<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission File Number : 0-21284
SALIVA DIAGNOSTIC SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 91-1549305
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
11719 NE 95TH STREET
VANCOUVER, WA 98682
(Address of principal executive offices and zip code)
(360) 696-4800
(Issuer's telephone number including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 [ ]
The number of shares outstanding of the Registrant's Common Stock as of August
3, 1998 was 36,496,857 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE> 2
SALIVA DIAGNOSTIC SYSTEMS, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
- ------------------------------- ----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -June 30, 1998
and December 31, 1997 2
Consolidated Statements of Operations -Three Months
and Six Months Ended June 30, 1998 and 1997 3
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 11
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
1
<PAGE> 3
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 147,441 $ 271,312
Accounts receivable, less allowance of $42,000 (1998)
and $42,000 (1997) 196,989 154,052
Inventories 357,822 458,177
Prepaid expenses 30,007 51,876
------------ ------------
Total current assets 732,259 935,417
Property and equipment, less accumulated
depreciation of $1,040,788 (1998) and $995,853 (1997) 339,022 434,457
Deposits 14,307 40,162
Restricted cash 120,500 120,500
Patents and trademarks, less accumulated
amortization of $52,971 (1998) and $48,375 (1997) 103,945 108,541
============ ============
$ 1,310,033 $ 1,639,077
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 508,108 $ 670,400
Accrued expenses 1,343,849 1,473,944
Accrued interest payable 68,240 68,240
Current portion of long-term debt and
obligations under capital leases 21,766 33,779
------------ ------------
Total current liabilities 1,941,963 2,246,363
Long-term debt and obligations under capital
leases, net of current portion 48,324 59,401
------------ ------------
Total liabilities 1,990,287 2,305,764
Series 1998-A Convertible Redeemable Preferred Stock,
$.01 par value, 1,360 shares issued and outstanding 1,359,241 --
Stockholders' equity:
Common stock, $.01 par value, 50,000,000
shares authorized, issued and outstanding:
1998: 3,530,017 and 1997: 2,934,462 35,300 29,344
Additional paid-in capital 28,872,073 27,914,252
Note receivable from shareholder for stock (83,825) (83,825)
Accumulated deficit (30,863,043) (28,526,458)
------------ ------------
Total stockholders' equity (2,039,495) (666,687)
============ ============
$ 1,310,033 $ 1,639,077
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
2
<PAGE> 4
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 251,531 $ 484,869 449,109 $ 711,903
Costs and expenses:
Cost of products sold 315,077 402,738 567,777 600,898
Research and development expense 142,659 156,124 315,038 350,836
Selling, general and administrative
expense 623,792 891,379 1,270,169 2,301,339
----------- ----------- ----------- -----------
Loss from operations (829,997) (965,372) (1,703,875) (2,541,170)
Interest income 3,779 8,447 10,354 14,126
Interest expense (1,300) (400,705) (2,705) (409,284)
Other income (expense) (16,608) (1,200) 27,132 8,030
----------- ----------- ----------- -----------
Net loss (844,126) (1,358,830) (1,669,094) (2,928,298)
Dividends including deemed dividends
on preferred stock (342,038) -- (667,491) --
----------- ----------- ----------- -----------
Net loss to common stockholders $(1,186,164) $(1,358,830) $(2,336,585) $(2,928,298)
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.36) $ (0.61) $ (0.73) $ (1.32)
=========== =========== =========== ===========
Shares used in per share calculations 3,314,317 2,232,234 3,179,119 2,220,656
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,669,094) $(2,928,298)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 134,533 147,632
Gain on sale of property and equipment (43,479) --
Compensation expense relating to Option Plan -- 397,749
Interest expense related to conversion of Debentures -- 404,395
Other -- (10,459)
Changes in current assets and liabilities:
Accounts receivable (42,937) (49,269)
Inventories 100,355 (165,513)
Prepaid expenses and deposits 47,724 (21,758)
Accounts payable and accrued expenses (266,787) 505,967
----------- -----------
Net cash used in operating activities (1,739,685) (1,719,554)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (35,585) (59,387)
Proceeds from sale of property and equipment 33,482 --
----------- -----------
Net cash provided by (used in) investing activities (2,103) (59,387)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of Common Stock 250,000 --
Exercise of Common Stock options and warrants -- 450
Proceeds from sale of preferred stock, net of issuance costs 1,380,000 --
Proceeds from Convertible Debentures, net of issuance costs -- 1,380,000
Repayment of long term debt and capital lease obligations (12,083) (17,764)
----------- -----------
Net cash provided by financing activities 1,617,917 1,362,686
----------- -----------
Net decrease in cash and cash equivalents (123,871) (416,255)
Cash and cash equivalents, beginning of period 391,812 776,380
----------- -----------
Cash and cash equivalents, end of period $ 267,941 $ 360,125
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for interest $ 1,405 $ --
Noncash transactions:
Debt extinguished on disposition of property and
equipment 11,007 --
Conversion of Debentures into Common Stock -- 1,380,000
Subscription receivable for Common Stock -- 912,500
Dividends payable on 1998-A Convertible Preferred Stock 34,945 --
Deemed dividends on 1998-A Convertible Preferred Stock 632,546 --
Payment of common stock to former employee 25,600 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
SALIVA DIAGNOSTIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements as of and for the
three and six month periods ended June 30, 1998 and 1997 have been prepared in
conformity with generally accepted accounting principles. The financial
information as of December 31, 1997 is derived from Saliva Diagnostic Systems,
Inc. (the "Company") consolidated financial statements included in the Company's
Annual Report on Form 10-KSB/A for the year ended December 31, 1997. Certain
information or footnote disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
accompanying consolidated financial statements include all adjustments necessary
(which are of a normal and recurring nature) for the fair presentation of the
results of the interim periods presented. The accompanying consolidated
financial statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 1997, as included in the
Company's Annual Report on Form 10-KSB/A for the year ended December 31, 1997.
Operating results for the three and six month periods ended June 30, 1998 are
not necessarily indicative of the results that may be expected for the entire
fiscal year ending December 31, 1998, or any other portion thereof.
Certain amounts have been restated for the consolidated financial statements for
the periods ended June 30, 1998 due to adjustments made as a result of the audit
of the Company's Annual Report on Form 10-KSB/A for the year ended December 31,
1997.
2. INVENTORIES
Inventories are stated at the lower of cost or market determined on a first-in,
first-out (FIFO) basis, and consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------- ---------------
<S> <C> <C>
Raw materials $ 252,881 $ 280,438
Work in process 16,911 11,569
Finished goods 88,030 166,170
------------- --------------
$ 357,822 $ 458,177
============= ==============
</TABLE>
3. LOSS PER SHARE
The Company has adopted 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." 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.
A net loss was reported in the second quarters and first six months of both 1998
and 1997, and accordingly, 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 219,550 shares, warrants for
the purchase of 156,721 shares
5
<PAGE> 7
and approximately 1,034,548 shares which represent the number of common shares
that preferred stock would convert into at June 30, 1998 were not included in
loss per share calculations, because to do so would have been anti-dilutive.
4. ACCRUED EXPENSES
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Accrued wages and salaries $ 444,331 $ 493,352
Accrued payroll taxes 83,803 92,144
Accrued restructuring expenses 13,040 135,522
Litigation contingencies 801,000 750,000
Other accrued liabilities 1,675 2,926
------------ ------------
$ 1,343,849 $ 1,473,944
============ ============
</TABLE>
5. SERIES 1998-A CONVERTIBLE REDEEMABLE PREFERRED STOCK
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 an investor for an aggregate purchase price of
$1,500,000. See Management's Discussion and Analysis-Liquidity and Capital
Resources for additional disclosure regarding the 1998-A Preferred Stock.
The 1998-A Preferred Stock is convertible into Common Stock of the Company at a
beneficial conversion ratio, and as a result, a discount of $300,000 was
recorded at the date of issuance of the 1998-A Preferred Stock. The discount
will be accreted to deemed preferred dividends over the conversion period, which
ends July 25, 1998. Additionally, the Company incurred offering costs related to
the 1998-A Preferred Stock totaling approximately $120,000. These offering costs
are reflected as a discount to the 1998-A Preferred Stock and will be accreted
as deemed preferred dividends over the conversion period, which ends July 25,
1998. Deemed dividends of $195,208 and $197,708 at June 30, 1998 and March 31,
1998, respectively, have been recorded relating to the beneficial conversion
ratio and offering costs. Dividends payable on conversion have been accrued
for at $34,945. On April 28, 1998, 140 shares of the 1998-A Preferred Stock were
converted into Common Stock in accordance with the Agreement.
In connection with the issuance of the 1998-A Preferred Stock, the Company
issued warrants to purchase up to 75,000 shares of Common Stock at an exercise
price of $3.375 per share, which expire on January 26, 2003. The fair value of
these warrants of $248,250 has been reflected as a discount to the 1998-A
Preferred Stock and will be accreted as deemed preferred dividends over the
conversion period, which ends July 25, 1998. Deemed dividends of $111,885 and
$127,745 at June 30, 1998 and March 31, 1998, respectively, have been recorded
related to the fair value of the warrants.
6. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130). This statement establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general purpose financial statements. The objective of SFAS 130
is to report a measure of all changes in equity of an enterprise that result
from transactions and other economic events of the period other than
transactions with owners. The Company adopted SFAS 130 during the first quarter
of 1998. Comprehensive loss did not differ from currently reported net loss in
the periods presented.
6
<PAGE> 8
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). This statement establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 also requires that changes in the derivative instrument's
fair value be recognized currently in results of operations unless specific
hedge accounting criteria are met. SFAS 133 is effective for fiscal years
beginning after June 15, 1999. The Company expects that adoption of SFAS 133
will have no impact on the Company's financial condition or results of
operations.
7. 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. A final judgment consistent with the jury verdict in this case will
have a material adverse effect on the Company.
In February 1998, a lawsuit was filed by Ronald Lealos, the former President of
the Company, who resigned in December 1996. The complaint alleges that Mr.
Lealos was entitled to certain cash payments and benefits under an employment
agreement whereby he would serve as the Company's president, and that the
Company's failure to make such payments and grant such benefits constituted
anticipatory breach and breach of that contract. In addition, the complaint
alleges that the Company wrongfully rescinded options to purchase 385,000 shares
of Common Stock in breach of a stock option agreement with Mr. Lealos. In March
1998, the Company filed an answer to the complaint in which it stated that the
alleged employment agreement was not intended to be effective and was rescinded
by the parties, and that the stock option agreement was not breached by the
Company. The Company's answer also asserted numerous counterclaims against Mr.
Lealos, including breach of fiduciary duty and conversion, for which the Company
is seeking 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.
8. SUBSEQUENT EVENTS
Subsequent to June 30, 1998, the Company amended the Company's Certificate of
Incorporation declaring that each ten outstanding shares of the Company's Common
Stock be converted and reconstituted into one share of Common Stock. As a
result, all share amounts and values in these financial statements have been
restated to reflect the reverse stock split.
On July 30, 1998, the Company amended to eliminate the redemption rights
pursuant to the Securities Purchase Agreement for the Series 1998-A Convertible
Preferred Stock which is shown on the mezzanine level in the accompanying
financial statements. As a result of this amendment, these shares will be
accounted for as an equity instrument as of the date of the amendment.
On July 31, 1998, the Company amended the Securities Purchase Agreement with an
investor for the issuance and sale of shares of the Company's newly designated
Series 1998-B Convertible Preferred Stock, stated value $1,000 per share (the
"1998-B Preferred Stock"). Pursuant to the Securities Purchase Agreement, the
Company sold 500 shares of the 1998-B Preferred Stock to the investor for an
aggregate purchase price of $470,000 (net of issuance costs of $30,000). The
investor is committed to purchase an additional 1,000 shares of 1998-B Preferred
Stock prior to April 3, 1999 for an aggregate purchase price of $940,000 (net of
issuance costs of $60,000).
7
<PAGE> 9
The 1998-B Preferred Stock is convertible into Common Stock of the Company at a
beneficial conversion ratio and, as a result, a discount of $125,000 will be
recorded at the date of issuance of the 1998-B Preferred Stock. The discount
will be accreted to deemed dividends over the conversion period, which ends
November 1, 1998.
In connection with the issuance of the 1998-B Preferred Stock, the Company
issued warrants to purchase up to 25,000 shares of Common Stock at an exercise
price of $3.375 per share, which expire on January 26, 2003. The fair value of
these warrants of $253,750 will be reflected as a discount to the 1998-B
Preferred Stock and will be accreted as deemed dividends over the conversion
period which ends November 1, 1998.
ITEM 2. 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 $30,863,043 at June
30, 1998. 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 believes that its current cash
position and cash received from the sale of its preferred stock in August 1998,
combined with revenues and other cash receipts, will be sufficient to fund the
Company's operations through 1998. However, substantial additional financing
will be required in 1999. There can be no assurance that such financing will be
achieved or that financings will be on terms favorable to the Company. The
Company's significant operating losses and significant capital requirements
raise substantial doubt about the Company's ability to continue as
a going concern.
On August 3, 1998, the Company effected a one-for-ten reverse split of shares of
its outstanding common stock. As a result, all share amounts and values
described below reflect the reverse stock split.
RESULTS OF OPERATIONS
SECOND QUARTER AND FIRST SIX MONTHS OF 1998 COMPARED TO SECOND QUARTER AND FIRST
SIX MONTHS OF 1997
REVENUES. The Company's revenues consist of product sales. Revenues decreased
48% to $251,531 in the second quarter of 1998 from $484,869 in the second
quarter of 1997, and decreased 37% to $449,109 in the first six months of 1998
from $711,903 in the first six months of 1997. The decreases in revenue were
primarily attributable to establishing a manufacturing base in Vancouver and
delays in commissioning equipment. See "Cost of products sold" below. Sales to
four customers represented approximately 47% of total revenues in the first six
months of 1998, and sales to one customer represented approximately 24% of total
revenues in the six months ended June 30, 1997.
COST OF PRODUCTS SOLD. Costs of products sold decreased to $315,077 (125% of
product sales) in the second quarter of 1998 from $402,738 (83% of product
sales) in the second quarter of 1997, and decreased to $567,777 (126% of product
sales) in the first six months of 1998 from $600,898 (84% of product sales) in
the first six months of 1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased
9% to $142,659 in the second quarter of 1998 from $156,124 in the second quarter
of 1997, and decreased 10% to $315,038 in the first six months of 1998 from
$350,836 in the first six months of 1997, primarily as a result of reduced
payroll and related expenses. The Company is focused on cost controls in all
departments, including research and development, and thus intentionally reduced
these costs. This has been achieved without compromising standards in research
and development. See "Recent Developments" below.
8
<PAGE> 10
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 25% to $623,792 in the second quarter of 1998
from $826,715 in the second quarter of 1997, and decreased 29% to $1,270,169 in
the first six months of 1998 from $1,780,628 in the first six months of 1997,
primarily as a result of the closure of facilities in Singapore, a reduction in
the number of administrative personnel and continued restraint on expenditure.
INTEREST EXPENSE. Interest expense decreased to $1,300 in the second quarter of
1998 from $400,705 in the second quarter of 1997, and decreased to $2,705 in the
first six months of 1998 from $409,284 in the first six months of 1997 due to a
non-recurring interest charge on the Convertible Debentures, due February 28,
1999, then outstanding.
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.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its capital requirements through
proceeds from its public offering of common 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
preferred 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 $1.5
million Convertible Debentures, due February 28, 1999. 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 408,290 shares of Common
Stock for an aggregate purchase price of $2,063,000 (net of issuance costs). In
January 1998, the Company entered into a securities purchase agreement with an
investor for the issuance and sale of 1,500 shares of the Company's newly
designated Series 1998-A Convertible Preferred Stock (the "1998-A Preferred
Stock") for an aggregate purchase price of $1,380,000 (net of issuance costs of
$120,000). In May 1998, the Company entered into a securities purchase agreement
with an investor for the issuance and sale of 156,250 shares of its common stock
for an aggregate purchase price of $250,000. In August 1998, the Company entered
into a securities purchase agreement with an investor for the issuance and sale
of 500 shares of the Company's Series 1998-B Convertible Preferred Stock for an
aggregate purchase price of $470,000 (net of issuance costs of $30,000).
Pursuant to such securities purchase agreement, the investor is obligated to
purchase an additional 500 shares of Series 1998-B Convertible Preferred Stock
for an aggregate purchase price of $470,000 (net of issuance costs of $30,000)
on or before December 3, 1998, and an additional 500 shares of Series 1998-B
Convertible Preferred Stock for an aggregate purchase price of $470,000 (net of
issuance costs of $30,000) on or before April 3, 1998.
Cash used in operating activities in the first six months of 1998 was
$1,739,685. This was primarily a result of a net loss of $1,669,094, adjustments
for depreciation and amortization, and a decrease in accounts payable, accrued
expenses and inventories. Accounts payable and inventories decreased due to
reduced production volume in the first quarter of 1998 resulting from delays in
the transfer of manufacturing to outsourced manufacturing facilities.
Accrued expenses totaled $1,343,849 at June 30, 1998 against $1,473,944 at
December 31, 1997. Accrued wages and salaries decreased to $444,331 at June 30,
1998 from $493,352 at December 31, 1997. Accrued restructuring costs decreased
to $13,040 at June 30, 1998 from $135,522 at December 31, 1997 due to the
completion of the closure of the Singapore operation. The residual amount will
be paid during the statutory liquidation of the Singapore subsidiary. Litigation
contingencies increased by $61,000 in the period to reflect new estimates of
ongoing legal costs related to the lawsuits.
9
<PAGE> 11
Cash used in investing activities in the first six months of 1998 was $2,103,
which represented acquisition costs of property and equipment related to the
construction of drying facilities and reengineering of molds.
Cash provided by financing activities in the first six months of 1998 was
$1,617,917. This was primarily a result of net proceeds of $1,380,000 from the
sale of its 1998-A Preferred Stock and $250,000 from the sale of its common
stock.
On January 26, 1998, the Company entered into a securities purchase agreement
with an investor for the issuance and sale of shares of its 1998-A Preferred
Stock. 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 $1,380,000 (net of issuance costs of $120,000). 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) $3.375, and (ii) 80% of
the average closing bid price of the Company's common stock for the five trading
days prior to conversion.
The 1998-A Preferred Stock is convertible into the Company's common stock at a
beneficial conversion ratio, and as a result, a discount of $300,000 was
recorded at the date of issuance of the 1998-A Preferred Stock. The discount
will be accreted to deemed preferred dividends over the conversion period, which
ends July 25, 1998. Additionally, the Company incurred offering costs related to
the 1998-A Preferred Stock totaling approximately $120,000. These offering costs
are reflected as a discount to the 1998-A Preferred Stock and will be accreted
as deemed preferred dividends over the conversion period, which ends July 25,
1998. At June 30, 1998, $195,208 had been recorded as deemed dividends, relating
to the beneficial conversion ratio and offering costs. Initially, the 1998-A
Preferred Stock was redeemable at the option of the holders under certain
conditions which were outside the control of the Company. Accordingly, the
1998-A Preferred Stock has not been classified as stockholders' equity at June
30, 1998. On July 30, 1998, the Company amended the terms of the 1998-A
Preferred Stock such that the 1998-A Preferred Stock will be accounted for as an
equity instrument as of that date.
In connection with the issuance and sale of the 1998-A Preferred Stock, the
Company 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. The Agreement provides that the Company will pay certain
amounts to the investor if the registration statement is not filed on or before
February 26, 1998 or is not 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 has
filed a pre-effective amendment to the registration statement on Form SB-2. The
terms of the 1998-A Preferred Stock provide that, if the registration statement
is not declared effective by April 26, 1998, the Company shall pay, upon demand
of the investor, an amount equal to two percent (2%) of the purchase price of
the 1998-A Preferred Stock for the period from April 26, 1998 until the date the
registration statement is declared effective. The investor has indicated that
he does not currently intend to make demand for payment.
In connection with the issuance of the 1998-A Preferred Stock, the Company paid
a cash fee to the investor of 7.5% of the gross proceeds ($112,500) and
attorney's fees equal to 0.5% of the gross proceeds ($7,500). The Company also
issued warrants to the investor to purchase up to 75,000 shares of Common Stock
at an exercise price of $3.375 per share, which expire on January 26, 2003. The
fair value of these warrants of $248,250 has been reflected as a discount to the
1998-A Preferred Stock and will be accreted as deemed preferred dividends over
the conversion period, which ends July 25, 1998. At June 30, 1998, $111,885 had
been recorded as deemed dividends related to the fair value of the warrants.
On April 28, 1998, the Company issued to the Tail Wind Fund Ltd. ("Tail Wind")
149,663 shares of its common stock, which Tail Wind was entitled to receive
pursuant to the terms of a common stock purchase agreement dated as of June 30,
1997 between Tail Wind and the Company. The agreement provided for the
10
<PAGE> 12
issuance of such additional reset shares upon the occurrence of certain
conditions related to the market price of the Company's common stock during a
specified period.
Also on April 28, 1998, the Company issued to Biscount Overseas Limited 153,756
shares of its common stock upon the conversion of 140 shares of the 1998-A
Preferred Stock.
On May 26, 1998, the Company entered into a common stock subscription agreement
with Paul Bernstein for the issuance and sale of 156,250 shares of its common
stock for an aggregate purchase price of $250,000.
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.
The Company believes that its current cash position and cash received from the
sale of its preferred stock in August 1998, combined with revenues
and other cash receipts, will be sufficient to fund the Company's operations
through 1998. However, substantial additional financing will be required in
1999. There can be no assurance that such financing will be achieved or that
financings will be on terms favorable 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 certainty. The Company's
significant operating losses and capital requirements raise substantial doubt
about the Company's ability to continue as a going concern.
RECENT DEVELOPMENTS
On July 22, 1998, the Company issued to Biscount Overseas Limited 68,291 shares
of its common stock upon the conversion of 60 shares of the 1998-A Preferred
Stock.
On July 28, 1998, the Company issued to Tail Wind 51,376 shares of its common
stock, which Tail Wind was entitled to receive pursuant to the terms of the
common stock purchase agreement dated as of June 30, 1997 between Tail Wind and
the Company, which provided for the issuance of such additional reset shares
upon the occurrence of certain conditions related to the market price of the
Company's common stock during a specified period. Under the terms of such common
stock purchase agreement, Tail Wind remains entitled to receive an additional
17,410 shares of common stock.
On July 31, 1998, the US Food and Drug Administration notified the Company that
it has granted Certificates of Exportability covering all required countries for
all of the Company's HIV diagnostic devices, after determining that the
Company's Vancouver facility was compliant with FDA Good Manufacturing Practices
(GMP) regulations.
On July 31, 1998, the Company appointed Paul Bernstein as a member of its Board
of Directors.
On August 3, 1998, the Company entered into a securities purchase agreement with
an investor for the issuance and sale of shares of its newly designated Series
1998-B Convertible Preferred Stock (the "1998-B Preferred Stock"). Pursuant to
the securities purchase agreement, the Company sold a total of 500 shares of the
1998-B Preferred Stock to the investor for an aggregate purchase price of
$470,000 (net of issuance costs of $30,000). The investor is entitled to receive
a number of shares of the Company's common stock upon conversion of the 1998-B
Preferred Stock as determined by dividing the purchase price of the 1998-B
Preferred Stock by the lesser of (i) $1.69, and (ii) 80% of the average closing
bid price of the Company's common stock for the five trading days prior to
conversion. In addition, the investor is committed to
11
<PAGE> 13
purchase an additional 1,000 shares of 1998-B Preferred Stock prior to April 3,
1999 for an aggregate purchase price of $940,000 (net of issuance costs of
$60,000).
On August 7, 1998, the US Food and Drug Administration advised the Company that
it has cleared the Company's Stat-Simple(TM) pylori test for diagnostic use in
humans. Stat-Simple(TM) pylori is a finger-prick test for the bacterial
infection responsible for the majority of stomach ulcers and certain other
gastrointestinal diseases in humans, and may allow physicians to diagnose the
infection at the time of patient visit, thereby avoiding the expense and time
consumed in traditional laboratory-based testing.
REVERSE STOCK SPLIT
On August 3, 1998, the Company effected a one-for-ten reverse split of shares of
its outstanding common stock, which was previously approved by the Company's
shareholders at a special meeting held on February 28, 1998. The Company's
common stock currently trades on the OTC Bulletin Board under the symbol "SALVD"
to reflect the reverse split, and will resume trading under the symbol "SALV"
beginning September 3, 1998. Warrants to purchase the Company's common stock,
including the Company's publicly-held warrants, and options, preferred stock,
and other securities convertible into shares of the Company's common stock, will
be adjusted in accordance with their terms to reflect the reverse stock split.
Upon exercise or conversion, holders of such securities will be entitled to
receive one-tenth of the number of shares of post-split common stock as they
were entitled to receive of pre-split common stock.
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As discussed in the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended March 31, 1998, 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 1998, the Company's motion for summary judgment
was granted and the lawsuit was dismissed without prejudice.
As discussed in the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended March 31, 1998, Lealos v. Saliva Diagnostic Systems, Inc. was filed
in Superior Court in Clark County in the State of Washington by Ronald Lealos,
the former President of the Company, in February 1998. The complaint alleges
that Mr. Lealos was entitled to certain cash payments and benefits under an
employment agreement whereby he would serve as the Company's president, and that
the Company's failure to make such payments and grant such benefits constituted
anticipatory breach and breach of that contract. In addition, the complaint
alleges that the Company wrongfully rescinded options to purchase 385,000 shares
of Common Stock in breach of a stock option agreement with Mr. Lealos. In March
1998, the Company filed an answer to the complaint in which it stated that the
alleged employment agreement was not intended to be effective and was
12
<PAGE> 14
rescinded by the parties, and that the stock option agreement was not breached
by the Company. The Company's answer also asserted numerous counterclaims
against Mr. Lealos, including breach of fiduciary duty and conversion, for which
the Company is seeking damages in excess of $1,500,000. Although management of
the Company intends to vigorously defend against the suit, 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.
ITEM 2. CHANGES IN SECURITIES
(a) On August 3, 1998, the Company amended its Certificate of Incorporation to
effect a one-for-ten reverse split of its common stock. As of that date, each
ten outstanding shares of the Company's common stock were converted and
reconstituted into one share of common stock, par value $0.01 per share. The
number of authorized shares of common stock of the Company was not affected by
the reverse stock split and remains at 50,000,000. Warrants to purchase the
Company's common stock, including the Company's publicly-held warrants, and
options, preferred stock and other securities convertible into shares of the
Company's common stock will be adjusted in accordance with their terms to
reflect the reverse stock split. Upon exercise or conversion, holders of such
securities will be entitled to receive one-tenth of the number of shares of
post-split common stock as they were entitled to receive of pre-split common
stock.
(b) On May 26, 1998, in reliance upon Rule 506 of Regulation D promulgated under
the Securities Act of 1933, as amended, the Company entered into a common stock
subscription agreement with Paul Bernstein for the issuance and sale of 156,250
shares (on a post-split basis) of its common stock for an aggregate purchase
price of $250,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this report are listed below:
<TABLE>
<CAPTION>
Exhibit
No. Description
--- -----------
<S> <C>
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, incorporated by
reference to Exhibit 3.3 of the Company's Annual Report on Form
10-KSB for its fiscal year ended December 31, 1997
3.4 Certificate of Amendment, dated July 31, 1998.
3.5 Company's By-laws, as amended, incorporated by reference to Exhibit
3.4 of the Company's Annual Report on Form 10-KSB for its fiscal
year ended December 31, 1997
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 among the Company and The Tail
Wind Fund Ltd. and Joseph Kaufman, 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 among the Company and The Tail
Wind Fund Ltd. and Joseph
</TABLE>
13
<PAGE> 15
<TABLE>
<S> <C>
Kaufman, 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 4.9 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 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").
4.12 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.
4.13 Certificate of Designations, Rights and Preferences of the Series
1998-A Convertible Preferred Stock, incorporated by reference to
Exhibit 4.1 of the Company's Current Report on Form 8-K, dated
January 26, 1998.
4.14 Amended Certificate of Designations, Rights and Preferences of the
Series 1998-A Convertible Preferred Stock.
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").
4.16 Certificate of Designations, Rights and Preferences of the Series
1998-B Convertible Preferred Stock.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1998.
14
<PAGE> 16
SIGNATURES
In accordance with the requirements 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: August 14, 1998
SALIVA DIAGNOSTIC SYSTEMS, INC.
By:/s/ KENNETH J. MCLACHLAN
--------------------------------------
Kenneth J. McLachlan
President, Chief Executive Officer and
Chief Financial Officer
<PAGE> 1
EXHIBIT 3.4
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. McLachlan, 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 as follows:
1. By adding an additional paragraph to ARTICLE FOURTH, as it now exists,
reading as follows:
"The corporation hereby declares that each ten
outstanding shares of the corporation's Common
Stock, par value $.01 per share, as of the date of
filing of this Certificate of Amendment, be
converted and reconstituted into one share of
Common Stock, par value $.01 per share. No
fractional shares shall be issued upon such
conversion and reconstitution, and the number of
shares of Common Stock to be issued shall be
rounded to the nearest whole share. If a
fractional interest in a share of Common Stock
would, except for the provisions of the preceding
sentence, be deliverable upon such conversion and
reconstitution, the corporation shall pay an
amount in cash equal to the fair market value of
such fractional interest, as determined by the
corporation's Board of Directors, to each holder
of shares of Common Stock to whom such fractional
interest would have been deliverable."
SECOND, that such amendment has been duly adopted in accordance with
the provisions of the General Corporation Law of the State of Delaware by the
vote of not less than a majority of the outstanding stock entitled to vote at a
special meeting of the stockholders and that valid notice of the special meeting
was given to the stockholders, all in accordance with the provisions of Sections
222 and 242 of the General Corporation Law of the State of Delaware.
<PAGE> 2
IN WITNESS WHEREOF, I have signed this certificate this 31st day of
July, 1998.
/s/ Kenneth J. McLachlan
-------------------------------
Kenneth J. McLachlan, President
<PAGE> 1
EXHIBIT 14.4
AMENDED
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS
OF
1998-A CONVERTIBLE PREFERRED STOCK
OF
SALIVA DIAGNOSTIC SYSTEMS, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
Saliva Diagnostic Systems, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
hereby certifies that the following resolutions were adopted by the Board of
Directors of the Corporation pursuant to authority of the Board of Directors as
required by Section 151 of the Delaware General Corporation Law:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "Board of Directors" or the "Board")
in accordance with the provisions of its Certificate of Incorporation, as
amended, the Board of Directors hereby authorizes a series of the Corporation's
previously authorized Preferred Stock, par value $0.01 per share (the "Preferred
Stock"), and hereby states the designation and number of shares, and fixes the
relative rights, preferences, privileges, powers and restrictions thereof as
follows:
1998-A Convertible Preferred Stock:
I. Designation and Amount
The designation of this series, which consists of One Thousand Five
Hundred (1,500) shares of Preferred Stock, is 1998-A Convertible Preferred Stock
(the "1998-A Preferred Stock") and the stated value shall be One Thousand
Dollars ($1,000) per share (the "Stated Value").
II. Rank
All 1998-A Preferred Stock shall rank (i) prior to the Corporation's
Common Stock, par value $.01 per share (the "Common Stock"); (ii) pari passu
with the Corporation's 1998-B Convertible Preferred Stock; (iii) prior to any
class or series of capital stock of the Corporation hereafter created (unless,
with the consent of the holders of the 1998-A Preferred Stock obtained in
accordance with Article IX hereof, such class or series of capital stock
specifically ranks, by its terms, pari passu with the 1998-A Preferred Stock
(together with the 1998-B Convertible Preferred
<PAGE> 2
Stock, the "Pari Passu Securities")); and (iv) junior to any class or series of
capital stock of the Corporation hereafter created (with the consent of the
holders of the 1998-A Preferred Stock obtained in accordance with Article IX
hereof) that specifically ranks, by its terms, senior to the 1998-A Preferred
Stock (collectively, the "Senior Securities"), in each case as to distribution
of assets upon liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary.
III. Dividend
The holder of the 1998-A Preferred Stock shall be entitled to receive
when, as and if declared by the Board of Directors out of funds legally
available for such purpose, dividends at an annual rate of six percent (6%) per
annum (the "Dividend"), payable annually commencing on the date of issuance. The
Dividend paid on the 1998-A Preferred Stock shall be cumulative and shall be
declared and paid out of funds legally available therefor simultaneously with
any conversion thereof and as set forth in Articles IV through VII hereof.
IV. Liquidation
A. If the Corporation shall commence a voluntary case under the
Federal bankruptcy laws or any other applicable Federal or State bankruptcy,
insolvency or similar law, or consent to the entry of an order for relief in an
involuntary case under any law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or make an assignment
for the benefit of its creditors, or admit in writing its inability to pay its
debts generally as they become due, or if a decree or order for relief in
respect of the Corporation shall be entered by a court having jurisdiction in
the premises in an involuntary case under the Federal bankruptcy laws or any
other applicable Federal or State bankruptcy, insolvency or similar law
resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of ninety (90) consecutive days and, on account of any such event (a
"Liquidation Event"), the Corporation shall liquidate, dissolve or wind up, or
if the Corporation shall otherwise liquidate, dissolve or wind up, no
distribution shall be made to the holders of any shares of capital stock of the
Corporation (other than Senior Securities) upon liquidation, dissolution or
winding up unless prior thereto, the holders of shares of 1998-A Preferred Stock
shall have received the Stated Value, plus the Dividend for the period ending on
the date of the Liquidation Event, with respect to each share. If upon the
occurrence of a Liquidation Event, the assets and funds available for
distribution among the holders of the 1998-A Preferred Stock and holders of Pari
Passu Securities shall be insufficient to permit the payment to such holders of
the preferential amounts payable thereon, then the entire assets and funds of
the Corporation legally available for distribution to the 1998-A Preferred Stock
and the Pari Passu Securities shall be distributed ratably among such shares in
proportion to the ratio that the Stated Value of each such share bears to the
aggregate Stated Value of all such shares.
2
<PAGE> 3
V. Cash Payment of Dividend by Corporation
A. The Corporation shall have the right, in its sole discretion,
upon receipt of a Notice of Conversion pursuant to Article VI.D or in the event
of a Mandatory Conversion effected in accordance with Article VII hereof, to pay
any portion of the Dividend payable upon such conversion for cash. All cash
payments hereunder shall be paid in lawful money of the United States of America
at such address for the holder as appears on the record books of the Corporation
(or at such other address as such holder shall hereafter give to the Corporation
by written notice).
VI. Conversion at the Option of the Holder
A. Each holder of shares of 1998-A Preferred Stock may, at its
option, convert its shares of 1998-A Preferred Stock into Common Stock in the
following amounts and at the following times (an "Optional Conversion").
(a) Each share of 1998-A Preferred Stock shall be convertible
into such number of fully paid and nonassessable shares of Common Stock as is
determined by one of the following formulas, as applicable:
(1) if the Dividend has been paid in cash by the Company
in accordance with Article V.A hereof,
1,000
----------
CP
where: CP = Conversion Price (as defined in Article VI.B);
or
(2) if the Dividend has not been paid in cash by the
Company,
(.06)(N/365)(1,000) + 1,000
---------------------------
CP
where: CP= Conversion Price (as defined in Article VI.B),
and
N= the number of days between the date of issuance
of the 1998-A Preferred Stock to the holder and the
Conversion Date (as defined in Article VI.D(d)).
(b) A holder of shares of 1998-A Preferred Stock shall have
the right to effect an Optional Conversion of up to (i) twenty-five percent
(25%) of the shares of 1998-A Preferred Stock originally issued to the holder at
any time from and after the ninetieth (90th) day following the date of issuance;
(ii) fifty percent (50%) of the shares of 1998-A Preferred Stock
3
<PAGE> 4
originally issued to the holder at any time from and after the one hundred
twentieth (120th) day following the date of issuance; (iii) seventy-five percent
(75%) of the shares of 1998-A Preferred Stock originally issued to the holder at
any time from and after the one hundred fiftieth (150th) day following the date
of issuance; and (iv) all (100%) of the shares of 1998-A Preferred Stock
originally issued to the holder at any time from and after the one hundred
eightieth (180th) day following the date of issuance.
B. The "Conversion Price" shall be the lesser of (i) 100% of the
Market Price on the date the 1998-A Preferred Stock is initially issued to the
holder, and (ii) 80% of the Market Price on the Conversion Date (as defined in
paragraph D(d) of this Article VI). For the purposes hereof, "Market Price"
shall mean the average of the closing bid prices of the Common Stock, as
reported by the OTC Bulletin Board or any principal securities exchange or
market upon which the Common Stock is or becomes traded, over a period of five
consecutive trading days ending on the day immediately preceding the date in
question.
C. The Conversion Price shall be subject to adjustment from time to
time as follows:
(a) Adjustment to Conversion Price Due to Stock Split, Stock
Dividend, Etc. If at any time when the 1998-A Preferred Stock is issued and
outstanding, the number of outstanding shares of Common Stock is increased by a
stock split, stock dividend, or other similar event, the Conversion Price shall
be proportionately reduced, or if the number of outstanding shares of Common
Stock is decreased by a reverse stock split, combination or reclassification of
shares, or other similar event, the Conversion Price shall be proportionately
increased. In such event the Corporation shall notify the Transfer Agent of such
change on or before the effective date thereof.
(b) Adjustment Due to Merger, Consolidation, Etc. If, at any
time when 1998-A Preferred Stock is issued and outstanding and prior to the
conversion of all 1998-A Preferred Stock, there shall be (i) any
reclassification or change of the outstanding shares of Common Stock (other than
a change in par value, or from par value to no par value, or from no par value
to par value, or as a result of a subdivision or combination), (ii) any
consolidation or merger of the Corporation with any other corporation (other
than a merger in which the Corporation is the surviving or continuing
corporation and its capital stock is unchanged), (iii) any sale or transfer of
all or substantially all of the assets of the Corporation or (iv) any share
exchange pursuant to which all of the outstanding shares of Common Stock are
converted into other securities or property, then the holders of 1998-A
Preferred Stock shall, upon being given at least thirty (30) days prior written
notice of such transaction, thereafter have the right to purchase and receive
upon conversion of 1998-A Preferred Stock, upon the basis and upon the terms and
conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore issuable upon conversion, such shares of stock and/or
securities or other property as may be issued or payable with respect to or in
exchange for the number of shares of Common Stock immediately theretofore
receivable upon the conversion of 1998-A Preferred Stock held by such holders
had such merger, consolidation, exchange of shares, recapitalization,
reorganization or other similar event not taken place, and in any such case
appropriate provisions shall be made with respect to the rights and interests of
the
4
<PAGE> 5
holders of the 1998-A Preferred Stock to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Conversion
Price and of the number of shares issuable upon conversion of the 1998-A
Preferred Stock) shall thereafter be applicable, as nearly as may be practicable
in relation to any shares of stock or securities thereafter deliverable upon the
conversion thereof. The above provisions shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or share exchanges.
(d) No Fractional Shares. If any adjustment under this Article
VI.C would create a fractional share of Common Stock or a right to acquire a
fractional share of Common Stock, such fractional share shall be disregarded and
the number of shares of Common Stock issuable upon conversion shall be the next
higher number of shares.
D. In order to convert 1998-A Preferred Stock into full shares of
Common Stock, a holder shall: (i) fax a copy of the fully executed notice of
conversion in the form attached hereto ("Notice of Conversion") to the
Corporation at the office of the Corporation (fax number 360-254-7942), with a
copy to the Corporation's Transfer Agent (fax number 718-921-8327 or such other
number as the Corporation shall specify in a notice to the holder) for the
1998-A Preferred Stock that the holder elects to convert the same, which notice
shall specify the number of shares of 1998-A Preferred Stock to be converted,
the applicable Conversion Price and a calculation of the number of shares of
Common Stock issuable upon such conversion (together with a copy of the first
page of each certificate to be converted) prior to 6:00 p.m. New York City time
(the "Conversion Notice Deadline") on the date of conversion specified on the
Notice of Conversion; and (ii) surrender the original certificates representing
the 1998-A Preferred Stock being converted (the "Preferred Stock Certificates"),
duly endorsed, along with a copy of the Notice of Conversion within two (2)
business days thereafter to the office of the Corporation; provided, however,
that the Corporation shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such conversion unless either the Preferred
Stock Certificates are delivered to the Corporation as provided above, or the
holder notifies the Corporation that such certificates have been lost, stolen or
destroyed (subject to the requirements of subparagraph (a) below). In the case
of a dispute as to the calculation of the Conversion Price, the Corporation
shall promptly issue such number of shares of Common Stock to purchase shares of
Common Stock that are n disputed in accordance with subparagraph (b) below. The
Corporation shall submit the disputed calculations to its outside accountant via
facsimile within five (5) business days of receipt of the Notice of Conversion.
The accountant shall audit the calculations and notify the Corporation and the
holder of the results no later than three (3) business days from the time it
receives the disputed calculations. The accountant's calculation shall be deemed
conclusive absent manifest error.
(a) Lost or Stolen Certificates. Upon receipt by the
Corporation of evidence of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing shares of 1998-A Preferred Stock, and
(in the case of loss, theft or destruction) of indemnity or security reasonably
satisfactory to the Corporation, and upon surrender and cancellation of the
Preferred Stock Certificate(s), if mutilated, the Corporation shall execute and
deliver new Preferred Stock Certificate(s) of like tenor and date. However, the
Corporation shall not be obligated to
5
<PAGE> 6
reissue such lost or stolen Preferred Stock Certificate(s) if the holder
contemporaneously requests the Corporation to convert such 1998-A Preferred
Stock.
(b) Delivery of Common Stock Upon Conversion. Upon the
surrender of certificates as described above from a holder of 1998-A Preferred
Stock accompanied by a Notice of Conversion, the Corporation shall issue and,
within two (2) business days (the "Delivery Period") after such surrender (or,
in the case of lost, stolen or destroyed certificates, after provision of
agreement and indemnification pursuant to subparagraph (a) above), request that
its Transfer Agent deliver to or upon the order of the holder (i) that number of
shares of Common Stock for the portion of the shares of 1998-A Preferred Stock
converted as shall be determined in accordance herewith and (ii) a certificate
representing the balance of the shares of 1998-A Preferred Stock not converted,
if any.
(c) No Fractional Shares. If any conversion of 1998-A
Preferred Stock would result in a fractional share of Common Stock or the right
to acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion of
the 1998-A Preferred Stock shall be the next higher number of shares.
(d) Conversion Date. The "Conversion Date" shall be the date
specified in the Notice of Conversion, provided (i) that the advance copy of the
Notice of Conversion is faxed to the Corporation before 6:00 p.m., New York City
time, on the Conversion Date, and (ii) that the original Preferred Stock
Certificate(s), duly endorsed, are surrendered along with a copy of the Notice
of Conversion within two (2) business days thereafter to the office of the
Corporation. The person or persons entitled to receive the shares of Common
Stock issuable upon conversion shall be treated for all purposes as the record
holder or holders of such securities as of the Conversion Date and all rights
with respect to the shares of 1998-A Preferred Stock surrendered shall forthwith
terminate except the right to receive the shares of Common Stock or other
securities or property issuable on such conversion.
E. A number of shares equal to 150% of the authorized but unissued
Common Stock to provide for the conversion of the 1998-A Preferred Stock
outstanding at the then current Conversion Price shall at all times be reserved
by the Corporation, free from preemptive rights, for such conversion in
accordance with the provisions of the Securities Purchase Agreement.
Notwithstanding anything to the contrary herein, shares of Common Stock so
reserved shall be allocated for issuance upon conversion of the 1998-A Preferred
Stock pro rata among the holders of 1998-A Preferred Stock based on the number
of shares of 1998-A Preferred Stock held by each such holder relative to the
total number of authorized shares of 1998-A Preferred Stock. If the Corporation
shall issue any securities or make any change in its capital structure which
would change the number of shares of Common Stock into which each share of the
1998-A Preferred Stock shall be convertible at the then current Conversion
Price, the Corporation shall at the same time also make proper provision so that
thereafter there shall be a sufficient number of shares of Common Stock
authorized and reserved, free from preemptive rights, for conversion of the
outstanding 1998-A Preferred Stock on the new basis. If at any time a holder of
shares of 1998-A
6
<PAGE> 7
Preferred Stock submits a Conversion Notice the Corporation does not have
sufficient authorized but unissued shares of Common Stock available to effect
such conversion in accordance with the provisions of this Article VI, the
Corporation shall issue to each holder such holder's pro rata share of all of
the shares of Common Stock which are available to effect such conversion and
shall thereafter use its best efforts and take all necessary action to obtain,
as promptly as practicable, shareholder approval to authorize the issuance of
sufficient shares of Common Stock to effect conversion of the 1998-A Preferred
Stock then outstanding. The number of shares of 1998-A Preferred Stock included
in the Notice of Conversion which exceeds the amount which is then convertible
into available shares of Common Stock shall, notwithstanding anything to the
contrary contained herein, not be convertible into Common Stock in accordance
with the terms hereof until (and at the holder's option at any time after) the
date additional shares of Common Stock are authorized by the Corporation to
permit such conversion.
F. Upon the occurrence of each adjustment or readjustment of the
Conversion Price pursuant to this Article VI, the Corporation, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of 1998-A Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of 1998-A Preferred
Stock, furnish or cause to be furnished to such holder a like certificate
setting forth (i) such adjustment or readjustment, (ii) the Conversion Price and
(iii) the number of shares of Common Stock and the amount, if any, of other
securities or property which at the time would be received upon conversion of a
share of 1998-A Preferred Stock.
VII. Mandatory Conversion
Each share of 1998-A Preferred Stock issued and outstanding on that
date which is two years from the issuance date of 1998-A Preferred Stock,
automatically shall be converted into shares of Common Stock on such date at the
Conversion Price plus a Dividend for the period ending on such date; provided,
however, that the Corporation may not automatically convert any shares of 1998-A
Preferred Stock pursuant to this Article VII which are the subject of a Notice
of Conversion which was faxed to the Corporation before 4:00 p.m., New York City
time, on such date or before such date.
VIII. Voting Rights
The holders of the 1998-A Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Delaware General Corporation Law
("DGCL"), and in this Article VIII, and in Article IX below.
To the extent that under the DGCL the vote of the holders of the
1998-A Preferred Stock, voting separately as a class or series as applicable, is
required to authorize a given action of the Corporation, the affirmative vote or
consent of the holders of at least a majority of the shares of the
7
<PAGE> 8
1998-A Preferred Stock represented at a duly held meeting at which a quorum is
present or by written consent of a majority of the shares of 1998-A Preferred
Stock (except as otherwise may be required under the DGCL) shall constitute the
approval of such action by the class. To the extent that under the DGCL holders
of the 1998-A Preferred Stock are entitled to vote on a matter with holders of
Common Stock, voting together as one class, each share of 1998-A Preferred Stock
shall be entitled to a number of votes equal to the number of shares of Common
Stock into which it is then convertible using the record date for the taking of
such vote of shareholders as the date as of which the Conversion Price is
calculated. Holders of the 1998-A Preferred Stock shall be entitled to notice of
(and copies of proxy materials and other information sent to shareholders) all
shareholder meetings or written consents with respect to which they would be
entitled to vote, which notice would be provided pursuant to the Corporation's
by-laws and the DGCL.
IX. Protective Provision
So long as shares of 1998-A Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by the DGCL) of the holders of at least a majority of the
then outstanding shares of 1998-A Preferred Stock:
(a) alter or change the rights, preferences or privileges of
the 1998-A Preferred Stock;
(b) increase the authorized number of shares of 1998-A
Preferred Stock;
(c) create any new class or series of capital stock having a
preference over the 1998-A Preferred stock as to dividends and as to
distribution of assets upon liquidation, dissolution or winding up of the
Corporation (as previously defined herein, "Senior Securities"); or
(d) create any new class or series of capital stock ranking
pari passu with the 1998-A Preferred Stock (except for the 1998-B Convertible
Preferred Stock, for which no approval shall be required) as to dividends and as
to distribution of assets upon liquidation, dissolution or winding up of the
Corporation (as previously defined herein, "Pari Passu Securities").
In the event holders of at least a majority of the then outstanding
shares of 1998-A Preferred Stock (voting together as a single class) agree to
allow the Corporation to alter or change the rights, preferences or privileges
of the shares of 1998-A Preferred Stock, pursuant to subsection (a) above, so as
to affect the 1998-A Preferred Stock, then the Corporation will deliver notice
of such approved change to the holders of the 1998-A Preferred Stock that did
not agree to such alteration or change (the "Dissenting Holders") and Dissenting
Holders shall have the right for a period of thirty (30) days to convert
pursuant to the terms of this Certificate of Designation as they exist prior to
such alteration or change or continue to hold their shares of 1998-A Preferred
Stock as altered or changed.
8
<PAGE> 9
IN WITNESS WHEREOF, this Amended Certificate of Designations,
Preferences and Rights is executed on behalf of the Corporation this 16th day of
July, 1998.
SALIVA DIAGNOSTIC SYSTEMS, INC.
By:/s/ Kenneth J. McLachlan
--------------------------------------
Kenneth J. McLachlan
President and Chief Executive Officer
9
<PAGE> 10
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the 1998-A Preferred Stock)
The undersigned hereby irrevocably elects to convert shares of 1998-A Preferred
Stock, represented by stock certificate no(s). ___________ (the "Preferred Stock
Certificates") into shares of common stock, par value $.01 per share ("Common
Stock"), of Saliva Diagnostic Systems, Inc. (the "Corporation") according to the
conditions of the Certificate of Designation of 1998-A Preferred Stock, as of
the date written below. If securities are to be issued in the name of a person
other than the undersigned, the undersigned will pay all transfer taxes payable
with respect thereto and is delivering herewith such certificates. No fee will
be charged to the Holder for any conversion, except for transfer taxes, if any.
A copy of each Preferred Stock Certificate is attached hereto (or evidence of
loss, theft or destruction thereof).
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
1998-A Preferred Stock shall be made pursuant to registration of the securities
under the Securities Act of 1933, as amended (the "Act"), or pursuant to an
exemption from registration under the Act.
Date of Conversion:
---------------------------
Applicable Conversion Price:
------------------
Number of Shares of
Common Stock to be Issued:
--------------------
Signature:
------------------------------------
Name:
-----------------------------------------
Address:
--------------------------------------
*The Corporation is not required to issue shares of Common Stock until the
original 1998-A Preferred Stock Certificate(s) (or evidence of loss, theft or
destruction thereof) to be converted are received by the Corporation.
10
<PAGE> 1
EXHIBIT 4.16
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS
OF
1998-B CONVERTIBLE PREFERRED STOCK
OF
SALIVA DIAGNOSTIC SYSTEMS, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
Saliva Diagnostic Systems, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
hereby certifies that the following resolutions were adopted by the Board of
Directors of the Corporation pursuant to authority of the Board of Directors as
required by Section 151 of the Delaware General Corporation Law:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "Board of Directors" or the "Board")
in accordance with the provisions of its Certificate of Incorporation, as
amended, the Board of Directors hereby authorizes a series of the Corporation's
previously authorized Preferred Stock, par value $0.01 per share (the "Preferred
Stock"), and hereby states the designation and number of shares, and fixes the
relative rights, preferences, privileges, powers and restrictions thereof as
follows:
1998-B Convertible Preferred Stock:
I. Designation and Amount
The designation of this series, which consists of One Thousand Five
Hundred (1,500) shares of Preferred Stock, is 1998-B Convertible Preferred Stock
(the "1998-B Preferred Stock") and the stated value shall be One Thousand
Dollars ($1,000) per share (the "Stated Value").
II. Rank
All 1998-B Preferred Stock shall rank (i) prior to the Corporation's
Common Stock, par value $.01 per share (the "Common Stock"); (ii) pari passu
with the Corporation's 1998-A Convertible Preferred Stock; (iii) prior to any
class or series of capital stock of the Corporation hereafter created (unless,
with the consent of the holders of the 1998-B Preferred Stock obtained in
accordance with Article IX hereof, such class or series of capital stock
specifically ranks, by its terms, pari passu with the 1998-B Preferred Stock
(together with the 1998-A Convertible Preferred Stock, the "Pari Passu
Securities")); and (iv) junior to any class or series of capital stock of the
<PAGE> 2
Corporation hereafter created (with the consent of the holders of the 1998-B
Preferred Stock obtained in accordance with Article IX hereof) that specifically
ranks, by its terms, senior to the 1998-B Preferred Stock (collectively, the
"Senior Securities"), in each case as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary.
III. Dividend
The holder of the 1998-B Preferred Stock shall be entitled to receive
when, as and if declared by the Board of Directors out of funds legally
available for such purpose, cumulative dividends at an annual rate of six
percent (6%) per annum (the "Dividend"), commencing on the date of issuance. The
Dividend shall be payable simultaneously with any conversion of the 1998-B
Preferred Stock and as set forth in Articles IV through VII hereof.
IV. Liquidation
A. If the Corporation shall commence a voluntary case under
the Federal bankruptcy laws or any other applicable Federal or State bankruptcy,
insolvency or similar law, or consent to the entry of an order for relief in an
involuntary case under any law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or make an assignment
for the benefit of its creditors, or admit in writing its inability to pay its
debts generally as they become due, or if a decree or order for relief in
respect of the Corporation shall be entered by a court having jurisdiction in
the premises in an involuntary case under the Federal bankruptcy laws or any
other applicable Federal or State bankruptcy, insolvency or similar law
resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of ninety (90) consecutive days and, on account of any such event (a
"Liquidation Event"), the Corporation shall liquidate, dissolve or wind up, or
if the Corporation shall otherwise liquidate, dissolve or wind up, no
distribution shall be made to the holders of any shares of capital stock of the
Corporation (other than Senior Securities) upon liquidation, dissolution or
winding up unless prior thereto, the holders of shares of 1998-B Preferred Stock
shall have received the Stated Value, plus the Dividend for the period ending on
the date of the Liquidation Event, with respect to each share. If upon the
occurrence of a Liquidation Event, the assets and funds available for
distribution among the holders of the 1998-B Preferred Stock and holders of Pari
Passu Securities shall be insufficient to permit the payment to such holders of
the preferential amounts payable thereon, then the entire assets and funds of
the Corporation legally available for distribution to the 1998-B Preferred Stock
and the Pari Passu Securities shall be distributed ratably among such shares in
proportion to the ratio that the Stated Value of each such share bears to the
aggregate Stated Value of all such shares.
2
<PAGE> 3
V. Cash Payment of Dividend by Corporation
The Corporation shall have the right, in its sole discretion, upon
receipt of a Notice of Conversion pursuant to Article VI.D or in the event of a
Mandatory Conversion effected in accordance with Article VII hereof, to pay any
portion of the Dividend payable upon such conversion for cash. All cash payments
hereunder shall be paid in lawful money of the United States of America at such
address for the holder as appears on the record books of the Corporation (or at
such other address as such holder shall hereafter give to the Corporation by
written notice).
VI. Conversion at the Option of the Holder
A. Each holder of shares of 1998-B Preferred Stock may, at its
option, convert its shares of 1998-B Preferred Stock into Common Stock in the
following amounts and at the following times (an "Optional Conversion").
(a) Each share of 1998-B Preferred Stock shall be convertible
into such number of fully paid and nonassessable shares of Common Stock as is
determined by one of the following formulas, as applicable:
(1) if the Dividend has been paid in cash by the Company
in accordance with Article V hereof,
1,000
---------------
CP
where: CP = Conversion Price (as defined in Article VI.B);
or
(2) if the Dividend has not been paid in cash by the
Company,
(.06)(N/365)(1,000) + 1,000
---------------------------
CP
where: CP= Conversion Price (as defined in Article VI.B),
and
N= the number of days between the date of issuance
of the 1998-B Preferred Stock to the holder and the
Conversion Date (as defined in Article VI.D(d)).
(b) A holder of shares of 1998-B Preferred Stock shall have the
right to effect an Optional Conversion of the shares of 1998-B Preferred Stock
originally issued to the holder at any time from and after ninetieth (90th) day
following the date of issuance.
B. The "Conversion Price" shall be the lesser of (I) 100% of the
Market Price on the date a share of 1998-B Preferred Stock is initially issued
to the holder, and (ii) 80% of the Market Price on the Conversion Date (as
defined in paragraph D(d) of this Article VI). For the purposes hereof, "Market
Price" shall mean the average of the closing bid prices of the Common
3
<PAGE> 4
Stock, as reported by the OTC Bulletin Board or any principal securities
exchange or market upon which the Common Stock is or becomes traded, over a
period of five consecutive trading days ending on the day immediately preceding
the date in question.
C. The Conversion Price shall be subject to adjustment from time to
time as follows:
(a) Adjustment to Conversion Price Due to Stock Split, Stock
Dividend, Etc. If at any time when the 1998-B Preferred Stock is issued and
outstanding, the number of outstanding shares of Common Stock is increased by a
stock split, stock dividend, or other similar event, the Conversion Price shall
be proportionately reduced, or if the number of outstanding shares of Common
Stock is decreased by a reverse stock split, combination or reclassification of
shares, or other similar event, the Conversion Price shall be proportionately
increased. In such event the Corporation shall notify the Transfer Agent of such
change on or before the effective date thereof.
(b) Adjustment Due to Merger, Consolidation, Etc. If, at any
time when 1998-B Preferred Stock is issued and outstanding and prior to the
conversion of all 1998-B Preferred Stock, there shall be (i) any
reclassification or change of the outstanding shares of Common Stock (other than
a change in par value, or from par value to no par value, or from no par value
to par value, or as a result of a subdivision or combination), (ii) any
consolidation or merger of the Corporation with any other corporation (other
than a merger in which the Corporation is the surviving or continuing
corporation and its capital stock is unchanged), (iii) any sale or transfer of
all or substantially all of the assets of the Corporation or (iv) any share
exchange pursuant to which all of the outstanding shares of Common Stock are
converted into other securities or property, then the holders of 1998-B
Preferred Stock shall, upon being given at least thirty (30) days prior written
notice of such transaction, thereafter have the right to purchase and receive
upon conversion of 1998-B Preferred Stock, upon the basis and upon the terms and
conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore issuable upon conversion, such shares of stock and/or
securities or other property as may be issued or payable with respect to or in
exchange for the number of shares of Common Stock immediately theretofore
receivable upon the conversion of 1998-B Preferred Stock held by such holders
had such merger, consolidation, exchange of shares, recapitalization,
reorganization or other similar event not taken place, and in any such case
appropriate provisions shall be made with respect to the rights and interests of
the holders of the 1998-B Preferred Stock to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Conversion
Price and of the number of shares issuable upon conversion of the 1998-B
Preferred Stock) shall thereafter be applicable, as nearly as may be practicable
in relation to any shares of stock or securities thereafter deliverable upon the
conversion thereof. The above provisions shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or share exchanges.
(c) No Fractional Shares. If any adjustment under this Article
VI.C would create a fractional share of Common Stock or a right to acquire a
fractional share of Common Stock, such fractional share shall be disregarded and
the number of shares of Common Stock issuable upon conversion shall be the next
higher number of shares.
4
<PAGE> 5
D. In order to convert 1998-B Preferred Stock into full shares of
Common Stock, a holder shall: (i) fax a copy of the fully executed notice of
conversion in the form attached hereto ("Notice of Conversion") to the
Corporation at the office of the Corporation (fax number 360-254-7942), with a
copy to the Corporation's Transfer Agent (fax number 718-921-8327 or such other
number as the Corporation shall specify in a notice to the holder) for the
1998-B Preferred Stock that the holder elects to convert the same, which notice
shall specify the number of shares of 1998-B Preferred Stock to be converted,
the applicable Conversion Price and a calculation of the number of shares of
Common Stock issuable upon such conversion (together with a copy of the first
page of each certificate to be converted) prior to 6:00 p.m. New York City time
(the "Conversion Notice Deadline") on the date of conversion specified on the
Notice of Conversion; and (ii) surrender the original certificates representing
the 1998-B Preferred Stock being converted (the "Preferred Stock Certificates"),
duly endorsed, along with a copy of the Notice of Conversion within two (2)
business days thereafter to the office of the Corporation; provided, however,
that the Corporation shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such conversion unless either the Preferred
Stock Certificates are delivered to the Corporation as provided above, or the
holder notifies the Corporation that such certificates have been lost, stolen or
destroyed (subject to the requirements of subparagraph (a) below). In the case
of a dispute as to the calculation of the Conversion Price, the Corporation
shall promptly issue such number of shares of Common Stock to purchase shares of
Common Stock that are n disputed in accordance with subparagraph (b) below. The
Corporation shall submit the disputed calculations to its outside accountant via
facsimile within five (5) business days of receipt of the Notice of Conversion.
The accountant shall audit the calculations and notify the Corporation and the
holder of the results no later than three (3) business days from the time it
receives the disputed calculations. The accountant's calculation shall be deemed
conclusive absent manifest error.
(a) Lost or Stolen Certificates. Upon receipt by the
Corporation of evidence of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing shares of 1998-B Preferred Stock, and
(in the case of loss, theft or destruction) of indemnity or security reasonably
satisfactory to the Corporation, and upon surrender and cancellation of the
Preferred Stock Certificate(s), if mutilated, the Corporation shall execute and
deliver new Preferred Stock Certificate(s) of like tenor and date. However, the
Corporation shall not be obligated to reissue such lost or stolen Preferred
Stock Certificate(s) if the holder contemporaneously requests the Corporation to
convert such 1998-B Preferred Stock.
(b) Delivery of Common Stock Upon Conversion. Upon the
surrender of certificates as described above from a holder of 1998-B Preferred
Stock accompanied by a Notice of Conversion, the Corporation shall issue and,
within two (2) business days (the "Delivery Period") after such surrender (or,
in the case of lost, stolen or destroyed certificates, after provision of
agreement and indemnification pursuant to subparagraph (a) above), request that
its Transfer Agent deliver to or upon the order of the holder (i) that number of
shares of Common Stock for the portion of the shares of 1998-B Preferred Stock
converted as shall be determined in accordance herewith and (ii) a certificate
representing the balance of the shares of 1998-B Preferred Stock not converted,
if any.
(c) No Fractional Shares. If any conversion of 1998-B
Preferred Stock would result in a fractional share of
5
<PAGE> 6
Common Stock or the right to acquire a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares of Common Stock
issuable upon conversion of the 1998-B Preferred Stock shall be the next higher
number of shares.
(d) Conversion Date. The "Conversion Date" shall be the date
specified in the Notice of Conversion, provided (i) that the advance copy of the
Notice of Conversion is faxed to the Corporation before 6:00 p.m., New York City
time, on the Conversion Date, and (ii) that the original Preferred Stock
Certificate(s), duly endorsed, are surrendered along with a copy of the Notice
of Conversion within two (2) business days thereafter to the office of the
Corporation. The person or persons entitled to receive the shares of Common
Stock issuable upon conversion shall be treated for all purposes as the record
holder or holders of such securities as of the Conversion Date and all rights
with respect to the shares of 1998-B Preferred Stock surrendered shall forthwith
terminate except the right to receive the shares of Common Stock or other
securities or property issuable on such conversion.
E. The Corporation shall at all times have authorized and reserved
for issuance, or shall have taken steps to ensure there will be available for
issuance at the time of conversion, a number of shares equal to 150% of the
authorized but unissued Common Stock to provide for the conversion of the 1998-B
Preferred Stock outstanding at the then current Conversion Price in accordance
with the provisions of the Securities Purchase Agreement. Notwithstanding
anything to the contrary herein, shares of Common Stock so reserved shall be
allocated for issuance upon conversion of the 1998-B Preferred Stock pro rata
among the holders of 1998-B Preferred Stock based on the number of shares of
1998-B Preferred Stock held by each such holder relative to the total number of
authorized shares of 1998-B Preferred Stock. If the Corporation shall issue any
securities or make any change in its capital structure which would change the
number of shares of Common Stock into which each share of the 1998-B Preferred
Stock shall be convertible at the then current Conversion Price, the Corporation
shall at the same time also make proper provision so that thereafter there shall
be a sufficient number of shares of Common Stock authorized and reserved, free
from preemptive rights, for conversion of the outstanding 1998-B Preferred Stock
on the new basis. If at any time a holder of shares of 1998-B Preferred Stock
submits a Conversion Notice the Corporation does not have sufficient authorized
but unissued shares of Common Stock available to effect such conversion in
accordance with the provisions of this Article VI, the Corporation shall issue
to each holder such holder's pro rata share of all of the shares of Common Stock
which are available to effect such conversion and shall thereafter use its best
efforts and take all necessary action to obtain, as promptly as practicable,
shareholder approval to authorize the issuance of sufficient shares of Common
Stock to effect conversion of the 1998-B Preferred Stock then outstanding. The
number of shares of 1998-B Preferred Stock included in the Notice of Conversion
which exceeds the amount which is then convertible into available shares of
Common Stock shall, notwithstanding anything to the contrary contained herein,
not be convertible into Common Stock in accordance with the terms hereof until
(and at the holder's option at any time after) the date additional shares of
Common Stock are authorized by the Corporation to permit such conversion.
F. Upon the occurrence of each adjustment or readjustment of the
Conversion Price pursuant to this Article VI, the Corporation, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of 1998-B Preferred Stock a
certificate setting forth such adjustment or readjustment and
6
<PAGE> 7
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
1998-B Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustment or readjustment, (ii) the
Conversion Price and (iii) the number of shares of Common Stock and the amount,
if any, of other securities or property which at the time would be received upon
conversion of a share of 1998-B Preferred Stock.
VII. Mandatory Conversion
Each share of 1998-B Preferred Stock issued and outstanding on that
date which is two years from the issuance date of that share of 1998-B Preferred
Stock, automatically shall be converted into shares of Common Stock on such date
at the Conversion Price plus a Dividend for the period ending on such date;
provided, however, that the Corporation may not automatically convert any shares
of 1998-B Preferred Stock pursuant to this Article VII which are the subject of
a Notice of Conversion which was faxed to the Corporation before 4:00 p.m., New
York City time, on such date or before such date.
VIII. Voting Rights
The holders of the 1998-B Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Delaware General Corporation Law
("DGCL"), and in this Article VIII, and in Article IX below.
To the extent that under the DGCL the vote of the holders of the
1998-B Preferred Stock, voting separately as a class or series as applicable, is
required to authorize a given action of the Corporation, the affirmative vote or
consent of the holders of at least a majority of the shares of the 1998-B
Preferred Stock represented at a duly held meeting at which a quorum is present
or by written consent of a majority of the shares of 1998-B Preferred Stock
(except as otherwise may be required under the DGCL) shall constitute the
approval of such action by the class. To the extent that under the DGCL holders
of the 1998-B Preferred Stock are entitled to vote on a matter with holders of
Common Stock, voting together as one class, each share of 1998-B Preferred Stock
shall be entitled to a number of votes equal to the number of shares of Common
Stock into which it is then convertible using the record date for the taking of
such vote of shareholders as the date as of which the Conversion Price is
calculated. Holders of the 1998-B Preferred Stock shall be entitled to notice of
(and copies of proxy materials and other information sent to shareholders) all
shareholder meetings or written consents with respect to which they would be
entitled to vote, which notice would be provided pursuant to the Corporation's
by-laws and the DGCL.
IX. Protective Provision
So long as shares of 1998-B Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by the DGCL) of the holders of at least a majority of the
then outstanding shares of 1998-B Preferred Stock:
(a) alter or change the rights, preferences or privileges of
the 1998-B Preferred Stock;
7
<PAGE> 8
(b) increase the authorized number of shares of 1998-B
Preferred Stock;
(c) create any new class or series of capital stock having a
preference over the 1998-B Preferred stock as to dividends and as to
distribution of assets upon liquidation, dissolution or winding up of the
Corporation (as previously defined herein, "Senior Securities"); or
(d) create any new class or series of capital stock ranking
pari passu with the 1998-B Preferred Stock (except for the 1998-A Convertible
Preferred Stock, for which no approval shall be required) as to dividends and as
to distribution of assets upon liquidation, dissolution or winding up of the
Corporation (as previously defined herein, "Pari Passu Securities").
In the event holders of at least a majority of the then outstanding
shares of 1998-B Preferred Stock (voting together as a single class) agree to
allow the Corporation to alter or change the rights, preferences or privileges
of the shares of 1998-B Preferred Stock, pursuant to subsection (a) above, so as
to affect the 1998-B Preferred Stock, then the Corporation will deliver notice
of such approved change to the holders of the 1998-B Preferred Stock that did
not agree to such alteration or change (the "Dissenting Holders") and Dissenting
Holders shall have the right for a period of thirty (30) days to convert
pursuant to the terms of this Certificate of Designation as they exist prior to
such alteration or change or continue to hold their shares of 1998-B Preferred
Stock as altered or changed.
IN WITNESS WHEREOF, this Certificate of Designation is executed on
behalf of the Corporation this 31st day of July, 1998.
SALIVA DIAGNOSTIC SYSTEMS, INC.
By: /s/ Kenneth J. McLachlan
---------------------------------
Kenneth J. McLachlan
President and Chief Executive Officer
8
<PAGE> 9
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the 1998-B Preferred Stock)
The undersigned hereby irrevocably elects to convert shares of 1998-B Preferred
Stock, represented by stock certificate no(s). ___________ (the "Preferred Stock
Certificates") into shares of common stock, par value $.01 per share ("Common
Stock"), of Saliva Diagnostic Systems, Inc. (the "Corporation") according to the
conditions of the Certificate of Designations, Preferences and Rights of 1998-B
Preferred Stock, as of the date written below. If securities are to be issued in
the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto and is delivering herewith such
certificates. No fee will be charged to the Holder for any conversion, except
for transfer taxes, if any. A copy of each Preferred Stock Certificate is
attached hereto (or evidence of loss, theft or destruction thereof).
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
1998-B Preferred Stock shall be made pursuant to registration of the securities
under the Securities Act of 1933, as amended (the "Act"), or pursuant to an
exemption from registration under the Act.
Date of Conversion:
---------------------------
Applicable Conversion Price:
------------------
Number of Shares of
Common Stock to be Issued:
--------------------
Signature:
------------------------------------
Name:
-----------------------------------------
Address:
--------------------------------------
*The Corporation is not required to issue shares of Common Stock until the
original 1998-B Preferred Stock Certificate(s) (or evidence of loss, theft or
destruction thereof) to be converted are received by the Corporation.
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements found in the Company's Report of Form 10-QSB
for the six months ended June 30, 1998, and is qualified in its entirely by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 147,441
<SECURITIES> 0
<RECEIVABLES> 238,989
<ALLOWANCES> 42,000
<INVENTORY> 357,822
<CURRENT-ASSETS> 732,259
<PP&E> 1,379,810
<DEPRECIATION> 1,040,788
<TOTAL-ASSETS> 1,310,033
<CURRENT-LIABILITIES> 1,941,963
<BONDS> 0
0
1,359,241
<COMMON> 35,300
<OTHER-SE> (2,074,795)
<TOTAL-LIABILITY-AND-EQUITY> 1,310,033
<SALES> 449,109
<TOTAL-REVENUES> 449,109
<CGS> 567,777
<TOTAL-COSTS> 567,777
<OTHER-EXPENSES> 1,547,721
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,705)
<INCOME-PRETAX> (1,669,094)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,669,094)
<EPS-PRIMARY> (0.73)
<EPS-DILUTED> (0.73)
</TABLE>
