format may be expanded to detect other diseases, such as tuberculosis,
measles, malaria, rubella, tetanus, herpes, chlamydia, mumps, influenza,
parvovirus, pertussis, certain cancers, tumor markers and cardiac disease.
Additionally, the Company believes that, in many cases, its tests may be able to
use saliva for analysis as well as blood and serum, although research has not
been completed on this.
The Company has received an Investigational Device Exemption for
Omni-SAL from the FDA which allows the Company to conduct clinical trials in the
United States for the purposes of determining whether Omni-SAL may be used for
collecting saliva samples for HIV testing in conjunction with certain laboratory
assays. The Company is considering partnering relationships to enable it to
pursue such regulatory approval and subsequently to market Omni-SAL in the
United States as part of a home collection testing system for HIV infection.
The Company expended approximately $1,040,000 and $903,000 in research
and development costs in fiscal years 1996 and 1995, respectively. See Note 1 of
Notes to Consolidated Financial Statements.
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MARKETING, SALES AND DISTRIBUTION
The Company is currently marketing its medical specimen collection
devices (Omni-SAL, Saliva.Sampler and Omni-Swab) in many countries and is
currently marketing two of its three HIV rapid tests (Sero.Strip HIV and
Hema.Strip HIV) outside the United States. These HIV rapid tests are not yet
approved for marketing in the United States. The Company believes Saliva.Strip
HIV and Stat.Simple will be ready for marketing outside the United States in
1997.
The Company has directed its initial primary marketing and distribution
efforts for its HIV-related products to international markets, principally in
Asia, Latin America, Eastern Europe, the Middle East and Africa. The reported
success in 1996 of certain therapies for AIDS and HIV infection, such as
protease inhibitors and immune boosters, has caused the Company to include the
United States in its primary marketing strategy. Despite the lower rate of HIV
infection in the United States, the Company believes the reported benefits of
early medical intervention for those who can afford treatment will spur demand
for HIV test products in the United States. Sales of the Company's HIV-related
products in the United States are subject to obtaining FDA approval. See
"Manufacturing and Supply" and "Regulation--Domestic Regulation." 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 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 technology expire.
Orgenics has paid the Company an initial licensing fee of $200,000 and will pay
4% royalties on sales of Orgenics' products which incorporate the Company's
Omni-SAL technology. In the event the Company ceases production of Omni-SAL,
Orgenics has the option, pursuant to the License Agreement, to purchase from the
Company the molds and equipment necessary to produce Omni-SAL and would
thereafter pay to the Company 6% royalties on sales of Omni-SAL products
produced and sold by Orgenics. The Company understands that Orgenics is not
currently exploiting its rights under the Company's license.
In January 1997, the Company signed a letter of intent to enter into a
distribution agreement with BioChem ImmunoSystems, Inc., a division of BioChem
Pharma, Inc., a Montreal-based conglomerate with significant international sales
in infectious disease therapies
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and diagnostics, for international distribution of the Company's rapid tests for
HIV infection. BioChem ImmunoSystems, Inc. is a Canadian research and
development organization specializing in the manufacture of diagnostic products
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 the Company's products
in selected geographic regions outside the United States. APS Canada is a
division of The APS Group of Companies, based in London, England. APS Canada
provides specialized human and veterinary medical testing services and maintains
a laboratory exclusively devoted to saliva testing.
In a separate letter of intent, BioChem ImmunoSystems Inc. and APS
Canada agreed to coordinate their distribution efforts for the Company's
products and to assist the Company in obtaining regulatory approvals for its
products in each of their respective distribution territories.
The Company has submitted certain of its products for evaluation to the
World Health Organization ("WHO"), a division of the United Nations that
maintains an inventory of medical goods for impoverished nations and
non-governmental health organizations. Certain smaller countries without their
own regulatory agencies rely on results of WHO evaluations as part of their
approval of products for use and sale in their countries. In 1996 the Company
bid for a contemplated bulk purchase by WHO of the Company's Sero.Strip HIV. In
April 1997, WHO notified the Company that it is one of three companies from
which WHO may make bulk purchases of rapid tests during the year ending February
28, 1998.
Sales to three customers, Fitzco, Inc., Osborn Laboratories and Beacon
Diagnostics, Inc. accounted for 21%, 19%, and 11% respectively, of total product
sales in 1996. Sales to Fitzco, Inc. and Osborn Laboratories accounted for 50%
of total revenues in 1995. The loss of sales to Fitzco, Inc., Osborn
Laboratories and Beacon Diagnostics, Inc. could have a material adverse effect
on the Company's financial condition and results of operations. See Note 10 of
Notes to Consolidated Financial Statements.
The Company has limited marketing resources. Achieving market
acceptance will require substantial marketing efforts and capabilities. The
Company relies in large part on forming partnerships with other companies for
marketing and distribution of its products. There can be no assurance that the
Company will form alliances with potential distributors or that these
distributors will be successful in promoting the Company's products.
MANUFACTURING AND SUPPLY
Omni-SAL is manufactured and distributed from the Company's
manufacturing facility in Singapore, while Omni-Swab and Saliva.Sampler are
manufactured at MML Diagnostic Packaging, Inc. ("MML") in the United States and
distributed by the Company. Sero.Strip HIV
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and Hema.Strip HIV are also manufactured and distributed from the Company's
facility in Singapore. Manufacturers, if located in the United States or if
manufacturing products which are to be sold in the United States, must comply
with the FDA's good manufacturing practices ("GMP") and pass pre-approval
inspections by the FDA and periodic GMP inspections. The Company has been
advised by MML that MML is in compliance with GMP and other FDA regulations.
The Company believes that most components used in the manufacture of
its current and proposed products are currently available from numerous
suppliers located in the United States, Europe and Asia. The Company believes,
however, that certain components are available only from a limited number of
suppliers. Although the Company believes that it will not encounter difficulties
in obtaining these components, there can be no assurance that the Company will
be able to enter into satisfactory agreements or arrangements for the purchase
of commercial quantities of such components.
In 1996, the Company began to design and build equipment for automated
production of its rapid tests at its Vancouver, Washington facility in the
United States. The Company believes such equipment will be fully installed and
functioning by May 1997, and believes it can reach full capacity of an estimated
three to six million tests manufactured per year (depending upon demand for the
products and the number of work shifts) later in 1997. The Company believes it
will be able to increase its capacity further if needed. The Company is required
to meet certain conditions, including compliance with FDA requirements (such as
GMP), in order to manufacture its tests at its Vancouver facility and to export
its products from there. The Company is currently addressing compliance with
those requirements.
As a result of the Export, Reform and Enhancement Act of 1996, a
company may manufacture products that have not yet received FDA approval for
sale in the United States within the United States for export to regions outside
the United States as long as such products have been approved by a country
designated by the FDA to be a "Tier One" country. In order for the Company to
export its HIV test products from its Vancouver facility to countries outside
the United States, the Company must obtain approval of its product from a Tier
One country and then must notify the FDA of such approval and of all intended
countries of export. The Company believes it can obtain such approval for its
Omni-SAL and Sero.Strip products which have already been approved in England, an
FDA-designated Tier One country. The Company has also recently submitted
Hema.Strip for approval in England.
In addition, the Company's manufacturing facility will be subject to
FDA regulations for GMP. If these conditions are met, the FDA will allow the
Company to export the medical device to countries outside the United States.
Additionally, the Company may be required to obtain permits in the countries
where the products are intended for distribution. Approval pursuant to the
Export, Reform and Enhancement Act of 1996 does not allow the Company to sell
those products within the United States. The Company must obtain separate FDA
approvals for sales within the United States. See "--Regulation --Domestic
Regulation."
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REGULATION
DOMESTIC REGULATION
FOOD AND DRUG ADMINISTRATION. In the United States, under the Federal
Food, Drug, and Cosmetics Act (the "FDC Act"), the FDA regulates all aspects,
including manufacture, testing, and marketing of medical devices that are made
or distributed domestically. The Company's domestically made and/or distributed
products have received FDA clearance for domestic distribution for certain
limited purposes. These include Omni-Swab and Saliva.Sampler. See also
"Manufacturing and Supply." The Company has not yet initiated activities for FDA
approval of its products that are manufactured and distributed outside the
United States.
All medical devices are categorized by the FDA as Class I, Class II, or
Class III. Class I devices are subject only to general control provisions of the
FDC Act, such as purity, labeling and GMP. Class II devices are required to also
ensure reasonable safety and efficacy through performance standards and other
controls. Class III devices must, in addition to fulfilling all other provisions
of the FDC Act, meet extensive and rigorous FDA standards that may require
clinical trials.
A manufacturer of medical devices which can establish that a new device
is "substantially equivalent" to a legally marketed Class I or Class II medical
device or to a Class III medical device for which the FDA has not required a
premarket approval application ("PMA") can seek FDA marketing clearance for the
device by filing a 510(k) Premarket Notification ("510(k) Notice"). The 510(k)
Notice may have to be supported by various types of information, including
performance data, indicating that the device is as safe and effective for its
intended use as a legally marketed predicate device.
The Company is pursuing several strategies for initiating FDA review of
its products not already approved or cleared for domestic distribution. These
strategies include alliances with other companies and selling limited licensing
rights to the Company's products to companies who agree to seek FDA approval for
them. The Company may also directly apply for FDA approval of those products.
In 1994, the FDA classified Omni-Swab as a Class I medical device. In
May 1995, in response to a 510(k) Notice made by the Company, the FDA approved
Saliva.Sampler as a Class II device, accepting the Company's contention that,
under the 510(k) application guidelines, Saliva.Sampler demonstrated
"substantial equivalency" to other non-saliva collection devices already in use
for general purposes.
The Company believes that all of its HIV products would, if submitted
to the FDA, fall under the Class III category of medical devices. This includes
the Company's saliva collection device, Omni-SAL, if marketed as a specimen
collection device for HIV testing. The Company
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believes its proposed assay for H. pylori, however, could be approved as a Class
II device. There is no assurance that the Company's position with respect to
these products will prevail with the FDA.
If human clinical trials of a proposed device are required, and the
device presents "significant risk," the manufacturer or distributor of the
device will have to file an Investigational Device Exemption ("IDE") with the
FDA prior to commencing human clinical trials. The IDE must be supported by
data, typically including the results of animal and mechanical testing. If the
IDE application is approved, human clinical trials may begin at a specific
number of Investigational sites and are limited to the number of subjects
approved by the FDA. The Company has generated supporting data for its
immunoassays for diseases and conditions such as HIV infection, schistosomiasis
and H. pylori.
In 1994, the FDA granted the Company's request to classify Omni-SAL
under the IDE provisions of the FDC Act, allowing the Company to manufacture and
distribute Omni-SAL for the limited purpose of demonstrating the efficacy of
using saliva as a diagnostic medium for HIV antibody testing.
In 1995, the FDA authorized the Company to begin clinical trials in the
United States to determine whether Omni-SAL could be used as a saliva collection
device for HIV testing in conjunction with certain laboratory assays. The
Company has not conducted any clinical trials for Omni-SAL in the United States,
although preclinical data has been generated for the device in the United States
and foreign countries. The Company would be required to use other, FDA- approved
confirmatory testing procedures during the trials.
If and when the Company's products are approved by the FDA, they will
be subject to continuing regulation by the FDA and state and local agencies. The
FDA has established a number of requirements for manufacturers, including GMP
(see discussion above), and requirements regarding labeling and reporting. The
failure to comply with these requirements can result in regulatory action,
including warning letters, product seizure, injunction, product recalls, civil
fines and prosecution. An FDA enforcement action could have a material adverse
effect on the Company. To date, the Company has not been the subject of any FDA
enforcement actions. The FDA also audits clinical studies for compliance with
applicable requirements.
CLINICAL LABORATORY IMPROVEMENT ACT. In 1988, Congress passed the
Clinical Laboratory Improvement Act ("CLIA '88"). CLIA '88 greatly expanded the
number of laboratories that are subject to regulation. CLIA '88 sets forth
performance standards that apply to subject laboratories. In February 1992,
final regulations implementing CLIA '88 were issued. The Company believes these
complex regulations may have a significant effect on diagnostic testing in the
United States.
While it is difficult to predict the ultimate impact of CLIA '88 on the
Company, it is possible that it may make it more costly and difficult for
physicians to operate their own office laboratories, resulting in closure of
some of these small private laboratories. This may reduce demand for some of the
Company's products.
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New guidelines established by the FDA to implement CLIA '88 may also
require the Company to generate additional testing data to support a PMA or
510(k) Notice.
OVERSEAS REGULATION AND DISTRIBUTION.
Regulatory approval for medical devices vary from country to country.
Some countries do not require regulatory approval when registering a product for
sale to the private sector. Others rely on evaluations by agencies such as the
WHO. The Company has submitted Sero.Strip to WHO for evaluation, and intends to
submit its other HIV tests to WHO as well. 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 is being distributed or has been approved as a sample
collection device for HIV testing and other uses in the following countries:
Argentina, The Bahamas, Brazil, Canada, China, Denmark, England, Finland,
France, Greece, Ireland, Israel, Luxembourg, Mexico, Malaysia, New Zealand,
Norway, Peru, Philippines, Singapore, Switzerland, Thailand and Turkey. The
Company has submitted Omni-SAL for approval as a sample collection device for
HIV testing and other uses in France and South Africa, and plans to apply for
approval in several other European and Middle Eastern nations.
2. Omni-Swab is distributed in the United States and in many of the
countries in which Omni-SAL is distributed.
3. Saliva.Sampler is distributed mainly in the United States.
4. Sero.Strip was approved for use and sale in Russia by the Russian
Ministry of Health in 1996, and has received a certificate of free sale from
Singapore, where it is manufactured, which allows Sero.Strip to be manufactured
in Singapore and exported to other countries. Sero.Strip is also approved in the
United Kingdom. It is currently being distributed in Brazil, Malaysia and
Turkey. Sero.Strip is pending approval (where needed) in other Asian, European
and Latin American countries. The Center for Disease Control in Atlanta, Georgia
has concluded a preliminary study using Sero.Strip and ordered more of the tests
for research use in Atlanta and epidemiological purposes overseas.
5. Hema.Strip has been approved for use and sale in Russia, is pending
approval in India and the United Kingdom, and is being evaluated by several
health institutes in Malaysia. In April 1996, Hema.Strip received a certificate
of free sale from Singapore. Like Sero.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.
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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.
INTELLECTUAL PROPERTY
The Company has applied for patents in the United States and other
countries on certain aspects relating to Omni-SAL, a saliva collection device,
and Omni-Swab, a medical specimen collection device. To date, nine such patents
have been awarded, four in the United States, and five in other countries.
Expiration dates for the patents range from 2008 to 2012. The Company intends to
seek other patent protections in the United States and other countries for
certain aspects relating to its collection devices and rapid test technology. No
assurance can be given that patents will be issued to the Company pursuant to
its patent applications in the United States and abroad, or that the Company's
patent portfolio will provide the Company with a meaningful level of commercial
protection.
The Company also depends on trade secrets and proprietary information
to protect much of the technology that it has developed. The Company has entered
into confidentiality agreements with its employees, certain third party
suppliers, potential customers, joint venture
22
<PAGE>
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.
EMPLOYEES
As of December 31, 1996, the Company employed forty full-time persons,
including eight engaged in research and development, three in regulatory
affairs, sixteen in manufacturing, four in sales and marketing, and nine in
administration. None of the Company's employees are covered by collective
bargaining agreements, and the Company believes its relations with its employees
are good.
PROPERTIES
The Company's executive offices and laboratory facility are located at
11719 NE 95th Street, Vancouver, Washington in an approximately 10,500 square
foot facility. The premises are occupied pursuant to a lease with an
unaffiliated party which expires in August 2002.
The Company leases from an unaffiliated party approximately 4,500
square feet in Singapore which it uses for offices and manufacturing facilities.
The lease, which was set to expire in June 1997, has been extended to May 1998.
23
<PAGE>
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, 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.
Other than that set forth above, to the best knowledge of the Company,
no other material legal proceedings are pending or have been threatened.
24
<PAGE>
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. 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
REVENUES. The Company's revenues consist primarily of product sales and
license revenue. Revenues from product sales increased 37% to $715,800 in 1996
from $522,800 in 1995. The increase in product sales revenue was primarily
attributable to increased sales of Omni-SAL, Omni-Swab, Sero.Strip HIV and
Hema.Strip HIV. License revenue decreased to $25,000 in 1996 from $60,000 in
1995. The decrease in license revenue was attributable to fewer licensing
agreements in 1996.
COST OF PRODUCTS SOLD. Costs of products sold increased to $472,100
(66% of product sales) in 1996 from $149,600 (29% of product sales) in 1995.
Cost of products sold increased as a percentage of product sales resulting from
additional costs to produce the products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development ("R&D")
expenses increased 15% to $1,040,000 in 1996 from $903,000 in 1995, primarily as
a result of expanded R&D for product development for Saliva.Strip HIV,
Stat.Simple (a H.pylori rapid test) and rapid tests for hepatitis.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased slightly to $3,911,600 in 1996 from $3,608,400
in 1995, primarily as a result of increased workforce and facilities.
INTEREST EXPENSE AND LOAN FEES. Interest expense and loan fees
decreased to $28,000 in 1996 from $557,700 in 1995, primarily as a result of the
Company engaging in fewer financial loan transactions requiring fees and
interest.
INCOME TAXES. The Company is in a net deferred tax asset position and
has generated net operating losses to date. Accordingly, no provision for or
benefit from income taxes has been recorded in the accompanying statements of
operations. The Company will continue to provide a
25
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its capital requirements
through proceeds from its public offering of stock in March 1993 and the
exercise of common stock purchase warrants pursuant to such offering, proceeds
from private sales of convertible debentures in 1992 through 1995 and 1997,
proceeds from private placements of common stock in 1994 and 1995, and the
exercise of common stock purchase warrants and stock options in 1996.
Cash used in operating activities in 1996 was $4,065,470. This was
primarily a result of a net loss of $5,152,399, and adjustments for depreciation
and amortization and the write-off of goodwill. See Note 3 of Notes to
Consolidated Financial Statements.
Cash used in investing activities in 1996 was $453,400. This was
primarily a result of the placement of restricted cash as collateral for bank
borrowings, and purchase of manufacturing equipment. The Company has no material
commitments for the capital expenditures at December 31, 1996.
Cash provided by financing activities in 1996 was $2,607,000. This was
primarily a result of proceeds of $2,547,400 from the exercise of options and
warrants to purchase common stock.
In 1995, the Company purchased the minority interest in its 90% owned
subsidiary, SDS Asia and the minority interest in SDS Asia's 83% owned
subsidiary. Excess purchase price over net assets acquired of $600,000 was
recorded. At December 31, 1996, the Company recorded a charge of $540,000, which
represented the balance of the goodwill associated with this transaction. See
Note 3 of Notes to Consolidated Financial Statements.
The Company's capital requirements have been and will continue to be
significant. The Company's capital base is smaller than that of many of its
competitors, and there can be no assurance that the Company's cash resources
will be able to sustain its business. The Company currently has an accumulated
deficit due to its history of losses. The Company is dependent upon its effort
to raise capital to finance its future operations, including the cost of
manufacturing and marketing of its products, to conduct clinical trials and
submissions for FDA approval of its products and to continue the design and
development of its new products. Marketing, manufacturing and clinical testing
may require capital resources substantially greater than the resources available
to the Company. The Company will continue to seek public or private placement of
its equity securities and corporate partners to develop products.
In March 1997, the Company raised net proceeds of $1,370,000 from the
private sale of $1,500,000 in principal amount of the Company's 7.5% Convertible
Debentures due February 28, 1999 (the "Debentures"), in a offering conducted
pursuant to Regulation D. Holders of the
26
<PAGE>
Debentures have 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. 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., $1.98375 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
--------- ---------
1996
- ----
First Quarter ............................................ $ 2.44 $ 0.47
Second Quarter ........................................... 5.00 1.63
Third Quarter ............................................ 3.13 1.31
Fourth Quarter ........................................... 2.34 1.06
1995
- ----
First Quarter ............................................ $ 2.88 $ 0.56
Second Quarter ........................................... 4.13 2.31
Third Quarter ............................................ 4.50 2.81
Fourth Quarter ........................................... 3.19 0.69
Warrants to purchase 1,380,000 shares of Common Stock at $3.00 per
share, which expire on 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
27
<PAGE>
Stock. There were no cash dividends declared or paid in fiscal years 1996 or
1995. The Company does not anticipate declaring such dividends in the
foreseeable future.
If the Company should continue to experience losses from operations, it
may be unable to maintain the standards for continued quotation on NASDAQ and
the Common Stock could be subject to removal from the NASDAQ system. Trading, if
any, in the Common Stock would thereafter be conducted in the over-the-counter
market on an electronic bulletin board established for securities that do not
meet the NASDAQ listing requirements or in what are commonly referred to as the
"pink sheets". As a result, an investor would find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, the Company's
securities. In addition, if the Company's securities were removed from the
NASDAQ system, they would be subject to so-called "penny stock" rules that
impose additional sales practice requirements on broker-dealers who sell such
securities. Consequently, removal from the NASDAQ system, if it were to occur,
could affect the ability or willingness of broker-dealers to sell the Company's
securities and the ability of purchasers of the Company's securities to sell
their securities in the secondary market.
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 Director and Managing Director of SDS
International, Ltd.
Hans R. Vauthier 72 Director
Michael A. Grant 52 Vice President, Operations
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., has served on the Board of Directors of the Company
since November 1993. 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
28
<PAGE>
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.
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.
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 $100,000 (collectively, the "named executive
officers") for the fiscal year ended December 31, 1996.
29
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Compensation(1) Long Term Compensation
---------------------------------------- ---------------------------
Securities
Other Annual Underlying
Name and Principal Position Year Salary Compensation Options
($)(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 and will expire June 1,
1997. 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").
30
<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.
31
<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
32
<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.
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.
In 1995, the Company acquired from Dr. David Barnes, Managing Director
of SDS-UK and a Director of the Company, his 10% interest in SDS-UK. The Company
has agreed to issue 350,000 shares of the Company's Common Stock to Dr. Barnes
in consideration of this transaction.
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.
33
<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 February 28, 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 or nominee for 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.
34
<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) 2.27%
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) 2.13%
c/o SDS International Ltd. (UK)
11 Sovereign Close
Sovereign Court
London, England E1 9HW, UK
Willfried Schramm, Ph.D. 75,000(4) .34%
23000 Schauer Road
Battleground, WA 98604
Ronald L. Lealos 1,181,912(5) 5.36%
1477 SE Columbia Shores
Vancouver, WA 98662
- ---------------------------------------------------------------------------------------
All Executive Officers, Directors and
Director nominees as a group (5 persons). 2,288,828(6) 10.38%
- ---------------------------------------------------------------------------------------
<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 February 28, 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.
(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.
35
<PAGE>
(4) Includes options to purchase 75,000 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 owners 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 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, none of the Selling Shareholders
owned any shares of Common Stock other than those offered hereby. 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.
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
36
<PAGE>
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. 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 and Grayson, and Tail
Wind 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, 22,040,785 shares of Common Stock were outstanding.
The Common Stock is traded in the over-the-counter market under the
NASDAQ symbol SALV. The closing bid and ask prices of the Common Stock on May
___, 1997 as reported by NASDAQ were $_______ and $_______, respectively.
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.
37
<PAGE>
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. 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. 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) $1.98375, 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 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.
38
<PAGE>
LEGAL MATTERS
The validity of the securities being offered will be passed upon for
the Company by Bryan Cave LLP, 700 Thirteenth Street, Washington, D.C. 20005.
EXPERTS
The financial statements of the Company for the fiscal years ended
December 31, 1995 and 1996 included in this Prospectus and in the Registration
Statement have been audited by Hollander, Gilbert & Co., independent certified
public accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of said firm as experts in
auditing and accounting.
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.
* * *
39
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Saliva Diagnostic Systems, Inc.
We have audited the accompanying consolidated balance sheets of Saliva
Diagnostic Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Saliva Diagnostic
Systems, Inc. and subsidiaries as of December 31, 1996 and 1995 and the results
of operations, stockholders' equity and cash flows for the years then ended, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's significant operating losses and significant
capital requirements raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Hollander, Gilbert & Co.
Los Angeles, California
March 21, 1997
F-1
<PAGE>
<TABLE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash .......................................................................... $ 776,380 $ 2,688,014
Accounts receivable ........................................................... 178,436 43,291
Inventories (Note 4) .......................................................... 268,431 300,161
Prepaid expenses .............................................................. 34,425 28,956
------------ ------------
TOTAL CURRENT ASSETS ...................................................... 1,257,672 3,060,422
------------ ------------
PROPERTY AND EQUIPMENT, Net (Note 5) .............................................. 493,649 470,593
------------ ------------
OTHER ASSETS
Deposits ...................................................................... 188,647 70,019
Restricted cash (Note 8) ...................................................... 120,500
Patents and trademarks, net of accumulated
amortization of $39,183 in 1996 and $29,983 in 1995 ......................... 117,733 127,057
Goodwill, net of accumulated amortization
of $15,000 in 1995 (Note 3) ................................................. 585,000
Prepaid loan fees (Note 6) .................................................... 45,367
------------ ------------
TOTAL OTHER ASSETS ........................................................ 426,880 827,443
------------ ------------
$ 2,178,201 $ 4,358,458
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses ......................................... $ 818,073 $ 500,078
Accrued interest payable ...................................................... 68,240 49,703
Current portion of long-term debt and
obligations under capital leases (Note 8) ................................... 35,057 15,869
Convertible debentures (Note 6) ............................................... 2,785,000
------------ ------------
TOTAL CURRENT LIABILITIES ................................................. 921,370 3,350,650
------------ ------------
LONG-TERM DEBT AND OBLIGATIONS UNDER
CAPITAL LEASES, net of current portion (Note 8) ................................. 96,199 30,497
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 8 and 9)
STOCKHOLDERS' EQUITY (Note 6)
Common stock - authorized 25,000,000 shares, $.01 par value,
issued and outstanding 22,040,785 in 1996 and 13,126,366 in 1995 ............ 220,408 131,264
Additional paid-in capital .................................................... 22,998,552 17,726,578
Note receivable related to sale of stock ...................................... (83,825) (83,825)
Cumulative foreign translation adjustment ..................................... (60,257) (34,859)
Accumulated deficit ........................................................... (21,914,246) (16,761,847)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ................................................ 1,160,632 977,311
------------ ------------
$ 2,178,201 $ 4,358,458
============ ============
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
F-2
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
------------ ------------
REVENUES
Product sales .......................... $ 715,780 $ 522,814
Technology licensing income ............ 24,870 59,855
Other fees and interest income ......... 99,418 38,630
------------ ------------
TOTAL REVENUES ...................... 840,068 621,299
------------ ------------
COSTS AND EXPENSES
Cost of product sold ................... 472,142 149,629
Research and development ............... 1,040,057 903,386
Selling, general and administrative .... 3,911,587 3,608,353
Write-off of Goodwill .................. 540,000
Interest expense and loan fees ............... 28,681 557,701
------------ ------------
TOTAL COSTS AND EXPENSES ............ 5,992,467 5,219,069
------------ ------------
NET LOSS ..................................... $ (5,152,399) $ (4,597,770)
============ ============
NET LOSS PER SHARE ........................... $ (0.26) $ (0.46)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSANDING.. 20,100,000 9,900,000
============ ============
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
<TABLE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<CAPTION>
Common Stock Note Cumulative
----------------------- Additional Receivable Foreign
Shares Paid-in (Sale of Translation Accumulated
Outstanding Amount Capital Stock) Adjustment Deficit Total
------------- -------- ----------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994............... 6,304,332 $ 63,043 $12,434,356 $ (83,825) $ (32,644) $(12,164,077) $ 216,853
Sale of common stock in private
offerings.............................. 3,715,000 37,150 1,935,350 1,972,500
Issuance of shares to officer for
compensation........................... 230,000 2,300 127,700 130,000
Convertible debentures converted into
common shares.......................... 1,726,572 17,266 945,234 962,500
Issuance of warrants to consultants...... 780,000 780,000
Issuance of options in settlement
agreement.............................. 88,750 88,750
Issuance of shares to consultants........ 100,000 1,000 149,000 150,000
Options exercised........................ 170,000 1,700 154,300 156,000
Underwriter's warrants exercised......... 180,462 1,805 268,888 270,693
Consulting warrants exercised............ 250,000 2,500 247,500 250,000
Issuance of shares to acquire minority
interest in subsidiaries............... 450,000 4,500 595,500 600,000
Foreign translation adjustment........... (2,215) (2,215)
Net loss for the year.................... (4,597,770) (4,597,770)
------------- -------- ----------- ---------- ----------- ------------- -----------
BALANCE, December 31, 1995............... 13,126,366 131,264 17,726,578 (83,825) (34,859) (16,761,847) 977,311
Warrants exercised....................... 2,580,861 25,807 2,444,711 2,470,518
Options exercised........................ 104,750 1,048 75,802 76,850
Issuance of shares in settlement
agreement.............................. 16,500 166 53,584 53,750
Convertible debentures payable
converted into common shares........... 6,212,308 62,123 2,697,877 2,760,000
Foreign translation adjustment........... (25,398) (25,398)
Net loss for the year.................... (5,152,399) (5,152,399)
------------- -------- ----------- ---------- ----------- ------------- -----------
BALANCE, December 31, 1996............... 22,040,785 220,408 $22,998,552 $ (83,825) $ (60,257) $(21,914,246) $1,160,632
============= ======== =========== ========== =========== ============= ===========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
F-4
<PAGE>
<TABLE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ................................................ $(5,152,399) $(4,597,770)
Adjustments to reconcile net loss
to net cash used by operating activities:
Cumulative foreign translation adjustment ....... (25,398) (2,215)
Depreciation and amortization ................... 290,929 749,750
Expenses satisfied with issuance of shares ...... 53,750 1,148,750
Write-off of goodwill ........................... 540,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ... (135,145) 3,748
(Increase) decrease in inventories ........... 31,730 (207,561)
(Increase) decrease in prepaid expenses ...... (5,469) (28,956)
Increase (decrease) in accounts payable
and accrued expenses ....................... 336,532 (65,317)
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES .......... (4,065,470) (2,999,571)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Placement of restricted cash ........................ (120,500)
Patents and trademarks .............................. 124 (4,310)
Deposits ............................................ (118,628) (5,863)
Purchase of equipment ............................... (214,418) (118,295)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES ........ (453,422) (128,468)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Convertible debentures .............................. 3,128,900
Repayments of convertible debentures ................ (25,000) (37,500)
Sale of stock - private placement and exempt offering 1,972,500
Proceeds from long-term debt ........................ 109,476
Repayment of long-term and obligations
under capital leases .............................. (24,586) (20,971)
Stock warrants and options exercised ................ 2,547,368 676,693
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .... 2,607,258 5,719,622
----------- -----------
NET INCREASE (DECREASE) IN CASH ......................... (1,911,634) 2,591,583
CASH BALANCE, Beginning of period ....................... 2,688,014 96,431
----------- -----------
CASH BALANCE, End of period ............................. $ 776,380 $ 2,688,014
=========== ===========
INTEREST AND LOAN FEES PAID ............................. $ 10,144 $ 565,035
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Shares issued in lieu of fees and expenses .......... $ 53,750 $ 1,148,750
Acquisition of minority interest .................... $ 600,000
</TABLE>
F-5
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - The Company is primarily engaged in the
development, manufacture and marketing of rapid immunoassays for use in the
detection of infectious diseases and other conditions. The Company has also
developed and distributes medical specimen collection devices.
Principles of Consolidation - The financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
Impairment of Long-Lived Assets - The Company periodically assesses the
recoverability of the carrying amounts of long-lived assets, including
intangible assets. A loss is recognized when expected undiscounted future
cash flows are less than the carrying amount of the asset. The impairment
loss is the difference by which the carrying amount of the asset exceeds its
fair value. As a result of its review, the Company wrote-off goodwill at
December 31, 1996 in the amount of $540,000.
Stock-Based Compensation - The Company has adopted the disclosure-only
provisions of SFAS No. 123, which retains the original accounting prescribed
by APB Opinion No. 25. As a result, options granted at fair value will not
result in charges to earnings. Disclosures are made, however, of
compensation costs determined under SFAS No. 123's fair value methodology.
Inventories - Inventories are stated at the lower of cost or market
determined on a first-in, first-out (FIFO) basis.
Property and Equipment - Property and equipment is stated at cost.
Depreciation is computed on the straight-line method based upon the
estimated useful life of the asset. Useful lives are generally as follows;
Office furniture & equipment 5 to 7 years
Machinery and Equipment 7 years
Exhibits 7 years
Vehicles 5 years
Patents and Trademarks - The costs of patents and trademarks are being
amortized on the straight line method over a 17 year life.
Goodwill - Goodwill represents the excess of the cost of companies acquired
over the fair value of their net assets at the date of acquisition and is
being amortized on the straight-line method over ten years.
Product Liability - The Company has not established any allowance for
product liability at present because of the limited distribution of its
product and limited history which reflect no instance of problems with
liability.
Income Taxes - The Company utilizes the asset and liability approach for
financial accounting and reporting for income taxes. If it is more likely
than not that some portion or all of a deferred tax asset will not be
realized, a valuation allowance is recognized.
F-6
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Loss Per Share - Loss per share is based upon the weighted average number of
common shares and common share equivalents outstanding during the periods.
Common share equivalents are not included as they are anti-dilutive.
Revenues - The Company derived revenues from two sources: sale of product
and licensing. Revenues are recognized as the service or product has been
delivered.
Research and Development - Research and development expenditures include
those costs associated with the Company's own on-going research and
development activities. All research and development costs are expensed as
incurred.
The Company has entered into various informal arrangements with certain
laboratories/manufacturers of assay kits whereby these
laboratories/manufacturers will share certain unspecified costs of research
and development. However, the Company has no obligation to perform research
and development for these entities.
Currency Fluctuations - Foreign currency transactions and financial
statements are to be translated into U.S. dollars at current rates, except
that revenues, costs and expenses are translated at average current rates
during each reporting period. The resulting translation adjustments are
recorded directly into a separate component of stockholders' equity. Gains
and losses resulting from foreign currency transactions, which are
insignificant, are included in income currently.
Reclassifications - Certain 1995 balances have been reclassified to conform
with the current year's presentation.
2. GOING CONCERN
Significant Operating Losses - Accumulated Deficit - The Company has
incurred significant operating losses since its inception, resulting in an
accumulated deficit of $21,914,246 and $16,761,847, at December 31, 1996 and
December 31, 1995, respectively. Such losses are expected to continue
through 1997 and until such time, if ever, as the Company is able to attain
sales levels sufficient to support its operations.
Significant Capital Requirements - Need for Additional Financing - The
Company's capital requirements have been and will continue to be
significant. The Company has been dependent on private placements of its
debt and equity securities and on a public offering of securities in March
1993 to fund such requirements. The Company is dependent upon its other
efforts to raise capital resources, including proceeds received from the
exercise of Warrants to finance the cost of manufacturing, marketing and
conducting clinical trials and submissions for FDA approval of its products
and continuing the design and development of the Company's new products
which utilize its rapid testing format. Marketing, manufacturing and
clinical testing may require capital resources substantially greater than
the resources currently available to the Company. There can be no assurance
that the Company will be able to obtain the additional capital resources
necessary to permit the Company to implement or continue its programs. The
Company has no current arrangements with respect to, or sources of,
additional financing and there can be no assurance that such financing will
be available on commercially reasonable terms or at all. It is not
anticipated that any of the officers, directors or shareholders of the
Company will provide any portion of the Company's future financing
requirements. (See Note 11).
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.
3. ACQUISITIONS
On September 30, 1995, the Company purchased the minority interest in its
90% owned subsidiary, Saliva Diagnostic Systems (Asia) Ltd. and the minority
interest in Asia's 83% owned subsidiary. The Company issued 350,000 shares
of its common stock valued at $500,000 to a director/stockholder of the
foreign subsidiaries and
F-7
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
100,000 shares to unrelated stockholder valued at $100,000. The assets
acquired were valued at fair market value based on the estimates of the
management of the Company which approximate the adjusted fair market value
of the shares issued.
The transaction was accounted for as a purchase and resulted in an excess of
purchase price over net assets acquired of $600,000. Amortization of
goodwill amounted to $45,000 in 1996 and $15,000 in 1995. At December 31,
1996, the Company assessed the recoverability of the Goodwill that resulted
to the write-off of the Goodwill in the amount of $540,000.
Management of the Company has reviewed the need for the Singapore operations
as were originally anticipated and have concluded that use of this location
as their primary manufacturing source is no longer required and as such have
deemed it appropriate to write off the remaining Goodwill associated with
this location.
4. INVENTORIES
Inventories consisted of the following at December 31, 1996 and 1995:
1996 1995
-------- --------
Raw materials ...................................... $253,000 $186,492
Work in process .................................... 2,495 66,807
Finished goods ..................................... 12,936 46,862
-------- --------
$268,431 $300,161
======== ========
5. PROPERTY AND EQUIPMENT
Property and Equipment consisted of the following at December 31, 1996 and
1995:
1996 1995
---------- ----------
Office Furniture & Equipment ..................... $ 114,041 $ 76,711
Machinery, Laboratory Equipment and Tooling ...... 861,957 806,918
Leasehold Improvements ........................... 97,582 38,727
Vehicle .......................................... 181,423 126,388
Exhibits ......................................... 30,955 60,710
---------- ----------
1,285,958 1,109,454
Less: accumulated depreciation and amortization... 792,309 638,861
---------- ----------
$ 493,649 $ 470,593
========== ==========
6. STOCKHOLDERS' EQUITY
Increase in Authorized Capital Stock - On February 20, 1997, the
stockholders of the Company approved an amendment to the Company's
Certificate of Incorporation to increase the authorized number of shares of
stock from 25,000,000 to 33,000,000 shares.
F-8
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Public Offering - In March 1993 the Company closed a public offering in
which it sold 1,300,000 shares of its common stock at $6.00 per share and
1,380,000 warrants to purchase 1,380,000 shares of the Company's common
stock for $7.20 per share, at $.10 per warrant. The Company received net
proceeds of $6,364,630 after expenses related to the offering of $1,573,490.
The warrants have been extended to June 30, 1997 and the exercise price has
been reduced from $7.20 to $3.00 per share.
The Company also sold for $120 to the underwriter a five-year warrant to
purchase up to 120,000 shares of common stock at $9 per share, exercisable
for four years commencing March 3, 1995 at a price of 110% of the public
offering price, as adjusted, of the common stock. During 1995, the
underwriter exercised a portion of its warrants and purchased 180,462 shares
for an aggregate amount of $270,693. During 1996, the underwriter exercised
the remaining warrants and purchased 756,361 shares at $1.00 per share.
During 1996, the Company granted new warrants to the underwriter to purchase
1,000,000 shares of common stock at $1.00 per share, all of which have been
exercised by the underwriter in 1996.
Note Receivable Related to Sale of Stock - In January 1992 the Company sold
to its President, who resigned in December 1996, 366,912 shares of common
stock for $92,970. The officer paid $9,145 and issued a note to the Company
for $83,825, payable in three years with interest of 6% per annum. These
shares were considered outstanding for all periods in the calculation of
earnings per share. The note which was originally due December 1994 was
extended until December 1995. In December 1995, the Company extended the
note for another year (see Note 8).
Convertible Debentures - During 1992, the Company sold privately $630,000 of
its 8% convertible debentures payable in May 1994 to various investors,
including $25,000 to an affiliate of the Company. These debentures can be
converted into the Company's common stock at a rate of $7.00 per share. In
May 1994 certain debenture holders converted $580,000 principal amount of
debentures into an aggregate of 580,000 shares of common stock. In November
1995, the Company repaid $25,000 principal amount of debentures including
all accrued and unpaid interest. In January 1996, the Company repaid the
remaining $25,000 debenture including all accrued and unpaid interest.
The Company raised $75,000 and $324,500 in 1993 and 1994, respectively, in a
combination of common shares, non-negotiable two year 8% convertible
debentures convertible at a rate of $2.00 per share after one year from the
date of issuance and three year warrant to purchase additional shares of
common stock at $3.50 per share. Each $50,000 unit consisted of 12,500
common shares, a $25,000 convertible debenture and a warrant to purchase
5,000 shares of common stock. The Company issued a total of 99,875 shares of
common stock and $199,750 convertible debentures and warrants to purchase a
total of 39,950 shares of common stock. In July 1994, certain debenture
holders converted $149,750 principal amount of debentures into an aggregate
of 149,750 shares of common stock. In September 1995, certain debenture
holders converted $37,500 principal amount of debentures into an aggregate
of 37,500 shares of common stock. In November 1995, the Company repaid
$12,500 principal amount of debentures including all accrued and unpaid
interest.
During 1995, the Company sold privately $3,685,000 of its 9% convertible
debentures payable on October 31, 1996. The holders of the debentures are
entitled, at their option, at any time commencing 45 days after issue to
convert any or all of the original principal amount of the debentures into
shares of common stock of the Company at a conversion price for each share
of common stock equal to seventy percent (70%) of the market price (as
defined in the debenture agreement) of the common stock. In December 1995,
certain debenture holders converted $925,000 principal amount of debentures
into an aggregate of 1,689,072 shares of common stock. The Company incurred
$556,100 in loan fees of which $510,733 and $45,367 was charged to expense
in 1995 and 1996, respectively. During 1996, certain debenture holders
converted $2,760,000 principal amount of debentures into 6,212,308 shares of
common stock. All of the convertible debentures in these transactions have
been converted to common stock as of December 31, 1996.
F-9
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Private Placements - In December 1994 the Company sold 860,000 shares of
common stock for an aggregate consideration of $430,000. During 1995, the
Company, sold an additional 3,645,000 shares of common stock for $1,802,500,
including 200,000 shares issued to its President.
In November 1995, the Company, in a new private placement, sold 300,000
shares of common stock for an aggregate consideration of $300,000, including
30,000 shares to its President. The units sold included warrants to purchase
a total of 450,000 shares of common stock at an exercise price of 50% of the
closing bid price of the stock on the exercise date. All of the warrants
were exercised in 1996.
Warrants and Shares Issued to Consultants - During 1995, the Company issued
warrants to purchase a total of 650,000 shares of common stock at an
exercise price of $1.00 per share for consulting services rendered. The
warrants were valued at $1.20 per share. As of December 31, 1996, 327,500
warrants have been exercised.
In 1995, the Company issued 100,000 shares of common stock to consultants
valued at a total of $150,000.
Settlement Agreements - During 1995, the Company reached a settlement
agreement with a director of its subsidiary whereby the Company granted the
director options to purchase 100,000 shares of common stock at an exercise
price of $.60 per share. The options were valued at a total of $88,750. As
of December 31, 1996, all of these options have been exercised.
During 1996, the Company issued a total of 12,500 shares of common stock
valued at approximately $43,750 to certain unrelated individuals to settle a
dispute. Also during 1996, the Company issued 4,000 shares of common stock
valued at $10,000 as a consideration for extension of a previous note
payable to an individual.
Warrants Issued to Licensee - In March 1994, as a result of entry into a
license agreement with Orgenics, Ltd. Orgenics Ltd. was granted a three year
option, expiring in March 1997, to purchase up to $1,000,000 of shares of
common stock (but not more than 19% of the then-outstanding common stock) at
60% of the average of the closing bid and asked price for the common stock
during the ten trading days prior to such purchase.
Shares Issued to Officer - During 1995, the Company issued 230,000 shares of
common stock to its former President valued at $130,000 as additional
compensation for the year 1995.
Stock Option Plans - In March 1992, the Company established a stock option
plan (1992 Plan). The 1992 Plan, as amended, covers 350,000 shares of its
common stock. Under the terms of the 1992 Plan, the Company is authorized to
issue options to employees and directors of the Company or its subsidiaries.
Decisions such as grants to employees, the selection of recipients, number
of options, the exercise price, duration and other terms, including whether
the options shall be incentive stock options as defined by the Internal
Revenue Code of 1986 or non-qualified options, are subject to the discretion
of the Board of Directors except that the exercise price may not be less
than 110% of the fair market value at the time of grant to holders of in
excess of 10% of the Company's common stock.
In addition, the 1992 Plan provides for automatic grants to each
non-employee director of the Company of 3,000 shares of common stock at the
date of the public offering or, in the case of election to the Board of
Directors after consummation of said offering, upon such election at a price
of 100% of fair market value of the common stock at the time of grant. The
options may be exercised after six months and before five years from the
date of grant.
In July 1994, the Company established a stock option plan (1994 Plan). The
1994 Plan, covers 350,000 shares of its common stock. Under the terms of the
1994 Plan, the Company is authorized to issue incentive and non-statutory
stock options to employees, consultants, advisors and/or directors. Options
shall be exercisable at the fair market value at the date of the grant
except options issued to persons who own in excess of 10% of the Company's
stock may be no less than 110% of the fair market value.
In addition, the 1994 Plan provides for automatic grants to all directors
and advisors who are not employees of the Company or its subsidiaries of
3,000 fully vested non-qualified options at the time this Plan was adopted
by
F-10
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
the Board or upon election or appointment to the Board, if not a member of
the Board at the time this plan was adopted by the Board.
On March 2, 1995, the Company's Board of Directors granted options to
purchase 997,000 shares, including 400,000 shares to its former President,
of the Company's common stock to its employees, outside of the above Stock
Option Plans. Such options are exercisable on March 2, 1995, at $1.00 per
share and expire on March 2, 1998.
The following table summarizes the stock options activity for the years 1996
and 1995:
Number Option Price
of Shares Range
---------- ------------------
Outstanding at December 31, 1994 ..... 660,000 $.60 to $6.875
Options granted .................. 997,000 $1.00
Options exercised ................ (170,000) $.60 to $1.375
Options expired or canceled ...... (53,000) $1.00 to $6.875
----------
Outstanding at December 31, 1995 ..... 1,434,000 $.60 to $5.50
Options granted .................. 302,500 $.43 to $2.38
Options exercised ................ (104,750) $.60 to $1.00
Options expired or canceled ...... (1,000) $.60
----------
Outstanding at December 31, 1996 ..... 1,630,750 $.60 to $5.50
==========
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". Accordingly, no compensation cost has been recognized for the
stock options. Had compensation cost for the Company's stock options been
determined based on the fair value at the grant date for options granted in
1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's
net loss and loss per common share would have been increased to the pro
forma amounts indicated below:
1996 1995
------------ ------------
Net loss - as reported ............... $(5,152,399) $(4,497,770)
Net loss - pro forma ................. $(5,518,599) $(5,325,580)
Loss per common share - as reported .. $ (0.26) $ (0.46)
Loss per common share - pro forma .... $ (0.27) $ (0.54)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
1996 1995
------ ------
Expected dividend yield ................................ 0% 0%
Expected stock price volatility ........................ 150% 106%
Risk-free interest rate ................................ 6% 6%
Expected life of options - years ....................... 3 3
The weighted average fair value of options granted during 1996 and 1995 was
$1.21 and $0.73, respectively.
F-11
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. INCOME TAXES
The Company has a net operating loss carryforward of approximately $17.5
million which is available to offset future taxable income, if any, expiring
through the year 2011. The Company has not recorded any deferred tax asset
as a result of the net operating loss carryforward as it has provided a 100%
allowance against this asset.
8. COMMITMENTS AND CONTINGENCIES
Employment Agreements - The Company has entered into various three year
employment agreements with certain officers. These employment agreements
provide for minimum annual compensation of between $65,000 and $126,000. In
addition, each employment agreement provides for bonuses, cost of living
increases, reimbursement of business expenses, health insurance and related
benefits.
In January 1997, a lawsuit was filed by the former President of the Company,
who resigned in December 1996. The complaint in the lawsuit alleged various
breach of contract claims. This lawsuit was recently dismissed without
prejudice as a prerequisite to a settlement agreement between the former
President and the Company currently in the process of being documented.
Long-Term Debt and Obligations under Capital Leases - The Company borrowed
$109,476 from a certain bank in 1996. The note carried an interest rate of
6.940% and is payable $2,162.54 per month for 60 months. The note is secured
by a time deposit in the amount of $120,500. The Company has acquired
vehicles under notes requiring 48 to 60 payments of $1,842 per month
including interest at 6% to 10% per annum.
The following represents the maturity schedule as of December 31, 1996:
1997................. $ 35,057
1998................. 36,792
1999................. 22,536
2000................. 24,151
2001................. 12,720
--------
Total................ 121,256
Less current portion. 35,057
--------
$ 96,199
========
Litigation - A former director and officer of the Company has filed a
complaint in Federal court listing several causes of action against the
Company and the individual defendants, including breach of employment
agreement with the Company, intentional interference with contract by the
individual defendants, slander and deceptive trade practices. The complaint
seeks damages and punitive damages in an unspecified amount. The Company
believes this complaint is without merit as the plaintiff was fired for
cause and intends to vigorously defend itself.
9. OPERATING LEASES
The Company leases its offices and laboratory spaces, under operating leases
with initial terms of three to seven years. Future minimum lease payments by
year and in the aggregate, under noncancelable operating leases with initial
or remaining lease terms in excess of one year, consisted of the following
at December 31, 1996:
F-12
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Year Ended December 31,
-----------------------
1997................... $199,101
1998................... 150,552
1999................... 148,180
2000................... 153,036
2001................... 153,036
Thereafter............. 102,024
--------
$905,929
========
Rent expense for the years ended December 31, 1996 and 1995 was $301,016 and
$237,855, respectively.
10. SEGMENT INFORMATION
Information about the Company's operations in different geographic areas
follows:
1996 1995
----------- -----------
Product sales:
United States ............ $ 393,635 $ 317,812
Asia ..................... 79,218 70,696
United Kingdom ........... 242,927 134,306
----------- -----------
Total ............. $ 715,780 $ 522,814
=========== ===========
Operating profit (loss)
United States ............ $(4,407,954) $(3,959,955)
Asia ..................... (621,958) (497,969)
United Kingdom ........... (122,487) (139,846)
----------- -----------
Total ............. $(5,152,399) $(4,597,770)
=========== ===========
Identifiable assets
United States ............ $ 1,687,866 $ 3,342,815
Asia ..................... 368,562 955,776
United Kingdom ........... 121,773 59,867
----------- -----------
Total ............. $ 2,178,201 $ 4,358,458
=========== ===========
Customer Concentration - During 1996, three customers accounted for
approximately 20%, 18% and 11% of total sales, respectively. During 1995,
two customers accounted for approximately 40% and 10% of total sales,
respectively.
11. BORROWINGS SUBSEQUENT TO YEAR-END
In March 1997, the Company raised net proceeds of $1,370,000 from private
placement of 7.5% convertible debentures. The principal amounts of the
debentures are due on February 28, 1999.
F-13
<PAGE>
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.............................................................2
Risk Factors...................................................................5
The Company...................................................................12
Management's Discussion and Analysis..........................................25
Market for Registrant's Common Equity and Related
Stockholder Matters........................................................27
Management....................................................................28
Executive Compensation and Other Matters......................................29
Security Ownership of Certain Beneficial Owners and Management................34
Selling Shareholders..........................................................36
Description of Securities.....................................................37
Legal Matters.................................................................39
Experts.......................................................................39
Additional Information........................................................39
Index to Financial Statements................................................F-1
Until ______, 1997 (25 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.
1,668,500 SHARES OF COMMON STOCK
PROSPECTUS
MAY __, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the
securities being registered hereby will be borne by the Company and are
estimated to be as follows:
Registration Fee....................................................$ 733.13
Legal Fees.......................................................... 30,000.00*
Accounting Fees..................................................... 5,000.00*
Miscellaneous....................................................... 5,000.00*
------------
Total..........................................................$ 40,733.13*
============
- ---------------
* Estimated
INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law empowers a
corporation to indemnify its directors and officers and to purchase insurance
with respect to liability arising out of their capacity or status as directors
and officers provided that this provision shall not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) arising under Section 174 of the General Corporation Law of Delaware, or
(iv) for any transaction from which the director derived an improper personal
benefit.
The Delaware Corporation Law provides further that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors and officers may be entitled under the corporation's by-laws, any
agreement, vote of shareholders or otherwise.
Article Ten of the Company's Certificate of Incorporation eliminates
the personal liability of directors to the fullest extent permitted by Section
145 of the Delaware Corporation Law.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such persons
in their official capacities if such person acted in good faith and in a manner
that he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
II-1
<PAGE>
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES
ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE
COMPANY PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT
IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION
IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS THEREFORE UNENFORCEABLE.
EXHIBITS.
Exhibit No. Description
- ----------- -------------------------------------------------------------------
2.1 Certificate of Incorporation, as amended, incorporated by reference
to Exhibits 2.1 through 2.6 to the Company's Registration Statement
on Form S-1 (Registration No. 33-46648) (the "Form S-1") and to
Exhibit 2.7 to the Company's Annual Report on Form 10-KSB for its
fiscal year ended December 31, 1995 (the "1995 10-KSB").
2.2 Certificate of Amendment to the Company's Certificate of
Incorporation, dated February 25, 1997, incorporated by reference
to Exhibit 2.2 to the Company's Annual Report on Form 10-KSB for
its fiscal year ended December 31, 1996 (the "1996 10-KSB").
3.1 Company's By-laws, incorporated by reference to Exhibit 3.1 to the
Form S-1.
4.1 Form of Underwriter's Warrant, incorporated by reference to Exhibit
4.2 to the Form S-1.
4.2 Warrant issued to Whale Securities Co., L.P. for 1,000,000 shares,
incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-95172).
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.
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.
II-2
<PAGE>
10.4 1992 Stock Option Plan, incorporated by reference to Exhibit 10.1
to the Form S-1.
10.5 1994 Stock Option Plan, incorporated by reference to Exhibit A to
the Proxy Statement for the Company's 1994 Annual Meeting.
10.6 Lease Agreement, dated June 13, 1994, between Technology Parks
Private Limited and Saliva Diagnostic Systems (Singapore) Pte.
Ltd., incorporated by reference to Exhibit 10.2 to the 1995 10-KSB.
10.7 Amendment, dated February 20, 1997, to Lease Agreement, dated June
13, 1994, between Technology Parks Private Limited and Saliva
Diagnostic Systems (Singapore) Pte. Ltd., incorporated by reference
to Exhibit 10.7 to the 1996 10-KSB.
10.8 Lease Agreement between the Company and East Ridge Business Park,
incorporated by reference to Exhibit 10.14 to the Form S-1.
10.9 Lease Agreement for additional premises between the Company and
East Ridge Business Park, incorporated by reference to Exhibit 10.4
to the Company's Registration Statement on Form SB-2 (Registration
No. 33-95172).
10.10 Amendment, dated June 14, 1996, to Lease Agreement between the
Company and East Ridge Business Park, incorporated by reference to
Exhibit 10.10 to the 1996 10-KSB.
10.11 License Agreement, dated March 22, 1994, between the Company and
Orgenics, Ltd., incorporated by reference to Exhibit 10.7 to the
1993 10-KSB.
10.12 License Agreement between Saliva Diagnostic Systems, Inc. and
Saliva Diagnostic Systems (Singapore) Pte. Ltd., incorporated by
reference to Exhibit 10.10 to the Company's Annual Report on Form
10-KSB for its fiscal year ended December 31, 1994 (the "1994
10-KSB")
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).*
- ---------------
* To be filed by amendment.
II-3
<PAGE>
UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions or otherwise, the
Company has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(b) The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10 (a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in this Registration Statement;
(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.
II-4
<PAGE>
(5) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
RECENT SALES OF UNREGISTERED SECURITIES.
In April 1995, the Company sold an aggregate of 4,545,000 shares of
Common Stock to the following persons, in the amount set forth opposite their
names below in consideration for an aggregate of approximately $2,200,000.
Name Number of Shares
- ------------------------------------------------------- -----------------------
Wilshire Center Geriatrics 540,000
G&G Diagnostics LP 100,000
Etek Electronics Corp. 100,000
Oppenheimer & Co., as trustee for Joel Scheinbaum, M.D 180,000
Pension Plan
Joel Scheinbaum 210,000
Gary Nathanson 95,000
Barry Coe 100,000
Jan Gilbert 200,000
Harris Cahn Employee Retirement Plan 100,000
Ronald Lealos 200,000
Richard Kalin 50,000
Millard Zimet 50,000
Douglas Becker 50,000
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
II-5
<PAGE>
Jim Furmston 50,000
Yuan Lin 180,000
Umbria Ltd. 300,000
Jeff Tipton 50,000
Berman Group 50,000
Stephen Horowitz 50,000
Robert Shemian 25,000
In April 1995, the Company issued an option to purchase 100,000 shares
of Common Stock to Dr. Chyang Fang, a former director and employee of the
Company, in connection with the termination of Dr. Fang's employment contract
with the Company.
From October 1995 through November 1995, the Company issued 8%
convertible debentures in an aggregate principal amount of $3,685,000 to the
following persons pursuant to Regulation S under the Securities Act of 1933, as
amended. These convertible debentures were ultimately converted into 7,901,380
shares of Common Stock.
Principal Amount
Name of 9% Convertible Debenture
- --------------------------------------------------- ---------------------------
RBB Bank AG $850,000
Chumuel Lubkowski 200,000
Yacov Barber 250,000
Panshore Services, SA 500,000
Tula Businesses 500,000
International Entertainment Ventures, Ltd. 60,000
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
II-6
<PAGE>
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 $1,375,000. Holders of the
Debentures have 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. 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., $1.98375 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-7
<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
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Vancouver, State of Washington, on May 7, 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 Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
Signature Title Date
- ------------------------ ---------------------------------------- ------------
/s/ Kenneth J. McLachlan
- ------------------------ Director, President, Chief Executive May 7, 1997
Kenneth J. McLachlan Officer and Chief Financial Officer
/s/ David Barnes
- ------------------------ Director May 7, 1997
David Barnes
/s/ Hans Vauthier
- ------------------------ Director May 7, 1997
Hans Vauthier
II-8
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
We hereby consent to the use in this Registration Statement on Form SB-2 of our
report dated March 21, 1997 relating to the consolidated financial statements of
Saliva Diagnostic Systems, Inc. and subsidiaries, and to the reference to our
Firm under the caption "Experts" in the Prospectus.
/s/ Hollander, Gilbert & Co.
Hollander, Gilbert & Co.
Los Angeles
May 8, 1997