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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 1O-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number : 0-21284
SALIVA DIAGNOSTIC SYSTEMS, INC.
(Name of small business issuer in its charter)
DELAWARE 91-1549305
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
11719 NE 95TH STREET
VANCOUVER, WA 98682
(Address of principal executive offices and zip code)
(360) 696-4800
(Issuer's telephone number)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: COMMON STOCK,
PAR VALUE
$.01 PER SHARE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: Yes [ X ] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $1,422,296.
The aggregate market value of voting stock held by non-affiliates of the
Registrant at February 27, 1998 was $6,951,919, computed by reference to the
last traded sale price as reported on The Nasdaq SmallCap Market on such date.
The number of shares outstanding of the Registrant's Common Stock as of
February 27, 1998 was 30,543,475 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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SALIVA DIAGNOSTIC SYSTEMS, INC.
FORM 10-KSB INDEX
<TABLE>
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PAGE
PART I
<S> <C> <C>
Item 1 Description of Business 2
Item 2 Description of Property 11
Item 3 Legal Proceedings 11
Item 4 Submission of Matters to a Vote of Security Holders 12
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 12
Item 6 Management's Discussion and Analysis or Plan of Operation 13
Item 7 Financial Statements 17
Item 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 19
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 19
Item 10 Executive Compensation 21
Item 11 Security Ownership of Certain Beneficial Owners and Management 23
Item 12 Certain Relationships and Related Transactions 24
Item 13 Exhibits and Reports on Form 8-K 25
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
This annual report on Form 10-KSB contains forward-looking statements, within
the meaning of the Private Securities Litigation Reform Act of 1995. Forward
looking statements include, but are not limited to, those statements relating
to the ability to raise additional capital, to succeed in pending litigation,
to enter into strategic partnering arrangements, to obtain approval of Saliva
Diagnostic Systems, Inc.'s (the "Company") products as and when required by the
Food and Drug Administration ("FDA") in the United States and similar
regulatory bodies in other countries, and to obtain new distribution
agreements and increase distribution for products under existing distribution
agreements. These forward looking statements are subject to the business and
economic risks faced by the Company and the Company's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth in this Business section
and under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" below.
GENERAL
The Company develops rapid immunoassays utilizing immunochromatography for the
detection of antibodies to selected pathogens, such as the HIV, the virus that
causes AIDS, and Helicobacter pylori, a bacteria linked to peptic ulcers and
gastric cancer. In addition, the Company develops 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. In October 1997,
the Company closed its Singapore facilities and ceased operations of the
subsidiary. In 1995, the Company purchased the minority interest (10%) in Saliva
Diagnostic Systems, UK, Ltd., and as a result this entity became a wholly owned
subsidiary of the Company and was renamed SDS International, Ltd. Unless
otherwise indicated, all references to the Company include the Company and its
wholly owned subsidiaries. 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 $28,526,458 at December 31, 1997. 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 reports 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.
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 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.
Effective with the close of business on March 10, 1998, the Company's securities
were delisted from The Nasdaq SmallCap Market for failure to meet the new
Nasdsaq continued listing requirements. As a result of the Nasdaq delisting, an
investor may find it more
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difficult to dispose of, or to obtain accurate quotations as to the price of,
the Company's securities. See Item 5 - Market for Common Equity and Related
Stockholder Matters.
PRODUCTS
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(R).
The Company has commenced production and marketing of two medical specimen
collectors in the U.S.: Saliva*Sampler and Omni-Swab, and one medical specimen
collector in the U.K.: Omni-SAL(R). In addition, 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 risk markers. The Company has under
development rapid tests for hepatits and tuberculosis.
RAPID IMMUNOASSAYS. The Company continues to develop rapid immunoassays
utilizing immunochromatography for the detection of antibodies to selected
pathogens, such as HIV, the virus that causes Acquired Immune Deficiency
Syndrome ("AIDS"), and Helicobacter pylori ("H. pylori"), a bacteria linked to
peptic ulcers and gastric cancer. The Company's immunoassays are designed to
require only a few simple steps and minutes to use. The tests produce visual
results in under 20 minutes, and may be used without special equipment, storage
or training. The Company's data and independent evaluations demonstrate that its
tests are generally equivalent in performance to widely used FDA-licensed tests
for HIV.
The Company's rapid tests utilize a capillary flow assay in which all reagents
are provided on solid phases in a dried format (test strip). Buffer solution is
introduced after sample collection. The resulting mixture of sample and buffer
migrate along the test strip by capillary action, reconstituting a dye
conjugate. A red control line will develop at a designated point on the upper
portion of the strip if the assay has been performed properly and if all
reagents are functionally active. The conjugate binds in the presence of
antibodies to pre-applied antigen to form a second red line (positive) at a
designated point on the lower portion of the strip. In the absence of specific
antibodies, a second line does not develop.
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 1998. The test is currently designed
for single use and incorporates Omni-SAL, the Company's proprietary saliva
collection device. The test is currently designed to obtain results in between
10 and 20 minutes. The Company believes Saliva*Strip's temperature stability is
similar to Sero*Strip and Hema*Strip.
Stat*Simple ("Stat*Simple") is the Company's rapid assay for H. pylori
antibody detection. The device is a modification of Hema*Strip HIV and uses
whole blood for analysis. Results are available in 5 to 20 minutes. In February
1998, the Company submitted a 510(k) Premarket Notification to the Food and Drug
Administration for its Stat*Simple tests. (See "Regulation -- Food and Drug
Administration" below.)
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MEDICAL SPECIMEN COLLECTION DEVICES. The Company has commenced production and
marketing of three medical specimen collectors: Omni-SAL (R), Saliva*Sampler and
Omni-Swab.
Omni-SAL(R) is a saliva collection device with a patented volume indicator sold
to several commercial companies for use with their laboratory assays for the
detection of HIV infection, drugs of abuse and cigarette smoking. It is also
used in research to collect saliva samples for studies of infectious diseases
such as Hepatitis, tuberculosis, schistosomiasis, leptospirosis and others.
Saliva*Sampler is a saliva collection device cleared for marketing in the United
States for the collection of saliva samples for purposes not related to HIV
testing.
Omni-Swab is a sample collection device comprised of a serrated cotton swab with
an ejectable head. It is used to collect various body fluids and cells,
primarily for the purposes of DNA identification.
Saliva Filter is a component of the Omni-SAL(R) and Saliva*Sampler that extracts
saliva from the devices' collection pads and also removes debris from the
samples. Due to limited production capability, the Company does not currently
manufacture Saliva Filter and thus, has elected to use filters of other
manufacturers for use with the Omni-SAL(R) and Saliva*Sampler devices.
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 on the market 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. 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.
PRODUCT DEVELOPMENT
The Company is currently engaged in the development of rapid immunoassays to
detect antibodies to Hepatitis. In 1996, the Company entered into a
codevelopment agreement for rapid Hepatitis tests with a European vaccine
manufacturer, which supplies antigen to the Company for product development. If
a product is ultimately developed, the Company will jointly market such product
and share profits on sales with its European partner.
In 1996, the Company also entered into a cooperative research and development
agreement (CRADA) with US Navy Medical Research Unit No. 2 to develop rapid
tests for certain tropical diseases, including dengue virus, leptospirosis and
scrub typhus, to which US Naval personnel are exposed in overseas assignments.
Under the agreement, the Company will use antigen supplied by the US Navy to
develop the tests, while the Navy will provide laboratory space and staff
devoted to the project. The Company is obligated to provide remuneration of up
to $19,000 to the Navy in exchange for its services.
The Company has conducted preliminary research that indicates its rapid test
format may be expanded to detect other diseases, such as tuberculosis, measles,
malaria, rubella, tetanus, herpes, chlamydia, mumps, influenza, parvovirus,
pertussis, certain cancers, tumor markers and cardiac disease markers.
Additionally, the Company believes that, in many cases, its tests may be able to
use saliva for analysis as well as blood and serum, although research has not
been completed on this.
The Company has received an Investigational Device Exemption for Omni-SAL(R)
from the FDA which allows the Company to conduct clinical trials in the United
States for the purposes of determining whether Omni-SAL(R) may be used for
collecting saliva samples for HIV testing in conjunction with certain
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laboratory assays. The Company is considering partnering relationships to enable
it to pursue such regulatory approval and subsequently to market Omni-SAL(R) in
the United States as part of a home collection testing system for HIV infection.
The Company expended approximately $665,500 and $617,400 in research and
development costs, respectively, in fiscal years 1997 and 1996. See Note 1 of
Notes to Consolidated Financial Statements.
Limited revenues have been generated from sales of the Company's rapid testing
platforms in their current designs. The Company will be required to devote
considerable additional efforts to finalize 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.
MARKETING, SALES AND DISTRIBUTION
The Company is currently marketing its medical specimen collection devices
(Omni-SAL(R), Saliva*Sampler and Omni-Swab) in many countries and is currently
marketing two of its three HIV rapid tests (Sero*Strip HIV and Hema*Strip HIV)
outside the United States. These HIV rapid tests are not yet approved for
marketing in the United States.
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, caused the Company to include the United States
and Canada in its primary marketing strategy. Despite the lower rate of HIV
infection in the United States, the Company believes the reported benefits of
early medical intervention for those who can afford treatment will spur demand
for HIV test products in the United States. Sales of the Company's HIV-related
products in the United States are subject to obtaining FDA approval. (See
"Manufacturing and Supply" and "Regulation--Domestic Regulation", below.) The
Company intends to file with the FDA for approval of its HIV products in 1998.
To proceed with FDA approval, the Company must enter into an alliance with
a strategic partner or have available substantial cash reserves. The Company
is currently seeking an alliance.
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 has proven satisfactory in smaller countries and in Brazil,
Russia, China and Mexico, but less so in other markets, such as Thailand. In
1996, the Company appointed its first Sales and Marketing Director to represent
the Company internationally.
In November 1997, the Company signed two agreements with BioChem ImmunoSystems,
Inc.("BioChem"), a division of BioChem Pharma, Inc., a Montreal-based
conglomerate with significant international sales in infectious disease
therapies and diagnostics, for international distribution of the Company's rapid
tests for HIV infection. The Company will purchase BioChem's proprietary
peptides for HIV detection in its testing kits. In return, BioChem will purchase
certain of the Company's products for international sales under its own private
label, except in territories where the Company has pre-existing license
arrangements.
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
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Company's products except Stat*Simple in selected geographic regions outside the
United States. On May 15, 1997, the parties entered into a definitive agreement
pursuant to the letter of intent. The agreement grants to APS Canada five-year
exclusive distributorship for the designated territory. APS Canada is a division
of The APS Group of Companies, based in London, England. APS Canada provides
specialized human and veterinary medical testing services and maintains a
laboratory exclusively devoted to saliva testing.
In March 1994, the Company granted a non-exclusive, worldwide license to
Orgenics, Ltd., an Israeli corporation ("Orgenics"), pursuant to which Orgenics
may make or have made diagnostic products incorporating the Company's
Omni-SAL(R) technology, and may use, sell, or license such products worldwide
(the "License Agreement"). The License Agreement expires the later of January
31, 2111 or the date on which any patents for the Omni-SAL(R) technology expire.
Orgenics has paid the Company an initial licensing fee of $200,000 and will pay
4% royalties on sales of Orgenics' products which incorporate the Company's
Omni-SAL(R) technology. In the event the Company ceases production of
Omni-SAL(R), Orgenics, Ltd. has the option, pursuant to the License Agreement,
to purchase from the Company the molds and equipment necessary to produce
Omni-SAL(R) and would thereafter pay to the Company 6% royalties on sales of
Omni-SAL(R) products produced and sold by Orgenics, Ltd. The Company understands
that Orgenics is not currently exploiting its rights under the Company's
license. The Company is pursuing its rights to cancel the license and is
considering a new distribution arrangement with Orgenics. There can be no
assurance that such an agreement will be concluded or that Orgenics will
manufacture or sell any product which will generate royalties for the Company.
The Company also has an agreement with Fremont Novo Sciences to license and
distribute the Company's rapid diagnostic tests through the Tata Merind Group in
India. This agreement allows Fremont Novo Sciences the ability to manufacture
and distribute the Company's strip products at an equivalent quality to tests
produced in the U.S., providing that the pricing is advantageous to the Company.
Fremont Novo Sciences, through the Tata Merind Group, will also distribute the
Company's products in India.
The Company has submitted certain of its products for evaluation to the World
Health Organization ("WHO"), a division of the United Nations that maintains an
inventory of medical goods for impoverished nations and non-governmental health
organizations. Certain smaller countries without their own regulatory agencies
rely on results of WHO evaluations as part of their approval of products for use
and sale in their countries. In 1996 the Company bid for a contemplated bulk
purchase by WHO of the Company's Sero*Strip HIV. In April 1997, WHO notified the
Company that the Sero*Strip HIV was evaluated by the United Nations AIDS Program
and found to conform with its minimum requirements. Accordingly, WHO agreed to
include the Company's Sero*Strip HIV among the approved products for WHO bulk
purchases during the years ending February 28, 1998 and 1999.
Sales to Fremont Novo Sciences accounted for approximately 17% of total product
sales in 1997. Sales to three customers, Fitzco, Inc., Osborn Laboratories and
Beacon Diagnostics, Inc. accounted for approximately 20%, 18%, and 11%
respectively, of total product sales in 1996. The loss of sales to any of the
Company's major customers could have a material adverse effect on the Company's
financial condition and results of operations. (See Note 1 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 for marketing and distribution of its
products. There can be no assurance that the Company will form alliances with
potential distributors or that such distributors will be successful in promoting
the Company's products.
MANUFACTURING AND SUPPLY
Omni-SAL(R) is manufactured at Wesley Coe, Ltd. in the U.K. and distributed from
SDS International, Ltd., while Omni-Swab and Saliva*Sampler are manufactured at
MML Diagnostic Packaging, Inc. ("MML") in the United States and distributed by
the Company. 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
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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. There can be no assurance
that MML will continue to comply with GMP, that the Company will be able to
locate additional manufacturers that comply with GMP or secure agreements with
such manufacturers on terms acceptable to the Company. There can be no assurance
that MML will be able to meet the Company's requirements or that MML will
continue to manufacture Omni-Swab or Saliva*Sampler on terms acceptable to the
Company.
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 intends to outsource all manufacturing of its
products in 1998. Until outsourcing is complete, the Company believes the
equipment at its Vancouver, Washington facility will be used for primary
assembly of materials, with additional assembly and packaging to be completed at
a facility in the U.S. or U.K. The Company is required to meet certain
conditions, including compliance with applicable FDA requirements in order
to manufacture its tests at its Vancouver facility and to export its products
from there. The Company believes it is in compliance with those
requirements. In addition, the Company may be required to obtain permits in
foreign countries where its products are intended for distribution, and must
obtain separate FDA product approvals for sales within the United States. (See
"Regulation - Domestic Regulation.") Following outsourcing of manufacturing,
the Company expects to use the equipment at its Vancouver, Washington facility
solely for research and development purposes.
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 premarket approval applications ("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.
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. Two of the Company's domestically made and/or
distributed products, Omni-Swab and Saliva*Sampler, have received FDA clearance
for domestic distribution for certain limited purposes. (See also "Manufacturing
and Supply", above.)
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
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for its intended use as a legally marketed predicate device. In February 1998,
the Company filed a 510(k) Notice for its Stat*Simple H.pylori tests.
The Company is pursuing several strategies for initiating FDA review of its
products not already approved or cleared for domestic distribution. These
strategies include alliances with other companies and selling limited licensing
rights to the Company's products to companies who agree to seek FDA approval for
them.
The Company may also directly apply for FDA approval of those products.
In January 1995, the FDA classified Omni-Swab as a Class I medical device. In
August 1995, in response to a 510(k) Notice made by the Company, the FDA
approved Saliva*Sampler as a Class II device, accepting the Company's contention
that, under the 510(k) application guidelines, Saliva*Sampler demonstrated
"substantial equivalency" to other non-saliva collection devices already in use
for general purposes.
The Company believes that all of its HIV products would, if submitted to the
FDA, fall under the Class III category of medical devices. This includes the
Company's saliva collection device, Omni-SAL(R), if marketed as a specimen
collection device for HIV testing. The Company believes its proposed assay for
H.pylori, however, could be approved as a Class II device. There is no assurance
that the Company's position with respect to these products will prevail with the
FDA.
If human clinical trials of a proposed device are required, and the device
presents "significant risk," the manufacturer or distributor of the device will
have to file an Investigational Device Exemption ("IDE") with the FDA prior to
commencing human clinical trials. The IDE must be supported by data, typically
including the results of animal and mechanical testing. If the IDE application
is approved, human clinical trials may begin at a specific number of
Investigational sites and are limited to the number of subjects approved by the
FDA. The Company has generated substantial supporting data required for the IDE
for its immunoassays for diseases and conditions such as HIV infection and
schistosomiasis.
In 1994, the FDA granted the Company's request to classify Omni-SAL(R) under the
IDE provisions of the FDC Act, allowing the Company to manufacture and
distribute Omni-SAL(R) for the limited purpose of demonstrating the efficacy of
using saliva as a diagnostic medium for HIV antibody testing.
In 1995, the FDA authorized the Company to begin clinical trials in the United
States to determine whether Omni-SAL(R) could be used as a saliva collection
device for HIV testing in conjunction with certain laboratory assays. The
Company has not conducted any clinical trials for Omni-SAL(R) in the United
States due to lack of financing for such trials, although preclinical data has
been generated for the device in the United States and foreign countries.
The development, manufacture and sale of the Company's products in the United
States are subject to regulation by the FDA and other governmental agencies. The
process of obtaining FDA approval is costly and time-consuming, and there can be
no assurance that any of the Company's products not yet approved will be
approved by the FDA or other regulatory agencies. Delays in obtaining regulatory
approvals may materially adversely affect the development, testing or marketing
of the Company's products and the ability of the Company to generate product
revenues therefrom. If and when the Company's products are approved by the FDA,
they will be subject to continuing regulation by the FDA and state and local
agencies. The FDA has established a number of requirements for manufacturers,
including GMP (see discussion above), and requirements regarding labeling and
reporting. The failure to comply with these requirements can result in
regulatory action, including warning letters, product seizure, injunction,
product recalls, civil fines and prosecution. An FDA enforcement action could
have a material adverse effect on the Company. To date, the Company has not been
the subject of any FDA enforcement actions. The FDA also audits clinical studies
for compliance with applicable requirements.
OVERSEAS REGULATION AND DISTRIBUTION.
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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.
1. Omni-SAL(R) is being distributed or has been approved as a sample
collection device for HIV testing and other uses in the United Kingdom and
various other countries. The Company has submitted Omni-SAL(R) for approval as a
sample collection device for HIV testing and other uses in South Africa, and
plans to apply for approval in several other European and Middle Eastern nations
where such approval is required. Approval in South Africa is pending, subject to
the results of a clinical trial with the National Institute of Virology in
Pretoria, South Africa.
2. Omni-Swab is distributed in the United States and in many of the
countries in which Omni-SAL(R) is distributed.
3. Saliva*Sampler is distributed in the United States and Israel.
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 the
U.K. government. It is currently registered in Brazil, India, Kenya, Romania,
and Malaysia, and is pending approval (where needed) in other Asian, European,
and Latin American countries. The Center for Disease Control in Atlanta, Georgia
has concluded studies using Sero*Strip and has purchased such tests for research
use in Atlanta and for epidemiological purposes overseas.
5. Hema*Strip has been approved for use and sale in Russia. In April
1996, Hema*Strip received a certificate of free sale from Singapore, and in June
1997, the Company received a similar certificate in the U.K. This test is also
approved for sale in Brazil, Chile, Romania, Kenya, China, and Malaysia.
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. The device has been issued a certificate of free sale in the
U.K.
7. Clinical trials in the United States for Stat*Simple pylori have now
been completed and in February 1998, the Company filed a 510(k) Notice for this
product. The product is on sale in Italy, Denmark, Austria, Saudi Arabia and
Mexico, and has been issued a Certificate of Free Sale in the U.K.
COMPETITION
The market in which the Company operates, saliva and blood-based collection and
diagnostic testing, is highly competitive. The Company is aware of certain
entities, including ChemTrak, Inc., Epitope, Inc., Quidel, Inc. and Trinity
Biotech, plc and specialized biotechnology firms, as well as universities and
other research institutions, which have developed or are developing technologies
and products which are competitive with Omni-SAL(R) and the Company's products
under development. Many of these competitors are established and have
substantially greater research, marketing and financial resources than the
Company. The Company expects that the number of products competing with its
products will increase as the perceived benefits of saliva-based testing become
more widely recognized, which may result in lower prices of the Company's
products and reduced gross revenues. There can be no assurance the Company will
be able to compete successfully.
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<PAGE> 11
In the biotechnology industry, technological change and obsolescence is rapid
and frequent. There can be no assurance that the Company can keep pace with such
changes or avoid product obsolescence.
INTELLECTUAL PROPERTY
The Company has applied for patents in the United States and other countries on
certain aspects relating to Omni-SAL(R), a saliva collection device, and
Omni-Swab, a medical specimen collection device. To date, ten such patents have
been awarded, four in the United States, and six in other countries. Expiration
dates for the patents range from 2008 to 2012. The Company intends to seek other
patent protections in the United States and other countries for certain aspects
relating to its collection devices and rapid test technology. No assurance can
be given that patents will be issued to the Company pursuant to its patent
applications in the United States and abroad, or that the Company's patent
portfolio will provide the Company with a meaningful level of commercial
protection.
Immuno chromatography, the principle on which the Company's rapid tests are
based is a technology covered by exising patents. The Company has purchased a
license from the principal patent holder, Unilever PLC of the U.K., to whom
royalty payments are due for all rapid tests sold. To obtain the license, the
Company paid approximately $50,000 and will be responsible for royalty fees
equal to 5% of the net sales in all territories where the Unilever patent is
enforceable. Products covered by the license include those related to HIV,
H.pylori, Tuberculosis and Hepatitis A. Additional analytes may be negotiated as
they become available.
The Company also depends on trade secrets and proprietary information to protect
much of the technology that it has developed. The Company has entered into
confidentiality agreements with its employees, certain third party suppliers,
potential customers, joint venture partners, distributors and consultants.
Despite such efforts, there can be no assurance that such confidentiality and
the protection it may afford can be maintained.
The Company believes that patent and trade secret protection are important to
its business. However, the issuance of a patent and the existence of trade
secret protection does not in itself ensure the Company's success. Competitors
may be able to produce products competing with a patented Company product
without infringing on the Company's patent rights. Issuance of a patent in one
country generally does not prevent manufacture or sale of the patented products
in other countries. The issuance of a patent to the Company is not conclusive as
to validity or as to the enforceable scope of the patent. The validity or
enforceability of a patent can be challenged by litigation after its issuance,
and if the outcome of such litigation is adverse to the owner of the patent, the
owner's rights could be diminished or withdrawn. Additionally, trade secret
protection does not prevent independent discovery and exploitation of a secret
product or technique by other parties.
A large number of individuals and commercial enterprises seek patent protection
for technologies, products and processes in fields related to the Company's area
of product development. To the extent such efforts are successful, the Company
may be required to obtain licenses in order to accomplish certain of its product
strategies. There can be no assurance that such licenses will be available to
the Company or available on acceptable terms. The Company is aware of certain
filed patents issued to developers of diagnostic products with potential
applicability to the Company's diagnostic technology. There can be no assurance
that the Company would prevail if a patent infringement claim were to be
asserted against it.
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<PAGE> 12
EMPLOYEES
As of December 31, 1997, the Company employed 24 full-time persons, including
four engaged in research and development, one in regulatory affairs, 10 in
manufacturing, three in sales and marketing, and six 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.
RECENT DEVELOPMENTS
Significant developments involving the Company have occurred since December 31,
1997. On January 26, 1998, the Company entered into a Securities Purchase
Agreement with an accredited investor for the issuance and sale of shares of the
Company's newly designated Series 1998-A Convertible Preferred Stock, stated
value $1,000 per share. Pursuant to the Agreement, the Company sold a total of
1,500 shares of the Preferred Stock for an aggregate purchase price of
$1,500,000. After payment of a finders fee and attorneys fees, the Company
raised $1,342,500 net proceeds from the private placement. (See Note 15 of the
Notes to Consolidated Financial Statements and Item 6 - Liquidity and Capital
Resources below).
The Company held a special meeting of shareholders on February 26, 1998 for
consideration of an amendment to the Company's Certificate of Incorporation
authorizing a reverse stock split of the Company's Common Stock at a ratio of up
to 10:1. The Board sought such authorization to enable the Company to increase
its per share Common Stock price for Nasdaq compliance purposes. (See Item 5 -
"Market for Common Equity and Related Stockholder Matters," below.) The
shareholders approved the amendment by an overwhelming majority. In light of
pending developments with Nasdaq, however, the Board of Directors deferred its
decision as to whether to implement the reverse stock split.
Effective with the close of the market on March 10, 1998, the Companys
securities were delisted from The Nasdaq SmallCap Market for failure to meet the
new Nasdaq continued listing requirements. Trading of the Companys securities is
currently being conducted in the over-the-counter market on the OTC Bulletin
Board (See Item 5 - "Market for Common Equity and Related Stockholder Matters").
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive offices and laboratory facility are located at 11719 NE
95th Street, Vancouver, Washington in an approximately 12,000 square foot
facility. The premises are occupied pursuant to a lease with an unaffiliated
party which expires in August 2002. The Company believes this facility is
adequate for its purposes.
ITEM 3. LEGAL PROCEEDINGS
Hardy v. Saliva Diagnostic Systems, Inc., Ronald L. Lealos, Eugene Seymour and
Richard S. Kalin, was filed in United States District Court, District of
Connecticut in August 1994 by 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, all arising from his termination. The complaint seeks
damages and punitive damages in an unspecified amount. A jury verdict for the
plaintiff, which is not a final judgment, was rendered on July 25, 1997 in the
approximate amount of $740,000. In October 1997, a hearing was held on the
Company's motions to set aside the jury verdict and for a new trial. The Company
is currently awaiting a decision on these motions. There can be no assurance
such motions will be granted. A final judgment in this case consistent with the
jury verdict will have a material adverse effect on the Company.
Meritxell Ltd. v. Saliva Diagnostic Systems, Inc., filed in the United States
District Court for the Southern District of New York, involved a dispute with
respect to the conversion rate of a convertible debenture issued to Meritxell by
the Company. The plaintiff sought damages in an unspecified amount. In February
1997, the Company's motion for summary judgment was granted and the lawsuit was
dismissed with prejudice.
In January 1997, Lealos v. Saliva Diagnostic Systems, Inc. was filed in Superior
Court in Clark County in the State of Washington by Ronald Lealos, former
President and CEO of the Company. The complaint in the lawsuit alleged various
breach of contract claims. This lawsuit was dismissed without prejudice as a
prerequisite to a settlement agreement between Mr. Lealos and the Company. The
parties did not reach a settlement and, in February 1998, Mr. Lealos filed a
complaint against the Company in the same court which alleges substantially the
same claims. The complaint seeks damages in the approximate amount of
$1,000,000. Management of the Company intends to vigorously defend the Company.
In March 1998, the Company filed a response to the complaint and asserted
numerous counterclaims against Mr. Lealos, including breach of fiduciary duty
and conversion. There can be no assurance that the litigation will not be
decided adverse to the Company and that such an adverse decision would not have
a material adverse effect on the Company.
Other than that set forth above, to the best knowledge of the Company, no other
material legal proceedings are pending or have been threatened.
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<PAGE> 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the shareholders of the Company was held on November 21,
1997. The following matters were submitted to the Company's shareholders for
their consideration:
1. Approval of an amendment to the Company's Certificate of Incorporation to
increase the authorized number of shares of the Company's Common Stock, par
value $.01 per share, from 33,000,000 shares to 50,000,000 shares. On this
matter, 22,465,699 votes were cast for, 2,074,760 votes were cast against
and there were 138,935 abstentions as to, the increase in authorized shares.
2. Approval of an amendment to the Company's Certificate of Incorporation to
authorize the creation of a new class of stock, designated "Preferred Stock."
On this matter, 10,359,165 votes were cast for, 2,840,893 votes were cast
against and there were 221,000 abstentions as to, the increase in authorized
shares.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Until the close of market on March 10, 1998, the Company's common stock was
included in The Nasdaq SmallCap Market under the symbol "SALV." The following
table sets forth the high and low bid quotations as reported by The Nasdaq
SmallCap 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.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
1997
First Quarter $ 2.06 $ 1.16
Second Quarter 1.78 0.94
Third Quarter 1.47 0.63
Fourth Quarter 1.22 0.31
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
</TABLE>
Effective with the close of the market on March 10, 1998, the Company's
securities were delisted from The Nasdaq SmallCap Market for failure to meet the
new Nasdsaq continued listing requirements. Trading, if any, in the Company's
securities is and will be conducted in the over-the-counter market on the OTC
Bulletin Board, 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 of the Nasdaq delisting, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the price
of, the Company's securities. In addition, the Company's securities are 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 may 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.
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<PAGE> 14
There were 452 shareholders of record and 8,677 beneficial owners of the
Company's common stock at March 25, 1998. There were no cash dividends declared
or paid in fiscal years 1997 or 1996. The Company does not anticipate declaring
such dividends in the foreseeable future.
Warrants to purchase approximately 1.4 million shares of the Company's common
stock at $1.25 per share, which were set to expire on March 31, 1998 and have
been extended to June 30, 1998, traded on The Nasdaq SmallCap Market under the
symbol "SALVW" until the close of market on March 10, 1998.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Since July 1990, the Company has been engaged almost exclusively in research and
development activities focused on developing proprietary saliva based collection
devices and rapid assays for infectious diseases. Other than sales of the
Company's collection devices, the Company has not yet commenced any significant
product commercialization. The Company has incurred significant operating losses
since its inception, resulting in an accumulated deficit of $28,526,458 at
December 31, 1997. 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. Despite the Company's preferred
stock financing in January 1998 (see Note 15), substantial additional financing
will be required in 1998. There can be no assurance that such financing will be
achieved. 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 "Description of Business- General" and Note 2 of Notes to
Consolidated Financial Statements).
RESULTS OF OPERATIONS
REVENUES. The Company's revenues consist of product sales. Revenues increased
92% to $1,422,296 in 1997 from $740,650 in 1996. The increase in product sales
revenue was primarily attributable to increasing demand for the Company's rapid
testing systems. Additionally, in 1997 sales of Sero*Strip HIV and Hema*Strip
HIV increased as the Company had more approvals to sell these two products in
countries outside the United States. Sales to one customer represented
approximately 17% of total revenues in 1997. Sales to three customers accounted
for approximately 20%, 18% and 11%, respectively of total revenues in 1996.
COST OF PRODUCTS SOLD. Costs of products sold increased to $1,426,638 (100.3% of
product sales) in 1997 from $894,841 (125% of product sales) in 1996. Costs of
products sold increased as a percentage of product sales due to increased
manufacturing overhead, larger square footage of manufacturing facilities and an
increase in the number of manufacturing personnel in early 1997. During 1997,
the Company reviewed the production efficiency, costs and regulations related to
its manufacturing facilities, and as a result of this review, the Company
decided to close its Singapore manufacturing operations in the third quarter of
1997. The Company expects the costs of products to decrease in 1998 due to the
closure of facilities in Singapore and reduction in personnel.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
8% to $665,475 in 1997 from $617,358 in 1996. In 1996, research and
development efforts were expanded for product development for Saliva*Strip and
Stat*Simple and rapid tests for Hepatitis. In 1997, research and development
efforts were focused primarily on Stat*Simple in order to submit this product
to the FDA for
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<PAGE> 15
marketing clearance, which occurred in February 1998. Additionally, in 1997, the
Company was focused on cost controls in all departments, including research and
development, and thus intentionally reduced these costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 34.7% to $5,270,955 in 1997 from $3,911,587 in
1996. The increase was primarily the result of increased legal fees related to
litigation matters and securities filings and compliance matters in 1997 and
compensation expense related to the grant of stock options in 1997, offset by
the result of cost cutting programs put in place to reduce administrative
expenses. The Company expects selling, general and administrative expenses to
decrease in 1998 due to the closure of facilities in Singapore and reduction in
personnel.
WRITE-OFF OF GOODWILL. In September 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. The transaction was accounted for as a purchase and
resulted in an excess of purchase price over net assets acquired of $600,000. In
1996, the Company reviewed its Singapore operations and concluded that the use
of Singapore as a primary manufacturing source was no longer required.
Accordingly, the Company assessed the recoverability of the remaining goodwill
associated with the purchase of SDS Asia, which resulted in a write-off of the
remaining goodwill, $540,000, at December 31, 1996.
RESTRUCTURING EXPENSE. Results of operations of 1997 included a charge
associated with a restructuring plan designed to reduce costs and improve
manufacturing and operational efficiencies. Under the plan, the Company closed
its Singapore manufacturing operations in October 1997. The Company plans to
out-source manufacturing previously performed in Singapore to qualified sources
and locations. Total costs accrued in connection with the restructuring at the
end of the third quarter of 1997 were $194,000 and included approximately
$100,000 related to termination of employees, approximately $37,000 associated
with the settlement of the lease obligation in Singapore, $47,000 for other
costs related to closing the Singapore location and $10,000 non-cash charge for
the write off of leasehold improvements. The change in the restructuring reserve
during the fourth quarter of 1997 consisted of approximately $61,000 of
additional employee termination costs and a $24,000 charge related to a portion
of the cumulative foreign translation account related to Singapore operation.
INTEREST EXPENSE AND LOAN FEES. Interest expense increased to $413,993 in 1997
from $28,861 in 1996. In March 1997, in connection with the sale of $1.5 million
of Convertible Debentures, due February 28, 1999 (the "Debentures"), a discount
of $375,000 was recorded, resulting from an allocation of proceeds to the
discounted conversion feature. This discount was written off to interest expense
at June 30, 1997, in connection with the conversion of the Debentures.
INCOME TAXES. The Company is in a net deferred tax asset position and has
generated net operating losses to date. Accordingly, no provision for or benefit
from income taxes has been recorded in the accompanying statements of
operations. The Company will continue to provide a valuation allowance for its
deferred tax assets until it becomes more likely than not, in management's
assessment, that the Company's deferred tax assets will be realized. (See Note 9
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 sales of
convertible debentures, proceeds from private placements of Common Stock, and
the exercise of common stock purchase warrants and stock options. In March 1997,
the Company raised net proceeds of approximately $1,380,000 (net of issuance
costs of $120,000) from the private sale of the Debentures. In June 1997 and
August 1997, the Company entered into three separate common stock subscription
agreements for the issuance and sale of a total of 4,082,905 shares of Common
Stock for an aggregate purchase price of $2,063,000, net of offering costs.
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<PAGE> 16
Cash used in operating activities in 1997 was $3,896,427. This was primarily a
result of a net loss of $6,612,212, offset by the non-cash write-off of the
discounted conversion feature of the Debentures sold in March 1997, the amount
of accrued interest on the Debentures which was converted to Common Stock, and a
non-cash charge for compensation expense recorded on issuance of stock options.
Cash used in investing activities in 1997 was $14,438, and included the
purchase of manufacturing equipment totalling $62,720. The Company has no
material commitments for capital expenditures at December 31, 1997.
Cash provided by financing activities in 1997 was $3,405,797. This was the
result of net proceeds of $2,063,414 from the issuance of Common Stock in July
and August 1997 and net proceeds of $1,380,000 from the sale of the Debentures
in March 1997.
In March 1997, the Company received net proceeds of approximately $1,380,000
(net of issuance costs of $120,000) from the private sale of 7.5% convertible
debentures due February 28, 1999 (the "Debentures"). In connection with the
issuance of the Debentures, the Company also issued to Grayson & Associates,
Inc. warrants to purchase up to 89,552 shares of the Company's Common Stock for
a purchase price of $1.34 per share on or before March 14, 2002. In May and June
1997, the holders of the Debentures agreed to an acceleration of conversion and
converted the Debentures into a total of 1,736,824 shares of Common Stock, plus
interest in the form of 27,604 shares of Common Stock. In October 1997 and
January 1998, the holders of the Debentures exercised their rights to receive an
additional approximately 1,560,000 shares after certain conditions had been
met. No further rights or obligations for the issuance of Common Stock are
outstanding under the terms of the Debentures.
A discount was recorded at the date of issuance of the Debentures, resulting
from an allocation of proceeds to the discounted conversion feature, which was
to be amortized to interest expense over the conversion period. Additionally,
financing costs related to these Debentures were deferred and amortized, using
the effective interest method, over the term of the Debentures. The discount and
remaining unamortized financing costs of $375,000 and $99,800, respectively,
were written off to interest expense and additional paid in capital,
respectively, upon the early conversion of the Debentures.
In June and August 1997, the Company entered into three separate common stock
subscription agreements pursuant to which the Company issued and sold a total of
4,082,905 shares of its Common Stock for an aggregate purchase price of
$2,063,000, net of offering costs. As a finder's fee, the Company paid $104,800
in cash and warrants to purchase 161,600 shares of the Common Stock for an
exercise price of $0.50 per share, and 33,032 shares of the Common Stock for an
exercise price of $0.72656 per share, all of which expire on June 30, 2002.
Also in connection with the private placement, the Company issued warrants to
purchase up to 100,000 shares of the Company's Common Stock, exercisable at any
time from January 1, 1998 to January 1, 2003, at an exercise price of $1.00 per
share.
In connection with the private placement, the Company also entered into separate
registration rights agreements under each of which the Company is required to
file a registration statement covering resales of
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<PAGE> 17
shares of the Common Stock. A registration statement on Form S-3 covering
resales of such shares was declared effective on September 30, 1997. Because the
Company is no longer eligible to file on Form S-3 due to the delisting of the
Company's securities from Nasdaq, the Company intends to file a post-effective
amendment to the registration statement on Form SB-2.
On January 26, 1998, the Company entered into a Securities Purchase Agreement
with an investor for the issuance and sale of shares of the Company's newly
designated Series 1998-A Convertible Preferred Stock, stated value $1,000 per
share (the "1998-A Preferred Stock") (the "Preferred Offering"). Pursuant to the
Securities Purchase Agreement, the Company sold a total of 1,500 shares of the
1998-A Preferred Stock to the Investor for an aggregate purchase price of
$1,500,000. The Investor is entitled to receive a number of shares of the
Company's Common Stock, upon conversion of the 1998-A Preferred Stock as
determined by dividing the purchase price of the 1998-A Preferred Stock by the
lesser of (i) $0.3375, and (ii) 80% of the average closing bid price of the
Common Stock for the five trading days prior to conversion. The timing of
conversion is subject to certain restrictions. The Securities Purchase Agreement
provides for an additional offering of up to $1,500,000 of an additional series
of the Company's preferred stock may be purchased at the investor's option upon
substantially the same terms as the Preferred Offering. This option must be
exercised by the Investor on or prior to September 26, 1998.
In connection with the Preferred Offering, the Company also entered into a
separate registration rights agreement with the investor under which the Company
is required to file a registration statement covering resales of shares of the
Common Stock issuable upon conversion of the 1998-A Preferred Stock, which
registration statement must be filed on or before February 26, 1998 and be
declared effective by the Securities and Exchange Commission by April 26, 1998.
A registration statement on Form S-3 was filed on February 26, 1998. Because the
Company is no longer eligible to file on Form S-3 due to the delisting of the
Company's securities from Nasdaq, the Company intends to file a pre-effective
amendment to the registration statement on Form SB-2.
In connection with the issuance of the 1998-A Preferred Stock, the Company paid
a cash fee of 7.5% of the gross proceeds and attorney's fees equal to 0.5% of
the gross proceeds. The Company also issued warrants to purchase up to 750,000
shares of Common Stock at an exercise price of $0.3375 per share, which expire
on January 26, 2003. In addition, the Company has agreed to issue additional
warrants to purchase up to 250,000 shares of Common Stock if and when the 1998-B
Preferred Stock is issued.
The Company's capital requirements have been and will continue to be
significant. 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. Despite the
Company's preferred stock financing in January 1998 (see Note 15), substantial
additional financing will be required in 1998. There can be no assurance that
such financing will be achieved. The Company will continue to seek public or
private placement of its equity securities and corporate partners to develop
products. 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. The Company's significant operating losses and
capital requirements raise substantial doubt about the Company's ability to
continue as a going concern.
YEAR 2000 ISSUE
The Company is aware of the critical business issue of how existing computer
software programs and operating systems will accommodate the Year 2000.
Programs and systems that do not properly recognize date sensitive information
upon the roll-over of the two-digit year value to "00" could generate erroneous
data or cause systems to fail. Management is in the process of determining the
impact the Year 2000 issue will have on the Company and its revenues, both
directly and indirectly through third parties such as suppliers. The Company
intends to send a written request to its suppliers for an assessment of the
impact the Year 2000 issue might have on their activities. Based upon
information currently available, the Company does not expect the costs of
addressing the Year 2000 issue will have a material impact on the Company's
financial position or on its results of operations.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), which establishes requirements
for disclosure of comprehensive income and is effective for the Company's fiscal
year ending December 31, 1998. Reclassification of earlier financial statements
for comparative purposes is required. The Company believes the implementation of
this statement will not have a material effect on its financial statement
disclosures.
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<PAGE> 18
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements, together with the report thereon of
Arthur Andersen LLP and Hollander, Gilbert & Co. are included in this report as
follows:
<TABLE>
<S> <C>
Report of Arthur Andersen LLP F-1
Report of Hollander, Gilbert & Co. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations - F-4
For the Years Ended December 31, 1997 and 1996
Consolidated Statement of Stockholders' Equity - F-5
For the Years Ended December 31, 1997 and 1996
Consolidated Statements of Cash Flows - F-6
For the Years Ended December 31, 1997 and 1996
Notes to Consolidated Financial Statements F-7
</TABLE>
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Report of Independent Public Accountants
To the Board of Directors and Shareholders of
Saliva Diagnostic Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Saliva Diagnostic
Systems, Inc. (an Oregon Corporation) as of December 31, 1997, and the related
consolidated statement of operations, stockholders' equity and cash flows for
the year ended December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audit 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
misstatement. 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 audit provides 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. as of December 31, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Arthur Andersen LLP
Portland, Oregon
March 23, 1998
F-1
<PAGE> 20
Report of Independent Public Accountants
To the Board of Directors and Stockholders
Saliva Diagnostic Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Saliva Diagnostic
Systems, Inc. and subsidiaries as of December 31, 1996, and the related
consolidated statement of operations, stockholders' equity and cash flows for
the year 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 audit.
We conducted our audit 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 audit provides 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 the results of
operations, stockholders' equity and cash flows for the year then ended, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's significant operating losses and significant
capital requirements raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Hollander, Gilbert & Co.
Los Angeles, California
March 21, 1997
F-2
<PAGE> 21
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 271,312 $ 776,380
Accounts receivable, less allowance of $42,000(1997)
and $0 (1996) 154,052 178,436
Inventories 458,177 268,431
Prepaid expenses 51,876 34,425
------------ ------------
Total current assets 935,417 1,257,672
Property and equipment, less accumulated
depreciation of $995,853(1997) and $792,309(1996) 434,457 493,649
Deposits 40,162 188,647
Restricted cash 120,500 120,500
Patents and trademarks, less accumulated
amortization of $48,375 (1997) and $39,183 (1996) 108,541 117,733
------------ ------------
$ 1,639,077 $ 2,178,201
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 670,400 $ 277,292
Accrued expenses 1,473,944 540,781
Accrued interest payable 68,240 68,240
Current portion of long-term debt and
obligations under capital leases 33,779 35,057
------------ ------------
Total current liabilities 2,246,363 921,370
Long-term debt and obligations under capital
leases, net of current portion 59,401 96,199
------------ ------------
Total liabilities 2,305,764 1,017,569
Commitments and contingencies (Note 13)
Shareholders' equity:
Preferred stock, no par value, 1,000,000 shares
authorized (1997), none issued and
outstanding - -
Common stock, $.01 par value, 50,000,000
shares authorized (1997), 25,000,000 shares
authorized (1996), issued and outstanding:
29,344,624 (1997) and 22,090,785 (1996) 293,447 220,908
Additional paid-in capital 27,701,417 22,998,052
Note receivable from shareholder for stock (83,825) (83,825)
Currency translation adjustment (51,268) (60,257)
Accumulated deficit (28,526,458) (21,914,246)
------------ ------------
Total stockholders' equity (666,687) 1,160,632
------------ ------------
$ 1,639,077 $ 2,178,201
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 22
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------ -----------
1997 1996
------------ -----------
<S> <C> <C>
Revenues:
Product sales $ 1,422,296 $ 715,780
Technology licensing income - 24,870
------------ ------------
Total revenues 1,422,296 740,650
Costs and expenses:
Cost of products sold 1,426,638 894,841
Research and development expense 665,475 617,358
Selling, general and administrative
expense 5,270,955 3,911,587
Write-off of goodwill - 540,000
Restructuring expense 278,537 -
------------ ------------
Loss from operations (6,219,309) (5,223,136)
Interest income 28,850 99,418
Interest expense (413,993) (28,681)
Other expense (7,760) -
------------ ------------
Net loss $ (6,212,212) $ (5,152,399)
============ ============
Basic and diluted net loss per share $ (0.27) $ (0.26)
============ ============
Shares used in basic and diluted per share calculations 24,894,900 20,100,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 23
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Currency
Common Stock Paid-in Note Translation Accumulated
Shares Amount Capital Receivable Adjustment Deficit Total
------------ ----------- -------------- -------------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1995 13,176,366 $ 131,764 $ 17,726,078 $ (83,825) $ (34,859) $ (16,761,847) $ 977,311
Exercise of warrants 2,580,861 25,807 2,444,711 2,470,518
Exercise of stock
options 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 stock 6,212,308 62,123 2,697,877 2,760,000
Currency translation
adjustment (25,398) (25,398)
Net loss (5,152,399) (5,152,399)
-------------------------------------------------------------------------------------------------------
Balances, December 31,
1996 22,090,785 220,908 22,998,052 (83,825) (60,257) (21,914,246) 1,160,632
Beneficial conversion
feature related to
Convertible Debentures
issued March 1997 375,000 375,000
Conversion of
Debentures
into common stock 1,736,824 17,368 1,482,632 1,500,000
Write-off of
unamortized financing
costs (99,800) (99,800)
Issuance of common
stock pursuant to
Debenture and private
placement conversion
reset provisions 1,399,356 13,994 (13,994) -
Issuance of common
stock in payment
of interest
on Debentures 27,604 276 29,119 29,395
Sale of common stock
in private
placements 4,082,905 40,829 2,022,585 2,063,414
Exercise of stock
options 7,150 72 386 458
Compensation expense
on issuance of stock
options 507,437 507,437
Currency translation
adjustment 8,989 8,989
Net loss (6,612,212) (6,612,212)
-------------------------------------------------------------------------------------------------------
Balances, December 31,
1997 29,344,624 293,447 $ 27,301,417 $ (83,825) $ (51,268) $ (28,526,458) $ (666,687)
=======================================================================================================
</TABLE>
The accompanying notes are an integral part of these inancial statements.
F-5
<PAGE> 24
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1996
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,212,212) $(5,152,399)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 225,606 290,929
Compensation expense on issuance of stock options 907,437 -
Net loss on disposal of assets 25,900 -
Shares issued in lieu of fees and expenses - 53,750
Interest expense related to conversion of Debentures 404,395
Write-off of goodwill - 540,000
Currency translation adjustment 8,989 (25,398)
Changes in current assets and liabilities:
Accounts receivable 24,384 (135,145)
Inventories (189,746) 31,730
Prepaid expenses and deposits (17,451) (5,469)
Accounts payable and accrued expenses 1,326,271 336,532
----------- -----------
Net cash used in operating activities (3,896,427) (4,065,470)
CASH FLOWS FROM INVESTING ACTIVITIES:
Placement of restricted cash - (120,500)
Acquisitions of property and equipment (62,770) (214,418)
Deposits 48,332 (118,628)
Other assets - 124
----------- -----------
Net cash used in investing activities (14,438) (453,422)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock, net of
issuance costs 2,063,414 -
Proceeds from convertible debentures, net of
issuance costs 1,380,000 -
Principal payment of convertible debentures - (25,000)
Notes payable and interim financing, net - 109,476
Repayment of long term debt and capital lease obligations (38,075) (24,586)
Exercise of Common Stock options and warrants 458 2,547,368
----------- -----------
Net cash provided by financing activities 3,405,797 2,607,258
----------- -----------
Net increase (decrease) in cash and cash equivalents (505,068) (1,911,634)
Cash and cash equivalents, beginning of period 776,380 2,688,014
----------- -----------
Cash and cash equivalents, end of period $ 271,312 $ 776,380
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 7,800 $ 10,144
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION:
Conversion of deposit to property and equipment $ 100,153 $ -
Shares issued in lieu of fees and expenses - 53,750
Conversion of Debentures into Common Stock 1,380,000 -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 25
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Saliva Diagnostic Systems, Inc. (the "Company") develops rapid immunoassays
utilizing immunochromatography for the detection of antibodies to selected
pathogens, such as the HIV, the virus that causes AIDS, and Helicobacter pylori,
a bacteria linked to peptic ulcers and gastric cancer. In addition, the Company
develops proprietary specimen collection devices and other diagnostic devices.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, SDS International, Ltd. and Saliva Diagnostic
Systems (Asia) Ltd. All significant intercompany accounts and transactions have
been eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of cash and short-term highly liquid
investments purchased with original or remaining maturities of three months or
less.
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 assets.
Leasehold improvements are amortized over the life of the related lease.
Useful lives are generally as follows:
Office furniture and equipment five to seven years
Machinery and equipment seven years
Exhibits seven years
Vehicles five years
PATENTS AND TRADEMARKS
The costs of patents and trademarks are being amortized on the straight line
method over 17 years.
REVENUE RECOGNITION
Revenue is recognized when products are shipped to customers.
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 product liability.
RESEARCH AND DEVELOPMENT
Research and development expenditures include those costs associated with the
Company's on-going research and development activities. All research and
development costs are expensed as incurred.
F-7
<PAGE> 26
INCOME TAXES
The Company is in a net deferred tax asset position and has generated net
operating losses to date. Accordingly, no provision for or benefit from income
taxes has been recorded in the accompanying statements of operations. The
Company will continue to provide a valuation allowance for its deferred tax
assets until it becomes more likely than not, in management's assessment, that
the Company's deferred tax assets will be realized.
CURRENCY TRANSLATION
The local currency is the functional currency in the Company's foreign
subsidiaries. Assets and liabilities of the foreign subsidiaries are translated
to U.S. dollars at current rates of exchange, and revenues and expenses are
translated using weighted average rates during the year. Foreign currency
translation adjustments are included as a separate component of shareholders'
equity. Foreign currency transaction gains and losses are included as a
component of other income and expense, in the consolidated statements of
operations.
LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). SFAS 128 changes the standards for computing and presenting earnings per
share (EPS) and supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share." SFAS 128 simplifies the standards for computing earnings per share
and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. This Statement requires restatement of all
prior-period EPS data presented.
As it relates to the Company, the principal differences between the provisions
of SFAS 128 and previous authoritative pronouncements are the exclusion of
common stock equivalents in the determination of Basic Earnings Per Share and
the market price at which common stock equivalents are calculated in the
determination of Diluted Earnings Per Share.
Basic earnings per common share is computed using the weighted average number of
shares of common stock outstanding for the period. Diluted earnings per common
share is computed using the weighted average number of shares of common stock
and dilutive common equivalent shares related to stock options and warrants
outstanding during the period.
The adoption of SFAS 128 had no effect on previously reported loss per share
amounts for the year ended December 31, 1996. For the years ended December 31,
1997 and 1996, primary loss per share was the same as basic loss per share and
fully diluted loss per share was the same as diluted loss per share. A net loss
was reported in 1997 and 1996, and accordingly, in those years the denominator
was equal to the weighted average outstanding shares with no consideration for
outstanding options and warrants to purchase shares of the Company's common
stock, because to do so would have been anti-dilutive. Stock options for the
purchase of 3,153,500 and 1,815,250 shares at December 31, 1997 and 1996,
respectively, and warrants for the purchase of 1,947,216 and 1,530,000 shares at
December 31, 1997 and 1996, respectively, were not included in loss per share
calculations, because to do so would have been anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short-term nature of
these instruments.
F-8
<PAGE> 27
Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument when available. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit risk
consist primarily of trade receivables from large domestic and foreign
companies. Sales to one customer accounted for approximately 17% of total
product sales in 1997. Sales to three customers, accounted for approximately
20%, 18%, and 11% respectively, of total product sales in 1996. At December 31,
1997 accounts receivable from two customers comprised 32% and 27%, respectively
of total net accounts receivable. The Company's foreign sales in 1997 and 1996
were 41% and 55% of total sales, respectively.
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. Actual results could differ
from those estimates.
RECLASSIFICATIONS
Certain 1996 balances have been reclassified to conform with the current year's
presentation.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), which establishes requirements
for disclosure of comprehensive income and is effective for the Company's fiscal
year ending December 31, 1998. Reclassification of earlier financial statements
for comparative purposes is required. The Company believes the implementation of
this statement will not have a material effect on its financial statement
disclosures.
2. SUBSTANTIAL DOUBT ABOUT ABILITY TO CONTINUE AS A GOING CONCERN
SIGNIFICANT OPERATING LOSSES - ACCUMULATED DEFICIT
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 $28,526,458 at
December 31, 1997. 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. There can be no assurance that the
Company will achieve or maintain profitability in the future. Despite the
Company's preferred stock financing in January 1998 (see Note 15), substantial
additional financing will be required in 1998. There can be no assurances that
such financing will be achieved.
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 is dependent upon its effort
to raise capital to finance its future operations, including the cost of
development, 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. 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 much certainty. The accompanying consolidated financial,
statements have been prepared assuming that the Company will continue as a
going concern. 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 consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
F-9
<PAGE> 28
3. RESTRUCTURING
Results of operations of 1997 included a charge associated with a restructuring
plan designed to reduce costs and improve manufacturing and operational
efficiencies. Under the plan, the Company closed its Singapore manufacturing
operations in October 1997. The Company plans to out-source manufacturing
previously performed in Singapore to qualified sources and locations. Total
costs accrued in connection with the restructuring at the end of the third
quarter of 1997 were $194,000 and included approximately $100,000 related to
termination of employees, approximately $37,000 associated with the settlement
of the lease obligation in Singapore, $47,000 for other costs related to closing
the Singapore location and $10,000 non-cash charge for the write-off of
leasehold improvements. The change in the restructuring reserve during the
fourth quarter of 1997 consisted of approximately $61,000 of additional employee
termination costs and a $24,000 charge related to portion of the cumulative
foreign translation account related to Singapore operation.
4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996
------------ -------------
<S> <C> <C>
Raw materials $ 280,438 $ 253,000
Work in process 11,569 2,495
Finished goods 166,170 12,936
---------------- -----------------
$ 458,177 $ 268,431
================ =================
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1996
------------ -------------
<S> <C> <C>
Office furniture and equipment $ 57,988 $ 114,041
Machinery and equipment 1,105,025 861,957
Leasehold improvements 71,568 97,582
Vehicles 164,774 181,423
Exhibits 30,955 30,955
------------ -------------
1,430,310 1,285,958
Less: accumulated depreciation
and amortization (995,853) (792,309)
------------ -------------
$ 434,457 $ 493,649
============ =============
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1996
------------- ------------
<S> <C> <C>
Accrued wages and salaries $ 493,352 $ 149,599
Accrued payroll taxes 92,144 131,681
Accrued restructuring expenses 135,522 -
Accrued litigation expenses 750,000 250,000
Other accrued liabilities 2,926 9,501
------------- ------------
$ 1,473,944 $ 540,781
============= ============
</TABLE>
F-10
<PAGE> 29
7. SHAREHOLDERS' EQUITY
On February 20, 1997, at a Special Meeting of Shareholders, the shareholders of
the Company approved an amendment to the Company's Certificate of Incorporation
increasing the number of authorized shares of the Company's Common Stock, par
value $.01 per share, from 25,000,000 to 33,000,000 shares.
On November 21, 1997, at a Special Meeting of Shareholders, the shareholders of
the Company approved an amendments to the Company's Certificate of Incorporation
(i) increasing the number of authorized shares of the Company's Common Stock,
par value $.01 per share, from 33,000,000 to 50,000,000, and (ii) authorizing
the creation of a new class of stock, designated "Preferred Stock." The
Preferred Stock is issuable in one or more series on terms and conditions to be
established by the Board of Directors of the Company. Designations, preferences,
conversion rights, cumulative rights, and relative, participation, optional and
other rights, including voting rights, qualifications, limitations or
restrictions, thereof, are determined by the Board of Directors of the Company.
CONVERSION OF CONVERTIBLE DEBENTURES IN 1996
During 1995, the Company sold privately $3,685,000 of its 9% convertible
debentures payable on October 31, 1996. During 1996, certain debenture holders
converted $2,760,000 principal amount of debentures into 6,212,308 shares of
common stock. At December 31, 1996, all of the debentures had been converted
into shares of common stock.
WARRANTS OUTSTANDING
In March 1993, in connection with its initial public offering, the Company
issued publicly traded warrants to purchase 1,380,000 shares of the Company's
stock at $1.25, which expire on March 31, 1998.
In 1995, in connection with consulting services rendered, the Company issued
warrants to purchase 400,000 shares of the Company's Common Stock at $1.00 per
share, which expire on March 31, 1998, of which warrants to purchase 90,000
shares were outstanding at December 31, 1997.
In November 1995, the Company issued warrants to purchase 95,000 shares of the
Company's Common Stock at 50% of the Nasdaq closing bid price of the day prior
to exercise, which expire on November 1, 2001, of which warrants to purchase
60,000 shares were outstanding at December 31, 1997.
In March 1997, in connection with the sale of Convertible Debentures, the
Company issued warrants to purchase 89,552 shares of the Company's Common Stock
at $1.34 per share, which expire on March 14, 2004, all of which were
outstanding at December 31, 1997.
In September 1997, in connection with private placements, the Company issued
warrants to purchase 194,632 shares of the Company's Common Stock at $0.50 per
share, and 33,032 shares of the Company's Common Stock at $0.72656 per share
which expire on June 30, 2002, and 100,000 shares of the Company's Common Stock
at $1.00 per share which expire on January 1, 2003, all of which were
outstanding at December 31, 1997.
1997 FINANCINGS
In March 1997, the Company raised net proceeds of approximately $1,380,000 (net
of issuance costs of $120,000) from the private sale of the 7.5% convertible
debentures due February 28, 1999 (the "Debentures"). In connection with the
issuance of the Debentures, the Company also issued warrants to Grayson &
Associates, Inc. ("Grayson") in consideration of certain financial consulting
services performed
F-11
<PAGE> 30
on behalf of the Company related to the sale of the Debentures. The warrants
entitle the holder thereof to purchase up to 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 warrants.) In May
and June 1997, the holders of the Debentures agreed to an acceleration of
conversion and to hold the Common Stock issued pursuant to such conversion (the
"Early Conversion Shares") in accordance generally with the original conversion
schedule. On June 5, 1997, $800,000 in principal amount of the Debentures were
converted into a total of 833,598 shares of the Company's Common Stock and on
June 30, 1997 the remaining $700,000 in principal amount of the Debentures were
converted into a total of 903,226 shares of the Company's Common Stock. A total
of $29,395 of accrued interest on the converted Debentures payable June 30, 1997
was paid to holders of the Debentures in the form of 27,604 shares of the
Company's Common Stock. In addition, the Company agreed to certain conversion
reset provisions, pursuant to which the holders of the Early Conversion Shares
may receive certain additional shares of the Company's Common Stock under
certain conditions. In accordance with such provisions, one holder of the
Debentures exercised his right to receive an additional 57,720 shares on October
15, 1997 and 342,330 shares on January 9, 1998, and the other holder of the
Debentures exercised its right to receive an additional 305,922 shares on
November 5, 1997 and 856,521 shares on January 9, 1998. No further rights or
obligations for the issuance of Common Stock are outstanding under the terms of
the Debentures.
The number of shares of Common Stock issuable upon the conversion of
the Debentures was determined by dividing the principal amount of the
Debentures converted by the Conversion Price, as defined in the Debentures. The
conversion price was defined as the lesser of 115% of Company's Common Stock
market price at issuance of the Debenture (i.e. $1.9191 per share) or 80% of the
Company's Common Stock market price at conversion of the Debenture.
A discount had been recorded at the date of issuance of the Debentures,
resulting from an allocation of proceeds to the discounted conversion feature,
which was to be amortized to interest expense over the conversion period.
Additionally, financing costs related to these Debentures were deferred and
amortized, using the effective interest method, over the term of the Debentures.
The discount and remaining unamortized financing costs of $375,000 and $99,800,
respectively, were written off to interest expense and additional paid in
capital, respectively, upon conversion of the Debentures.
On June 30, 1997, the Company entered into two separate common stock
subscription agreements for the issuance and sale of shares of the Company's
Common Stock pursuant to Regulation D, promulgated under the Securities Act of
1933, as amended (the "Offering"). Pursuant to a Common Stock Purchase Agreement
between the Company and certain investors named therein (the "Investors"), the
Company sold a total of 2,420,000 shares of Common Stock to the Investors for an
aggregate purchase price of $1,210,000, $612,500 of which was subscribed for by
Investors as of June 30, 1997. Pursuant to a Common Stock Purchase Agreement
between the Company and The Tail Wind Fund Ltd. ("Tail Wind"), the Company sold
a total of 412,905 shares of Common Stock to Tail Wind for an aggregate purchase
price of $300,000. The closing on $337,500 principal amount of the Offering to
the Investors and $300,000 principal amount of the Offering to Tail Wind took
place on July 14, 1997; the closing of $547,500 principal amount of the Offering
to the Investors took place on July 17, 1997; and the closing of the remaining
$325,000 principal amount of the Offering to the Investors took place on July
22, 1997.
On August 22, 1997, the Company entered into a Common Stock Subscription
Agreement for the issuance and sale of shares of the Company's Common Stock
pursuant to Regulation D, (the "August Offering.") Pursuant to a Common Stock
Purchase Agreement between the Company and an investor named therein (the
"August Investor") the Company sold a total of 1,250,000 shares of Common Stock
for an aggregate purchase price of $750,000. The Closing of the August Offering
took place on August 26, 1997.
Tail Wind and the August Investor are entitled to receive additional shares of
Common Stock under their respective agreements subject to certain conditions
related to the trading price of the Company's Common Stock during a specified
period. In accordance with such provisions, the August Investor exercised his
right
F-12
<PAGE> 31
to receive an additional 1,035,714 shares on December 16, 1997. Tail Wind may
still be able to exercise its rights under certain circumstances. The Common
Stock purchased in the Offering and the August Offering (collectively referred
to as "the Offerings") is subject to certain resale restrictions. In connection
with the Offerings, the Company also entered into separate registration rights
agreements with the Investors, Tail Wind, and the August Investor under each of
which the Company is required to file a registration statement covering resales
of shares of the Common Stock sold in the Offering within 30 days after the
date on which the closing relating to those shares occurred. A registration
statement on Form S-3 covering resales of such shares was declared effective on
September 30, 1997. Because the Company is no longer eligible to file on Form
S-3 due to the delisting of the Company's securities from Nasdaq, the Company
intends to file a post effective amendment to the registration statement on
Form SB-2.
In connection with the Offerings, the Company paid a finder's fee to Grayson &
Associates, Inc. ("Grayson") of $104,800 in cash and warrants to purchase
161,600 shares of the Company's Common Stock for an exercise price of $0.50 per
share, and 33,032 shares of the Company's Common Stock for an exercise price of
$0.72656 per share, all of which expire on June 30, 2002. The Company also
issued to Tail Wind warrants to purchase up to 100,000 shares of the Company's
Common Stock, exercisable at any time from January 1, 1998 to January 1, 2003,
at an exercise price of $1.00 per share. Grayson and Tail Wind have certain
registration rights with respect to the shares of Common Stock that may be
issued upon exercise of their respective warrants. The registration statement on
Form S-3 which was declared effective on September 30, 1997, covered resales of
these shares.
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 for a note payable to the
Company in that amount. In 1995, $9,145 of principal on the note was paid. The
note bore interest at 6% per annum, and was originally due December 1994, but
later extended until December 1995. In December 1995, the Company extended the
note for another year. The note was due on December 31, 1996 and, at December
31, 1997, $83,825 plus unpaid accrued interest was outstanding.
8. STOCK-BASED COMPENSATION PLANS
The Company has two stock option plans, a "1992 Plan", under which 350,000
shares of its common stock have been reserved for issuance, and a "1994 Plan",
under which 350,000 shares of its common stock have been reserved for issuance.
Under both plans, the Company's Board of Directors may grant either incentive
stock options with an exercise price of not less than the fair market value of
the common stock at the date of grant or non-qualified stock options with an
exercise price of not less than 85% of the fair market value of the common stock
at the date of grant. The Board of Directors shall determine the period of each
option and the time or times at which options may be exercised and any
restrictions on the transfer of stock issued upon exercise of any options. Both
plans also provide for certain automatic grants to each non-employee director at
a price of 100% of fair market value of the common stock at the time of grant.
Options generally vest over a period of six months and are exercisable over a
period of five years. The following table summarizes all stock option activity
for options granted under the 1992 Plan and 1994 Plan, and for non-plan
options, during the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Number of Option Price
Shares Range
---------------- -----------------
<S> <C> <C>
Outstanding at December 31, 1995 1,623,500 $0.60 - $6.88
Options granted 302,500 0.43 - 2.38
Options exercised (104,750) 0.60 - 2.38
Options expired or canceled (6,000) 0.60 - 1.38
---------------- -----------------
Outstanding at December 31, 1996 1,815,250 0.43 - 6.88
Options granted 1,750,000 0.41
Options exercised (7,150) 0.43 - 0.60
Options expired or canceled (404,600) 0.43 - 2.38
---------------- -----------------
Outstanding at December 31, 1997 3,153,500 $0.41 - $6.88
================ =================
</TABLE>
F-13
<PAGE> 32
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
The Company has adopted the disclosure provisions of Financial Accounting
Standards Board Statement No. 123 ("SFAS 123") which defines a fair value based
method of accounting for employee stock options and similar equity instruments
and encourages all entities to adopt that method of accounting for all employee
stock-based compensation plans. However, SFAS 123 also allows an entity to
continue to measure compensation cost for such plans using the method of
accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25").
Entities electing to remain with the accounting as prescribed by APB 25 must
make pro forma disclosures of net income and, if presented, earnings per share,
as if the fair value based method of accounting defined in SFAS 123 had been
adopted.
The Company has elected to account for its stock-based compensation plans using
APB 25. The Company has computed, for pro forma disclosure purposes, the value
of options granted during fiscal year 1997 and 1996 using the Black-Scholes
pricing model.
The following weighted average assumptions were used in the computations for the
years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------------- ------------------
<S> <C> <C>
Expected dividend yield 0% 0%
Expected stock price volatility 203% 150%
Risk-free interest rate 6% 6%
Expected life of options - years five three
</TABLE>
The total value of options granted during 1997 and 1996 was $805,000 and
$366,200, respectively, which vested upon grant. The weighted average fair value
of options granted during 1997 and 1996 was $0.46 and $1.21, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net loss and net loss per share would
have approximated the pro forma amounts show below:
<TABLE>
<CAPTION>
1997 1996
---------------- -----------------
<S> <C> <C>
Net loss as reported $ (6,612,212) $ (5,152,399)
Net loss pro forma (7,017,212) (5,518,599)
Loss per share as reported (0.27) (0.26)
Loss per share pro forma (0.28) (0.27)
</TABLE>
The effect of applying SFAS 123 in this pro forma disclosure is not indicative
of future results. SFAS 123 does not apply to awards prior to January 1, 1995.
F-14
<PAGE> 33
The following table summarizes the information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------- ---------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding at Contractual Price Exercisable at Price
Per Share Dec. 31, 1997 Life (months) Per Share Dec. 31, 1997 Per Share
--------- ------------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$0.41 - $0.60 1,852,000 113.3 $0.41 1,852,000 $0.41
$1.00 - $1.38 1,242,000 17.3 1.08 1,240,500 1.08
$2.19 - $2.63 53,500 16.2 2.49 53,500 2.49
$5.25 - $6.88 6,000 9.0 6.07 6,000 6.07
------------ ------------
3,153,500 3,152,000
============ ============
</TABLE>
9. INCOME TAXES
The Company has a net operating loss carryforward of approximately $21 million
which is available to offset future taxable income, if any, expiring through the
year 2012. The Company is in a net deferred tax asset position and has generated
net operating losses to date. Accordingly, no provision for or benefit from
income taxes has been recorded in the accompanying statements of operations. The
Company will continue to provide a valuation allowance for its deferred tax
assets until it becomes more likely than not, in management's assessment, that
the Company's deferred tax assets will be realized.
10. LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
The Company has a note payable to a bank which bears interest at 6.940% per
annum and is payable in equal annual installments over 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, 1997:
<TABLE>
<S> <C>
1998 $ 33,779
1999 22,536
2000 24,151
2001 12,714
---------
93,180
Less current
portion 33,779
---------
$ 59,401
=========
</TABLE>
F-15
<PAGE> 34
11. 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, 1997:
<TABLE>
<CAPTION>
Year Ended December
31,
<S> <C>
1998 $ 162,475
1999 170,059
2000 169,788
2001 165,254
2002 108,282
Thereafter -
-----------
$ 775,858
===========
</TABLE>
Rent expense for the years ended December 31, 1997 and 1996 was $330,920 and
$301,106, respectively.
12. SEGMENT INFORMATION
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Product sales:
United States $ 584,467 $ 393,635
Asia 453,308 79,218
United Kingdom 384,521 242,927
-------------- --------------
Total $ 1,422,296 $ 715,780
============== ==============
Operating loss:
United States $ (5,734,653) $ (4,478,691)
Asia (225,307) (621,958)
United Kingdom (259,349) (122,487)
-------------- --------------
Total $ (6,219,309) $ (5,223,136)
============== ==============
Identifiable assets:
United States $ 1,422,034 $ 1,687,866
Asia - 368,562
United Kingdom 217,043 121,773
-------------- --------------
Total $ 1,639,077 $ 2,178,201
============== ==============
</TABLE>
F-16
<PAGE> 35
13. COMMITMENTS AND CONTINGENCIES
Luc Hardy, a former director and officer of the Company, filed a complaint in
Federal court against the Company and several individual defendants, including
former directors and officers of the Company, making certain allegations,
including breach of Mr. Hardy's employment agreement with the Company,
intentional interference with contract by the individual defendants, slander and
deceptive trade practices, all arising from his termination. The complaint seeks
damages and punitive damages in an unspecified amount. A jury verdict for the
plaintiff, which is not a final judgment, was rendered on July 25, 1997 in the
approximate amount of $740,000. In October 1997, a hearing was held on the
Company's motions to set aside the jury verdict and for a new trial. The Company
is currently awaiting a decision. There can be no assurance such motions will be
granted or that the final judgment in this case will not have a material adverse
effect on the Company.
In January 1997, Lealos v. Saliva Diagnostic Systems, Inc. was filed in Superior
Court in Clark County in the State of Washington by Ronald Lealos, former
President and CEO of the Company. The complaint in the lawsuit alleged various
breach of contract claims. This lawsuit was dismissed without prejudice as a
prerequisite to a settlement agreement between Mr. Lealos and the Company. The
parties did not reach a settlement and, in February 1998, Mr. Lealos filed a
complaint against the Company in the same court which alleged substantially the
same claims. The complaint seeks damages in the approximate amount of
$1,000,000. Management of the Company intends to vigorously defend the Company.
In March 1998, the Company filed a response to the complaint and asserted
numerous counterclaims against Mr. Lealos, including breach of fiduciary duty
and conversion and seeks damages in excess of $1,500,000. There can be no
assurance that the litigation will not be decided adverse to the Company and
that such an adverse decision would not have a material adverse effect on the
Company.
Immuno chromatography, the principle on which the Company's rapid tests are
based is a technology covered by exising patents. The Company has secured a
license from the principal patent holder, Unilever PLC of the U.K., to whom
royalty payments are due for all rapid tests sold. To obtain the license, the
Company paid approximately $50,000 and will be responsible for royalty fees
equal to 5% of the net sales in all territories where the Unilever patent is
enforceable. Products covered by the license include those related to HIV,
H.pylori, Tuberculosis and Hepatitis A.
14. RELATED PARTIES
A member of the Board of Directors of the Company is a partner in a law firm
which provides legal services to the Company. During 1997 and 1996, the
Company incurred 437,863 and 36,572, respectively, in services provided
by this law firm.
15. SUBSEQUENT EVENTS
JANUARY 1998 FINANCING
On January 26, 1998, the Company entered into a Securities Purchase Agreement
with Biscount Overseas Limited (the "Investor") for the issuance and sale of
shares of the Company's newly designated Series 1998-A Convertible Preferred
Stock, stated value $1,000 per share (the "1998-A Preferred Stock") (the
"Preferred Offering"). Pursuant to the Securities Purchase Agreement, the
Company sold a total of 1,500 shares of the 1998-A Preferred Stock to the
Investor for an aggregate purchase price of $1,500,000. The Investor is entitled
to receive a number of shares of the Company's Common Stock, upon conversion of
the 1998-A Preferred Stock as determined by dividing the purchase price of the
1998-A Preferred Stock by the lesser of (i) $0.3375 (as adjusted for certain
capital events, which would include a reverse stock split), and (ii) 80% of the
average closing bid price of the Common Stock for the five trading days prior to
conversion. The closing of the Preferred Offering took place on January 26,
1998.
The Securities Purchase Agreement provides for an "Additional Offering" of up
to $1,500,000 of an additional series of the Company's preferred stock (the
"1998-B Preferred Stock") which the Investor may purchase at its option upon
substantially the same terms as the Offering. This option, which must be
exercised by the Investor on or prior to September 26, 1998, is subject to
certain limitations as specified in the Securities Purchase Agreement.
The 1998-A Preferred Stock is convertible into shares of Common Stock on or
prior to January 26, 2000, subject to the following restrictions. The Investor
may convert up to (i) 25% the 1998-A Preferred Stock at any time from and after
April 26, 1998; (ii) 50% of the 1998-A Preferred Stock at any time from and
after May 26, 1998; (iii) 75% of the 1998-A Preferred Stock at any time from and
after June 25, 1998; and (iv) all of the 1998-A Preferred Stock at any time from
and after July 25, 1998.
In connection with the Preferred Offering, the Company also entered into a
separate registration rights agreement with the Investor under which the Company
is required to file a registration statement covering resales of shares of the
Common Stock issuable upon conversion of the 1998-A Preferred Stock sold in the
Preferred Offering. Such registration statement is required to be filed on or
before February 26, 1998 and be
F-17
<PAGE> 36
declared effective by the Securities and Exchange Commission by April 26, 1998.
A registration statement on Form S-3 was filed on February 26, 1998. Because the
Company is no longer eligible to file on Form S-3 due to the delisting of the
Company's securities from Nasdaq, the Company intends to file a registration
statement on Form SB-2 covering resales of these shares.
In connection with the Preferred Offerings, the Company paid a cash fee of 7.5%
of the gross proceeds of the Offering to Aryeh Trading, Inc. ("ATI"), and
attorney's fees in connection with the Preferred Offering equal to 0.5% of the
gross proceeds of the Offering to counsel to ATI. The Company also issued to the
Investor warrants to purchase up to 750,000 shares of Common Stock at an
exercise price of $0.3375 per share, which expire on January 26, 2003 (the
"Warrants"). The holder of the Warrants has certain registration rights with
respect to the shares of Common Stock that may be issued upon exercise of the
Warrants. In addition, the Company has agreed to issue to the Investor
additional warrants to purchase up to 250,000 shares of Common Stock on the same
terms as the Warrants if and when the 1998-B Preferred Stock is issued.
The Company held a special meeting of shareholders on February 26, 1998 for
consideration of an amendment to the Company's Certificate of Incorporation
authorizing a reverse stock split of the Company's Common Stock at a ratio of up
to 10:1. The Board sought such authorization to enable the Company to increase
its per share Common Stock price for Nasdaq compliance purposes. (See Item 5 -
"Market for Common Equity and Related Stockholder Matter," below.) The
shareholders approved the amendment by an overwhelming majority. In light of
pending developments with Nasdaq, however, the Board of Directors deferred its
decision as to whether to implement the reverse stock split.
Effective with the close of the market on March 10, 1998, the Companys
securities were delisted from The Nasdaq SmallCap Market for failure to meet the
new Nasdaq continued listing requirements. Trading of the Companys securities is
currently being conducted in the over-the-counter market on the OTC Bulletin
Board (See Item 5 - "Market for Common Equity and Related Stockholder Matters").
F-18
<PAGE> 37
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As reported on Form 8-K, Item 4, filed with the Securities and Exchange
Commission on June 9, 1997, on May 30, 1997 Saliva Diagnostic Systems, Inc. (the
"Company") dismissed its independent accountants, Hollander, Gilbert & Co. Such
dismissal was recommended and approved by the Company's Board of Directors, and
ratified by the Company's shareholders at the Company's annual meeting of
shareholders held on May 30, 1997.
The audit reports of Hollander, Gilbert & Co. on the Company's consolidated
financial statements as of and for the fiscal years ended December 31, 1996 and
1995 did not contain an adverse opinion or a disclaimer of opinion nor were they
qualified or modified as to uncertainty, audit scope, or accounting principles
except: they were modified as to uncertainty of the Company to continue as a
going concern. During fiscal years 1996 and 1995 and the subsequent interim
period through May 30, 1997, there were no disagreements with Hollander, Gilbert
& Co. on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which, if not satisfied to
Hollander, Gilbert & Co.'s satisfaction, would have caused it to make reference
to the subject matter of the disagreement in connection with its reports. In
addition, there were no such events as described under Item 304(a)(1)(iv)(B) of
Regulation S-B during fiscal years 1996 and 1995 and the subsequent interim
period through May 30, 1997.
Also on May 30, 1997, the Company engaged Arthur Andersen LLP to be its
independent auditors. The Company did not consult with Arthur Andersen LLP at
any time prior to its engagement regarding the application of accounting
principles to a completed or contemplated specified transaction or the type of
audit opinion that might be rendered on the Company's consolidated financial
statements. Prior to engaging Arthur Andersen LLP, the Company did not receive
any written or oral advice from Arthur Andersen LLP on accounting, auditing, or
financial reporting issues.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS OF THE COMPANY
<TABLE>
<CAPTION>
NAME OF DIRECTOR AGE POSITION WITH THE COMPANY
---------------- --- -------------------------
<S> <C> <C>
Kenneth J. McLachlan 51 President, Chief Executive Officer, Chief Financial
Officer, Chief Accounting Officer and Director
Hans R. Vauthier, Ph.D. 73 Director
Eric F. Stoer, Esq. 53 Director
</TABLE>
The following are brief summaries of the business experience of the directors of
the Company, including, where applicable, information as to other directorships
held by each of them. There are no family relationships among any of the
directors and executive officers of the Company.
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, and as the Company's Chief
Financial Officer and Chief Accounting Officer since September 1997. 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.
HANS R. VAUTHIER, PH.D. was appointed to the Board of Directors of the Company
in May 1996 to fill the vacancy created by the resignation of Dr. Eugene
Seymour. Since 1981, Dr. Vauthier has been a principal of
19
<PAGE> 38
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.
ERIC F. STOER, ESQ. was elected to the Board of Directors of the Company at its
Annual Meeting of Shareholders in May 1997. Mr. Stoer has been a partner
in the Washington, DC office of the law firm of Bryan Cave LLP since 1990.
His practice is concentrated in the areas of corporate and business law with
an international focus. Mr. Stoer has served on the boards of directors of a
number of pharmaceutical testing and consulting companies, including Boehringer
Mannheim Pharmaceuticals.
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION(S) WITH COMPANY
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Kenneth J. McLachlan 51 President, Chief Executive Officer, Chief Financial
Officer and Chief Accounting Officer
David Barnes, MD 52 Managing Director, SDS International, Ltd.
Paul D. Slowey, Ph.D. 42 Chief Operating Officer and Vice President of Marketing
</TABLE>
The following are brief summaries of the business experience of the Executive
Officers of the Company. For information on the business background of Mr.
McLachlan , see "Directors of the Company" above.
DAVID BARNES, M.D. had served on the Board of Directors of the Company from
November 1993 until May of 1997. Dr. Barnes has been the Managing Director of
SDS International, Ltd. (UK) ("SDS-UK") since commencement of its operations.
Prior to his position as Managing Director of SDS-UK, Dr. Barnes was Director of
Medical Services for Hemotex Ltd., a laboratory service primarily involved with
the insurance industry in the United Kingdom.
PAUL D. SLOWEY, PH.D. began employment as Director of Sales and Marketing at the
Company in August 1996. In May 1997, Dr. Slowey was promoted to Chief Operating
Officer and Vice President of Sales and Marketing of the Company. From February
1990 until he joined the Company, Dr. Slowey was employed at INCSTAR Corp., a
Minnesota manufacturer of diagnostic products, as International Marketing
Manager and Director of International Sales.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's executive officers and directors, and persons who own
more than ten percent of a registered class of the Company's equity securities
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission ("SEC") and the National Association of Securities Dealers,
Inc. Executive officers, directors and greater than ten percent stockholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting persons, the
Company believes that, during year ended December 31, 1997, all executive
officers, directors and greater than 10% shareholders complied with all
applicable filing requirements.
20
<PAGE> 39
ITEM 10. EXECUTIVE COMPENSATION
The following table provides certain summary information for the 1995, 1996 and
1997 fiscal years concerning compensation awarded to, earned by or paid the
Company's 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, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION (1) ----------------
--------------------------------------------- AWARDS
SECURITIES
OTHER UNDERLYING
FISCAL ANNUAL OPTIONS ALL OTHER
YEAR SALARY COMPENSATION (#) COMPENSATION
-------- ------------------ ----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Kenneth J. McLachlan (2) 1997 - $ 180,000 1,000,000 -
President and 1996 - 51,000 - -
Chief Executive Officer 1995 - - - -
David Barnes, MD (3) 1997 $ 135,000 - 75,000 -
Managing Director, 1996 135,000 - - -
SDS International, Ltd. 1995 131,750 - 175,000 -
</TABLE>
(1) Amounts shown include compensation earned in each respective fiscal year.
No bonuses were paid in any of the fiscal years reported.
(2) Includes 1,000,000 options granted to International Business Consultants
("IBCO"), a Jersey company of which Mr. McLachlan is a principal, pursuant
to a Management Consulting Agreement entered into as of December 5, 1997
between IBCO and the Company under which IBCO provides Mr. McLachlan's
services to the Company. See "Certain Relationships and Related
Transactions." Amounts paid in 1996 included payments to Mr. McLachlan
pursuant to a consulting contract which commenced in June 1996 and which
was superseded by the Agreement with IBCO. Mr. McLachlan has served as the
Company's Chief Financial Officer since June 1996 and was appointed
President and Chief Executive Officer by the Board of Directors in December
1996.
(3) Includes options to purchase 175,000 shares of Common Stock granted to Mr.
Barnes in 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.
In August 1994, the Company entered into an 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 $135,000.00) plus the use of a car. If the agreement is
terminated for any reason, Dr. Barnes is entitled to receive his base salary for
the remaining term of the agreement through August 1998.
21
<PAGE> 40
The following table sets forth, for each of the named executive officers,
information concerning options granted during the fiscal year ended December 31,
1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------ POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED ANNUAL
TOTAL OPTIONS RATES OF STOCK PRICE
GRANTED TO EXERCISE APPRECIATION FOR
OPTIONS EMPLOYEES PRICE EXPIRATION OPTION TERM (2)
NAME GRANTED(1) IN 1997 ($/SH) DATE 5% 10%
---- ---------- ------- ------ ---- --- ---
<S> <C> <C> <C> <C> <C> <C>
Kenneth J. McLachlan 1,000,000 (3) 57% $0.406 12-05-07 $661,300 $1,053,100
David Barnes, M.D. 75,000 4% $0.406 12-05-07 49,600 79,000
</TABLE>
(1) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock on date of grant. Options granted were
exercisable upon grant, and have a ten year term.
(2) The potential realizable value is calculated based on the term of the
option at time of grant (10 years) and is calculated by assuming that the
stock price on the date of grant appreciates at the indicated annual rate
compounded annually for the entire term of the option and that the option
is exercised and sold on the last day of its term for the appreciated
price. Actual gains, if any, on stock option exercises are dependent on the
future performance of the Common Stock and overall stock market conditions.
(3) Options were granted to International Business Consultants, a Jersey
company, of which Mr. McLachlan is a principal. See "Certain Relationships
and Related Transactions."
The following table provides certain information concerning the value of
unexercised options held as of the end of the fiscal year with respect to the
named executive officers. There were no options exercised by the named executive
officers in the last fiscal year. All options held by the named executive
officers are currently exercisable.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS OPTIONS
ACQUIRED VALUE AT FY-END AT FY-END
ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------ ------------- ------------ -------------------- -------------------
<S> <S> <C> <C> <C>
Kenneth J. McLachlan - - 1,000,000 / 0 - / -
David Barnes, MD - - 358,000 / 0 - / -
</TABLE>
22
<PAGE> 41
ITEM 11. 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 March 30, 1998 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.
<TABLE>
<CAPTION>
COMMON STOCK
- ------------------------------------------------------ ----------------------------------
NUMBER OF SHARES % SHARES
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OWNED (1) OWNED
- ------------------------------------------------------ ----------------- ----------------
<S> <C> <C>
Kenneth J. McLachlan (2)
607 Collingwood House
Dolphin Square
London SW1 3NF England 1,700,000 (2) 5.4%
Hans R. Vauthier
Steinengraben 28
Ch-4051
Basel, Switzerland 250,000 (3) *
Eric F. Stoer, Esq.
c/o Bryan Cave LLP
700 Thirteenth Street
Washington, DC 20005 250,000 (4) *
David Barnes, M.D.
c/o SDS International Ltd. (UK)
11 Sovereign Close
Sovereign Court
London, England E1 9HW, UK 358,000 (5) 1.2
All Executive Officers, Directors and Director
nominees as a group, (five persons) 2,635,800 (6) 8.6%
</TABLE>
* Less than one percent.
(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 March 30, 1998 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) Includes 200,000 shares registered in the name of Bank of Bermuda Trust
Company, trustee for the Morar Trust, an irrevocable trust established for
the benefit of Mr. McLachlan's children. Also includes 500,000 shares
registered in the name of Reads Trust Company Limited, trustee of an
irrevocable trust established for the benefit of Mr. McLachlan's children.
Mr. McLachlan has no power to vote or dispose of these shares pursuant to
the terms of the trusts. Also includes options to purchase 1,000,000 shares
of Common Stock
23
<PAGE> 42
which were granted to International Business Consultants, a Jersey
company, of which Mr. McLachlan is a principal.
(3) Includes options to purchase 250,000 shares of Common Stock.
(4) Includes options to purchase 250,000 shares of Common Stock.
(5) Includes options to purchase 358,000 shares of Common Stock.
(6) Includes Kenneth J. McLachlan, Eric F. Stoer, Hans R. Vauthier, David
Barnes, and Paul D. Slowey, the current directors and executive officers
of the Company. Includes options to purchase an aggregate of 1,933,000
shares of Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1997, the Company entered into a Management Consulting Agreement
(the "Agreement") with International Business Consultants ("IBCO"), under which
IBCO agreed to provide the services of Ken McLachlan as the Company's President
and Chief Executive Officer from December 5, 1997 until December 31, 1998, with
an automatic one year extension on January 1, 1999 and each year thereafter
unless written notice is given by either the Company or IBCO 90 days prior
thereto. Under the Agreement, IBCO will provide the services of Kenneth J.
McLachlan as President and Chief Executive Officer of the Company in exchange
for a base salary of $180,000 per annum or such greater amount as the Board of
Directors of the Company may from time to time determine, commencing January 1,
1998. Upon entering into the Agreement, IBCO was granted options to purchase
250,000 shares of the Company's Common Stock at $0.406 per share. IBCO was also
granted options to purchase 750,000 shares of the Company's Common Stock at
$0.406 per share as compensation for Mr. McLachlan's previous service to the
Company. Additionally, under the Agreement, IBCO is entitled to an annual
incentive bonus of 10% of the annual net income of the Company, during the term
which IBCO renders services to the Company under the Agreement, payable, at the
option of the Company, in cash or Common Stock of the Company. IBCO may be
terminated for "cause" or "good reason", as defined in the Agreement.
In January 1997, subsequent to his resignation as President and CEO of the
Company in December 1996, Ronald Lealos filed a lawsuit against the Company in
Superior Court in Clark County in the State of Washington. The complaint in the
lawsuit alleged various breach of contract claims. This lawsuit was dismissed
without prejudice as a prerequisite to a settlement agreement between Mr. Lealos
and the Company. The parties did not reach a settlement and, in February 1998,
Mr. Lealos filed a complaint against the Company in the same court which alleged
substantially the same claims. In March 1998, the Company filed an answer to the
complaint and asserted numerous counterclaims against Mr. Lealos (the
"Counterclaim"), including counterclaims for breach of fiduciary duty and
conversion.
In 1992, the Company loaned to Mr. Lealos, then President and Director of the
Company, $93,000 to purchase shares of the Company's Common Stock. The loan
accrues interest at 6% annually. In 1995, the sum of $9,175 was paid toward the
principal of the loan, leaving a remaining principal balance of $83,825 due
December 31, 1996. The loan is among the subjects of the Company's
Counterclaim.
In July 1997, the Company issued and sold shares of its Common Stock in a
private placement pursuant to Regulation D, promulgated under the Securities Act
of 1933. Pursuant to a common stock subscription agreement between the Company
and the investors named therein, the Company sold a total of 2,420,000 shares of
Common Stock for an aggregate purchase price of $1,210,000.
24
<PAGE> 43
Bermuda Trust Company, trustee for the Morar Trust, of which the children of
Kenneth J. McLachlan are beneficiaries, was an investor in the private placement
and purchased 200,000 shares for an aggregate purchase price of $100,000.
Eric F. Stoer, a director of the Company, is a partner in the law firm of Bryan
Cave LLP, which has provided legal services to the Company.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits included herein:
Exhibit
No. Description
- --- -----------
3.1 Certificate of Incorporation, as amended, incorporated by reference
to Exhibits 2.1 through 2.6 of the Company's Registration Statement
No. 33-46648 filed on Form S-1 (the "Form S-1"); and to Exhibit 2.7
of the Company's Annual Report on Form 10-KSB for its fiscal year
ended December 31, 1995
3.2 Certificate of Amendment, dated February 25, 1997, incorporated by
reference to Exhibit 2.2 of the Company's Annual Report on Form
10-KSB for its fiscal year ended December 31, 1996
3.3 Certificate of Amendment, dated November 21, 1997 *
3.4 Company's By-laws, as amended *
4.1 Specimen of Certificate Representing Common Stock, incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (Registration No. 33-46648)
4.2 Form of Underwriter's Warrant, incorporated by reference to Exhibit
4.2 of the Form S-1.
4.3 7.5% Convertible Debenture due February 28, 1999, issued by the
Company to The Tail Wind Fund, Ltd. on March 11, 1997, incorporated
by reference to Exhibit 4 to the Company's Quarterly Report on Form
10-QSB for its fiscal quarter ended March 31, 1997.
4.4 Common Stock Purchase Warrant for 89,552 shares, issued by the
Company to Grayson & Associates on March 14, 1997, incorporated by
reference to Exhibit 4.3 of the Company's Registration Statement on
Form SB-2 (Registration No. 333-26795).
4.5 Letter Agreement dated May 28, 1997 between the Company and The Tail
Wind Fund Ltd., incorporated by reference to Exhibit 4.9 to the
Company's Current Report on Form 8-K dated June 5, 1997 (File No.
000-21284) (the "June 1997 8-K").
4.6 Letter Agreement dated June 27, 1997 between the Company and The Tail
Wind Fund Ltd., incorporated by reference to Exhibit 4.10 to the June
1997 8-K.
4.7 Common Stock Subscription Agreement dated as of June 30, 1997 by and
between the Company and The Tail Wind Fund Ltd., incorporated by
reference to Exhibit 4.2 of the June 1997 8-K.
4.8 Common Stock Subscription Agreement dated as of June 30, 1997 by and
between the Company and the investors set forth on Schedule A
thereto, incorporated by reference to Exhibit 4.3 of the June 1997
8-K.
4.9 Registration Rights Agreement dated as of June 30, 1997 between the
Company and The Tail Wind Fund Ltd., incorporated by reference to
Exhibit 4.4 of the June 1997 8-K.
4.10 Form of Registration Rights Agreement dated as of June 30, 1997
between the Company and the investors set forth on Schedule A to the
Common Stock Subscription Agreement dated as of June 30, 1997 by and
between the Company and the investors set forth on Schedule A
thereto, incorporated by reference to Exhibit 4.5 of the June 1997
8-K.
4.11 Form of Warrant to be issued to each of Grayson & Associates, Inc.
and The Tail Wind Fund Ltd., incorporated by reference to Exhibit 4.1
of the June 1997 8-K.
4.12 Common Stock Subscription Agreement dated as of August 22, 1997 by
and between the Company and David Freund, incorporated by reference
to Exhibit 10.5 of Amendment No. 1 to the Company's Registration
Statement on Form S-3 dated September 26, 1997 (Registration No.
333-33429) (the "S-3/A").
4.13 Registration Rights Agreement dated as of August 22, 1997 between the
Company and David Freund, incorporated by reference to Exhibit 10.6
of the S-3/A.
4.14 Certificate of Designations, Rights and Preferences of the Series
1998-A Convertible Preferred
25
<PAGE> 44
Stock, incorporated by reference to Exhibit 4.1 of the Company's
Current Report on Form 8-K, dated January 26, 1998
4.15 Warrant dated as of January 26, 1998 issued to Biscount Overseas
Limited, incorporated by reference to Exhibit 4.3 of the Company's
Registration Statement on Form S-3 dated February 26, 1998
(Registration No. 333-46961) (the "1998 S-3")
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 Company's Annual Report on Form 10-KSB for its
fiscal year ended December 31, 1996 (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 of the
Company's Annual Report on Form 10-KSB for its fiscal year ended
December 31, 1993 (the "1993 10-KSB"). #
10.3 Employment Agreement, dated August 9, 1994, between the Company and
David Barnes, incorporated by reference to Exhibit 10.3 to the 1996
10-KSB. #
10.4 1992 Stock Option Plan, incorporated by reference to Exhibit 10.1 of
the Form S-1. #
10.5 1994 Stock Option Plan, incorporated by reference to Exhibit A of the
Proxy Statement for the Company's 1994 Annual Meeting. #
10.6 Lease Agreement, dated June 13, 1994, between Technology Parks
Private Limited and Saliva Diagnostic Systems (Singapore) Pte. Ltd.,
incorporated by reference to Exhibit 10.2 of the 1995 10-KSB.
10.7 Amendment, dated February 20, 1997, to Lease Agreement, dated June
13, 1994, between Technology Parks Private Limited and Saliva
Diagnostic Systems (Singapore) Pte. Ltd., 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 of the Form S-1.
10.9 Lease Agreement for additional premises between the Company and East
Ridge Business Park, incorporated by reference to Exhibit 10.14 of
the Form S-1.
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 of the 1993
10-KSB.
10.12 License Agreement between Saliva Diagnostic Systems, Inc. and Saliva
Diagnostic Systems (Singapore) Pte. Ltd., incorporated by reference
to Exhibit 10.10 to the Company's Annual Report on Form 10-KSB for
its fiscal year ended December 31, 1994 (the "1994 10-KSB").
10.13 Securities Purchase Agreement dated as of January 26, 1998 between
the Company and Biscount Overseas Limited, incorporated by reference
to Exhibit 10.1 of the Company's Current Report on Form 8-K, dated
January 26, 1998 (the "January 8-K").
10.14 Registration Rights Agreement dated as of January 26, 1998 between
the Company and Biscount Overseas Limited, incorporated by reference
to Exhibit 10.2 of the Company's January 8-K.
10.15 Placement Agent Agreement dated as of January 26, 1998 between the
Company and Aryeh Trading, Inc. incorporated by reference to Exhibit
10.3 of the January 8-K.
10.16 Consulting Agreement, dated December 5, 1997, between the Company and
International Business Consultants Limited *
10.17 Sub-License Agreement by and among Saliva Diagnostic Systems, Pte.
Ltd., Saliva Diagnostic Systems, Inc. Fremont Novo Sciences, L.L.C.
and the Company dated February 21, 1995 *
10.18 Amendment to Sub-License Agreement, dated March 8, 1995 *
10.19 Agreement between Unilever PLC and the Company dated December 15,
1997 *
21 List of Significant Subsidiaries, incorporated by reference to
Exhibit 21.1 of the Form S-1.
24 Powers of Attorney (included on the signature pages to this Annual
Report)
27 Financial Data Schedule *
* Filed herewith.
# Denotes officer/director compensation plan or arrangement.
26
<PAGE> 45
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1997.
A Current Report on Form 8-K was filed on January 28, 1998, reporting a
securities purchase agreement dated as of January 26, 1998 in connection with a
financing pursuant to Regulation D promulgated under the Securities Act of 1933,
as amended.
27
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 31, 1998
SALIVA DIAGNOSTIC SYSTEMS, INC.
By: /s/ KENNETH J. MCLACHLAN
----------------------------
Kenneth J. McLachlan
President and Chief Executive
Officer (and Director)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated. Each of such persons appoints
Kenneth J. McLachlan and Eric F. Stoer, or each of them with full power to act
without the other, his true lawful attorneys-in-fact and agents for him and on
his behalf and in his name, place and stead, and in any and all capacities, with
full and several power of substitution, to sign and file with the proper
authorities any and all documents in connection with this report, granting unto
said attorneys, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises in order to effectuate the same as fully to all intents and purposes as
he might or could do if personally present, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, may lawfully do or cause
to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ KENNETH J. MCLACHLAN Director, President and Chief Executive Officer March 31, 1998
- ------------------------
Kenneth J. McLachlan
/s/ KENNETH J. MCLACHLAN Chief Financial Officer March 31, 1998
- ------------------------
Kenneth J. McLachlan
/s/ DAVID BARNES Managing Director, SDS International Ltd. March 31, 1998
- ----------------
David Barnes, MD
/s/ HANS VAUTHIER Director March 31, 1998
- -----------------
Hans R. Vauthier
s/ ERIC F. STOER Director March 31, 1998
- ----------------
Eric F. Stoer
</TABLE>
28
<PAGE> 1
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF
THE CERTIFICATE OF INCORPORATION
OF
SALIVA DIAGNOSTIC SYSTEMS, INC.
-----------------------------------------
Adopted in accordance with the provisions
of Section 242 of the General Corporation
Law of the State of Delaware
-----------------------------------------
I, Kenneth J. MacLachlan, President of SALIVA DIAGNOSTIC SYSTEMS,
INC., a corporation organized and existing under the laws of the State of
Delaware, do hereby affirm under penalties of perjury as follows:
FIRST, that the Certificate of Incorporation of said corporation be
amended by striking out the whole of ARTICLE FOURTH, as it now exists and
inserting in lieu and instead thereof a new ARTICLE FOURTH, reading as follows:
"The aggregate number of shares of all classes of stock
which the corporation shall have authority to issue is Fifty One
Million (51,000,000), of which 50,000,000 shall be Common Stock, par
value $.01 per share, and 1,000,000 shall be preferred stock, no par
value per share."
SECOND, that such amendment has been duly adopted in accordance with
the provisions of the General Corporation Law of the Sate of Delaware by the
vote of not less than a majority of the outstanding stock entitled to vote at a
special meeting of stockholders and that valid notice of the special meeting was
given to the stockholders, all in accordance with the provisions of Sections 222
and 242 of the General Corporation Law of the State of Delaware.
<PAGE> 2
IN WITNESS WHEREOF, I have signed this certificate this 26th day of
November, 1997.
/s/ Kenneth J. McLachlan
----------------------------------
Kenneth J. McLachlan, President
<PAGE> 1
EXHIBIT 3.4
SALIVA DIAGNOSTIC SYSTEMS, INC.
BY-LAWS
AS AMENDED
I. OFFICES
1.1 The registered office and the registered agent of the Corporation
shall be located at such place as the Board of Directors may from time to time
designate.
1.2 The Corporation may also have offices at such other places both
within and without the State of Delaware as the Board of Directors may from time
to time determine or the business of the Corporation may require.
II. ANNUAL MEETING OF SHAREHOLDERS
2.1 All meetings of Shareholders shall be held at such time and place
as may be fixed from time to time by the Board of Directors.
2.2 Written notice of the Annual Meeting stating the time, place, and
purpose or purposes of the meeting shall be delivered either personally or by
mail, not less than ten nor more than sixty days before the date of the meeting,
to each Shareholder of record entitled to vote at such meeting.
2.3 When a meeting is adjourned to another time or place, it shall not
be necessary to give notice of the adjourned meeting if the time and place to
which the meeting is adjourned are announced at the meeting at which the
adjournment is taken, and at the adjourned meeting only such business is
transacted as might have been transacted at the original meeting. However, if
after the adjournment the Board of Directors establishes a new record date for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
Shareholder of record on the new record date.
2.4 Notice of meeting need not be given to any Shareholder who signs a
waiver of notice, in person or by proxy, whether before or after the meeting.
The attendance of any Shareholder at a meeting, in person or by proxy, without
protesting prior to the conclusion of the meeting the lack of notice of such
meeting, shall constitute a waiver of notice by him.
2.5 Any action required or permitted to be taken at a meeting of
Shareholders by statute, the Certificate of Incorporation, or these By-Laws, may
be taken without a meeting upon the written consent of the Shareholders entitled
to vote who in the aggregate own the requisite amount of issued and outstanding
shares of stock of the Corporation which constitutes the minimum number of votes
necessary to authorize such action at a meeting at which all Shareholders
entitled to vote thereon were present and voting. The election of Directors may
be taken without a meeting upon the written consent of all Shareholders entitled
to vote.
III. SPECIAL MEETING OF SHAREHOLDERS
3.1 Special Meetings of Shareholders for any purpose other than the
election of directors may be held at such time and place within or without the
State of Delaware as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof.
3.2 Special Meetings of the Shareholders, for any purpose or purposes,
unless otherwise prescribed by statute or by the Certificate of Incorporation,
may be called by the President or the Board of Directors.
1
<PAGE> 2
3.3 Written notice of a Special Meeting stating the time, place, and
purpose or purposes of the meeting for which the meeting is called, shall be
delivered not less than ten nor more than sixty (60) days before the date of the
meeting, personally, by mail, or by telegram, by or at the direction of the
President, the Secretary, or the officer or persons calling the meeting, to each
Shareholder of record entitled to vote at such meeting.
IV. QUORUM AND VOTING OF STOCK
4.1 The holders of a majority of the shares of stock issued and
outstanding and entitled to vote, represented in person or by proxy, shall
constitute a quorum at all meetings of the Shareholders for the transaction of
business, except as otherwise provided by statute or by the Certificate of
Incorporation. If, however, such quorum shall not be present or represented at
any meeting of the Shareholders, the Shareholders present in person or
represented by proxy shall have the power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present or represented. At such adjourned meeting at which a quorum
shall be present or represented, any business may be transacted which might have
been transacted at the meeting as originally notified.
4.2 If a quorum is present, in all matters other than the election of
Directors, the affirmative vote of a majority of the shares of stock present in
person or by proxy at the meeting and entitled to vote on the subject matter
shall be the act of the Shareholders unless the vote of a greater number of
shares of stock is required by law or the Certificate of Incorporation.
Directors shall be elected by a plurality of the votes of the shares present in
person or by proxy at the meeting and entitled to vote on the election of
Directors.
4.3 Each outstanding share of stock, having voting power, shall be
entitled to one vote on each matter submitted to a vote at a meeting of
Shareholders, unless otherwise provided in the Certificate of Incorporation. A
Shareholder may vote either in person or by proxy.
V. DIRECTORS
5.1 The number of Directors which shall constitute the whole Board of
Directors shall be not less than one (1) nor more than seven (7), such number to
be increased or decreased by an amendment to these By-Laws. Each Director shall
be at least eighteen (18) years of age. Directors need not be residents of the
State of Delaware or Shareholders of the Corporation. The Directors, other than
the first Board of Directors, shall be elected at the Annual Meeting of the
Shareholders, except as hereinafter provided, and each Director elected shall
serve until the next succeeding Annual Meeting and until his successor shall
have been elected and qualified.
5.2 Unless otherwise provided in the Certificate of Incorporation, any
vacancy occurring in the Board of Directors or an increase in the number of
Directors may be filled by the affirmative vote of a majority of the remaining
Directors though less than a quorum of the Board of Directors. A director
elected to fill a vacancy shall be elected for the unexpired portion of the term
of his predecessor in office. Any directorship to be filled by reason of an
increase in the number of Directors shall be filled by election at an Annual
Meeting or at a Special Meeting of Shareholders called for that purpose. A
Director elected to fill a newly created directorship shall serve until the next
succeeding Annual Meeting of Shareholders and until his successor shall have
been elected and qualified. If by reason of death, resignation or other cause
the Corporation has no Directors in office, any Shareholder or the executor or
administrator of the deceased Shareholder may call a Special Meeting of
Shareholders for the election of Directors and, over his own signature, shall
give notice of said meeting in accordance with these By-Laws.
5.3 One or more or all the Directors of the Corporation may be removed
for cause by the Shareholders by the affirmative vote of the majority of the
votes cast by the holders of shares entitled to vote for the election of
Directors.
2
<PAGE> 3
5.4 The business affairs of the Corporation shall be managed by its
Board of Directors which may exercise all such powers of the Corporation and do
all such lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these By-Laws directed or required to be exercised or done
by the Shareholders.
5.5 The Directors may keep the books and records of the Corporation,
except such as are required by law to be kept within the state, outside of the
State of Delaware, at such place or places as they may from time to time
determine.
5.6 The Board of Directors, by the affirmative vote of a majority of
the Directors then in office, and irrespective of any personal interest of any
of its members, shall have the authority to establish reasonable compensation of
all Directors and Officers of the Corporation.
VI. MEETINGS OF THE BOARD OF DIRECTORS
6.1 Meetings of the Board of Directors, regular or Special, may be held
either within or without the State of Delaware, and at such time and place as
shall be determined by the Board.
6.2 Regular meetings of the Board of Directors may be held upon such
notice, or without notice, and at such time and at such place as shall from time
to time be determined by the Board.
6.3 Special Meetings of the Board of Directors may be called by the
President on ten (10) days' notice to each Director, either personally or by
mail or by telegram; Special Meetings shall be called by the President or
Secretary in like manner and on like notice on the written request of two
Directors. Notice need not be given to any Director who signs a waiver of
notice, whether before or after the meeting.
6.4 Attendance of a Director at any meeting shall constitute a waiver
of notice of such meeting, except where a Director attends for the express
purpose of objecting to the transaction of any business because the meeting is
not lawfully called or convened. Neither the business to be transacted at, nor
the purpose of, any regular or Special Meeting of the Board of Directors need be
specified in the notice or waiver of notice of such meeting.
6.5 A majority of the then current number of Directors shall constitute
a quorum for the transaction of business unless a greater or lesser number is
required by statute or by the Certificate of Incorporation. The act of a
majority of the Directors present at any meeting at which a quorum is present
shall be the act of the Board of Directors, unless the act of a greater or
lesser number is required by statute or by the Certificate of Incorporation. If
a quorum shall not be present at any meeting of Directors, the Directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
6.6 Unless otherwise provided by the Certificate of Incorporation, any
action required to be taken at a Meeting of the Board, or any committee thereof
may be taken without a meeting and, shall be deemed the action of the Board of
Directors or of a committee thereof, if all Directors or committee members, as
the case may be, execute either before or after the action is taken, a written
consent thereto, and the consent is filed with the records of the Corporation.
VII. EXECUTIVE COMMITTEE OF THE BOARD OF DIRECTORS
7.1 The Board of Directors, by resolution adopted by a majority of the
number of Directors then in office, may designate one or more Directors to
constitute an executive committee, which committee, to the extent provided in
such resolution, shall have and exercise all of the authority of the Board of
Directors in the management of the Corporation, except as otherwise required by
law. Vacancies in the membership of the committee shall be filled by the Board
of Directors at a regular or Special Meeting of the
3
<PAGE> 4
Board of Directors. The Executive Committee shall keep regular minutes of its
proceedings and report the same to the Board when required.
VIII. NOTICES
8.1 Whenever, under the provisions of the statutes or of the
Certificate of Incorporation or of these By-Laws, notice is required to be given
to any Director or Shareholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
Director or Shareholder, at his address as it appears on the records of the
Corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to Directors may also be given by telegram.
8.2 Whenever any notice is required to be given by law or under the
Certificate of Incorporation or these By-Laws, a waiver thereof in writing
signed by the person or persons entitled to such notice, whether before or after
the time stated therein, shall be deemed equivalent to the giving of such
notice.
IX. OFFICERS
9.1 The Board of Directors at its first meeting after each Annual
Meeting of Shareholders shall choose the Officers, none of whom need to be a
member of the Board of Directors.
9.2 The Board of Directors may appoint such Officers and agents as it
shall deem necessary who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the Board of Directors.
9.3 The salaries of all Officers and agents of the Corporation shall be
fixed by the Board of Directors.
9.4 The Officers of the Corporation shall hold office until their
successors are chosen and qualify. Any Officer elected or appointed by the Board
of Directors may be removed with or without cause at any time by the affirmative
vote of a majority of the Board of Directors. Any vacancy occurring in any
office of the Corporation shall be filled by the Board of Directors.
THE PRESIDENT
9.5 The President, if one be appointed, shall preside at all meetings
of the Shareholders and in the absence of the Chairman of the Board of
Directors, at the meeting of the Board of Directors, and shall have general and
active management of the business of the Corporation and shall see that all
orders and resolutions of the Board of Directors are carried into effect.
9.6 The President shall execute bonds, mortgages and other contracts
requiring a seal, under the seal of the Corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be delegated by the Board of Directors to
some other Officer or agent of the Corporation.
THE VICE-PRESIDENTS
9.7 The Vice-President, if one be elected, or if there shall be more
than one, the Vice-Presidents in the order determined by the Board of Directors,
shall, in the absence or disability of the President, perform the duties and
exercise the powers of the President and shall perform such other duties and
have such other powers as the Board of Directors may from time to time
prescribe.
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THE SECRETARY AND ASSISTANT SECRETARIES
9.8 The Secretary, if one be elected, shall attend all meetings of the
Board of Directors and all meetings of the Shareholders and record all the
proceedings of the meetings of the Corporation and of the Board of Directors in
a book to be kept for that purpose and shall perform like duties for standing
committees when required. The Secretary shall give, or cause to be given, notice
of all meetings of the Shareholders and Special Meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or President. The Secretary shall have custody of the corporate
seal of the Corporation and he, or an Assistant Secretary, shall have authority
to affix the same to any instrument requiring it and when so affixed, it may be
attested by his signature or by the signature of such Assistant Secretary. The
Board of Directors may give general authority to any other Officer to affix the
seal of the Corporation and to attest the affixing by his signature.
9.9 The Assistant Secretary, if one be elected, or if there be more
than one, the assistant secretaries in the order determined by the Board of
Directors, shall, in the absence or disability of the Secretary, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
9.10 The Treasurer, if one be elected, shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all monies and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors.
9.11 The Treasurer shall disburse from the funds of the Corporation as
may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Treasurer and of the financial condition of the
Corporation.
9.12 If required by the Board of Directors, the Treasurer shall give
the Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation.
9.13 The Assistant Treasurer, if one be elected, or, if there shall be
more than one, the Assistant Treasurers in the order determined by the Board of
Directors, shall, in the absence or disability of the Treasurer, perform the
duties and exercise the powers of the Treasurer and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
CHIEF FINANCIAL OFFICER
9.14 The Chief Financial Officer, if one be elected, shall have such
duties as from time to time may be prescribed by the Board of Directors.
CHIEF EXECUTIVE OFFICER
9.15 The Chief Executive Officer, if one be elected, shall have such
duties as may from time to time be prescribed by the Board of Directors.
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CHIEF OPERATING OFFICER
9.16 The Chief Operating Officer, if one be elected, shall have such
duties as may from time to time be prescribed by the Board of Directors.
X. CERTIFICATES FOR SHARES
10.1 The shares of the Corporation shall be represented by certificates
signed by the President or a Vice-President and by the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary of the Corporation, and
may be sealed with the seal of the Corporation or a facsimile thereof.
10.2 When the Corporation is authorized to issue shares of more than
one class there shall be set forth upon the face or back of the certificate, or
the certificate shall have a statement that the Corporation will furnish to any
Shareholder upon request and without charge, a full statement of the
designations, preferences, limitations and relative rights of the shares of each
class authorized to be issued and, if the Corporation is authorized to issue any
preferred or special class in series, the variations in the relative rights and
preferences between the shares of each such series so far as the same have been
fixed and determined and the authority of the Board of Directors to fix and
determine the relative rights and preferences of subsequent series.
10.3 The signatures of the Officers of the Corporation upon a
certificate may be facsimiles if the certificate is countersigned by a transfer
agent, or registered by a registrar, other than the Corporation itself or an
employee of the Corporation. In case any Officer who has signed or whose
facsimile signature has been placed upon such certificate shall have ceased to
be such Officer before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such Officer at the date of its
issue.
LOST CERTIFICATES
10.4 The Board of Directors may direct a new certificate to be issued
in place of any certificate theretofore issued by the Corporation alleged to
have been lost or destroyed. When authorizing such issue of a new certificate,
the Board of Directors, in its discretion and as a condition precedent to the
issuance thereof, may prescribe such terms and conditions as it deems expedient,
and may require such indemnities as it deems adequate, to protect the
Corporation from any claim that may be made against it with respect to any such
certificate alleged to have been lost or destroyed.
TRANSFERS OF SHARES
10.5 Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate representing shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, a new
certificate shall be issued to the person entitled thereto, and the old
certificate canceled and the transaction recorded upon the books of the
Corporation.
CLOSING OF TRANSFER BOOKS
10.6 For the purpose of determining Shareholders entitled to notice of
or to vote at any meeting of Shareholder, or any adjournment thereof or entitled
to receive payment of any dividend, or in order to make a determination of
Shareholders for any other proper purpose, the Board of Directors may provide
that the stock transfer books shall be closed for a stated period but not to
exceed, in any case, sixty (60) days. If the stock transfer books shall be
closed for the purpose of determining Shareholders entitled to notice of or to
vote at a meeting of Shareholders, such books shall be closed for at least ten
(10) days immediately preceding such meeting. In lieu of closing the stock
transfer books, the Board of Directors may fix in advance a date as the record
date for any such determination of Shareholders, such date in any case to be not
more than sixty (60) days and, in case of a meeting of Shareholders, not less
than ten (10) days prior to the date on which the particular action, requiring
such determination of Shareholders, is to be taken. If the stock
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transfer books are not closed and no record date is fixed for the determination
of Shareholders entitled to notice of or to vote at a meeting of Shareholders,
or Shareholders entitled to receive payment of a dividend, the record date for
the determination of Shareholders entitled to notice of or to vote at a meeting
of Shareholders shall be the close of business on the day next preceding the day
on which notice is given, or, if no notice is given, the day next preceding the
day on which the meeting is held; and the record date for determining
Shareholders for any other purpose shall be at the close of business on the day
on which the resolution of the board relating thereto is adopted. When a
determination of Shareholders entitled to vote at any meeting of Shareholders
has been made as provided in this section, such determination shall apply to any
adjournment thereof.
REGISTERED SHAREHOLDERS
10.7 The Corporation shall be entitled to recognize the exclusive right
of a person registered on its books as the owner of shares to receive dividends,
and to vote as such owner, and to hold liable for calls and assessments a person
registered on its books as the owner of shares, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Delaware.
LIST OF SHAREHOLDERS
10.8 The Officer or agent having charge of the transfer books for
shares shall make, and certify a complete list of the Shareholders entitled to
vote at a Shareholders' meeting, or adjournment thereof, arranged in
alphabetical order within each class and series, with the address of, and the
number of shares held by each Shareholder, which list shall be produced and kept
open at the time and place of the meeting and shall be subject to the inspection
of any Shareholder during the whole time of the meeting. Such list shall be
prima facie evidence as to who are the Shareholders entitled to examine such
list or to vote at any meeting of the Shareholders.
XI. GENERAL PROVISIONS
DIVIDENDS
11.1 Subject to the provisions of the Certificate of Incorporation
relating thereto, if any, dividends may be declared by the Board of Directors at
any regular or Special Meeting, pursuant to law. Dividends may be paid in cash,
in its bonds, in its own shares or other property including the shares or bonds
of other corporations subject to any provisions of law and of the Certificate of
Incorporation.
11.2 Before payment of any dividend, there may be set aside out of any
funds of the Corporation available for dividends such sum or sums as the
Directors from time to time, in their absolute discretion, think proper as a
reserve fund to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purpose as the Directors shall think conducive to the interest of the
Corporation, and the Directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
11.3 All checks or demands for money and notes of the Corporation shall
be signed by such Officer or Officers or such other person or persons as the
Board of Directors may from time to time designate.
FISCAL YEAR
11.4 The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.
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SEAL
11.5 The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization and the words "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or in any manner reproduced.
IX. AMENDMENTS
12.1 These By-Laws may be altered, amended, or repealed or new By-Laws
may be adopted by the affirmative vote of a majority of the Board of Directors
at any regular or Special Meeting of the Board of Directors, subject to any
provision in the Certificate of Incorporation reserving to the Shareholders the
power to adopt, amend, or repeal By-Laws, but By-Laws made by the Board of
Directors may be altered or repealed and new By-Laws made by the Shareholders.
The Shareholders may prescribe that any By-Law made by them shall not be altered
or repealed by the Board of Directors.
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EXHIBIT 10.16
MANAGEMENT CONSULTING AGREEMENT
THIS AGREEMENT, entered into as of the 5th day of December, 1997, by
and between Saliva Diagnostic Systems, Inc., a Delaware corporation (the
"Company"), and International Business Consultants, a Jersey corporation
("IBCO") (collectively, "the parties").
WHEREAS, IBCO has heretofore provided the services of Kenneth J.
McLachlan (the "Executive") as the Company's President and Chief Executive
Officer, and the Executive is experienced in and has contributed to all phases
of the business of the Company, and the Company desires to retain IBCO to
provide the services of the Executive on the terms set forth herein;
WHEREAS, the Board of Directors of the Company (the "Board")
recognizes that it is essential and in the best interest of the Company and its
stockholders to ensure the continued dedication and efforts of IBCO to provide
the services of the Executive by offering security in the relationship and
severance and other benefits; and
WHEREAS, in order to induce IBCO to continue to provide the services
of the Executive, the Company desires by this writing to set forth the continued
relationship of IBCO and the Company.
NOW, THEREFORE, in consideration of the respective agreements of the
parties contained herein, it is agreed as follows:
1. Term. The initial term of services under this Agreement shall be
for the period commencing on the date hereof, and ending December 31, 1998;
provided, however, that the terms of this Agreement shall be automatically
extended for one (1) year on January 1, 1999 and on each year thereafter unless
either the Company or IBCO shall have given written notice to the other at least
ninety (90) days prior thereto to the effect that the term of this Agreement
shall not be so extended; and provided, further, that notwithstanding any such
notice by the Company not to extend, the term of this Agreement shall not expire
prior to the expiration of the third anniversary of a Change in Control (as
hereinafter defined).
2. Services. IBCO shall provide the services of an individual
acceptable to the Company as the President and Chief Executive Officer of the
Company and/or in such other senior executive capacity as may be mutually agreed
to in writing by the parties. IBCO has designated Kenneth J. McLachlan to act in
such capacity, and the term "Executive" as used in this Agreement shall refer to
Mr. McLachlan.
(a) The Executive shall report to the Board and shall perform the
duties, undertake the responsibilities and exercise the authority customarily
performed, undertaken and exercised by persons situated in a similar executive
capacity and as are, from time to time, prescribed by the Board. The Executive
shall also promote, by entertainment or otherwise, the business of the Company.
<PAGE> 2
(b) IBCO agrees that the Executive shall devote reasonable
attention and time during usual business hours to the business and affairs of
the Company to the extent necessary to discharge the responsibilities assigned
to the Executive hereunder. The Executive may participate in other business or
personal ventures or activities including, but not limited to, (i) serving on
corporate, civil or charitable boards or committees, (ii) managing personal
investments and (iii) delivering lectures and teaching at educational
institutions, so long as such activities are not inconsistent with and do not
significantly interfere with the performance of the Executive's responsibilities
hereunder.
(c) The Company agrees to nominate the Executive for election to
the Board at each annual meeting of shareholders during the terms of Agreement.
IBCO agrees that the Executive shall serve on the Board if elected.
3. Base Salary. The Company agrees to pay or cause to be paid to IBCO
during the term of this Agreement a base salary at the rate of $180,000 per
annum or such greater amount as the Board may from time to time determine
(hereinafter referred to as the "Base Salary"). Such Base Salary shall be
payable to IBCO in semi-monthly installments, commencing on January 1, 1998, as
compensation for its services during the term during which it renders services
hereunder. Such rate of salary, or increased rate of salary, if any, as the case
may be, shall be reviewed at least annually by the Board and may be further
increased (but not decreased) in such amounts as the Board in its discretion may
decide.
4. Stock Options. Upon entering into this Agreement, IBCO shall be
granted options to purchase up to 250,000 shares of common stock of the Company,
par value $.01 per share, pursuant to and on the terms set forth in the Form of
Stock Option Agreement attached hereto as Exhibit A.
5. Bonus.
(a) As compensation for IBCO's previous service to and efforts on
behalf of the Company, IBCO shall be granted options to purchase up to 750,000
shares of common stock of the Company, par value $.01 per share, pursuant to and
on the terms set forth in the Form of Stock Option Agreement attached hereto as
Exhibit A (together with the options described in Section 4, the "Options").
(b) IBCO shall receive an annual incentive bonus (the "Incentive
Bonus") for each of the Company's fiscal years during the term during which IBCO
renders services hereunder, commencing with the fiscal year ending December 31,
1998, in an amount equal to ten percent (10%) of the net income of the Company
for such fiscal year in excess of the amount determined by multiplying
stockholders equity for such fiscal year (determined by averaging the four
quarterly stockholders equity figures reported by the Company for that fiscal
year) by 0.20. The Incentive Bonus shall be payable on the January 30 following
the end of the applicable fiscal year. Notwithstanding the foregoing, IBCO shall
not be entitled to receive the Incentive Bonus if
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its services are terminated for Cause (as defined in Section 9 hereof) during
the applicable fiscal year.
(c) Any Incentive Bonus payable pursuant to this Section 5 shall
be payable in cash or, at the option of the Company, in whole or in part in
shares of the Company's common stock, par value $.01 per share, subject to the
following:
(i) all such shares shall be "restricted securities"
within the meaning of the Securities Act of 1933, as amended, and shall bear a
restrictive legend to that effect; and
(ii) for the purpose of calculating the number of shares
to be issued, the Company's common stock shall be valued at the average of the
closing bids on the five trading days subsequent to the date of the end of the
Company's fiscal year, as reported by The Nasdaq Stock Market.
6. Expenses. IBCO shall be entitled to receive prompt reimbursement
of all expenses reasonably incurred by the Executive in connection with the
performance of his duties hereunder or for promoting, pursuing or otherwise
furthering the business or interests of the Company.
7. Termination. IBCO's services hereunder may be terminated under the
following circumstances:
(a) Disability. The Company may terminate IBCO's services after
having established the Executive's Disability. For purposes of this Agreement,
"Disability" means a physical or mental infirmity which impairs the Executive's
ability to substantially perform his duties under this Agreement which continues
for a period of at least 12 consecutive months. A determination of Disability
shall be made by a physician satisfactory to both IBCO and the Company, which
physician's determination as to Disability shall be made within 10 days of the
request therefor and shall be binding on all parties; provided, however, that if
IBCO and the Company do not agree on a physician, IBCO and the Company shall
each select a physician and these two together shall select a third physician,
which third physician's determination as to Disability shall be binding on all
parties. IBCO shall be entitled to the compensation and benefits provided for
under this Agreement for any period during the term of this Agreement and prior
to the establishment of the Executive's Disability during which the Executive is
unable to work due to a physical or mental infirmity. Notwithstanding anything
contained in this Agreement to the contrary, until the Termination Date
specified in a Notice of Termination (as each term is hereinafter defined)
relating to the Executive's Disability, IBCO shall be entitled to return the
Executive to his position with the Company as set forth in this Agreement in
which event no Disability of the Executive will be deemed to have occurred.
(b) Cause. The Company may terminate IBCO's services for "Cause."
A termination for Cause is a termination evidenced by a resolution adopted in
good faith by two-thirds (2/3) of the Board that the Executive (i) willfully and
continually failed to substantially
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perform his duties with the Company (other than a failure resulting from the
Executive's incapacity due to physical or mental illness or from the Executive's
assignment of duties that would constitute "Good Reason" as hereinafter defined)
which failure continued for a period of at least thirty (30) days after a
written notice of demand for substantial performance has been delivered to IBCO
specifying the manner in which the Executive has failed to substantially
perform, or (ii) willfully engaged in conduct which is demonstrably and
materially injurious to the Company, monetarily or otherwise; provided, however
that no termination of IBCO's services shall be for Cause as set forth in clause
(ii) above until (x) there shall have been delivered to IBCO a copy of a written
notice setting forth that the Executive was guilty of the conduct set forth in
clause (ii) and specifying the particulars thereof in detail, and (y) IBCO shall
have been provided an opportunity to be heard by the Board (with the assistance
of counsel if IBCO so desires). No act, nor failure to act, on the Executive's
part, shall be considered "willful" unless he has acted or failed to act with an
absence of good faith and without a reasonable belief that his action or failure
to act was in the best interest of the Company. Notwithstanding anything
contained in this Agreement to the contrary, no failure to perform by IBCO after
Notice of Termination is given by IBCO shall constitute Cause for purposes of
this Agreement.
(c) (1) Good Reason. IBCO may terminate its services for "Good
Reason." For purposes of this Agreement, Good Reason shall mean the occurrence
after a Change in Control (as hereinafter defined) of any of the events or
conditions described in Subsections (i) through (ix) hereof:
(i) a change in the Executive's status, title, position
or responsibilities (including reporting responsibilities) which, in
IBCO's reasonable judgment, does not represent a promotion from the
Executive's status, title, position or responsibilities as in effect
immediately prior thereto; the assignment to the Executive of any
duties or responsibilities which, in IBCO's reasonable judgment, are
inconsistent with such status, title, position or responsibilities;
or any removal of the Executive from or failure to reappoint or
reelect him to any of such positions, except in connection with the
termination IBCO's services for the Executive's Disability, Cause, as
a result of the Executive's death or by IBCO other than for Good
Reason;
(ii) a reduction in the Base Salary or any failure to pay
IBCO any compensation or benefits to which it is entitled within five
(5) days of the date due;
(iii) a failure by the Company to increase the Base Salary
at least annually at a percentage of Base Salary no less than the
average percentage increases (other than increases resulting from
the Executive's promotion) granted to IBCO during the three most
recent full years ended prior to a Change in Control (or such lesser
number of full years during which IBCO has provided services);
(iv) the failure by the Company to (A) continue in effect
(without reduction in benefit level and/or reward opportunities) any
material compensation or benefit plan in which IBCO was participating
at the time of the Change
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in Control, or (B) provide IBCO with compensation and benefits at
least equal (in terms of benefit levels and/or reward opportunities)
to those provided for under each applicable plan, program and
practice as in effect immediately prior to the Change in Control (or
as in effect following the Change in Control, if greater);
(v) the insolvency or the filing (by any party,
including the Company) of a petition for bankruptcy of the Company;
(vi) any material breach by the Company of any provision
of this Agreement;
(vii) any purported termination of IBCO's services for
Cause by the Company which does not comply with the terms of this
Section 7; or
(viii) the failure of the Company to obtain an agreement,
satisfactory to IBCO, from any successor or assign of the Company to
assume and agree to perform this Agreement, as contemplated in
Section 12 hereof.
(2) Any event or condition described in this Section 7(c)(i)
through (viii) which occurs prior to a Change in Control but which (i) was at
the request of a third party who has taken steps reasonably calculated to effect
a Change in Control, or (ii) otherwise arose in connection with a Change in
Control, shall constitute Good Reason for purposes of this Agreement
notwithstanding that it occurred prior to a Change in Control.
(3) IBCO's right to terminate its services pursuant to this
Section 7(c) shall not be affected by the Executive's incapacity due to physical
or mental illness.
(d) Voluntary Termination. IBCO may voluntarily terminate its
services hereunder at any time. If IBCO voluntarily terminates its services for
any reason or without reason during the 60-day period which commences on the
date which is six (6) months following the date of a Change in Control, it shall
be referred to as a "Limited Period Termination."
(e) For purposes of this Agreement, a "Change in Control" shall
mean any of the following events:
(1) An acquisition (other than directly from the Company) of
any voting securities of the Company (the "Voting Securities") by any "Person"
(as the term person is used for purposes of Section 13 (d) or 14 (d) of the
Securities Exchange Act of 1934, as amended (the "1934 Act")) immediately after
which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3
promulgated under the 1934 Act) of fifteen percent (15%) or more of the combined
voting power of the Company's then outstanding Voting Securities; provided,
however, in determining whether a Change in Control has occurred, Voting
Securities which are acquired in a "Non-Control Acquisition" (as hereinafter
defined) shall not constitute an acquisition which would cause a Change in
Control. A "Non-Control Acquisition" shall mean an acquisition by (i) an
employee benefit plan (or a trust forming a part thereof) maintained by (x)
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the Company or (y) any corporation or other Person of which a majority of its
voting power or its equity securities or equity interest is owned directly or
indirectly by the Company (a "Subsidiary") , (ii) the Company or any Subsidiary,
or (iii) any Person in connection with a "Non-Control Transaction" (as
hereinafter defined).
(2) The individuals who, as of the date of this Agreement, are
members of the Board (the "Incumbent Board"), cease for any reason to constitute
at least two-thirds of the Board; provided, however, that if the election, or
nomination for election by the Company's stockholders, of any new director was
approved by a vote of at least two-thirds of the Incumbent Board, such new
director shall, for purposes of this Agreement, be considered as a member of the
Incumbent Board; provided further, however, that no individual shall be
considered a member of the Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened "Election Contest" (as
described in Rule 14a-l(i) promulgated under the 1934 Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board (a "Proxy Contest") including by reason of any agreement intended
to avoid or settle any Election Contest or Proxy Contest; or
(3) Approval by stockholders of the Company of:
(A) A merger, consolidation or reorganization involving
the Company, unless
(i) the stockholders of the Company, immediately
before such merger, consolidation or reorganization, own, directly or
indirectly immediately following such merger, consolidation or
reorganization, at least sixty-six and two-thirds (66 2/3%) of the
combined voting power of the outstanding voting securities of the
corporation resulting from such merger or consolidation or
reorganization (the "Surviving Corporation") in substantially the
same proportion as their ownership of the Voting Securities
immediately before such merger, consolidation or reorganization,
(ii) the individuals who were members of the
Incumbent Board immediately prior to the execution of the agreement
providing for such merger, consolidation or reorganization
constitute at least two-thirds of the members of the board of
directors of the Surviving corporation,
(iii) no Person (other than the company or any
subsidiary), any employee benefit plan (or any trust forming a part
thereof) maintained by the Company, the surviving corporation or any
Subsidiary, or any Person who, immediately prior to such merger,
consolidation or reorganization had Beneficial Ownership of fifteen
percent (15%) or more of the then outstanding Voting Securities, has
Beneficial ownership of fifteen percent (15%) or more of the combined
voting power of the Surviving Corporation's then outstanding voting
securities, and
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(iv) a transaction described in clauses (i) through
(iii) shall herein be referred to as a "Non-Control Transaction";
(B) A complete liquidation or dissolution of the Company;
or
(C) An agreement for the sale or other disposition of all
or substantially all of the assets of the Company to any Person
(other than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur
solely because any Person (the "Subject Person") acquired Beneficial Ownership
of more than the permitted amount of the outstanding Voting Securities as a
result of the acquisition of Voting Securities by the Company which, by reducing
the number of Voting Securities outstanding, increases the proportional number
of shares Beneficially owned by the Subject Person, provided that if a Change in
Control would occur (but for the operation of this sentence) as a result of the
acquisition of Voting Securities by the Company, and after such share
acquisition by the Company, the Subject Person becomes the Beneficial Owner of
any additional Voting Securities which increases the percentage of the then
outstanding Voting Securities Beneficially Owned by the Subject Person, then a
Change in Control shall occur.
(4) Notwithstanding anything contained in this Agreement to
the contrary, if IBCO's services are terminated during the term of this
Agreement and IBCO reasonably demonstrates that such termination (i) was at the
request of a third party who has indicated an intention or taken steps
reasonably calculated to effect a Change in Control and who effectuates a Change
in Control (a "Third Party") or (ii) otherwise occurred in connection with, or
in anticipation of, a Change in Control which actually occurs, then for all
purposes of this Agreement, the date of a Change in Control with respect to IBCO
shall mean the date immediately prior to the date of such termination.
(f) Notice of Termination. Any purported termination by the
Company or by IBCO shall be communicated by written Notice of Termination to the
other. For purposes of this Agreement, a "Notice of Termination" shall mean a
notice which indicates the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of IBCO's services under the
provision so indicated. For purposes of this Agreement, no purported termination
of services shall be effective without such Notice of Termination.
(g) Termination Date, Etc. "Termination Date" shall mean in the
case of the Executive's death, his date of death or in all other cases, the date
specified in the Notice of Termination, subject to the following:
(1) If IBCO's services are terminated by the Company for
Cause or due to the Executive's Disability, the date specified in the Notice of
Termination shall be at least thirty (30) days from the date the Notice of
Termination is given to IBCO, provided that, in the
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case of Disability, the Executive shall not have returned to the full-time
performance of his duties during such period of at least thirty (30) days; and
(2) If IBCO's services are terminated for Good Reason or as a
Limited Period Termination, the date specified in the Notice of Termination
shall not be more than sixty (60) days from the date the Notice of Termination
is given to the Company.
8. Compensation Upon Termination. Upon termination of IBCO's services
during the term of this Agreement (including any extensions thereof), IBCO shall
be entitled to the following benefits:
(a) If IBCO's services are terminated by the Company for Cause or
Disability or by IBCO (other than for Good Reason or a Limited Period
Termination), or by reason of the Executive's death, the Company shall pay IBCO
all amounts earned or accrued hereunder through the Termination Date but not
paid as of the Termination Date, including (i) Base Salary, (ii) reimbursement
for any and all monies advanced or expenses incurred in connection with IBCO's
services for reasonable and necessary expenses incurred by the Executive on
behalf of the Company for the period ending on the Termination Date, (iii) any
bonuses or incentive compensation and (iv) any previous compensation which IBCO
has previously deferred (including any interest earned or credited thereon)
(collectively, "Accrued Compensation"). In addition to the foregoing, if IBCO's
services are terminated by the Company for Disability or by reason of the
Executive's death, the Company shall pay to IBCO (i) an amount equal to the
bonus or incentive award that IBCO would have been entitled to receive in
respect of the fiscal year in which the Termination Date occurs had its services
continued until the end of such fiscal year, calculated as if all performance
targets and goals (if applicable) had been fully met by the Company and by IBCO,
as applicable, for such year multiplied by a fraction the numerator of which is
the number of days in such fiscal year through the Termination Date and the
denominator of which is 365 (a "Pro Rata Bonus") plus (ii) a severance payment
equal to the Base Salary at the rate in effect immediately prior to the
termination of IBCO's services. IBCO's entitlement to any other compensation or
benefits shall be determined in accordance with the Company's applicable
programs and practices then in effect.
(b) If IBCO's services shall be terminated (1) by the Company
other than for Cause, death or Disability, (2) by IBCO for Good Reason, or (3)
by IBCO as a Limited Period Termination, then IBCO shall be entitled to the
benefits provided below:
(i) the Company shall pay IBCO all Accrued Compensation
and a Pro Rata Bonus;
(ii) the Company shall pay IBCO as severance pay and in
lieu of any further salary for periods subsequent to the Termination
Date, in a single payment an amount in cash equal to three (3) times
the sum of (A) the Base Salary at the highest rate in effect at any
time within the ninety (90) day period ending on the date the Notice
of Termination is given (or if IBCO's services are terminated after a
Change in Control, the Base Salary immediately prior to the Change in
Control, if greater) and (B) the "Bonus
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<PAGE> 9
Amount." The term "Bonus Amount" shall mean (x) the greatest amount
of any cash bonus or incentive compensation received by IBCO during
the three fiscal years immediately preceding the Termination Date or
(y) if no such bonus was received by IBCO during any of such three
years, then an amount equal to IBCO's maximum bonus which could be
awarded for the fiscal year in which the Termination Date occurs had
IBCO's services continued until the end of such fiscal year;
(iii) (A) all restrictions on any outstanding award
(including restricted stock awards) granted to IBCO shall lapse and
such awards shall become fully (100%) vested immediately and (B) IBCO
shall have the right to require the Company to purchase, for cash,
any shares of unrestricted stock or shares purchased upon the
exercise of any options, at a price equal to the fair market value of
such shares on the date of purchase by the Company.
(c) The amounts provided for in Sections 8(a) and 8(b)(i) and (ii)
shall be paid within five (5) days after the Termination Date.
9. Excise Tax Payments
(a) In the event that any payment or benefit (within the meaning
of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the
"Code")), to IBCO or for its benefit paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise in connection
with, or arising out of, its services to the Company or a change in ownership or
effective control of the Company or of a substantial portion of its assets (a
"Payment" or "Payments"), would be subject to the excise tax imposed by Section
4999 of the Code or any interest or penalties incurred by IBCO with respect to
such excise tax (such excise tax, together with any such interest and penalties,
are hereinafter collectively referred to as the "Excise Tax"), then IBCO will be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that after payment by IBCO of all taxes (including any interest or
penalties, other than interest and penalties imposed by reason of IBCO's failure
to file timely a tax return or pay taxes shown due on its return, imposed with
respect to such taxes and the Excise Tax), including any Excise Tax imposed upon
the Gross-Up Payment, IBCO retains an amount of the Gross-Up Payment equal to
the Excise Tax imposed upon the Payments.
(b) An initial determination as to whether a Gross-Up Payment is
required pursuant to this Agreement and the amount of such Gross-Up Payment
shall be made at the Company's expense by an accounting firm selected by the
Company and reasonably acceptable to IBCO which is designated as one of the five
largest accounting firms in the United States (the "Accounting Firm"). The
Accounting Firm shall provide its determination (the "Determination"), together
with detailed supporting calculations and documentation to the Company and IBCO
within five days of the Termination Date, if applicable, or such other time as
requested by the Company or by IBCO (provided IBCO reasonably believes that any
of the Payments may be subject to the Excise Tax) and if the Accounting Firm
determines that no Excise Tax is payable by IBCO with respect to a Payment or
Payments, it shall furnish IBCO with an opinion reasonably acceptable to IBCO
that no Excise Tax will be imposed with respect
9
<PAGE> 10
to any such Payment or Payments. Within ten days of the delivery of the
Determination to IBCO, IBCO shall have the right to dispute the Determination
(the "Dispute"). The Gross-Up Payment, if any, as determined pursuant to this
Section 9(b) shall be paid by the Company to IBCO within five days of the
receipt of the Accounting Firm's determination. The existence of the Dispute
shall not in any way affect IBCO's right to receive the Gross-Up Payment in
accordance with the Determination. If there is no Dispute, the Determination
shall be binding, final and conclusive upon the Company and IBCO subject to the
application of Paragraph 9(c) below.
(c) As a result of the uncertainty in the application of Sections
4999 and 280G of the Code, it is possible that a Gross-Up Payment (or a portion
thereof) will be paid which should not have been paid (an "Excess Payment") or a
Gross-Up Payment (or a portion thereof) which should have been paid will not
have been paid (an "Underpayment"). An Underpayment shall be deemed to have
occurred (i) upon notice (formal or informal) to IBCO from any governmental
taxing authority that IBCO's tax liability (whether in respect of IBCO's current
taxable year or in respect of any prior taxable year) may be increased by reason
of the imposition of the Excise Tax on a Payment or Payments with respect to
which the Company has failed to make a sufficient Gross-Up Payment, (ii) upon a
determination by a court, (iii) by reason of determination by the Company (which
shall include the position taken by the Company, together with its consolidated
group, on its federal income tax return) or (iv) upon the resolution of the
Dispute to IBCO's satisfaction. If an Underpayment occurs, IBCO shall promptly
notify the Company and the Company shall promptly, but in any event, at least
five days prior to the date on which the applicable government taxing authority
has requested payment, pay to IBCO an additional Gross-Up Payment equal to the
amount of the Underpayment plus any interest and penalties (other than interest
and penalties imposed by reason of IBCO's failure to file timely a tax return or
pay taxes shown due on IBCO's return) imposed on the Underpayment. An Excess
Payment shall be deemed to have occurred upon a "Final Determination" (as
hereinafter defined) that the Excise Tax shall not be imposed upon a Payment or
Payments (or portion thereof) with respect to which IBCO had previously received
a Gross-Up Payment. A "Final Determination" shall be deemed to have occurred
when IBCO has received from the applicable government taxing authority a refund
of taxes or other reduction in IBCO's tax liability by reason of the Excise
Payment and upon either (x) the date a determination is made by, or an agreement
is entered into with, the applicable governmental taxing authority which finally
and conclusively binds IBCO and such taxing authority, or in the event that a
claim is brought before a court of competent jurisdiction, the date upon which a
final determination has been made by such court and either all appeals have been
taken and finally resolved or the time for all appeals has expired or (y) the
statute of limitations with respect to IBCO's applicable tax return has expired.
If an Excess Payment is determined to have been made, the amount of the Excess
Payment shall be treated as a loan by the Company to IBCO and IBCO shall pay to
the Company on demand (but not less than 10 days after the determination of such
Excess Payment and written notice has been delivered to the Executive) the
amount of the Excess Payment plus interest at an annual rate equal to the
Applicable Federal Rate provided for in Section 1274(d) of the Code from the
date the Gross-Up Payment (to which the Excess Payment relates) was paid to IBCO
until the date of repayment to the Company.
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(d) Notwithstanding anything contained in this Agreement to the
contrary, in the event that, according to the Determination, an Excise Tax will
be imposed on any Payment or Payments, the Company shall pay to the applicable
government taxing authorities as Excise Tax withholding, the amount of the
Excise Tax that the Company has actually withheld from the Payment or Payments.
10. Unauthorized Disclosure. IBCO shall not make, and shall take
appropriate steps to ensure that the Executive not make, any Unauthorized
Disclosure. For purposes of this Agreement, "Unauthorized Disclosure" shall mean
disclosure by IBCO or by the Executive without the consent of the Board to any
person, other than an employee of the Company or a person to whom disclosure is
reasonably necessary or appropriate in connection with the performance by the
Executive of his duties as an executive of the Company or as may be legally
required, of any confidential information obtained by IBCO or the Executive
while providing services to the Company (including, but not limited to, any
confidential information with respect to any of the Company's customers or
methods of distribution) the disclosure of which it or he knows or has reason to
believe will be materially injurious to the Company; provided, however, that
such term shall not include the use or disclosure by IBCO or the Executive,
without consent, of any information known generally to the public (other than as
a result of disclosure by him in violation of this Section 10) or any
information not otherwise considered confidential by a reasonable person engaged
in the same business as that conducted by the Company. Upon termination of
IBCO's services, IBCO and the Executive shall return to the Company all such
information which exists in writer on other physical form in its or his
possession or under its control, and shall take appropriate steps to ensure that
the Executive returns such information.
11. Unique Services. IBCO recognizes that the Executive's services
hereunder are of a special and peculiar value, the loss of which cannot be
adequately compensated for in damages, and in the event of a breach of this
Agreement by IBCO, the Company shall be entitled to equitable relief by way of
injunction, in addition to any other legal and equitable remedies.
12. Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of IBCO and the Company, and their respective
successors and its assigns. IBCO and the Company shall require any successor or
assign to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that IBCO and the Company would be required to
perform it if no such succession or assignment had taken place. The terms "IBCO"
and "the Company" as used in this Agreement shall include such respective
successors and assigns. The term "successors and assigns" as used herein shall
exclusively mean a corporation or other entity acquiring all or substantially
all the assets and business of IBCO or the Company, as applicable (including
this Agreement), whether by operation of law or otherwise.
13. Fees and Expenses. The Company shall pay all legal fees and
related expenses (including the costs of experts, evidence and counsel) incurred
by IBCO as they become due as a result of (i) the termination of IBCO's services
(including all such fees and expenses, if any, incurred in contesting or
disputing any such termination), (ii) IBCO's hearing before the Board as
contemplated in Section 7(b) of this Agreement, or (iii) IBCO's seeking to
obtain or enforce any right or benefit provided by this Agreement (including,
without limitation, any such fees and
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<PAGE> 12
expenses incurred in connection with (x) the Dispute and (y) the Gross-Up
Payment, whether as a result of any applicable government taxing authority,
proceeding, audit or otherwise) or by any other plan or arrangement maintained
by the Company under which IBCO is or may be entitled to receive benefits.
14. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement (including the Notice of
Termination) shall be in writing and shall be deemed to have been duly given
when personally delivered or sent by certified mail, return receipt requested,
postage prepaid, addressed to the respective addresses last given by each party
to the other, provided that all notices to the Company shall be directed to the
attention of the Board with a copy to the Company. All notices and
communications shall be deemed to have been received on the date of delivery
thereof or on the third business day after the mailing thereof, except that
notice of change of address shall be effective only upon receipt.
15. Non-exclusivity of Rights. Nothing in this Agreement shall
prevent or limit IBCO's continuing or future participation in any benefit,
bonus, incentive or other plan or program provided by the Company or any of its
subsidiaries and for which IBCO may qualify, nor shall anything herein limit or
reduce such rights as IBCO may have under any other agreements with the Company
or any of its subsidiaries. Amounts which are vested benefits or which IBCO is
otherwise entitled to receive under any plan or program of the Company or any of
its subsidiaries shall be payable in accordance with such plan or program,
except as explicitly modified by this Agreement.
16. Settlement of Claims. The Company's obligation to make the
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be circumstances affected by any set-off, counterclaim,
recoupment, defense or other right which the Company may have against IBCO or
others.
17. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by IBCO and the Company. No waiver by either party hereto
at any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreement or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement.
18. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Delaware, without
giving effect to the conflict of law principles thereof.
19. Jurisdiction and Venue. Each of the parties to this Agreement
hereby (i) consents to personal jurisdiction in any suit, claim, action or
proceeding relating to or arising under this Agreement which is brought in any
local or federal court in the State of Delaware, (ii) consents to service of
process upon such party in the manner set forth in Section 14 hereof, and (iii)
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waives any objection such party may have to venue in any such Delaware court or
to any claim that any such Delaware court is an inconvenient forum.
20. Public Announcements. Neither the Company nor IBCO shall make any
public statements, including, without limitation, any press releases, with
respect to this Agreement and the transactions contemplated hereby without the
prior written consent of the other party (which consent may not be unreasonably
withheld), except as may be required by law.
21. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
22. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto and supersedes all prior agreements, if any,
understandings and arrangements, oral or written, between the parties hereto
with respect to the subject matter hereof.
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IN WITNESS WHEREOF, the Company and IBCO have caused this Management
Consulting Agreement to be executed by their respective duly authorized officers
as of the day and year first above written.
SALIVA DIAGNOSTIC SYSTEMS, INC.
By: /s/ Eric F. Stoer
-----------------------------------
Name: Eric F. Stoer
Title: Director
By: /s/ Hans R. Vauthier
-----------------------------------
Name: Hans R. Vauthier
Title: Director
INTERNATIONAL BUSINESS CONSULTANTS
By: /s/ Kenneth J. McLachlan
-----------------------------------
Name: Kenneth J. McLachlan
Title: President
<PAGE> 1
EXHIBIT 10.17
SUB-LICENSE AGREEMENT
THIS SUB-LICENSE AGREEMENT, made and entered into as of this 21st day
of February, 1995, by and among Saliva Diagnostic Systems (Singapore) Pte.
Ltd., a corporation organized under the laws of Singapore and having its
principal place of business at 12, Science Park Drive, #02-01, The Mendel,
Singapore Science Park, Singapore 0511 (hereinafter referred to as "SDS
Singapore"); Saliva Diagnostic Systems Inc., a corporation organized under the
laws of the State of Delaware, USA, and having its principal place of business
at 11719 NE 95th Street, Vancouver, Washington 98682 USA (hereinafter referred
to as "SDS Inc"); and Fremont Novo Sciences. L.L.C., a limited liability
company organized under the laws of the State of Illinois, USA and having its
principal place of business at 175 North Franklin Street, Suite 302, Chicago,
Illinois 60606 USA (hereinafter referred to as "FNS");
WHEREAS, SDS Inc. has developed and is continuing to develop certain
diagnostic products and procedures for the non-invasive or minimally-invasive
collection and testing of saliva and blood to detect the presence of contagious
diseases, including but not limited to HIV 1 & 2, Hepatitis B & C and TB
(hereinafter included in the term "Products"); and
WHEREAS, SDS Inc. has granted, by that certain License Agreement dated
August 16, 1994 (hereinafter referred to as the "License Agreement"), the
exclusive right to manufacture and distribute the Products in a territory which
includes India; and
<PAGE> 2
WHEREAS, SDS Singapore desires to grant to FNS the (i) exclusive
sub-license to distribute the Products within India, and (ii) exclusive right
to manufacture the Products in India for distribution in India; and
WHEREAS, SDS Inc. desires to consent to SDS Singapore's grant to FNS
of the (i) exclusive sub-license to distribute the Products within India, and
(ii) exclusive right to manufacture the Products in India for distribution in
India;
NOW THEREFORE, in consideration of the premises, and the mutual
covenants, conditions, agreements and promises contained herein, the parties
hereto hereby agree as follows:
1. DEFINITIONS. For purposes of this Sub-license Agreement, the
following terms shall, unless the context otherwise requires, have the
following definitions and meanings:
a. "License Agreement" shall mean that certain agreement dated
August 16, 1994, by and between SDS Singapore and SDS Inc.
wherein SDS Inc. grants to SDS Singapore the exclusive rights
to manufacture and distribute diagnostic devices and other
products invented, improved and/or developed by SDS Inc. in a
territory encompassing Asia and Oceana, including India.
b. "Products" shall include diagnostic products and procedures
for the non-invasive or minimally-invasive collection and
testing of saliva and blood to detect the presence of
contagious diseases, including but not limited to, HIV 1 & 2,
Hepatitis B & C, and TB; "Omni-SAL"; "SDS Sero-Strip"; and
"SDS Hema-Strip"; as well as all products and/or procedures
which fall within the meaning of the
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<PAGE> 3
following terms as those terms are defined in the License
Agreement: "Invention", "Improvements", "Know-How", "Licensed
Marks", "Licensed Products", and "Other Licensed Products".
c. "Omni-SAL" shall mean that certain saliva collection device
which is the subject matter of United States Patent Number
5,260,031, dated November 9, 1993, and any enhancements or
improvements to the same, whether such enhancements or
improvements are or are not covered by other patents.
d. "SDS Sero-Strip" shall mean a dry rapid assay strip for HIV 1
& 2 which uses serum or plasma separated by centrifugation of
whole blood obtained by phlebotomy, The actual test is
accomplished by a proprietary method developed and owned by
SDS Inc. that permits visual confirmation of the results.
e. "SDS Hema-Strip" shall mean a dry rapid assay strip for HIV I
& 2 to which whole blood obtained via finger prick is used;
the separation of the serum occurs on the strip itself. The
actual test is accomplished by a proprietary method developed
and owned by SDS Inc. that permits visual confirmation of the
results.
2. WARRANTIES. SDS Singapore and SDS Inc. hereby represent and warrant
that SDS Singapore is the exclusive licensee for India and that there
are no other licensees or sublicensees under the License Agreement for
India. SDS Singapore and SDS Inc. also hereby represent and warrant
that SDS Singapore and/or SDS Inc. has(ve) the exclusive right to
manufacture and distribute the SDS Sero-Strip and SDS Hema-Strip in
India. SDS Singapore and SDS Inc.
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jointly and severally agree to hold harmless and fully indemnify FNS
from any losses, damages or other adverse consequences that may be
suffered by FNS for any breach of the representations and warranties
contained herein.
3. GRANT OF SUB-LICENSE. In consideration of FNS' promise to pay certain
fees as set forth in paragraph 6 hereinafter, SDS Singapore grants to
FNS a complete assignment and transfer (hereinafter referred to the
"Sub-License") of all of its rights under the License Agreement for
the marketing, sale and distribution of the Products within India,
except as provided in paragraph 5 hereinafter, for the term of this
Sub-License Agreement and any extensions hereof. SDS Inc.,
recognizing that the Sub-License will further the purposes of SDS Inc.
under the License Agreement, hereby consents to the grant of the
Sub-License.
4. GRANT OF MANUFACTURING RIGHTS. In the event that FNS demonstrates
that FNS can manufacture SDS Inc. Products of equal quality as those
of SDS Singapore as determined by SDS Inc. (or any one of the
Products) in India at a cost equal to or less than the price
(including freight) ,charged by SDS Singapore to FNS for such Products
(or one of the Products, as the case may be), then, in consideration
of FNS' promise to pay a certain royalty as set forth in paragraph 6f
hereinafter, SDS Singapore shall grant to FNS a complete assignment
and transfer of its rights to manufacture in India under the License
Agreement (hereinafter referred to as the "Manufacturing Rights") the
Products for distribution and sale within India for the term of this
Agreement and any extensions
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<PAGE> 5
hereof, SDS Inc., recognizing that a grant hereunder of Manufacturing
Rights will further the purposes of SDS Inc. under the License
Agreement, hereby consents to such grant of the Manufacturing Rights,
SDS Inc. shall have the right to establish, maintain and monitor
quality control manufacturing standards (equal to those applicable to
SDS Singapore) which FNS shall adhere to in its manufacturing
operations.
SDS Singapore shall have the right to purchase Products manufactured
by FNS in India for distribution and sale by SDS Singapore in the
territory, excluding India, covered by the License Agreement, provided
that FNS may allocate a portion or all of its manufacturing capacity
and production to satisfy its own distribution and sale needs within
India.
5. TRANSACTIONS EXCLUDED FROM THE SUB-LICENSE. The parties hereto hereby
agree that all sales of Products by SDS Singapore directly to WHO,
USAID, UNICEF and UNDP without assistance from FNS shall be excluded
from the SubLicense.
6. FEES. In consideration for the grant of the Sub-License and
Manufacturing Rights and other undertakings, agreements, and consents
herein contained of SDS Singapore and SDS Inc., FNS agrees to pay SDS
Singapore the following:
a. Prior to March 1, 1995, provided that the five hundred (500)
SDS Sero-Strips have been delivered as set forth in paragraph
7.a.l. hereinafter, FNS shall remit to SDS Singapore, via wire
transfer, the sum
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<PAGE> 6
of US $25,000.
b. Prior to March 1, 1995, FNS shall remit to SDS Singapore, via
wire transfer, the sum of US $10,000 for the rights to
distribute in India the Omni-SAL collection device.
c. Within 5 days of the receipt of acceptable evaluation of the
five hundred (500) SDS Sero-Strips, as set forth in paragraph
7.a.l. hereinafter, FNS shall remit to SDS Singapore, via wire
-transfer, the sum of US $25,000.
d. Within 5 days of receiving five hundred (500) SDS Hema-Strips,
as set forth in paragraph 7.a.2. hereinafter, FNS shall remit
to SDS Singapore, via wire transfer, the sum of US $25,000.
e. Within 5 days of the receipt of acceptable evaluation of five
hundred (500) SDS Hema-Strips, as set forth in paragraph
7.a.2. hereinafter FNS shall remit to SDS Singapore, via wire
transfer, the sum of US $25,000.
f. In consideration for the grant by SDS Singapore of the
Manufacturing Rights to FNS, FNS shall pay to SDS Singapore a
royalty which shall be equal to 8% of FNS' sale price of the
Products; provided, however, that this royalty shall not apply
to any sales made by FNS to SDS Singapore or SDS Inc.
7. PURCHASE OF PRODUCTS.
a. INITIAL PURCHASES.
1. SDS Sero-Strips. FNS shall purchase from SDS
Singapore five hundred (500) SDS Sero-Strips
at a price of US $1.80 each. SDS Singapore
shall deliver these SDS Sero-Strips to FNS at
its
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<PAGE> 7
principal place of business in Chicago, Illinois not
later than February 17, 1995. FNS shall have these
SDS Sero-Strips evaluated by an independent testing
service in India under local conditions. Minimum
acceptable results of such evaluation shall consist
of sensitivity and specificity of greater than 98%
when compared to a reference method. Results and
other data collected during such evaluation shall be
shared With SDS Singapore. All costs associated with
the evaluation, including confirmatory costs, shall
be borne by FNS.
2. SDS Hema-Strips. FNS shall purchase from SDS
Singapore five hundred (500) SDS Hema-Strips at a
price of US $ 1.80 each. FNS shall have these SDS
Hema-Strips evaluated by an independent testing
service in India under local conditions. Minimum
acceptable results of such evaluation shall consist
of sensitivity and specificity of greater than 98%
when compared to a reference method. Results and
other data collected during such evaluation shall be
shared with SDS Singapore. All costs associated with
the evaluation, including confirmatory costs, shall
be borne by FNS.
b. PRICES. Under the Sub-License FNS shall be entitled to
purchase all Products from SDS Singapore at prices (FOB
Singapore) not exceeding those prices for the Products sold by
SDS Singapore to third parties within the "Territory" under
the License Agreement. FNS shall be entitled to any and all
volume or other discounts, rebates, promotions or
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<PAGE> 8
any other incentives as are offered by SDS Singapore to
third parties.
c. QUANTITIES. FNS agrees to purchase from SDS Singapore minimum
quantities or minimum monetary values of the Products as set
forth in Exhibit A to this Sub-License Agreement, and made a
part hereof.
d. QUALITY. SDS Singapore agrees to maintain the quality of the
Products as the same exists at the time this Sub-License
Agreement is executed, and agrees to use its best efforts to
improve or enhance the Products during the term of this
Sub-License Agreement and any extensions thereto.
8. TERM. This Sub-License Agreement shall be effective as of the date
set forth on the first page hereof, and shall remain in full force and
effect for a period of five (5) years thereafter, following which FNS
shall have the option of extending this Sub-License Agreement on the
same terms and conditions contained herein including this paragraph 8
for subsequent periods of five (5) years each, provided that FNS has
made the minimum purchases set forth in Exhibit A hereto, by giving
written notice to the other parties hereto not later than thirty (30)
days prior to the applicable expiration date. In the event the
License Agreement is terminated, this SubLicense Agreement shall
terminate simultaneously, unless the termination of the License
Agreement is caused by action or omission of SDS Singapore, in which
case, FNS shall have the option to continue as a direct licensee of
SDS Inc. on the same terms and conditions as this SubLicense Agreement
provides, and in that event for purposes of this Sub-License
Agreement, SDS Inc. shall be
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<PAGE> 9
substituted in place of SDS Singapore. Said option shall be exercised
by written notice given to SDS Inc. not later than ninety (90) days
after termination of the License Agreement.
9. CONFIDENTIAL INFORMATION. Each of the parties acknowledge that each
has imparted to the other parties and may from time to time impart to
the other parties information of a confidential nature and each party
undertakes and agrees that it will use such confidential information
solely for purposes of this sub-License Agreement and that it shall
not disclose directly or indirectly to any other person or entity such
confidential information other than as may be required to fulfill the
purposes of this Sub-License Agreement, without the express prior
written consent of the other parties to this Sub-License Agreement.
Where such disclosure is made to any other person or entity as
aforesaid, the party making such disclosure shall ensure that such
other person or entity complies with the provisions of this paragraph.
10. ASSIGNMENT. Except as provided hereinafter, no party to this
Sub-License Agreement shall be entitled to assign or transfer any of
its rights or obligations hereunder without the express prior written
consent of the other parties hereto, which consent shall not be
unreasonably withheld; notwithstanding anything to the contrary
hereinbefore provided, any party may without the consent of the other
parties hereto transfer or assign its rights and/or obligations under
this Sub-License Agreement to any "related entity". For purposes of
this paragraph 10
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<PAGE> 10
a "related entity" shall be deemed to be any juridical entity at least
20% of the ownership of which (i) is owned by a party hereto, or (ii)
is owned by the owners of at least 20% of a party hereto. Notice of
any assignment or transfer hereunder shall be given to the other
parties hereto in writing and shall designate the assignee or
transferee and shall specify the rights and/or obligations so assigned
or transferred.
11. WAIVER. Failure for any reason by one party to this Sub-License
Agreement to enforce at any time any provisions of this Sub-License
Agreement shall not be construed nor deemed to be a waiver of any
rights of such party nor in any manner affect the validity of the
whole or any part of this Sub-License Agreement nor prejudice the
rights of such party to subsequently take any action permitted it
under this Sub-License Agreement.
12. NOTICES. Any notice required or permitted under this Sub-License
Agreement or required by statute, regulation or court order shall be
in writing and shall be delivered in person, mailed by certified or
registered mail postage prepaid, or transmitted by facsimile to the
respective parties as follows:
SDS Singapore: Saliva Diagnostics Systems
(Singapore) Pte. Ltd.
Attention: Duke van Kalken
12, Science Park Drive, #02-01
The Mendel, Singapore Science Park
Singapore
Facsimile: 65-773-6733
10
<PAGE> 11
SDS Inc. Saliva Diagnostics Systems Inc.
Attention: Ronald L. Lealos
11719 N.E. 95th Street
Vancouver, Washington 98682 USA
Facsimile: 206-254-7942
FNS: Fremont Novo Sciences, L.L.C.
Attention: David F. Wolf
175 North Franklin Street
Suite 302
Chicago, Illinois 60606 USA
Facsimile: 312-263-2549
or to such other address or facsimile number as may from time to time
be designated by notice hereunder. Any notice hereunder shall be
deemed given upon delivery, posting, or facsimile transmission, as the
case may be.
13. INVALIDITY AND SEVERABILITY. If any provision of this Sub-License
Agreement shall be found by any court or administrative body of
competent jurisdiction to be invalid or unenforceable, the invalidity
or unenforceability of such provision shall not affect the other
provisions of this Sub-License Agreement, and to the extent of such
invalidity or unenforceability, such provisions shall be deleted. All
provisions not affected by such invalidity or unenforceability shall
remain in full force and affect. The parties shall attempt to
substitute for any invalid or unenforceable provision a valid or
enforceable provision which achieves to the greatest extent possible
the economic, legal and commercial objectives of the invalid or
unenforceable
11
<PAGE> 12
provision. If by virtue of any subsequent change in the applicable
law, any of the provisions of this Sub-License Agreement becomes void,
voidable or otherwise unenforceable, the parties agree to negotiate in
good faith to amend or modify such provision to such extent as may be
necessary to gave the same within the spirit and general intent of
this Sub-License Agreement.
14. ENTIRE AGREEMENT. This Sub-License Agreement supersedes any
arrangements, undertakings, promises or agreements made or existing
between the parties hereto prior to or simultaneously with this
Sub-License Agreement and constitutes the entire understanding between
the parties hereto. No addition, amendment to, or modification of
this Sub-License Agreement shall be effective unless it is in writing
and signed by and on behalf of all parties hereto.
15. GOVERNING LAW AND ARBITRATION. This Sub-License Agreement shall be
construed in accordance with and governed by the laws of the State of
Illinois, U.S.A. Any dispute arising out of or in connection with this
Sub-License Agreement, including any question regarding its existence,
validity or termination, shall be referred to and finally resolved by
arbitration in Chicago, Illinois, U.S.A. in accordance with the
Arbitration Rules of the American Arbitration Association then
currently in force, which rules are deemed to be incorporated by
reference into this paragraph.
12
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused this Sub-License
Agreement to be executed in triplicate as of the day and year first above
written.
Saliva Diagnostic Systems Saliva Diagnostic Systems Inc.
(Singapore) Pte. Ltd.
By /s/ Duke van Kalken By /s/ Ronald L. Lealos
Title Managing Director Title President
Fremont Novo Sciences, L.L.C.
By /s/ David F. Wolf
Title Managing Director
13
<PAGE> 14
EXHIBIT A
FNS agrees to purchase during the specified period the following Products from
SDS Singapore in either the minimum quantity or minimum monetary amount
(whichever is applicable) set opposite each individual product:
<TABLE>
<CAPTION>
Period Quantity US $
------ -------- ----
<S> <C> <C> <C>
1. Omni-SAL First 15 months 100,000
of the Agreement units
2. SDS Sero-Strip To be mutually agreed by the parties within thirty (30) days of the date hereof.
3. WS Hema-Strip To be mutually agreed by the parties within thirty (30) days of the date hereof.
</TABLE>
14
<PAGE> 1
EXHIBIT 10.18
[FREMONT GROUP LETTERHEAD]
TO: MR. RONALD L. LEALOS FAX: 1-206-254-7942
MR. DUKE VAN KALKEN 011-65-773-6733
PAGE 1 OF 1
FROM: LAKSHMAN R. SENGAL, Ph.D. OUR FAX: (312) 263-2340
FREMONT NOVO SCIENCES (312) 332-5914
DATE: MARCH 4, 1995 REF: Number Illegible
Gentlemen:
Pursuant to conversations held today among Ronald L. Lealos, David F. Wolf, and
myself, it is our understanding that the Sub-License Agreement (the
"Sub-License Agreement") among Saliva Diagnostic Systems Inc., and Fremont Novo
Sciences is amended as follows:
1. In paragraph 6. A. of the Sub-License Agreement the date "March 1,
1995," shall be deleted and the date "March 7, 1995," shall be
substituted.
2. In paragraph 6. B. of the Sub-License Agreement the date "March 1,
1995," shall be deleted and the date "March 15, 1995," shall be
substituted. In the event funds are not transferred by wire as
provided in this paragraph by March 15, 1995, the Sub-License rights
of distribution of Omni-SAL devices under the Sub-License Agreement
shall lapse.
3. If Saliva Diagnostic Systems Inc. demonstrates to the undersigned that
technical changes in the Sero-Strips can be economically and easily
made within a reasonable time, the sensitivity measure for the 500
Sero-Strips referred to in paragraph 7. a. 1. Of the Sub-License
Agreement shall be 95% rather than 98%.
If the above meets with your understanding and agreement, please execute a copy
of this fax and fax it to the undersigned as soon as possible.
With best regards, Agreed to this 8 day of
March, 1995.
FREMONT NOVO SCIENCES Saliva Diagnostic
Systems, Inc.
/s/ Lakshman R. Sengal, Ph.D. By /s/ Ronald L. Lealos
President
Saliva Diagnostic Systems
LRS/naw (Singapore) Pte. Ltd.
By /s/ Duke Van Kalken
<PAGE> 1
EXHIBIT 10.19
AGREEMENT
This AGREEMENT is made on 15th December 1997
BETWEEN
UNILEVER PLC, an English company having its principal place of business at
Unilever House, Blackfriars, London EC4P 4BQ, England and UNILEVER NV, a
Netherlands company having its principal place of business, at Weena 455, 3013
AL Rotterdam, Netherlands (hereinafter collectively "Unilever").
AND
SALIVA DIAGNOSTIC SYSTEMS INC., having its principal place of business at 11719
N.E. 95th Street, Vancouver, Washington 986682, USA (hereinafter "Licensee").
1. DEFINITIONS
1.1 "Affiliate" shall mean in relation to the Licensee, any company of
which Licensee owns or controls a majority of the ordinary share
capital.
1.2 "Patent Rights" shall mean UK 2204398, AU 626207, AU 656966, AU
656967, Italian utility model 21428, all national patents designated
under EP 291194B, corresponding patent applications pending in Japan
and the United States and all equivalents, substitutions, additions,
extensions, divisionals, continuations, continuations-in-part,
re-examinations, re-issues or registrations thereof, including those
detailed in Appendix 1.
1.3 "Territory" shall mean all those territories where there are
subsisting Patent Rights.
1.4 "Licensed Product" shall mean any device for qualitative Or
quantitative detection of the analytes specified in Appendix 2a
covered by or made in accordance with, or adapted for use
<PAGE> 2
- 2 -
within a claim of a patent or published patent application within the
Patent Rights.
1.5 "Products Under Option" shall mean any device for qualitative or
quantitative detection of the analytes specified in Appendix 2b
covered by or made in accordance with, or adapted for use within a
claim of a patent or published patent applications with the Patent
Rights.
1.6 "Product Sale Date" shall mean the date of first commercial sale of
any Licensed Product in the Territory.
1.7 "Net Sales" shall mean the amount invoiced by the Licensee or an
Affiliate to an independent third party for sale of Licensed Product
less any customary trade, quantity or cash discounts and
non-affiliated broker's or agent's commissions actually allowed and
taken, amounts repaid or credited by reason of rebate, rejection,
return, short-dating outdating, and less any import, value added or
excise taxes and customs duties levied and any other governmental
charges made as to production, sale, transportation, delivery or use
to the extent such charges art paid by the Licensee or Affiliate and
are separately identified on invoices.
1.8 "Effective Date" shall mean the date of first commercial sale of
Licensed Product.
1.9 "Calendar Quarter" shall mean the respective three month periods
ending on the last business days of March, June, September and
December respectively,
2. LICENSE GRANT
2.1 Unilever hereby grants to the Licensee and the Licensee hereby accepts
with effect from the Effective Date a nonexclusive royalty-bearing
licence under the Patent Rights in the Territory to make, have made
for it, use and sell Licensed Products.
<PAGE> 3
- 3 -
2.2 Unilever hereby grants to the Licensee and the Licensee hereby accepts
with effect from the Effective Date a nonexclusive option to a
royalty-bearing licence to make, have made for it, use and sell
Products Under Option. This option may he exercised on a per analyte
basis at any time within the two (2) year period subsequent to the
signature of this agreement, whereupon it will cease on a per analyte
basis.
2.3 It is hereby expressly agreed that no licence is granted by Unilever
to the Licensee under any other Unilever patent rights whatsoever and
licence is granted by Unilever to the Licensee for any analyte other
than those indicated in Appendix 2.
2.4 There will be no right to sub-licence without prior written consent of
Unilever.
2.5 The licence to the Licensee shall not be assigned or otherwise
transferred in whole or in part except to the purchaser of all the
material business assets and goodwill of the Licensee with respect to
all the Licensed Products, who shall have agreed with Unilever in
writing prior to such assignment or transfer to accept all of the
Licensee's obligations under this Agreement with respect to the
Licensed Products, and any such licence so transferred may thereafter
continue to be used by the purchaser only in connection with the
Licensee's business assets which are so purchased.
3. PAYMENTS
3.1 In consideration of the licence granted in clause 2.1 hereof, the
Licensee will pay to Unilever within seven (7) days of the date of
signature of this agreement an initial nonreturnable sum of twenty
thousand pounds sterling (20,000 Pounds) and provided that ten
thousand pounds sterling (10,000 Pounds) may be credited against
royalty payments due under clause 3.3 made on and subsequent to the
Effective Date until 31st December 1997.
3.2 In consideration of the licence option granted in clause 2.2 hereof,
the Licensee will pay to Unilever within seven (7)
<PAGE> 4
- 4 -
days of signature of this agreement a sum of three thousand pounds
sterling (f3,000) per analyte and a further ten thousand pounds
sterling (10,000 Pounds) per analyte upon exercise of the licence
option or upon first commercial sale of a Product Under Option,
whichever is sooner.
3.3 The licensee will pay to Unilever a royalty on Licensed Products which
relate to Helicobacter pylori and on Products Under Option at a rate
of five per cent (5%) A all Net Sales made by Licensee and Affiliates
on and after the Effective Date.
The licensee will pay to Unilever a royalty on Licensed Products which
relate to Human Immunodeficiency Virus at a rate of five per cent (5%)
of all Net Sales made up to a threshold of twenty thousand pounds
Sterling (20,000 Pounds) per annum and at a rate of three per cent
(3%) of all Net Sales made over twenty thousand pounds Sterling
(20,000 Pounds) per annum by Licensee and Affiliates on and after the
Effective Date.
3.4 Only one royalty shall be paid upon sale of any Licensed Product
regardless of the number of claims or patents within the Patent Rights
that may be infringed by the Licensed Product or its use.
4. ACCOUNTING AND AUDIT
4.1 Commencing within thirty (30) days after the date of signature of this
Agreement and thereafter within thirty (30) days after the end of each
Calendar Quarter for the remainder of the term of this Agreement, the
Licensee shall furnish to Unilever at the address in clause 7.3
hereof, a written report certified as correct by the Licensee's chief
executive officer or senior qualified accountant setting forth the
number, name and type of all Licensed Product in each country of sale
upon which the Licensee is obligated to pay royalties and the
computation of the royalties payable with respect thereto, together
with the remittance of the amount due. For the avoidance of doubt,
the first royalty report shall include an account of royalties due on
sales made on and
<PAGE> 5
- 5 -
subsequent to the Effective Date until the day prior to signature of
this agreement. A report will be furnished to Unilever whether or
not any sales have been made in that Calendar Quarter. Any payments of
royalties which are sent more than fifteen (15) days beyond the due
date shall bear interest. at fifteen (15) percent per annum from the
date on which payment was due to the date on which payment is received
by Unilever.
4.2 Fees and royalties shall be paid in Pounds sterling by cheque payable
to Unilever PLC at the address in clause 7.3 hereof, or otherwise as
Unilever shall direct. Unilever NV hereby confirms that Unilever PLC
may give valid and binding receipt on behalf of Unilever NV. All
currency translations from the currency of sale to Pounds sterling
will be made based on the mid-rate of exchange published by the
Financial Times (London) on the last business day of the relevant
Calendar Quarter for calculation of royalties due under use 3.3.
4.3 All royalty payments provided for under this Agreement shall be made
to Unilever in full, provided however that in any event and to the
extent that any royalty or other sum payable hereunder is subject to
direct taxes levied or assessed by any government authority under the
law of the country from which the remittance is made, and a treaty
exists with that country and the country where the remittance is
received or there is other provision for the avoidance of double
taxation, the Licensee has the right to deduct from the payment any
such taxes and the Licensee shall for each such deduction provide to
Unilever a certificate or other documentary evidence executed by the
appropriate official or relevant government authority to enable
Unilever to claim relief from double taxation on such payments All
payments due under this Agreement are exclusive of value added tax, or
equivalent taxes where applicable.
4.4 The Licensee shall keep accurate records in sufficient detail to
enable royalties payable hereunder to he determined, and shall permit
such records to be inspected once per year with reasonable notice. In
the event Unilever does not request an
<PAGE> 6
- 6 -
inspection of the records within three years following a royalty
report the Licensee may dispose Of the records. Any inspection of
records shall be made during reasonable business hours by a certified
accountant reasonably acceptable to the Licensee and appointed by
Unilever at its expense for this purpose, but only to the extent
necessary to verify the amount of royalties payable. The accountant
making such inspection shall report to Unilever No amount of royalty
due and payable. Any amount of royalty found to be underpaid shall be
promptly remitted to Unilever together with any interest at a rate of
fifteen (15) percent per annum, and any amount of royalty found to be
overpaid shall be deductible from subsequent royalty remittances, and
if the amount of royalty found to be underpaid shall exceed (10)
percent of the royalty payment for the respective period, the Licensee
shall pay to Unilever the reasonable cost of the inspection of the
records by the certified Accountant.
5. APPLICABLE LAW
5.1 This Agreement shall be deemed to have be made in and shall be
construed in accordance with the laws of England for all matters
(other than scope and validity of the Patent Rights which shall be
construed and governed in accordance with laws of the jurisdiction in
which the Patent Rights have been granted) and the parties submit to
the jurisdiction of the English Courts.
6. TERMINATION
6.1 The Licensee may terminate the licence granted in this Agreement at
any time upon ninety (90) days written notice subject to payment of
royalties in respect of sales of all Licensed Product and Product
Under Option until termination.
6.2 Upon material default by the Licensee in the performance of any
obligation to be performed by the Licensee, Unilever may give written
notice specifying the thing or matter in default. Unless the default
is cured within sixty (60) days following the giving of notice,
Unilever may give further
<PAGE> 7
- 7 -
written notice to the other party forthwith terminating the licence
granted hereunder,
6.3 if the Licensee shall directly or indirectly dispute the validity of
the Patent Rights in any country for which they have been licensed
under this Agreement, Unilever may upon thirty (30) days written
notice terminate the licence rights to the Licensee.
6.4 Unilever may terminate the licence rights of Licensee forthwith if the
Licensee shall be declared bankrupt or shall enter into liquidation or
receivership or similar state.
6.5 Unilever may terminate the licence rights of the Licensee forthwith if
the Licensee manufactures uses or sells (or procures any third party
so to do), any product which is covered by the Patent Rights in the
country of such manufacture use or sale, other than a Licensed Product
or Product Under Option on which royalty is paid pursuant to this
Agreement.
6.6 Unilever can terminate the licence on a per analyte basis on thirty
(30) days notice if the Licensee makes no sales of the Particular
Licensed Product or if the royalties received by Unilever are less
than five thousand pounds sterling (5,000 Pounds) per analyte within
any period of 12 months starting one year after signature of this
Agreement.
6.7 Unilever can terminate the licence on a per analyte basis on thirty
days (30) notice if the. Licensee makes no sales of Product Under
Option or if the royalties received by Unilever are less than five
thousand pounds sterling (5,000 Pounds) per analyte within any period
of 12 months starting one year after exercise of the option for the
particular Product Under Option.
6.8 Termination pursuant to clauses 6.1 to 6.6 hereof shall not relieve
either party of any obligations accrued prior to the termination.
<PAGE> 8
- 8 -
6.9 Unless sooner terminated as provided above, the licence rights granted
hereunder shall continue until expiration of the last no expire of the
patents within the Patent Rights.
7. GENERAL PROVISIONS
7.1 This Agreement supersedes all previous oral and written agreements
between the parties and is the only and entire understanding existing
between the parties with respect to the subject matter of this
Agreement. Any amendment thereto shall be in writing and signed by
the parties.
7.2 The provisions of this Agreement shall be deemed separable, and if any
part of this Agreement is rendered void, invalid, or unenforceable,
such rendering shall not affect the validity or enforceability of the
remainder of the Agreement unless the part or parts which are void,
invalid or unenforceable shall substantially impair the value of the
whole Agreement to either party.
7.3 All notices and reports shall be sent to the parties at the addresses
shown below. Such notice or report shall be deemed received when sent
addressed to the party at the address shown below by first class mail
with correct postage affixed or by express service prepaid or by
facsimile or telex confirmed by mail within 14 days, The addresses for
notices and reports may be changed by timely written notice to the
other party.
For the Licensee: President and CEO
SALIVA DIAGNOSTIC SYSTEMS INC.
11719 N.E. 95th Street
Vancouver
Washington 986682
U.S.A.
For Unilever: The Agreements Advisor
UNILEVER PLC
Patent Division
Colworth House
<PAGE> 9
- 9 -
Sharnbrook
Bedfordshire MK44 1LQ
England
7.4 Unilever represents and warrants that they own directly or indirectly
all right title and interest in and to the Patent Rights or are
otherwise authorised to enter into this Agreement. Unilever expressly
does not warrant the validity of any of the Patent Rights but is not
aware of any ground for invalidity thereof. The Licensee will
promptly inform Unilever of any apparent infringements of the Patent
Rights which come to its notice, and the parties will on request
discuss the action to be taken in that respect. It is Unilever's
intention to use reasonable efforts to enforce the Patent Rights, but
Unilever shall not be compelled to take Court action. against third
party infringers. Unilever will advise the Licensee of the status of
the Patent Rights following any significant change to the status and
on the request of the Licensee.
7.5 Unilever expressly does not warrant that any Licensed Product or
Product Under Option is free from infringement of any third party
patent or other intellectual property rights. The Licensee accepts
full responsibility for the manufacture use and sale of all Licensed
Product and Product Under Option and Unilever shall not be liable to
Licensee for the consequences of any such infringement of third party
rights or other damages caused to any third party by such manufacture
use or sale, and the Licensee shall hold harmless and indemnify
Unilever from any and all judgements of any kind which arise from such
manufacture, use and sale of Licensed Product and Product Under
option-
7.6 The Licensee shall not make any use of the Unilever name or any
trademark of Unilever or of any company in the Unilever Group in
connection with the manufacture use or sale of Licensed Product or
Product Under option or otherwise without the prior written consent of
Unilever.
<PAGE> 10
- 10 -
7.7 No licence is hereby granted to the Licensee by implication, estoppel
or otherwise under any letters patent or application thereof other
than under the Patent Rights.
7.8 Failure by either party to enforce any provision of this Agreement
shall not be construed as a waiver of such provision and shall not
affect the validity of the Agreement or any part thereof or the right
of that party to enforce any provision thereof.
<PAGE> 11
- 11 -
In WITNESS WHEREOF, the parties have caused this Agreement to be executed in
duplicate originals.
UNILEVER PLC SALIVA DIAGNOSTICS SYSTEMS INC.
BY: /s/ Signature Illegible BY: /s/ Kenneth J. McLachlan
TITLE: ...................... TITLE: President
UNILEVER NV
BY (1): /s/ Signature Illegible
TITLE: ......................
BY (2): /s/ Signature Illegible
TITLE: Agreements Advisor
NFS/31 October 1997
<PAGE> 12
- 12 -
APPENDIX 1
A) GRANTED RIGHTS
<TABLE>
<CAPTION>
COUNTRY NUMBER EXPIRY DATE
---------------------------------------------------------------------------
<S> <C> <C>
United Kingdom 2204398 26 April 2008
Hong Kong 1409/95 26 April 2008
Italy 214285 27 April 1998
Australia 626207 26 April 2008
Australia 656966 26 April 2008
Australia 656967 26 April 2008
USA 5602040 11 February 2014
USA 5622871 22 April 2014
European 291194 26 April 2008
designated states under the
European patent are:-
Austria E101721 26 April 2008
Belgium 291194 26 April 2008
France 291194 26 April 2008
Germany 3887771 26 April 2008
Greece 940400378 26 April 2008
Italy 291194 26 April 2008
Netherlands 291194 26 April 2008
Spain 291194 26 April 2008
Sweden 291194 26 April 2008
Switzerland 291194 26 April 2008
</TABLE>
<PAGE> 13
- 13 -
APPENDIX 1 (cont.)
B) PENDING RIGHTS
<TABLE>
<CAPTION>
COUNTRY NUMBER
------------------------------------------
<S> <C>
Australia Divisional 3 80490/94
Australia Divisional 4 80489/94
European Divisional 1 93108764.7
European Divisional 2 93108763.9
Japan 503518/88
Japan Divisional 1 150881/93
Japan Divisional 2 150882/93
USA Divisional 1 08/305967
USA Divisional 2 08/474192
USA Divisional 3 08/487319
</TABLE>
<PAGE> 14
- 14 -
APPENDIX 2
(a) Human Immunodeficiency virus
Helicobacter pylori
(b) Hepatitis A
Tuberculosis
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S REPORT ON FORM
10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-01-1997
<CASH> 271,213
<SECURITIES> 0
<RECEIVABLES> 196,052
<ALLOWANCES> 42,000
<INVENTORY> 458,177
<CURRENT-ASSETS> 935,417
<PP&E> 1,430,310
<DEPRECIATION> 995,853
<TOTAL-ASSETS> 1,639,077
<CURRENT-LIABILITIES> 1,899,376
<BONDS> 0
0
0
<COMMON> 293,447
<OTHER-SE> (610,134)
<TOTAL-LIABILITY-AND-EQUITY> 1,639,077
<SALES> 1,422,296
<TOTAL-REVENUES> 1,422,296
<CGS> 1,699,094
<TOTAL-COSTS> 1,699,094
<OTHER-EXPENSES> 5,200,271
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 413,993
<INCOME-PRETAX> (5,862,212)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,862,212)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,862,212)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
