<PAGE> 1
As filed with the Securities and Exchange Commission on May 15, 1998
Registration No. 333-46961
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO REGISTRATION STATEMENT
ON FORM S-3
FILED ON FORM SB-2
UNDER THE SECURITIES ACT OF 1933
SALIVA DIAGNOSTIC SYSTEMS, INC.
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(Name of Small Business Issuer as Specified in its Charter)
Delaware
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(State of Incorporation)
3841
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(Primary Standard Industrial Classification Code Number)
91-154-9305
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(I.R.S. Employer Identification Number)
11719 NE 95th Street
Vancouver, Washington 98682
(360) 696-4800
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(Address and telephone number of registrant's principal executive office
and principal place of business)
Kenneth J. McLachlan, President
Saliva Diagnostic Systems, Inc.
11719 NE 95th Street
Vancouver, Washington 98682
(360) 696-4800
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(Name, address and telephone number of agent for service)
Please send a copy of all communications to:
LaDawn Naegle
Bryan Cave LLP
700 13th Street, N.W.
Washington, DC 20005
(202) 508-6046
<PAGE> 2
Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. [ X ]
If this form is registering additional securities pursuant to Rule
462(b) under the Securities Act please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434 please check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 3
PROSPECTUS
SALIVA DIAGNOSTIC SYSTEMS, INC.
COMMON STOCK
Saliva Diagnostic Systems, Inc. (the "Company") is registering for
resale up to 12,592,105 shares of its common stock, $.01 par value (the "Common
Stock"), which include (i) 11,842,105 shares which have been and may be issued
upon the conversion of 1,500 shares of the Company's 1998-A Convertible
Preferred Stock, par value $.01 per share (the "1998-A Preferred Stock") and
(ii) 750,000 shares which may be issued upon the exercise of warrants granted in
connection with the private placement of the 1998-A Preferred Stock (the
"Warrants"), plus an additional presently indeterminate number of shares which
may be issued upon conversion of the 1998-A Preferred Stock (collectively, the
"Shares"). All of the Common Stock offered hereby is being offered for the
account of a shareholder of the Company which acquired its securities in a
private placement conducted by the Company. See "Selling Shareholder."
Additional shares that may become issuable as a result of the anti-dilution
provisions of the Warrants are offered hereby pursuant to Rule 416 under the
Securities Act of 1933, as amended (the "Securities Act"). The Company will not
receive any of the proceeds from the sale of the Common Stock being offered
hereby (the "Offering"), but will receive the exercise price payable upon the
exercise of the Warrants. There can be no assurance that all or any part of the
Warrants will be exercised or that they will be exercised for cash.
The Shares may be sold from time to time in transactions (which may
include block transactions) on the OTC Bulletin Board or in the pink sheets at
the market prices then prevailing. Sales of the Shares may also be made through
negotiated transactions or otherwise. The Selling Shareholder and the brokers
and dealers through which the sales of the Shares may be made may be deemed to
be "underwriters" within the meaning set forth in the Securities Act, and their
commissions and discounts and other compensation may be regarded as
underwriters' compensation. See "Plan of Distribution."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SHOULD
NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. PROSPECTIVE PURCHASERS SHOULD CAREFULLY CONSIDER THE MATTERS
DISCUSSED UNDER "RISK FACTORS" BEGINNING ON PAGE 5.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Price to Public(1) Proceeds to Selling Shareholder(1) (2)
--------------- -------------------------------
<S> <C> <C>
Per share of Common Stock $0.285 $0.285
Total (3) $3,558,750 $3,588,750
</TABLE>
(1) Estimated based upon the average of the closing bid and ask prices for the
Common Stock on May 8, 1998 as reported on the OTC Bulletin Board.
(2) Excludes regular brokerage commissions and other expenses, including
expenses of counsel, if any, for the Selling Shareholder, which will be paid by
the Selling Shareholder. The other expenses of the offering are estimated to be
approximately $41,000, all of which will be paid by the Company.
(3) Assumes all shares registered will be issued to the Selling Shareholder and
will be sold in this offering.
The date of this Prospectus is May __, 1998
<PAGE> 4
AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Such reports and other information
can be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; and the
Commission's regional offices at Room 1204, 219 South Dearborn Street, Chicago,
Illinois 60604; Room 1028, 7 World Trade Center, New York, New York 10007; and
Suite 500 East, 5757 Wilshire Boulevard, Los Angeles, California 90036. Copies
of such material can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549 at prescribed rates. The Commission maintains
an internet web site that contains reports, proxy statements and other materials
filed electronically by the Company through the Commission's Electronic Data,
Gathering, Analysis and Retrieval (EDGAR) system. This web site can be accessed
at http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on
Form SB-2 (the "Registration Statement") under the Securities Act with respect
to the shares of Common Stock offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement or the exhibits
thereto. As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information contained or incorporated by reference in
the Registration Statement. For further information, reference is hereby made to
the Registration Statement and exhibits thereto, copies of which may be
inspected at the offices of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 or obtained from the Commission at the same address at
prescribed rates.
The Company furnishes Annual Reports to the holders of its securities
which contain financial information which have been examined and reported upon,
with an opinion expressed by, its independent certified public accountants.
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<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety.
THE COMPANY
Saliva Diagnostic Systems, Inc., a Delaware corporation (the
"Company"), is primarily engaged in the development, manufacturing and marketing
of rapid in vitro assays for use in the detection of infectious diseases and
other conditions, proprietary specimen collection devices and other diagnostic
devices. The Company has a limited operating history and has incurred
significant operating losses to date.
The Company has two categories of products: medical specimen collection
devices and rapid antibody immunoassays. The Company's product, Omni-SAL(R), an
on-site, easy-to-use medical collection device, utilizes saliva as a diagnostic
tool to detect the presence of the HIV virus, other infectious diseases and
tobacco use. Omni-SAL(R) is manufactured in the U.K. by a third party and
distributed from SDS International, Ltd. to customers located outside the United
States. The Company's other collection devices include Saliva+Sampler, which is
used to collect saliva specimens, and Omni-Swab, a serrated cotton swab with an
ejectable head, which can be used to collect various body fluids and cells,
primarily for the purposes of DNA identification. See "The Company -- Products."
The Company has developed rapid immunoassays for the detection of
antibodies to selected pathogens, such as the HIV virus, and Helicobacter
pylori, a bacteria linked to peptic ulcers and gastric cancer. The Company's
immunoassays are designed to require only a few simple steps to use and to
provide results in minutes. To date, the Company has developed three rapid HIV
tests: Sero+Strip HIV, Hema+Strip HIV and Saliva+Strip HIV and a rapid H. pylori
test: Stat+Simple. The Company has under development rapid tests for hepatitis
and tuberculosis. See "The Company -- Products."
The Company is currently marketing its medical specimen collection
devices (Omni-SAL(R), Saliva+Sampler and Omni-Swab) in many countries and is
currently marketing two of its three HIV rapid tests (Sero+Strip HIV and
Hema+Strip HIV) outside the United States. These HIV rapid tests are not yet
approved for marketing in the United States. See "The Company -- Marketing,
Sales and Distribution."
The Company was incorporated in California in 1986 as E&J Systems, Inc.
In January 1992 the Company merged with and into a Delaware corporation and
changed its name to Saliva Diagnostic Systems, Inc. The Company completed an
initial public offering of its common stock in March 1993. Unless otherwise
indicated, all references to the Company include the Company and its wholly
owned subsidiaries.
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<PAGE> 6
THE OFFERING
Securities Offered 12,003,718 shares of Common Stock, plus an
additional presently indeterminate number of
shares Common Stock. See "Description of
Securities."
Risk Factors The securities offered hereby involve a high
degree of risk and should not be purchased
by investors who cannot afford the loss of
their entire investment. See "Risk Factors."
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the
financial statements appearing elsewhere in this Prospectus. Such information
should be read in conjunction with such financial statements, including the
notes thereto.
Balance Sheet Data
------------------
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Year Ended Year Ended
March 31, 1998 March 31, 1997 December 31, 1997 December 31, 1996
------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Total assets $ 1,903,689 $ 1,639,077 $ 1,639,077 $2,178,201
Total liabilities $ 2,017,820 $ 2,305,764 $ 2,305,764 $1,017,569
Shareholders' $(1,271,334) $ (666,687) $ (666,687) $1,160,632
equity
</TABLE>
Income Statement Data
---------------------
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Year Ended Year Ended
March 31, 1998 March 31, 1997 December 31, 1997 December 31, 1996
------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Total revenues $ 197,578 $ 227,034 $ 1,422,296 $ 740,650
Net loss $ (824,968) $ (1,174,901) $ (6,612,212) $ (5,152,399)
Net loss per common $ (0.04) $ (0.05) $ (0.27) $ (0.26)
share
Number of common 30,423,590 22,040,784 24,894,900 20,100,000
shares used in per share
calculations
</TABLE>
4
<PAGE> 7
RISK FACTORS
The securities offered hereby are speculative and involve a high degree
of risk, including, but not limited to, the risk factors described below. Each
prospective investor should carefully consider the following risk factors
inherent in and affecting the business of the Company and this offering before
making an investment decision.
1. Limited Operating History. Since July 1990, the Company has been
engaged primarily in research and development activities focused on developing
proprietary collection devices and rapid assays. To date, sales of the Company's
products have been to a limited customer base. The Company has a limited
operating history upon which an evaluation of the Company's prospects can be
made. Such prospects must be considered in light of the risks, expenses and
difficulties frequently encountered in the establishment of a new business in a
continually evolving, heavily regulated industry, characterized by an increasing
number of market entrants and intense competition, as well as the risks,
expenses and difficulties encountered in the shift from development to
commercialization of new products based on innovative technology. There can be
no assurance that the Company will be able to implement successfully its
marketing strategy, obtain necessary regulatory approval, generate increased
revenues or ever achieve profitable operations.
2. Significant Operating Losses; Accumulated Deficit; Explanatory
Paragraph in Report of Independent Certified Public Accountants. The Company has
incurred significant operating losses since its inception, resulting in an
accumulated deficit of $28,526,458 and $21,914,246 at December 31, 1997 and
December 31, 1996, respectively, and a shareholders' equity of $(666,687) and
$1,160,632 at December 31, 1997 and December 31, 1996, respectively. The Company
has incurred additional operating losses through the date of this Prospectus.
Such losses are expected to continue for the foreseeable future and until such
time, if ever, as the Company is able to attain sales levels sufficient to
support its operations. The Company's independent certified public accountants
have included an explanatory paragraph in their report stating that the
Company's significant operating losses and significant capital requirements
raise substantial doubt about the Company's ability to continue as a going
concern.
3. Significant Capital Requirements; Need for Additional Financing. The
Company's capital requirements have been and will continue to be significant.
The Company has been dependent on private placements of its debt and equity
securities and on a public offering of securities in March 1993 to fund such
requirements. The Company is dependent upon its other efforts to raise capital,
including proceeds received from the exercise of warrants, to finance the costs
of manufacturing, marketing and conducting clinical trials and submissions for
FDA approval of its products and continuing the design and development of the
Company's new products. Marketing, manufacturing and clinical testing may
require capital resources substantially greater than the resources currently
available to the Company. There can be no assurance that the Company will be
able to
5
<PAGE> 8
obtain additional capital resources necessary to permit the Company to implement
or continue its programs. There can be no assurance that such financing will be
available on commercially reasonable terms or at all. Any additional equity
financing may involve substantial dilution to the interests of the Company's
shareholders, which dilution also has occurred in the past.
4. Disclosure Relating to Low-Priced Stocks. Effective with the close
of market on March 10, 1998, the Company's securities were delisted from The
Nasdaq SmallCap Market for failure to meet the new Nasdaq continued listing
requirements. Trading of the Company's securities is currently being conducted
in the over-the-counter market on the OTC Bulletin Board. As a result, an
investor may find it difficult to dispose of, or to obtain accurate quotations
as to the price of, the Company's securities. In addition, the Company's
securities are now subject to so-called "penny stock" rules that impose
additional sales practice requirements on broker-dealers who sell such
securities. Consequently, the ability or willingness of broker-dealers to sell
the Company's securities and the ability of purchasers of the Company's
securities to sell their securities in the secondary market may be limited.
There can be no assurance that the Company's securities will continue to trade
on the OTC Bulletin Board.
5. Significant Outstanding Options, Warrants and Convertible
Securities. As of May 11, 1998, there were outstanding (i) stock options to
purchase an aggregate of approximately 2,195,500 shares of Common Stock at
exercise prices ranging from $0.40 to $5.50 per share; (ii) warrants to purchase
1,380,000 shares of Common Stock which were issued in the Company's initial
public offering, are exercisable at $1.25 per share, and expire June 30, 1998,
unless extended by the Company; (iii) warrants to purchase approximately
1,567,216 shares which are exercisable at prices ranging from $0.3375 to $4.00
per share; (iv) convertible preferred stock which is convertible at the lesser
of $0.3375 per share and 80% of the market price of the Common Stock at the time
of conversion (currently estimated to be convertible into approximately
6,000,000 shares); and (v) an option to purchase convertible preferred stock
which is convertible at 80% of the market price of the Common Stock at the time
of conversion (currently estimated to be convertible into approximately
6,500,000 shares).
Upon the exercise of outstanding options and warrants and the
conversion of outstanding convertible stock, dilution to the Company's
shareholders will occur. Moreover, the terms upon which the Company will be
able to obtain additional equity capital may be adversely affected since the
holders of outstanding options and warrants can be expected to exercise them at
a time when the Company would, in all likelihood, be able to obtain any needed
capital on terms more favorable to the Company than the exercise terms provided
by such outstanding securities.
6. Potential Dilution; Shares Eligible for Future Sales; Possible
Effect on Additional Equity Financing.
6
<PAGE> 9
Under the conversion formulas of the Company's currently outstanding
convertible preferred stock, the number of shares of Common Stock issuable upon
conversion is inversely proportional to the market price of the Common Stock at
the time of conversion (i.e., the number of shares increases as the market
price of the Common Stock decreases) and there is no cap on the number of
shares of Common Stock which may be issuable. In addition, the number of shares
issuable upon the conversion of the convertible preferred stock and the
exercise of options and warrants is subject to adjustment upon the occurrence
of certain dilutive events.
On May 11, 1998, there were issued and outstanding a total of
32,378,821 shares of Common Stock. Assuming conversion of the convertible
perferred stock based on the market price of the Company's Common Stock on the
date of this Propectus, if all options, warrants, convertible preferred stock
and options to purchase convertible preferred stock which the Company has
issued were deemed converted and exercised, as the case may be, there would be
issuable 17,642,716 shares of Common Stock. Upon such conversion and exercise,
there would be outstanding 50,021,537 shares of Common Stock. Of these, the
Company currently has registered for resale approximately 12,592,105 shares
(including the Shares offered hereby) and has granted demand registration
rights in respect of approximately 15,000,000 additional shares. The sale or
availability for sale of this number of shares of Common Stock in the public
market could adversely affect the market price of the Common Stock.
Additionally, the availability to the Company of additional equity financing,
and the terms of any such financing, may be adversely affected by the sale or
availability for sale of this number of shares.
7. Uncertain Acceptance of Saliva-Based Tests and Rapid Tests as
Diagnostic Tools. The specimens traditionally used for human diagnostic testing
and quantitative measurement of most physiologically active substances, drugs
and toxins in the body, are blood and urine. Substantially all of the
assay-based diagnostic test kits currently available were approved by the FDA
for use with these testing specimens. Political and social factors may create
impediments to the use of rapid tests as diagnostic tools. These factors include
whether certain diagnostic tests, such as HIV antibody tests, should be
conducted without trained specialists and whether rapid tests in nontraditional
testing environments will lead to invasions of privacy. Although the Company
acknowledges the existence of such considerations, it is committed to developing
rapid testing devices as useful diagnostic tools. Limitations on the Company's
ability to market rapid tests caused by political and social factors could have
a material adverse effect on the Company's operations.
8. Uncertainty of New Product Development. The design and development
of the Company's rapid testing platforms in their current designs have been
completed and limited revenues have been generated from sales thereof. The
Company will be required to devote considerable additional efforts to finalize
the evaluation of its products. Satisfactory completion of development, testing,
evaluations, obtaining regulatory approvals and achieving sufficient production
levels of such products will be required prior to their being available for
commercial sale. The Company's products remain subject to all the risks inherent
in the introduction of new diagnostic products, including unanticipated
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<PAGE> 10
problems, as well as the possible insufficiency of funds to continue design and
development which could result in abandonment of or substantial change in the
design or development of such products. There can be no assurance that such
products will be successfully developed, be developed on a timely basis or prove
to be as effective as products based on existing or newly developed
technologies. The inability to successfully complete development, or a
determination by the Company, for financial or other reasons, not to undertake
to complete development of any product, particularly in instances in which the
Company has made significant capital expenditures, could have a material adverse
effect on the Company.
9. Competition. The market in which the Company operates, saliva and
blood-based collection and diagnostic testing, is highly competitive. The
Company is aware of certain entities, including ChemTrak, Inc., Epitope, Inc.,
Quidel, Inc. and Trinity Biotech, plc and specialized biotechnology firms, as
well as universities and other research institutions, which have developed or
are developing technologies and products which are competitive with Omni-SAL(R)
and the Company's products under development. Many of these competitors are
established and have substantially greater research, marketing and financial
resources than the Company. The Company expects that the number of products
competing with its products will increase as the perceived benefits of
saliva-based testing become more widely recognized. There can be no assurance
the Company will be able to compete successfully.
10. Technological Change and Risk of Technological Obsolescence. The
biotechnology industry and, in particular, saliva and blood-based diagnostic
testing, is subject to rapid and significant technological change. There can be
no assurance that the Company's competitors will not succeed in developing
technologies and products relating to the collection of saliva for diagnostic
testing prior to the Company or that they will not develop technologies and
products that are more effective than any which have been or are being developed
by the Company. In addition, the diagnostic products market is characterized by
changing technology and developing industry standards sometimes resulting in
product obsolescence or short product life cycles. Accordingly, the ability of
the Company to compete will be dependent on its introducing products to the
marketplace in a timely manner and enhancing and improving such products. There
can be no assurance that the Company will be able to keep pace with
technological developments or that its products will not become obsolete.
11. Government Regulation. The development, manufacture and sale of the
Company's products in the United States are subject to regulation by the FDA and
other governmental agencies. The process of obtaining FDA approval is costly and
time-consuming, and there can be no assurance that any of the Company's products
not yet approved will be approved by the FDA or other regulatory agencies.
Delays in obtaining regulatory approvals may adversely affect the development,
testing or marketing of the Company's products and the ability of the Company to
generate product revenues therefrom. If and when the Company's products are
approved by the FDA, they will be
8
<PAGE> 11
subject to continuing regulation by the FDA and state and local agencies. The
FDA has established a number of requirements for manufacturers and requirements
regarding labeling and reporting. The failure to comply with these requirements
can result in regulatory action, including warning letters, product seizure,
injunction, product recalls, civil fines and prosecution. An FDA enforcement
action could have a material adverse effect on the Company. The Company is
subject to regulation in certain foreign markets. There can be no assurance that
regulatory approvals for any of the Company's products or for its manufacturing
in the United States will be obtained in a timely manner, or at all.
12. Risks Related to Foreign Activities. The Company and its
manufacturers may be subject to various import duties imposed by foreign
governments applicable to both finished products and components and may be
affected by various other import and export restrictions or duties as well as
other developments having an impact upon international trade. These factors
could, under certain circumstances, have an impact both on the manufacturing
cost and the wholesale and retail prices of such products. To the extent that
transactions relating to foreign sales, manufacturing of the Company's products
and purchases of components involve currencies other than United States dollars,
the operating results of the Company could be adversely affected by fluctuations
in foreign currency exchange rates.
13. Uncertainty of Market Acceptance; Dependence Upon Third Party
Distributors. The Company has limited marketing capabilities and resources.
Achieving market acceptance will require substantial marketing efforts and the
expenditure of significant funds to inform potential consumers and the public of
the perceived benefits of the Company's current and proposed products. Moreover,
the Company does not have the financial or other resources to undertake
extensive marketing and advertising activities. The Company has begun to develop
strategic alliances and marketing arrangements, including joint ventures,
license or distribution arrangements. The Company's prospects will be
significantly affected by its ability to successfully develop and maintain its
relationships with its joint venturers, licensors and distributors and upon the
marketing efforts of such third parties. While the Company believes that any
independent distributors and sales representatives with whom it enters into such
arrangements will have an economic motivation to commercialize the Company's
products, the time and resources devoted to those activities generally will be
controlled by such entities and not by the Company. There can be no assurance
that the Company will be able, for financial or other reasons, to develop and
maintain any third party distribution or marketing arrangements or that such
arrangements, if established, will result in the successful commercialization of
any of the Company's products.
14. Dependence on Manufacturers. The Company relies on arrangements
with third parties for the manufacture of its products. Such manufacturers, if
located in the United States or if manufacturing products to be sold in the
United States, must comply with the FDA's good manufacturing practices ("GMP")
and pass pre-approval inspections by the FDA and periodic GMP inspections.
Wesley Coe, Ltd. manufactures Omni-SAL(R)
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<PAGE> 12
in the United Kingdom for sale outside the United States. MML Diagnostic
Packaging, Inc. ("MML") manufactures Omni-Swab and Saliva+Sampler for the
Company in the United States and has advised the Company that it is in
compliance with all applicable FDA requirements for such manufacturing. There
can be no assurance that the Company's manufacturer will continue to comply with
GMP, that the Company will be able to locate additional manufacturers that
comply with GMP or secure agreements with such manufacturers on terms acceptable
to the Company. There can be no assurance that MML will be able to meet the
Company's requirements or that MML will continue to manufacture Omni-Swab or
Saliva+Sampler on terms acceptable to the Company.
15. Dependence Upon Third-Party Suppliers. The Company believes that
most of the components used in the manufacture of its proposed products are
currently available from numerous suppliers located in the United States, Europe
and Asia. The Company believes, however, that certain components are available
from a limited number of suppliers. Although the Company believes that it will
not encounter difficulties in obtaining these components, there can be no
assurance that the Company will be able to enter into satisfactory agreements or
arrangements for the purchase of commercial quantities of such components. The
failure to enter into agreements or otherwise arrange for adequate or timely
supplies of components and the possible inability to secure alternative sources
of components could have a material adverse effect on the Company's ability to
manufacture its products. In addition, development and regulatory approval of
the Company's products in the United States are dependent upon the Company's
ability to procure certain components and certain packaging materials from
FDA-approved sources. Since the FDA approval process requires manufacturers to
specify their proposed suppliers of certain components in their premarket
approval applications ("PMAs"), if any such component were no longer available
from the specified supplier, FDA approval of a new supplier would be required,
resulting in potential manufacturing delays.
16. Dependence on Small Number of Customers. The Company derives a
large portion of its revenues from sales to a small number of customers. Sales
to one customer accounted for approximately 17% of total product revenues in
1997. Sales to three customers accounted for approximately 49% of total product
revenues in 1996. At December 31, 1997, accounts receivable from two customers
comprised 32% and 27%, respectively, of total net accounts receivable. The loss
of sales to any of the Company's major customers could have a material adverse
effect on the Company's financial condition and results of operations.
17. Dependence on Key Personnel. The success of the Company will be
largely dependent on the personal efforts of Kenneth J. McLachlan, its President
and Chief Executive Officer, and certain key management and scientific
personnel. The loss of Mr. McLachlan's services or the services of other key
management or scientific personnel would have a material adverse effect on the
Company's business and prospects. Competition among biotechnology companies for
qualified employees is intense, and the loss of key personnel or the inability
to attract and retain the additional highly skilled
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<PAGE> 13
employees required for the Company's activities could adversely affect its
business. There can be no assurance that the Company will be able to hire or
retain such necessary personnel.
18. Uncertainty of Patent Protection; Proprietary Information. The
Company has applied for United States patents on certain aspects of its saliva
collection and diagnostic testing devices and has been awarded eight of these
patents. To the extent possible, the Company also anticipates filing patent
applications for protection on future products and technology which it develops.
There can be no assurance that patents applied for will be obtained, that any
such patents will afford the Company commercially significant protection of its
technology or that the Company will have adequate resources to enforce its
patents. Inasmuch as the Company intends to sell its products in foreign
markets, it is in the process of seeking foreign patent protection on its
current products and technologies. The patent laws of other countries may differ
from those of the United States as to the patentability of the Company's
products and technologies and the degree of protection afforded. Other companies
may independently develop equivalent or superior products and technologies and
may obtain patent or similar rights with respect thereto. Although the Company
believes that its products and technologies have been independently developed
and do not infringe on the patents of others, there can be no assurance that the
Company's products and technologies do not and will not infringe on the patents
of others. In the event of infringement, the Company would, under certain
circumstances, be required to modify its device or obtain a license. There can
be no assurance that the Company will be able to do either of the foregoing in a
timely manner or upon acceptable terms and conditions, and the failure to do so
could have a material adverse effect on the Company. There can be no assurance
that the Company will have the financial or other resources necessary to
successfully defend a claim of violation of proprietary rights.
19. Product Liability; Insurance Coverage. The Company may be exposed
to potential product liability claims by consumers. The Company maintains
product liability insurance coverage in an amount up to $4,000,000 per
occurrence, up to a maximum of $4,000,000 in the aggregate, with excess umbrella
liability insurance coverage of $4,000,000. In the event of a product liability
claim, there can be no assurance that such insurance will be sufficient to cover
all possible liabilities. In the event of a successful suit against the Company,
insufficiency of insurance coverage would have a material adverse effect on the
Company.
20. No Dividends. To date, the Company has not paid any dividends on
its Common Stock and does not expect to declare or pay any dividends in the
foreseeable future.
21. Litigation. In February 1998, a lawsuit was filed by Ronald Lealos,
the former President of the Company, who resigned in December 1996. The
complaint in the lawsuit alleges various breach of contract claims and seeks
damages in an amount in excess of $1,000,000. A similar suit was filed against
the Company by Mr. Lealos in January
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1997 but was dismissed without prejudice as a prerequisite to a settlement
agreement between Mr. Lealos and the Company. The parties did not reach a final
settlement, however, and Mr. Lealos thereupon filed a new complaint against the
Company. 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.
The Company is also currently involved in litigation brought by Luc
Hardy against the Company and former officer and directors, Ronald Lealos and
Eugene Seymour, and Richard Kalin. This matter involves allegations against the
Company and the individual defendants arising from Mr. Hardy's termination by
the Company in 1994. 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 in this
case consistent with the jury verdict will have a material adverse effect on the
Company.
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THE COMPANY
This Prospectus contains forward-looking statements, within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward looking
statements include, but are not limited to, those statements relating to the
ability to raise additional capital, to succeed in pending litigation, to enter
into successful strategic partnerships, to obtain approval of the Company's
products as and when required by the Food and Drug Administration ("FDA") in the
United States and similar regulatory bodies in other countries, and to obtain
new distribution agreements and increase distribution for products under
existing distribution agreements. These forward looking statements are subject
to the business and economic risks faced by the Company and the Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under this
"The Company" section and under "Risk Factors" and "Management's Discussion and
Analysis."
GENERAL
The Company develops rapid immunoassays utilizing immunochromatography
for the detection of antibodies to selected pathogens, such as the HIV, the
virus that causes AIDS, and Helicobacter pylori, a bacteria linked to peptic
ulcers and gastric cancer. In addition, the Company develops proprietary
specimen collection devices and other diagnostic devices.
The Company was incorporated in California in 1986 as E&J Systems, Inc.
In January 1992, the Company merged with and into a Delaware corporation and
changed its name to Saliva Diagnostic Systems, Inc. The Company completed an
initial public offering of its Common Stock in March 1993. In 1994, the
Company's 90% owned subsidiary, Saliva Diagnostic Systems (Asia) Ltd. ("SDS
Asia"), formed Saliva Diagnostic Systems (Singapore) Pte. ("SDS Singapore"). In
1995, the Company purchased the minority interest (10%) in SDS Asia and the
outstanding minority interest (19%) in SDS Singapore. As a result, SDS Asia and
SDS Singapore became wholly owned subsidiaries of the Company. In October 1997,
the Company closed its Singapore facilities and ceased operations of the
subsidiary. In 1995, the Company purchased the minority interest (10%) in Saliva
Diagnostic Systems, UK, Ltd., and as a result this entity became a wholly owned
subsidiary of the Company and was renamed SDS International, Ltd. Unless
otherwise indicated, all references to the Company include the Company and its
wholly owned subsidiaries. The Company's principal executive offices are located
at 11719 NE 95th Street, Vancouver, Washington, 98682.
The Company has incurred significant operating losses since its
inception, resulting in an accumulated deficit of $28,526,458 at December 31,
1997. Such losses are expected to continue for the foreseeable future and until
such time, if ever, as the Company is able to attain sales levels sufficient to
support its operations. The Company's independent certified
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public accountants have included an explanatory paragraph in their reports
stating that the Company's significant operating losses and significant capital
requirements raise substantial doubt about the Company's ability to continue as
a going concern.
The Company's capital requirements have been and will continue to be
significant. The Company has been dependent on private placements of its debt
and equity securities to fund its capital requirements. The Company is dependent
upon its efforts to raise capital to finance the cost of development,
manufacturing and marketing of its products, to conduct clinical trials and
submissions for FDA approval of its products and to design and develop new
products. Marketing, manufacturing and clinical testing may require capital
resources substantially greater than the resources which will be available to
the Company. There can be no assurance that the Company will be able to obtain
the additional capital resources necessary to implement or continue its
programs, or that such financing will be available on commercially reasonable
terms or at all. See Note 2 of Notes to Consolidated Financial Statements.
Effective with the close of business on March 10, 1998, the Company's securities
were delisted from The Nasdaq SmallCap Market for failure to meet the new
Nasdsaq continued listing requirements. As a result of the Nasdaq delisting, an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, the Company's securities. See "Market for Common
Equity and Related Stockholder Matters."
PRODUCTS
To date, the Company has developed three rapid HIV tests: Sero+Strip
HIV, Hema+Strip HIV and Saliva+Strip HIV, and a rapid H. pylori test:
Stat+Simple. The Company has commenced production and marketing of two medical
specimen collectors in the U.S.: Saliva+Sampler and Omni-Swab, and one medical
specimen collector in the U.K.: Omni-SAL(R). In addition, the Company has
conducted preliminary research that indicates its rapid test format may be
expanded to detect other diseases, such as tuberculosis, measles, malaria,
rubella, tetanus, herpes, chlamydia, mumps, influenza, parvovirus, pertussis,
certain cancers, tumor markers and cardiac disease risk markers. The Company has
under development rapid tests for hepatits and tuberculosis.
RAPID IMMUNOASSAYS. The Company continues to develop rapid immunoassays
utilizing immunochromatography for the detection of antibodies to selected
pathogens, such as HIV, the virus that causes Acquired Immune Deficiency
Syndrome ("AIDS"), and Helicobacter pylori ("H. pylori"), a bacteria linked to
peptic ulcers and gastric cancer. The Company's immunoassays are designed to
require only a few simple steps and minutes to use. The tests produce visual
results in under 20 minutes, and may be used without special equipment, storage
or training. The Company's data and independent evaluations demonstrate that its
tests are generally equivalent in performance to widely used FDA-licensed tests
for HIV.
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The Company's rapid tests utilize a capillary flow assay in which all
reagents are provided on solid phases in a dried format (test strip). Buffer
solution is introduced after sample collection. The resulting mixture of sample
and buffer migrate along the test strip by capillary action, reconstituting a
dye conjugate. A red control line will develop at a designated point on the
upper portion of the strip if the assay has been performed properly and if all
reagents are functionally active. The conjugate binds in the presence of
antibodies to pre-applied antigen to form a second red line (positive) at a
designated point on the lower portion of the strip. In the absence of specific
antibodies, a second line does not develop.
Sero+Strip HIV ("Sero+Strip") analyzes a small amount of serum or
plasma to detect HIV antibodies. Sero+Strip is packaged as a multiple-use kit
designed for professional health care settings where many patients are tested
and specimens may be stored. Results are available in 5 to 15 minutes. The test
kit may be stored without refrigeration for up to 18 months after the date of
manufacture.
Hema+Strip HIV ("Hema+Strip") is a single use test kit that collects,
processes and analyzes a minute amount of whole blood to detect HIV antibodies.
Sample collection requires only a few seconds. The principles used in the
Hema+Strip test strip are identical to that utilized in Sero+Strip; however, an
added filter traps red blood cells from the whole blood sample permitting the
migration of serum to flow onto the strip and negating the need for the user to
separate serum from the whole blood sample. The test kit may be stored without
refrigeration for up to 18 months after the date of manufacture.
Saliva+Strip HIV ("Saliva+Strip") is a rapid testing system that
collects, processes and analyzes saliva to detect HIV antibodies. Principles of
the test strip are similar to that used in Sero+Strip and Hema+Strip. The
Company expects to complete development of Saliva+Strip in 1998. The test is
currently designed for single use and incorporates Omni-SAL, the Company's
proprietary saliva collection device. The test is currently designed to obtain
results in 10 to 20 minutes. The Company believes Saliva+Strip's temperature
stability is similar to Sero+Strip and Hema+Strip.
Stat+Simple ("Stat+Simple") is the Company's rapid assay for H. pylori
antibody detection. The device is a modification of Hema+Strip HIV and uses
whole blood for analysis. Results are available in 5 to 20 minutes.
MEDICAL SPECIMEN COLLECTION DEVICES. The Company has commenced production and
marketing of three medical specimen collectors: Omni-SAL (R), Saliva+Sampler and
Omni-Swab.
Omni-SAL(R) is a saliva collection device with a patented volume
indicator currently sold to several commercial companies for use with their
laboratory assays for the detection of HIV infection, drugs of abuse and
cigarette smoking. It is also used in research to
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collect saliva samples for studies of infectious diseases such as Hepatitis,
tuberculosis, schistosomiasis, leptospirosis and others.
Saliva+Sampler is a saliva collection device cleared for marketing in
the United States for the collection of saliva samples for purposes not related
to HIV testing.
Omni-Swab is a sample collection device comprised of a serrated cotton
swab with an ejectable head. It is used to collect various body fluids and
cells, primarily for the purposes of DNA identification.
Saliva Filter is a component of the Omni-SAL(R) and Saliva+Sampler that
extracts saliva from the devices' collection pads and also removes debris from
the samples. Due to limited production capability, the Company does not
currently manufacture Saliva Filter and thus, has elected to use filters of
other manufacturers for use with the Omni-SAL(R) and Saliva+Sampler devices.
The specimens traditionally used for human diagnostic testing and
quantitative measurement of most physiologically active substances, drugs and
toxins in the body, are blood and urine. Substantially all of the assay-based
diagnostic test kits currently available on the market were approved by the FDA
for use with these testing specimens. Political and social factors may create
impediments to the use of rapid tests as diagnostic tools. These factors include
whether certain diagnostic tests, such as HIV antibody tests, should be
conducted without trained specialists and whether rapid tests in nontraditional
testing environments will lead to invasions of privacy. Limitations on the
Company's ability to market rapid tests caused by political and social factors
could have a material adverse effect on the Company's operations.
PRODUCT DEVELOPMENT
The Company is currently engaged in the development of rapid
immunoassays to detect antibodies to Hepatitis. In 1996, the Company entered
into a codevelopment agreement for rapid Hepatitis tests with a European vaccine
manufacturer, which supplies antigen to the Company for product development. If
a product is ultimately developed, the Company will jointly market such product
and share profits on sales with its European partner.
In 1996, the Company also entered into a cooperative research and
development agreement (CRADA) with US Navy Medical Research Unit No. 2 to
develop rapid tests for certain tropical diseases, including dengue virus,
leptospirosis and scrub typhus, to which US Naval personnel are exposed in
overseas assignments. Under the agreement, the Company will use antigen supplied
by the US Navy to develop the tests, while the Navy will provide laboratory
space and staff devoted to the project. The Company is obligated to provide
remuneration of up to $19,000 to the Navy in exchange for its services.
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The Company has conducted preliminary research that indicates its rapid
test format may be expanded to detect other diseases, such as tuberculosis,
measles, malaria, rubella, tetanus, herpes, chlamydia, mumps, influenza,
parvovirus, pertussis, certain cancers, tumor markers and cardiac disease
markers. Additionally, the Company believes that, in many cases, its tests may
be able to use saliva for analysis as well as blood and serum, although research
has not been completed on this.
The Company has received an Investigational Device Exemption for
Omni-SAL(R) from the FDA which allows the Company to conduct clinical trials in
the United States for the purposes of determining whether Omni-SAL(R) may be
used for collecting saliva samples for HIV testing in conjunction with certain
laboratory assays. The Company is considering partnering relationships to enable
it to pursue such regulatory approval and subsequently to market Omni-SAL(R) in
the United States as part of a home collection testing system for HIV infection.
The Company expended approximately $665,500 and $617,400 in research
and development costs, respectively, in fiscal years 1997 and 1996. See Note 1
of Notes to Consolidated Financial Statements.
Limited revenues have been generated from sales of the Company's rapid
testing platforms in their current designs. The Company will be required to
devote considerable additional efforts to finalize its products. Satisfactory
completion of development, testing, evaluations, obtaining regulatory approvals
and achieving sufficient production levels of such products will be required
prior to their being available for commercial sale. The Company's products
remain subject to all the risks inherent in the introduction of new diagnostic
products, including unanticipated problems, as well as the possible
insufficiency of funds to continue design and development which could result in
abandonment of or substantial change in the design or development of such
products. There can be no assurance that such products will be successfully
developed, be developed on a timely basis or prove to be as effective as
products based on existing or newly developed technologies. The inability to
successfully complete development, or a determination by the Company, for
financial or other reasons, not to undertake to complete development of any
product, particularly in instances in which the Company has made significant
capital expenditures, could have a material adverse effect on the Company.
MARKETING, SALES AND DISTRIBUTION
The Company is currently marketing its medical specimen collection
devices (Omni-SAL(R), Saliva+Sampler and Omni-Swab) in many countries and is
currently marketing two of its three HIV rapid tests (Sero+Strip HIV and
Hema+Strip HIV) outside the United States. These HIV rapid tests are not yet
approved for marketing in the United States.
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The Company has directed its initial primary marketing and distribution
efforts for its HIV-related products to international markets, principally in
Asia, Latin America, Eastern Europe, the Middle East and Africa. The reported
success in 1996 of certain therapies for AIDS and HIV infection, such as
protease inhibitors and immune boosters, caused the Company to include the
United States and Canada in its primary marketing strategy. Despite the lower
rate of HIV infection in the United States, the Company believes the reported
benefits of early medical intervention for those who can afford treatment will
spur demand for HIV test products in the United States. Sales of the Company's
HIV-related products in the United States are subject to obtaining FDA approval.
See "Manufacturing and Supply" and "Regulation --Domestic Regulation" below. The
Company intends to file with the FDA for approval of its HIV products in 1998.
To proceed with FDA approval, the Company must enter into an alliance with a
strategic partner or have substantial cash reserves. The Company is currently
seeking an alliance.
For international distribution of its products, the Company's strategy
has been to form direct relationships with in-country distributors of medical
products for both distribution and assistance in obtaining local regulatory
approval. This strategy has proven satisfactory in smaller countries and in
Brazil, Russia, China and Mexico, but less so in other markets, such as
Thailand.
In November 1997, the Company signed two agreements with BioChem
ImmunoSystems, Inc. ("BioChem"), a division of BioChem Pharma, Inc., a
Montreal-based conglomerate with significant international sales in infectious
disease therapies and diagnostics, for international distribution of the
Company's rapid tests for HIV infection. The Company will purchase BioChem's
proprietary peptides for HIV detection in its testing kits. In return, BioChem
will purchase certain of the Company's products for international sales under
its own private label, except in territories where the Company has pre-existing
license arrangements.
In November 1996, the Company signed a letter of intent to enter into a
distribution agreement with another Canadian company, Advanced Pathology
Services Canada, Inc. ("APS Canada"), for distribution of the Company's products
except Stat+Simple in selected geographic regions outside the United States. On
May 15, 1997, the parties entered into a definitive agreement pursuant to the
letter of intent. The agreement grants to APS Canada a five-year exclusive
distributorship for the designated territory. APS Canada is a division of The
APS Group of Companies, based in London, England. APS Canada provides
specialized human and veterinary medical testing services and maintains a
laboratory exclusively devoted to saliva testing.
In March 1994, the Company granted a non-exclusive, worldwide license
to Orgenics, Ltd., an Israeli corporation ("Orgenics"), pursuant to which
Orgenics may make or have made diagnostic products incorporating the Company's
Omni-SAL(R) technology, and may use, sell, or license such products worldwide
(the "License Agreement"). The
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License Agreement expires the later of January 31, 2111 or the date on which any
patents for the Omni-SAL(R) technology expire. Orgenics has paid the Company an
initial licensing fee of $200,000 and will pay 4% royalties on sales of
Orgenics' products which incorporate the Company's Omni-SAL(R) technology. In
the event the Company ceases production of Omni-SAL(R), Orgenics, Ltd. has the
option, pursuant to the License Agreement, to purchase from the Company the
molds and equipment necessary to produce Omni-SAL(R) and would thereafter pay to
the Company 6% royalties on sales of Omni-SAL(R) products produced and sold by
Orgenics, Ltd. The Company understands that Orgenics is not currently exploiting
its rights under the Company's license. The Company is pursuing its rights to
cancel the license and is considering a new distribution arrangement with
Orgenics. There can be no assurance that such an agreement will be concluded or
that Orgenics will manufacture or sell any product which will generate royalties
for the Company.
The Company also has an agreement with Fremont Novo Sciences to license
and distribute the Company's rapid diagnostic tests through the Tata Merind
Group in India. This agreement allows Fremont Novo Sciences the ability to
manufacture and distribute the Company's strip products at an equivalent quality
to tests produced in the U.S. providing that the pricing is advantageous to the
Company.
The Company has submitted certain of its products for evaluation to the
World Health Organization ("WHO"), a division of the United Nations that
maintains an inventory of medical goods for impoverished nations and
non-governmental health organizations. Certain smaller countries without their
own regulatory agencies rely on results of WHO evaluations as part of their
approval of products for use and sale in their countries. In 1996 the Company
bid for a contemplated bulk purchase by WHO of the Company's Sero+Strip HIV. In
April 1997, WHO notified the Company that the Sero+Strip HIV was evaluated by
the United Nations AIDS Program and found to conform with its minimum
requirements. Accordingly, WHO agreed to include the Company's Sero+Strip HIV
among the approved products for WHO bulk purchases during the years ending
February 28, 1998 and 1999.
Sales to Fremont Novo Sciences accounted for approximately 17% of total
product sales in 1997. Sales to three customers, Fitzco, Inc., Osborn
Laboratories and Beacon Diagnostics, Inc. accounted for approximately 20%, 18%,
and 11% respectively, of total product sales in 1996. The loss of sales to any
of the Company's major customers could have a material adverse effect on the
Company's financial condition and results of operations. See Note 1 of Notes to
Consolidated Financial Statements.
The Company has limited marketing resources. Achieving market
acceptance will require substantial marketing efforts and capabilities. The
Company relies in large part on forming partnerships for marketing and
distribution of its products. There can be no assurance that the Company will
form alliances with potential distributors or that such distributors will be
successful in promoting the Company's products.
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MANUFACTURING AND SUPPLY
Omni-SAL(R) is manufactured at Wesley Coe, Ltd. in the U.K. and
distributed from SDS International, Ltd., while Omni-Swab and Saliva+Sampler are
manufactured at MML Diagnostic Packaging, Inc. ("MML") in the United States and
distributed by the Company. Manufacturers, if located in the United States or if
manufacturing products which are to be sold in the United States, must comply
with the FDA's good manufacturing practices ("GMP") and pass pre-approval
inspections by the FDA and periodic GMP inspections. The Company has been
advised by MML that MML is in compliance with GMP and other FDA regulations.
There can be no assurance that MML will continue to comply with GMP, that the
Company will be able to locate additional manufacturers that comply with GMP or
secure agreements with such manufacturers on terms acceptable to the Company.
There can be no assurance that MML will be able to meet the Company's
requirements or that MML will continue to manufacture Omni-Swab or
Saliva+Sampler on terms acceptable to the Company.
In 1996, the Company began to design and build equipment for automated
production of its rapid tests at its Vancouver, Washington facility in the
United States. The Company must meet certain conditions, including compliance
with applicable FDA requirements, in order to manufacture its tests at its
Vancouver facility and to export its products from there. In an effort to
minimize capital expenditures and related costs, the Company has determined to
forestall full use of its production facilities in Vancouver. The Company
intends to outsource all manufacturing of its products in 1998. Following
outsourcing of manufacturing, the Company expects to use the equipment at its
Vancouver, Washington facility solely for research and development purposes.
The Company believes that most of the components used in the
manufacture of its proposed products are currently available from numerous
suppliers located in the United States, Europe and Asia. The Company believes,
however, that certain components are available from a limited number of
suppliers. Although the Company believes that it will not encounter difficulties
in obtaining these components, there can be no assurance that the Company will
be able to enter into satisfactory agreements or arrangements for the purchase
of commercial quantities of such components. The failure to enter into
agreements or otherwise arrange for adequate or timely supplies of components
and the possible inability to secure alternative sources of components could
have a material adverse effect on the Company's ability to manufacture its
products. In addition, development and regulatory approval of the Company's
products in the United States are dependent upon the Company's ability to
procure certain components and certain packaging materials from FDA-approved
sources. Since the FDA approval process requires manufacturers to specify their
proposed suppliers of certain components in their premarket approval
applications ("PMAs"), if any such component were no longer available from the
specified supplier, FDA approval of a new supplier would be required, resulting
in potential manufacturing delays.
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REGULATION
DOMESTIC REGULATION
FOOD AND DRUG ADMINISTRATION. In the United States, under the Federal Food,
Drug, and Cosmetics Act (the "FDC Act"), the FDA regulates all aspects,
including manufacture, testing, and marketing of medical devices that are made
or distributed domestically. Two of the Company's domestically made and/or
distributed products, Omni-Swab and Saliva+Sampler, have received FDA clearance
for domestic distribution for certain limited purposes. See " -- Manufacturing
and Supply".
All medical devices are categorized by the FDA as Class I, Class II, or
Class III. Class I devices are subject only to general control provisions of the
FDC Act, such as purity, labeling and GMP. Class II devices are required to also
ensure reasonable safety and efficacy through performance standards and other
controls. Class III devices must, in addition to fulfilling all other provisions
of the FDC Act, meet extensive and rigorous FDA standards that may require
clinical trials.
A manufacturer of medical devices which can establish that a new device
is "substantially equivalent" to a legally marketed Class I or Class II medical
device or to a Class III medical device for which the FDA has not required a
premarket approval application ("PMA") can seek FDA marketing clearance for the
device by filing a 510(k) Premarket Notification ("510(k) Notice"). The 510(k)
Notice may have to be supported by various types of information, including
performance data, indicating that the device is as safe and effective for its
intended use as a legally marketed predicate device. In February 1998, the
Company filed a 510(k) Notice for its Stat+Simple H.pylori tests.
The Company is pursuing several strategies for initiating FDA review of
its products not already approved or cleared for domestic distribution. These
strategies include alliances with other companies and selling limited licensing
rights to the Company's products to companies who agree to seek FDA approval for
them. The Company may also directly apply for FDA approval of those products.
In January 1995, the FDA classified Omni-Swab as a Class I medical
device. In August 1995, in response to a 510(k) Notice made by the Company, the
FDA approved Saliva+Sampler as a Class II device, accepting the Company's
contention that, under the 510(k) application guidelines, Saliva+Sampler
demonstrated "substantial equivalency" to other non-saliva collection devices
already in use for general purposes.
The Company believes that all of its HIV products would, if submitted
to the FDA, fall under the Class III category of medical devices. This includes
the Company's saliva collection device, Omni-SAL(R), if marketed as a specimen
collection device for HIV testing. The Company believes its proposed assay for
H.pylori, however, could be
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approved as a Class II device. There is no assurance that the Company's position
with respect to these products will prevail with the FDA.
If human clinical trials of a proposed device are required, and the
device presents "significant risk," the manufacturer or distributor of the
device will have to file an Investigational Device Exemption ("IDE") with the
FDA prior to commencing human clinical trials. The IDE must be supported by
data, typically including the results of animal and mechanical testing. If the
IDE application is approved, human clinical trials may begin at a specific
number of investigational sites and are limited to the number of subjects
approved by the FDA. The Company has generated substantial supporting data
required for the IDE for its immunoassays for diseases and conditions such as
HIV infection and schistosomiasis.
In 1994, the FDA granted the Company's request to classify Omni-SAL(R)
under the IDE provisions of the FDC Act, allowing the Company to manufacture and
distribute Omni-SAL(R) for the limited purpose of demonstrating the efficacy of
using saliva as a diagnostic medium for HIV antibody testing.
In 1995, the FDA authorized the Company to begin clinical trials in the
United States to determine whether Omni-SAL(R) could be used as a saliva
collection device for HIV testing in conjunction with certain laboratory assays.
The Company has not conducted any clinical trials for Omni-SAL(R) in the United
States due to lack of financing for such trials, although preclinical data has
been generated for the device in the United States and foreign countries.
The process of obtaining FDA approval is costly and time-consuming, and
there can be no assurance that any of the Company's products not yet approved
will be approved by the FDA or other regulatory agencies. Delays in obtaining
regulatory approvals may materially adversely affect the development, testing or
marketing of the Company's products and the ability of the Company to generate
product revenues therefrom. If and when the Company's products are approved by
the FDA, they will be subject to continuing regulation by the FDA and state and
local agencies. The failure to comply with these regulations can result in
regulatory action, including warning letters, product seizure, injunction,
product recalls, civil fines and prosecution. An FDA enforcement action could
have a material adverse effect on the Company. To date, the Company has not been
the subject of any FDA enforcement actions. The FDA also audits clinical studies
for compliance with applicable requirements.
OVERSEAS REGULATION AND DISTRIBUTION.
Regulatory approval for medical devices vary from country to country.
Some countries do not require regulatory approval when registering a product for
sale to the private sector. Others rely on evaluations by agencies such as the
WHO. The Company has submitted Sero+Strip to WHO for evaluation, and intends to
submit its other HIV tests
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to WHO as well. WHO's evaluation of Sero+Strip has been completed and WHO has
found that Sero+Strip meets its standards for rapid test performance.
The following lists the Company's products, where the products are
distributed and where regulatory approval is pending.
1. Omni-SAL(R) is being distributed or has been approved as a sample
collection device for HIV testing and other uses in the United Kingdom and
various other countries. The Company has submitted Omni-SAL(R) for approval as a
sample collection device for HIV testing and other uses in South Africa, and
plans to apply for approval in several other European and Middle Eastern nations
where such approval is required. Approval in South Africa is pending, subject to
the results of a clinical trial with the National Institute of Virology in
Pretoria, South Africa.
2. Omni-Swab is distributed in the United States and in many of the
countries in which Omni-SAL(R) is distributed.
3. Saliva+Sampler is distributed in the United States and Israel.
4. Sero+Strip was approved for use and sale in Russia by the Russian
Ministry of Health in 1996, and has received a certificate of free sale from the
U.K. government. It is currently registered in Brazil, India, Kenya, Romania,
and Malaysia, and is pending approval (where needed) in other Asian, European,
and Latin American countries. The Center for Disease Control in Atlanta, Georgia
has concluded studies using Sero+Strip and has purchased such tests for research
use in Atlanta and for epidemiological purposes overseas.
5. Hema+Strip has been approved for use and sale in Russia. In April
1996, Hema+Strip received a certificate of free sale from Singapore, and in June
1997, the Company received a similar certificate in the U.K. This test is also
approved for sale in Brazil, Chile, Romania, Kenya, China, and Malaysia.
6. Saliva+Strip is in final stages of development in its current form.
When completed, the Company intends to submit the device for approval (if
needed) and distribution in the same areas where its other products are sold.
There is no assurance, however, that any such approvals will be timely obtained
or obtained at all. The device has been issued a certificate of free sale in the
U.K.
7. Stat+Simple is the subject of a 510(k) Notice filed by the Company
with the FDA in February 1998. The product is on sale in Italy, Denmark,
Austria, Saudi Arabia and Mexico, and has been issued a Certificate of Free Sale
in the U.K.
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COMPETITION
The market in which the Company operates, saliva and blood-based
collection and diagnostic testing, is highly competitive. The Company is aware
of certain entities, including ChemTrak, Inc., Epitope, Inc., Quidel, Inc. and
Trinity Biotech, plc and specialized biotechnology firms, as well as
universities and other research institutions, which have developed or are
developing technologies and products which are competitive with Omni-SAL(R) and
the Company's products under development. Many of these competitors are
established and have substantially greater research, marketing and financial
resources than the Company. The Company expects that the number of products
competing with its products will increase as the perceived benefits of
saliva-based testing become more widely recognized, which may result in lower
prices of the Company's products and reduced revenues. In the biotechnology
industry, technological change and obsolescence is rapid and frequent. There can
be no assurance that the Company will be able to compete successfully with its
competitors, keep pace with technological changes or avoid product obsolescence.
INTELLECTUAL PROPERTY
The Company has applied for patents in the United States and other
countries on certain aspects relating to Omni-SAL(R), a saliva collection
device, and Omni-Swab, a medical specimen collection device. To date, ten such
patents have been awarded, four in the United States, and six in other
countries. Expiration dates for the patents range from 2008 to 2012. The Company
intends to seek other patent protections in the United States and other
countries for certain aspects relating to its collection devices and rapid test
technology. No assurance can be given that patents will be issued to the Company
pursuant to its patent applications in the United States and abroad, or that the
Company's patent portfolio will provide the Company with a meaningful level of
commercial protection.
Immuno chromatography, the principle on which the Company's rapid tests
are based, is a technology covered by existing patents. The Company has
purchased a license from the principal patent holder, Unilever PLC of the U.K.,
to whom royalty payments are due for all rapid tests sold. To obtain the
license, the Company paid approximately $50,000 and will be responsible for
royalty fees equal to 5% of the net sales in all territories where the Unilever
patent is enforceable. Products covered by the license include those related to
HIV, H.pylori, Tuberculosis and Hepatitis A. Additional analytes may be
negotiated as they become available.
The Company also depends on trade secrets and proprietary information
to protect much of the technology that it has developed. The Company has entered
into confidentiality agreements with its employees, certain third party
suppliers, potential customers, joint venture partners, distributors and
consultants. Despite such efforts, there can be no assurance that such
confidentiality and the protection it may afford can be maintained.
24
<PAGE> 27
The Company believes that patent and trade secret protection are
important to its business. However, the issuance of a patent and the existence
of trade secret protection does not in itself ensure the Company's success.
Competitors may be able to produce products competing with a patented Company
product without infringing on the Company's patent rights. Issuance of a patent
in one country generally does not prevent manufacture or sale of the patented
products in other countries. The issuance of a patent to the Company is not
conclusive as to validity or as to the enforceable scope of the patent. The
validity or enforceability of a patent can be challenged by litigation after its
issuance, and if the outcome of such litigation is adverse to the owner of the
patent, the owner's rights could be diminished or withdrawn. Additionally, trade
secret protection does not prevent independent discovery and exploitation of a
secret product or technique by other parties.
A large number of individuals and commercial enterprises seek patent
protection for technologies, products and processes in fields related to the
Company's area of product development. To the extent such efforts are
successful, the Company may be required to obtain licenses in order to
accomplish certain of its product strategies. There can be no assurance that
such licenses will be available to the Company or available on acceptable terms.
The Company is aware of certain filed patents issued to developers of diagnostic
products with potential applicability to the Company's diagnostic technology.
There can be no assurance that the Company would prevail if a patent
infringement claim were to be asserted against it.
EMPLOYEES
As of May 11, 1998, the Company employed 17 full-time persons,
including two engaged in research and development, one in regulatory affairs,
five in manufacturing, three in sales and marketing, and six in administration.
None of the Company's employees are covered by collective bargaining agreements,
and the Company believes its relations with its employees are good.
PROPERTIES
The Company's executive offices and laboratory facility are located at
11719 NE 95th Street, Vancouver, Washington in an approximately 12,000 square
foot facility. The premises are occupied pursuant to a lease with an
unaffiliated party which expires in August 2002. The Company believes this
facility is adequate for its purposes.
LEGAL PROCEEDINGS
Hardy v. Saliva Diagnostic Systems, Inc., Ronald L. Lealos, Eugene
Seymour and Richard S. Kalin, was filed in United States District Court,
District of Connecticut in August 1994 by Luc Hardy, a former director and
officer of the Company. The complaint
25
<PAGE> 28
alleges several causes of action against the Company and individual defendants,
including former directors and officers of the Company, including breach of Mr.
Hardy's employment agreement with the Company, intentional interference with
contract by the individual defendants, slander and deceptive trade practices,
all arising from his employment termination by the Company. The complaint seeks
damages and punitive damages in an unspecified amount. A jury verdict for the
plaintiff, which is not a final judgment, was rendered on July 25, 1997 in the
approximate amount of $740,000. In October 1997, a hearing was held on the
Company's motions to set aside the jury verdict and for a new trial. The Company
is currently awaiting a decision on these motions.
In January 1997, Lealos v. Saliva Diagnostic Systems, Inc. was filed in
Superior Court in Clark County in the State of Washington by Ronald Lealos,
former President and CEO of the Company. The complaint in the lawsuit alleged
various breach of contract claims. This lawsuit was dismissed without prejudice
as a prerequisite to a settlement agreement between Mr. Lealos and the Company.
The parties did not reach a settlement and, in February 1998, Mr. Lealos filed a
complaint against the Company in the same court which alleges substantially the
same claims. The complaint seeks damages in the approximate amount of
$1,000,000. Management of the Company intends to vigorously defend the Company.
In March 1998, the Company filed a response to the complaint and asserted
numerous counterclaims against Mr. Lealos, including breach of fiduciary duty
and conversion.
Other than that set forth above, to the best knowledge of the Company,
no other material legal proceedings are pending or have been threatened. See
"Risk Factors - Litigation."
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Since July 1990, the Company has been engaged almost exclusively in
research and development activities focused on developing proprietary saliva
based collection devices and rapid assays for infectious diseases. Other than
sales of the Company's collection devices, the Company has not yet commenced any
significant product commercialization. The Company has incurred significant
operating losses since its inception, resulting in an accumulated deficit of
$28,526,458 at December 31, 1997 and $29,676,879 at March 31, 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.
26
<PAGE> 29
Despite the issuance and sale of the 1998-A Preferred Stock, substantial
additional financing will be required in 1998. 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. See "Description of Business - General."
RESULTS OF OPERATIONS
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
REVENUES. The Company's revenues consist of product sales. Revenues increased
92% to $1,422,296 in 1997 from $740,650 in 1996. The increase in product sales
revenue was primarily attributable to increasing demand for the Company's rapid
testing systems. Additionally, in 1997 sales of Sero+Strip HIV and Hema+Strip
HIV increased as the Company had more approvals to sell these two products in
countries outside the United States. Sales to one customer represented
approximately 17% of total revenues in 1997. Sales to three customers accounted
for approximately 20%, 18% and 11%, respectively of total revenues in 1996.
COST OF PRODUCTS SOLD. Costs of products sold increased to $1,426,638 (100.3% of
product sales) in 1997 from $894,841 (125% of product sales) in 1996. Costs of
products sold increased as a percentage of product sales due to increased
manufacturing overhead, larger square footage of manufacturing facilities and an
increase in the number of manufacturing personnel in early 1997. During 1997,
the Company reviewed the production efficiency, costs and regulations related to
its manufacturing facilities, and as a result of this review, the Company
decided to close its Singapore manufacturing facility. The Company expects the
costs of products to decrease in 1998 due to the closure of facilities in
Singapore and reduction in personnel.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
8% to $665,475 in 1997 from $617,358 in 1996. In 1996, research and development
efforts were expanded for product development for Saliva+Strip and Stat+Simple
and rapid tests for hepatitis. In 1997, research and development efforts were
focused primarily on Stat+Simple in order to submit this product to the FDA for
marketing clearance, which occurred in February 1998. Additionally, in 1997, the
Company was focused on cost controls in all departments, including research and
development, and thus intentionally reduced these costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 34.7% to $5,270,955 in 1997 from $3,911,587 in
1996. The increase was primarily the result of increased legal fees related to
litigation matters and securities filings and compliance matters in 1997 and
compensation expenses related to the grant of stock options in 1997, offset by
the result of cost cutting programs put in place to reduce administrative
expenses. The Company expects selling, general and administrative
27
<PAGE> 30
expenses to decrease in 1998 due to the closure of facilities in Singapore and
reduction in personnel.
WRITE-OFF OF GOODWILL. In September 1995, the Company purchased the minority
interest in its 90% owned subsidiary, Saliva Diagnostic Systems (Asia) Ltd.
("SDS Asia") and the minority interest in SDS Asia's 83% owned subsidiary. The
transaction was accounted for as a purchase and resulted in an excess of
purchase price over net assets acquired of $600,000. In 1996, the Company
reviewed its Singapore operations and concluded that the use of Singapore as a
primary manufacturing source was no longer required. Accordingly, the Company
assessed the recoverability of the remaining goodwill associated with the
purchase of SDS Asia, which resulted in a write-off of the remaining goodwill,
$540,000, at December 31, 1996.
RESTRUCTURING EXPENSE. Results of operations of 1997 included a charge
associated with a restructuring plan designed to reduce costs and improve
manufacturing and operational efficiencies. Under the plan, the Company closed
its Singapore manufacturing operations in October 1997. The Company plans to
out-source manufacturing previously performed in Singapore to qualified sources
and locations. Total costs accrued in connection with the restructuring at the
end of the third quarter of 1997 were $194,000 and included approximately
$100,000 related to termination of employees, approximately $37,000 associated
with the settlement of the lease obligation in Singapore, $47,000 for other
costs related to closing the Singapore location and $10,000 non-cash charge for
the write off of leasehold improvements. The change in the restructuring reserve
during the fourth quarter of 1997 consisted of approximately $61,000 of
additional employee termination costs and a $24,000 charge related to a portion
of the cumulative foreign translation account related to the Singapore
operation.
INTEREST EXPENSE AND LOAN FEES. Interest expense increased to $413,993 in 1997
from $28,861 in 1996. In March 1997, in connection with the sale of $1.5 million
of 7.5% Convertible Debentures, due February 28, 1999 (the "Debentures"), a
discount of $375,000 was recorded, resulting from an allocation of proceeds to
the discounted conversion feature. This discount was written off to interest
expense at June 30, 1997, in connection with the conversion of the Debentures.
INCOME TAXES. The Company is in a net deferred tax asset position and has
generated net operating losses to date. Accordingly, no provision for or benefit
from income taxes has been recorded in the accompanying statements of
operations. The Company will continue to provide a valuation allowance for its
deferred tax assets until it becomes more likely than not, in management's
assessment, that the Company's deferred tax assets will be realized. See Note 9
of Notes to Consolidated Financial Statements.
28
<PAGE> 31
FIRST QUARTER OF 1998 COMPARED TO FIRST QUARTER OF 1997
REVENUES. The Company's revenues consist of product sales. Revenues decreased
13% to $197,578 in the first quarter of 1998 from $227,034 in the first quarter
of 1997. The decrease in revenue was primarily attributable to delays in the
transfer of manufacturing to outsourced manufacturing facilities. See "Cost of
products sold" below. Sales to three customers represented approximately 68% of
total revenues in the first quarter of 1998, and sales to four customers
accounted for approximately 68% of total revenues in the first quarter of 1997.
COST OF PRODUCTS SOLD. Costs of products sold decreased to $252,700 (128% of
product sales) in the first quarter of 1998 from $259,641 (114% of product
sales) in the first quarter of 1997. Costs of products sold increased as a
percentage of product sales due to reduced production levels in the first
quarter of 1998.
The Company has designed and built equipment for automated production of its
rapid tests at its Vancouver, Washington facility. However, the Company
currently intends to outsource all manufacturing of its products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased
11% to $172,379 in the first quarter of 1998 from $194,712 in the first quarter
of 1997, primarily as a result of reduced payroll and related expenses. Over the
last year, the Company has focused on cost controls in all departments,
including research and development, and thus intentionally reduced these costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 32% to $646,377 in the first quarter of 1998
from $953,913 in the first quarter of 1997, primarily as a result of the closure
of facilities in Singapore and a reduction in the number of administrative
personnel.
INTEREST EXPENSE AND LOAN FEES. Interest expense decreased to $1,405 in the
first quarter of 1998 from $8,578 in the first quarter of 1997.
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.
29
<PAGE> 32
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its capital requirements
through proceeds from its public offering of stock in March 1993 and the
exercise of common stock purchase warrants pursuant to such offering, proceeds
from sales of convertible debentures, proceeds from private placements of Common
Stock, and the exercise of common stock purchase warrants and stock options. In
March 1997, the Company raised net proceeds of approximately $1,380,000 (net of
issuance costs of $120,000) from the private sale of the Debentures. In June
1997 and August 1997, the Company entered into three separate common stock
subscription agreements for the issuance and sale of a total of 4,082,905 shares
of Common Stock for an aggregate purchase price of $2,063,000, net of offering
costs. In January 1998, the Company entered into a Securities Purchase Agreement
with an investor for the issuance and sale of the 1998-A Preferred Stock for an
aggregate purchase price of $1,380,000, net of offering costs.
Cash used in operating activities was $3,896,427 in 1997. This was
primarily a result of a net loss of $6,612,212, offset by the non-cash write-off
of the discounted conversion feature of the Debentures, the amount of accrued
interest on the Debentures which was converted to Common Stock, and a non-cash
charge for compensation expense recorded on issuance of stock options. Cash used
in operating activities was $1,099,166 in the first quarter of 1998, which was
primarily a result of a net loss of $824,968, adjustments for depreciation and
amortization, and a decrease in accounts payable and accrued expenses. Accounts
payable and accrued expenses decreased in the first quarter of 1998 due to
reduced production volume resulting from delays in the transfer of manufacturing
to outsourced manufacturing facilities.
Cash used in investing activities in 1997 was $14,438 and included the
purchase of manufacturing equipment totaling $62,720. Cash provided by
investing activities in the first quarter of 1998 was $29,946, which primarily
represented proceeds from sale of property and equipment in Singapore.
Cash provided by financing activities in 1997 was $3,405,797. This was
the result of net proceeds of $2,063,414 from the issuance of Common Stock in
July and August 1997 and net proceeds of $1,380,000 from the sale of the
Debentures. Cash provided by financing activities in the first quarter of 1998
was $1,373,119, which was primarily a result of net proceeds from the sale of
the 1998-A Preferred Stock.
In March 1997, the Company received net proceeds of approximately
$1,380,000 (net of issuance costs of $120,000) from the sale of the Debentures.
In connection with the issuance of the Debentures, the Company also issued to
Grayson & Associates, Inc. warrants to purchase up to 89,552 shares of the
Company's Common Stock for a purchase price of $1.34 per share on or before
March 14, 2002. In May and June 1997, the holders of the Debentures agreed to an
acceleration of conversion and converted the Debentures
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<PAGE> 33
into a total of 1,736,824 shares of Common Stock, plus interest in the form of
27,604 shares of Common Stock. In October 1997 and January 1998, the holders of
the Debentures exercised their rights to receive an additional approximately
1,560,000 shares after certain conditions had been met. No further rights or
obligations for the issuance of Common Stock are outstanding under the terms of
the Debentures.
A discount was recorded at the date of issuance of the Debentures,
resulting from an allocation of proceeds to the discounted conversion feature,
which was to be amortized to interest expense over the conversion period.
Additionally, financing costs related to these Debentures were deferred and
amortized, using the effective interest method, over the term of the Debentures.
The discount and remaining unamortized financing costs of $375,000 and $99,800,
respectively, were written off to interest expense and additional paid in
capital, respectively, upon the early conversion of the Debentures.
In June and August 1997, the Company entered into three separate common
stock subscription agreements pursuant to which the Company issued and sold a
total of 4,082,905 shares of its Common Stock for an aggregate purchase price of
$2,063,000, net of offering costs. As a finder's fee, the Company paid $104,800
in cash and warrants to purchase 161,600 shares of the Common Stock for an
exercise price of $0.50 per share, and 33,032 shares of the Common Stock for an
exercise price of $0.72656 per share, all of which expire on June 30, 2002. Also
in connection with the private placement, the Company issued warrants to
purchase up to 100,000 shares of the Company's Common Stock, exercisable at any
time from January 1, 1998 to January 1, 2003, at an exercise price of $1.00 per
share.
In connection with the private placement, the Company also entered into
separate registration rights agreements under each of which the Company is
required to file a registration statement covering resales of shares of the
Common Stock. A registration statement on Form S-3 covering resales of such
shares was declared effective on September 30, 1997. Because the Company is no
longer eligible to file on Form S-3 due to the delisting of the Company's
securities from Nasdaq, the Company intends to file a post-effective amendment
to the registration statement on Form SB-2.
On January 26, 1998, the Company entered into a Securities Purchase
Agreement with an Investor for the issuance and sale of the 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 $1,500,000. The Investor is entitled to receive a number of
shares of the Company's Common Stock, upon conversion of the 1998-A Preferred
Stock as determined by dividing the purchase price of the 1998-A Preferred
Stock by the lesser of (i) $0.3375, and (ii) 80% of the average closing bid
price of the Common Stock for the five trading days prior to conversion. The
timing of conversion is subject to certain restrictions. The Securities
Purchase Agreement provides for an additional offering of up to $1,500,000 of
an additional series of the Company's preferred stock may be purchased at the
Investor's option upon substantially the same terms as the issuance and sale of
the
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<PAGE> 34
1998-A Preferred Stock. This option must be exercised by the Investor on or
prior to September 26, 1998. See "Description of Securities - 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. At March 31, 1998, $197,708 had been recorded as
deemed dividends, relating to the beneficial conversion ratio and offering
costs. Additionally, the 1998-A Preferred Stock may be redeemed at the option on
the holders under certain conditions, as specified in the Securities Purchase
Agreement, which are outside the control of the Company. Accordingly, the 1998-A
Preferred Stock has not been classified as stockholders' equity at March 31,
1998.
In connection with the issuance and sale of the 1998-A Preferred Stock,
the Company also entered into a separate registration rights agreement with the
Investor under which the Company is required to file a registration statement
covering resales of shares of the Common Stock issuable upon conversion of the
1998-A Preferred Stock, which registration statement must be filed on or before
February 26, 1998 and be declared effective by the Securities and Exchange
Commission by April 26, 1998. A registration statement on Form S-3 was filed on
February 26, 1998. Because the Company is no longer eligible to file on Form
S-3 due to the delisting of the Company's securities from Nasdaq, the Company
has filed an amendment to the registration statement.
In connection with the issuance of the 1998-A Preferred Stock, the
Company paid a cash fee of 7.5% of the gross proceeds and attorney's fees equal
to 0.5% of the gross proceeds. The Company also issued warrants to purchase up
to 750,000 shares of Common Stock at an exercise price of $0.3375 per share,
which expire on January 26, 2003. See "Description of Securities - Warrants." In
addition, the Company has agreed to issue additional warrants to purchase up to
250,000 shares of Common Stock if and when the Investor exercises its
option to purchase an additional series of the Company's preferred stock.
The Company's capital requirements have been and will continue to be
significant. The Company currently has an accumulated deficit due to its history
of losses. The Company is dependent upon its effort to raise capital to finance
its future operations, including the cost of manufacturing and marketing of its
products, to conduct clinical trials and submissions for FDA approval of its
products and to continue the design and development of its new products.
Marketing, manufacturing and clinical testing may require capital resources
substantially greater than the resources available to the Company. Despite the
issuance and sale of the 1998-A Preferred Stock, substantial additional
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<PAGE> 35
financing will be required in 1998. 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.
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, 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.
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<PAGE> 36
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Until the close of market on March 10, 1998, the Company's common stock
was included in The Nasdaq SmallCap Market under the symbol "SALV." The
following table sets forth the high and low bid quotations as reported by the
OTC Bulletin Board for the period March 10, 1998 through March 31, 1998, and as
reported by The Nasdaq SmallCap Market for the other periods indicated. The
market quotations represent prices between dealers, do not include retail
markup, markdown or commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
1998
March 10 - March 31 $ 0.31 $ 0.15
January 1 - March 10 0.44 0.22
1997
First Quarter $ 2.06 $ 1.16
Second Quarter 1.78 0.94
Third Quarter 1.47 0.63
Fourth Quarter 1.22 0.31
1996
First Quarter $ 2.44 $ 0.47
Second Quarter 5.00 1.63
Third Quarter 3.13 1.31
Fourth Quarter 2.34 1.06
</TABLE>
Effective with the close of the market on March 10, 1998, the Company's
securities were delisted from The Nasdaq SmallCap Market for failure to meet the
new Nasdsaq continued listing requirements. Trading in the Company's securities
is and will be conducted in the over-the-counter market on the OTC Bulletin
Board, an electronic bulletin board established for securities that do not meet
the Nasdaq listing requirements, or in what are commonly referred to as the
"pink sheets." As a result of the Nasdaq delisting, an investor may find it more
difficult to dispose of, or to obtain accurate quotations as to the price of,
the Company's securities. In addition, the Company's securities are subject to
so-called "penny stock" rules that impose additional sales practice requirements
on broker-dealers who sell such securities. Consequently, removal from the
Nasdaq system may affect the ability or willingness of broker-dealers to sell
the Company's securities and the ability of purchasers of the Company's
securities to sell their securities in the secondary market.
There were approximately 450 shareholders of record and 8,700
beneficial owners of the Company's common stock at May 11, 1998. There were no
cash dividends declared
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<PAGE> 37
or paid in fiscal years 1997 or 1996. The Company does not anticipate declaring
such dividends in the foreseeable future.
Warrants to purchase approximately 1.4 million shares of the Company's
common stock at $1.25 per share, which were set to expire on March 31, 1998 and
have been extended to June 30, 1998, traded on The Nasdaq SmallCap Market under
the symbol "SALVW" until the close of market on March 10, 1998.
MANAGEMENT
DIRECTORS OF THE COMPANY
<TABLE>
<CAPTION>
NAME OF DIRECTOR AGE POSITION WITH THE COMPANY
---------------- --- -------------------------
<S> <C> <C>
Kenneth J. McLachlan 51 President, Chief Executive Officer, Chief
Financial Officer, Chief Accounting Officer
and Director
Hans R. Vauthier, Ph.D. 73 Director
Eric F. Stoer, Esq. 53 Director
</TABLE>
The following are brief summaries of the business experience of the
directors of the Company, including, where applicable, information as to other
directorships held by each of them. There are no family relationships among any
of the directors and executive officers of the Company.
KENNETH J. MCLACHLAN has served on the Board of Directors since December 1995.
In December 1996, Mr. McLachlan was appointed by the Board to serve as the
Company's President and Chief Executive Officer. Mr. McLachlan has served as the
Company's Chief Financial Officer since June 1996, and as the Company's Chief
Financial Officer and Chief Accounting Officer since September 1997. In 1993,
Mr. McLachlan founded an international finance and consulting firm in the
Netherlands. From 1988 to 1993, Mr. McLachlan served as Chief Financial Officer
and Executive Vice President of Corange - Boehringer Mannheim, a privately-owned
multinational health care group.
HANS R. VAUTHIER, PH.D. was appointed to the Board of Directors of the Company
in May 1996 to fill the vacancy created by the resignation of Dr. Eugene
Seymour. Since 1981, Dr. Vauthier has been a principal of Vauthier & Partner
A.G., a consulting firm located in Basle, Switzerland which assists
pharmaceutical companies in discovering and developing new products. Dr.
Vauthier received his doctorate in economics and business administration from
the University of Bern in Switzerland.
ERIC F. STOER, ESQ. was elected to the Board of Directors of the Company at its
Annual Meeting of Shareholders in May 1997. Mr. Stoer has been a partner in the
Washington, DC office of the law firm of Bryan Cave LLP since 1990. His practice
is concentrated in the areas
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<PAGE> 38
of corporate and business law with an international focus. Mr. Stoer has served
on the boards of directors of a number of pharmaceutical testing and consulting
companies, including Boehringer Mannheim Pharmaceuticals.
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION(S) WITH COMPANY
- -------------------------------------------------------------------------------
<S> <C> <C>
Kenneth J. McLachlan 51 President, Chief Executive Officer, Chief
Financial Officer and Chief Accounting Officer
David Barnes, MD 52 Managing Director, SDS International, Ltd.
Paul D. Slowey, Ph.D. 42 Chief Operating Officer and Vice President of
Marketing
</TABLE>
The following are brief summaries of the business experience of the
Executive Officers of the Company. For information on the business background of
Mr. McLachlan, see "-- Directors of the Company."
DAVID BARNES, M.D. had served on the Board of Directors of the Company from
November 1993 until May of 1997. Dr. Barnes has been the Managing Director of
SDS International, Ltd. (UK) ("SDS-UK") since commencement of its operations.
Prior to his position as Managing Director of SDS-UK, Dr. Barnes was Director of
Medical Services for Hemotex Ltd., a laboratory service primarily involved with
the insurance industry in the United Kingdom.
PAUL D. SLOWEY, PH.D. began employment as Director of Sales and Marketing at the
Company in August 1996. In May 1997, Dr. Slowey was promoted to Chief Operating
Officer and Vice President of Sales and Marketing of the Company. From February
1990 until he joined the Company, Dr. Slowey was employed at INCSTAR Corp., a
Minnesota manufacturer of diagnostic products, as International Marketing
Manager and Director of International Sales.
EXECUTIVE COMPENSATION AND OTHER MATTERS
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information for
the 1995, 1996 and 1997 fiscal years concerning compensation awarded to, earned
by or paid the Company's Chief Executive Officer and the other executive officer
of the Company whose total annual salary and bonus exceeded $100,000
(collectively, the "named executive officers") for the fiscal year ended
December 31, 1997.
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<PAGE> 39
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION (1) ------------
------------------------------------- AWARDS
SECURITIES
OTHER UNDERLYING
FISCAL ANNUAL OPTIONS ALL OTHER
YEAR SALARY COMPENSATION (#) COMPENSATION
------------------------------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Kenneth J. McLachlan (2) 1997 -- $180,000 1,000,000 --
President and 1996 -- 51,000 -- --
Chief Executive Officer 1995 -- -- -- --
David Barnes, MD (3) 1997 $135,000 -- 75,000 --
Managing Director, 1996 135,000 -- -- --
SDS International, Ltd. 1995 131,750 -- 175,000 --
</TABLE>
(1) Amounts shown include compensation earned in each respective fiscal year.
No bonuses were paid in any of the fiscal years reported.
(2) Includes 1,000,000 options granted to International Business Consultants
("IBCO"), a Jersey company of which Mr. McLachlan is a principal, pursuant
to a Management Consulting Agreement entered into as of December 5, 1997
between IBCO and the Company under which IBCO provides Mr. McLachlan's
services to the Company. See "Certain Relationships and Related
Transactions." Amounts paid in 1996 included payments to Mr. McLachlan
pursuant to a consulting contract which commenced in June 1996 and which
was superseded by the Agreement with IBCO. Mr. McLachlan has served as the
Company's Chief Financial Officer since June 1996 and was appointed
President and Chief Executive Officer by the Board of Directors in December
1996.
(3) Includes options to purchase 175,000 shares of Common Stock granted to Mr.
Barnes in 1995 subject to shareholder approval of an increase in the
Company's authorized number of common shares; such approval was obtained
on February 20, 1997.
In August 1994, the Company entered into an employment agreement with
Dr. David Barnes for the position of Managing Director of SDS International,
Ltd. (UK). The employment agreement provides for an annual base salary of
79,200 (pound) (approximately US $135,000.00) plus the use of a car. If the
agreement is terminated for any reason, Dr. Barnes is entitled to receive his
base salary for the remaining term of the agreement through August 1998.
37
<PAGE> 40
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth, for each of the named executive
officers, information concerning options granted during the fiscal year ended
December 31, 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------ POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF STOCK
TOTAL OPTIONS PRICE
GRANTED TO EXERCISE APPRECIATION FOR
OPTIONS EMPLOYEES PRICE EXPIRATION OPTION TERM (2)
NAME GRANTED(1) IN 1997 ($/SH) DATE 5% 10%
---- ---------- ------------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Kenneth J. McLachlan 1,000,000 (3) 57% $0.406 12-05-07 $661,300 $1,053,100
David Barnes, M.D. 75,000 4% $0.406 12-05-07 49,600 79,000
</TABLE>
(1) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock on date of grant. Options granted were
exercisable upon grant, and have a ten year term.
(2) The potential realizable value is calculated based on the term of the
option at time of grant (10 years) and is calculated by assuming that the
stock price on the date of grant appreciates at the indicated annual rate
compounded annually for the entire term of the option and that the option
is exercised and sold on the last day of its term for the appreciated
price. Actual gains, if any, on stock option exercises are dependent on the
future performance of the Common Stock and overall stock market conditions.
(3) Options were granted to International Business Consultants, a Jersey
company, of which Mr. McLachlan is a principal. See "-- Certain
Relationships and Related Transactions."
OPTION EXERCISE AND HOLDINGS
The following table provides certain information concerning the value of
unexercised options held as of the end of the fiscal year with respect to the
named executive officers. There were no options exercised by the named executive
officers in the last fiscal year. All options held by the named executive
officers are currently exercisable.
38
<PAGE> 41
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS OPTIONS
ACQUIRED VALUE AT FY-END AT FY-END
ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kenneth J. McLachlan - - 1,000,000 / 0 - / -
David Barnes, MD - - 358,000 / 0 - / -
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1997, the Company entered into a Management Consulting
Agreement (the "Agreement") with International Business Consultants ("IBCO"),
under which IBCO agreed to provide the services of Kenneth J. McLachlan as the
Company's President and Chief Executive Officer from December 5, 1997 until
December 31, 1998, with an automatic one year extension on January 1, 1999 and
each year thereafter unless written notice is given by either the Company or
IBCO 90 days prior thereto. Under the Agreement, IBCO will provide the services
of Kenneth J. McLachlan as President and Chief Executive Officer of the Company
in exchange for a base salary of $180,000 per annum or such greater amount as
the Board of Directors of the Company may from time to time determine. Upon
entering into the Agreement, IBCO was granted options to purchase 250,000 shares
of the Company's Common Stock at $0.406 per share. IBCO was also granted options
to purchase 750,000 shares of the Company's Common Stock at $0.406 per share as
compensation for Mr. McLachlan's previous service to the Company. See "--
Summary of Cash and Certain Other Compensation." Additionally, under the
Agreement, IBCO is entitled to an annual incentive bonus of 10% of the annual
net income of the Company, during the term which IBCO renders services to the
Company under the Agreement, payable, at the option of the Company, in cash or
Common Stock of the Company. IBCO may be terminated for "cause" or "good
reason", as defined in the Agreement.
In January 1997, subsequent to his resignation as President and CEO of
the Company in December 1996, Ronald Lealos filed a lawsuit against the Company
in Superior Court in Clark County in the State of Washington. The complaint in
the lawsuit alleged various breach of contract claims. This lawsuit was
dismissed without prejudice as a prerequisite to a settlement agreement between
Mr. Lealos and the Company. The parties did not reach a settlement and, in
February 1998, Mr. Lealos filed a complaint against the
39
<PAGE> 42
Company in the same court which alleged substantially the same claims. In March
1998, the Company filed an answer to the complaint and asserted numerous
counterclaims against Mr. Lealos (the "Counterclaim"), including counterclaims
for breach of fiduciary duty and conversion.
In 1992, the Company loaned to Mr. Lealos, then President and Director
of the Company, $93,000 to purchase shares of the Company's Common Stock. The
loan accrues interest at 6% annually. In 1995, the sum of $9,175 was paid toward
the principal of the loan, leaving a remaining principal balance of $83,825 due
December 31, 1996. The loan is among the subjects of the Company's Counterclaim.
In June and August 1997, the Company sold shares of its Common Stock in
a private placement pursuant to Regulation D, promulgated under the Securities
Act of 1933. Pursuant to common stock subscription agreements between the
Company and the investors named therein, the Company sold a total of 4,082,905
shares of Common Stock for an aggregate purchase price of $2,063,000, net of
issuance costs. Bermuda Trust Company, trustee for the Morar Trust, of which the
children of Kenneth J. McLachlan are beneficiaries, was an investor in the
private placement and purchased 200,000 shares for an aggregate purchase price
of $100,000.
Eric F. Stoer, a director of the Company, is a partner in the law firm
of Bryan Cave LLP, which has provided legal services to the Company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding
the beneficial ownership of Common Stock of the Company as of May 11, 1998 as to
(i) each person who is known by the Company to own beneficially more than 5% of
the outstanding shares of Common Stock, (ii) each director or nominee for
director of the Company, (iii) each of the executive officers named in the
Summary Compensation Table herein and (iv) all directors and executive officers
as a group. Except as otherwise noted, the Company believes the persons listed
below have sole investment and voting power with respect to the Common Stock
owned by them.
40
<PAGE> 43
<TABLE>
<CAPTION>
COMMON STOCK
- -------------------------------------------- -----------------------------
NUMBER OF
SHARES % SHARES
NAME AND ADDRESS BENEFICIALLY BENEFICIALLY
OWNED (1) OWNED
- -------------------------------------------- -----------------------------
<S> <C> <C>
Kenneth J. McLachlan (2)
607 Collingwood House
Dolphin Square
London SW1 3NF England 1,700,000 (2) 5.0%
Hans R. Vauthier
Steinengraben 28
Ch-4051
Basel, Switzerland 250,000 (3) *
Eric F. Stoer, Esq.
c/o Bryan Cave LLP
700 Thirteenth Street
Washington, DC 20005 250,000 (4) *
David Barnes, M.D.
c/o SDS International Ltd. (UK)
11 Sovereign Close
Sovereign Court
London, England E1 9HW, UK 358,000 (5) 1.0%
Biscount Overseas Limited 14,787,567 (6) 32.4%
c/o International Securities Corp.
310 Madison Avenue, Suite 501
New York, NY 10017
All Executive Officers and Directors
as a group (five persons) 2,635,800 (7) 7.0%
</TABLE>
- -----------------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting power and
investment power with respect to shares. Shares issuable upon the exercise
of outstanding stock options that are currently exercisable or become
exercisable within 60 days from May 11, 1998 are considered outstanding for
the purpose of calculating the percentage of Common Stock
41
<PAGE> 44
owned by such person but not for the purpose of calculating the percentage
of Common Stock owned by any other person.
(2) Includes 200,000 shares registered in the name of Bank of Bermuda Trust
Company, trustee for the Morar Trust, an irrevocable trust established for
the benefit of Mr. McLachlan's children. Also includes 500,000 shares
registered in the name of Reads Trust Company Limited, trustee of an
irrevocable trust established for the benefit of Mr. McLachlan's children.
Mr. McLachlan has no power to vote or dispose of these shares pursuant to
the terms of the trusts. Also includes options to purchase 1,000,000 shares
of Common Stock which were granted to International Business Consultants, a
Jersey company, of which Mr. McLachlan is a principal.
(3) Includes options to purchase 250,000 shares of Common Stock.
(4) Includes options to purchase 250,000 shares of Common Stock.
(5) Includes options to purchase 358,000 shares of Common Stock.
(6) Includes an estimated 6,000,000 shares of Common Stock issuable upon
conversion of the 1998-A Convertible Preferred Stock (based on the
assumption of conversion at the market price of the Company's Common Stock
on the date of this Prospectus). Also includes an estimated 6,500,000
shares of Common Stock issuable upon the exercise of an option to purchase
$1,500,000 of an additional series of convertible preferred stock upon
substantially the same terms and conditions as the purchase of the 1998-A
Preferred Stock (based on the assumption of conversion at the market
price of the Company's Common Stock on the date of this Prospectus).
(7) Includes Kenneth J. McLachlan, Eric F. Stoer, Hans R. Vauthier, David
Barnes and Paul D. Slowey, the current directors and executive officers of
the Company. Includes options to purchase an aggregate of 1,933,000 shares
of Common Stock.
SELLING SHAREHOLDER
The Selling Shareholder is Biscount Overseas Limited (the "Selling
Shareholder" or "Biscount"), the purchaser of 1,500 shares of the Company's
1998-A Convertible Preferred Stock, stated value $1,000 per share (the "1998-A
Preferred Stock"), for an aggregate purchase price of $1,500,000, and the owner
of warrants to purchase 750,000 shares of Common Stock (the "Warrants") acquired
by Biscount in connection with the private placement of the 1998-A Preferred
Stock.
Of the Shares offered hereby, 12,592,105 shares, plus a presently
indeterminate number of shares, have been or may be issued upon the conversion
of 1,500 shares of the 1998-A Preferred Stock (representing 150% of the number
of shares issuable based on the assumption of conversion at the market price of
the Company's Common Stock on the date of this Prospectus), and 750,000 shares
may be issued upon the exercise of the Warrants. The number of Shares that may
be acquired by the Selling Shareholder upon conversion of the 1998-A Preferred
Stock will vary according to certain circumstances, including changes in the
market price of the Common Stock. All of the Shares that may be acquired by the
Selling Shareholder upon conversion of the 1998-A Preferred Stock or
42
<PAGE> 45
exercise of the Warrants are being registered pursuant to the Registration
Statement of which this Prospectus forms a part, and are being offered hereby.
See "Description of Securities -- 1998-A Preferred Stock" and " --Warrants."
As of the date of this Prospectus, the Selling Shareholder has
converted 140 shares of 1998-A Preferred Stock for a total of 1,537,567 shares
of Common Stock. The Selling Shareholder currently owns no other shares of
Common Stock. Under the terms of the securities purchase agreement pursuant to
which the Selling Shareholder purchased the 1998-A Preferred Stock, the Selling
Shareholder has the option to purchase up to $1,500,000 of an additional series
of convertible preferred stock upon substantially the same terms as the purchase
of the 1998-A Preferred Stock and, upon the exercise of such option, to receive
a warrant to purchase up to 250,000 shares of Common Stock at an exercise price
of $0.3375 per share. If such option were exercised and the underlying preferred
stock converted, the Selling Shareholder would receive approximately 6,500,000
shares of Common Stock.
The Company will not receive any proceeds from the sale of the Shares
by the Selling Shareholder. Sale of any shares of Common Stock by the Selling
Shareholder, or even the existence of the right to acquire shares of Common
Stock by reason of the 1998-A Preferred Stock, or to acquire shares of Common
Stock upon the exercise of the Warrants, may depress the price of the Common
Stock. The Selling Shareholder is not an affiliate of the Company and has had no
position, office or other material relationship with the Company within the past
three years.
The foregoing summary is qualified in its entirety by the terms of the
1998-A Preferred Stock and the Warrants, which are filed as exhibits to the
Registration Statement of which this Prospectus is a part.
DESCRIPTION OF SECURITIES
GENERAL
The Company's Certificate of Incorporation authorizes the Company to
issue up to 50,000,000 shares of Common Stock, par value $.01 per share, and
1,000,000 shares of Preferred Stock, par value $.01 per share. As of May 11,
1998, there were approximately 32,378,821 shares of Common Stock outstanding.
43
<PAGE> 46
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by stockholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voted for the election of
directors can elect all of the directors. The holders of Common Stock are
entitled to receive dividends when, as and if declared by the Board of Directors
out of funds legally available therefor. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining available for distribution to
them after payment of liabilities and after provision has been made for each
class of stock, if any, having preference over the Common Stock. Holders of
shares of Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
Common Stock. All of the outstanding shares of Common Stock are, and the shares
of Common Stock offered hereby, when issued against the consideration set forth
in this Prospectus, will be, fully paid and nonassessable.
1998-A PREFERRED STOCK
The Company issued the 1998-A Preferred Stock to the Selling
Shareholder in a private placement on January 26, 1998. Pursuant to the terms of
the 1998-A Preferred Stock, the holder has the right, exercisable at one or more
times, at its option, to convert up to (i) twenty-five percent (25%) of the
shares of 1998-A Preferred Stock initially issued to the holder at any time from
and after April 26,1998, (ii) fifty percent (50%) of the shares of 1998-A
Preferred Stock from and after May 26, 1998, (iii) seventy-five percent (75%) of
the shares of 1998-A Preferred Stock from and after June 25, 1998, and (iv) all
of the shares of 1998-A Preferred Stock from and after July 25, 1998.
Upon conversion of the 1998-A Preferred Stock, the holder will be
entitled to receive a number of shares of Common Stock determined by dividing
the stated value of the 1998-A Preferred Stock ($1,000 per share), plus a
dividend in the amount of 6% per annum of the stated value from the date of
issuance (unless the Company elects to pay that dividend in cash), by a
conversion price equal to the lesser of $.3375 or 20% of the average closing bid
prices for shares of the Common Stock during the five-day period prior to
conversion, subject to adjustment upon the occurrence of certain dilutive
events. However, in no event will the holder be entitled to receive upon
conversion a number of shares of that would result in the holder beneficially
owning more than 4.99% of the outstanding shares of the Company's Common Stock.
As of the date of this Prospectus, Biscount has converted 140 shares of
1998-A Preferred Stock for a total of 1,537,567 shares of Common Stock, which
includes 22,415 shares representing a dividend.
44
<PAGE> 47
WARRANTS
In connection with the private placement of the 1998-A Preferred Stock,
the Company issued the Warrants to Biscount. The Warrants entitle the holder
thereof to purchase 750,000 shares of Common Stock from the Company for a
purchase price of $0.3375 per share on or before January 26, 2003. The
warrantholder has certain demand and piggyback registration rights with respect
to the shares that may be issued upon exercise of the Warrants. The Warrants
have customary provisions regarding the adjustment of the number of warrants and
the exercise price upon the occurrence of certain extraordinary events,
including in the event of a reverse split of the Common Stock. Biscount
exercised its piggyback registration right in connection with the registration
of the shares issued and to be issued on conversion of the 1998-A Preferred
Stock.
The foregoing summary is qualified in its entirety by the terms of the
Common Stock, 1998-A Preferred Stock and the Warrants.
PLAN OF DISTRIBUTION
The Selling Shareholder may sell the shares in one or more transactions
(which may involve one or more block transactions) on the over-the-counter
markets on the OTC Bulletin Board and upon terms then prevailing or at prices
related to the then current market price, or in separately negotiated
transactions or in a combination of such transactions. The Common Stock offered
hereby may be sold by one or more of the following methods, without limitation:
(a) a block trade in which a broker or dealer so engaged will attempt to sell
the shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction; (b) purchases by a broker or dealer as
principal and resale by such broker or dealer for its account pursuant to this
Prospectus; (c) ordinary brokerage transactions and transactions in which the
broker solicits purchasers; (d) privately negotiated transactions; (e) short
sales; and (f) face-to-face transactions between sellers and purchasers without
a broker-dealer. The Selling Shareholder may also sell Shares in accordance with
Rule 144 under the Securities Act. The Selling Shareholder may be deemed to be
an underwriter of the shares offered hereby within the meaning of the Securities
Act.
The Company has agreed to keep effective the registration of the Shares
offered hereby for a period of not less than two years, until the date upon
which all of the Shares offered hereby have been sold or until the date on which
the Shares may be sold without registration, whichever is shorter.
In effecting sales, brokers or dealers engaged by the Selling
Shareholder may arrange for other brokers or dealers to participate. Such broker
or dealers may receive commissions or discounts from the Selling Shareholder in
amounts to be negotiated. All other expenses incurred in connection with this
offering will be borne by the Company other than the Selling Shareholder's legal
fees. Such brokers and dealers and any other
45
<PAGE> 48
participating brokers or dealers may, in connection with such sales, be deemed
to be underwriters within the meaning of the Securities Act. Any discounts or
commissions received by any such brokers or dealers may be deemed to be
underwriting discounts and commissions under the Securities Act.
The Company is bearing all of the costs relating to registration of the
Shares, except commissions, discounts or other fees payable to a broker, dealer,
underwriter, agent or market maker in connection with the sale of any of the
Shares and fees of counsel for the Selling Shareholder.
LEGAL MATTERS
The validity of the securities being offered will be passed upon for
the Company by Bryan Cave LLP, 700 Thirteenth Street, Washington, DC 20005.
EXPERTS
The financial statements of the Company for the fiscal year ended
December 31, 1997 have been audited by Arthur Andersen LLP, independent
certified public accountants, to the extent and for the periods set forth in
their report with respect thereto, and are included in the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1997, and are
incorporated herein by reference, in reliance upon such report given upon the
authority of said firm as experts in auditing and accounting. The financial
statements of the Company for the fiscal year ended December 31, 1996 have been
audited by Hollander, Gilbert & Co., independent certified public accountants,
to the extent and for the periods set forth in their report with respect
thereto, and are included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996, and are incorporated herein by reference,
in reliance upon such report given upon the authority of said firm as experts in
auditing and accounting.
CHANGES IN ACCOUNTANTS
On May 30, 1997, the Company dismissed its independent accountants,
Hollander, Gilbert & Co. Such dismissal was recommended and approved by the
Company's Board of Directors.
The audit reports of Hollander, Gilbert & Co. on the Company's
consolidated financial statements as of and for the fiscal years ended December
31, 1996 and 1995 did not contain an adverse opinion or a disclaimer of opinion
nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles except: they were modified as to uncertainty of the
Company to continue as a going concern. During fiscal years 1996 and 1995 and
the subsequent interim period through May 30, 1997, there were
46
<PAGE> 49
no disagreements with Hollander, Gilbert & Co. on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which, if not satisfied to Hollander, Gilbert & Co.'s satisfaction,
would have caused it to make reference to the subject matter of the disagreement
in connection with its reports.
Also on May 30, 1997, the Company engaged Arthur Andersen LLP to be its
independent auditors. The Company did not consult with Arthur Andersen LLP at
any time prior to its engagement regarding the application of accounting
principles to a completed or contemplated specified transaction or the type of
audit opinion that might be rendered on the Company's consolidated financial
statements. Prior to engaging Arthur Andersen LLP, the Company did not receive
any written or oral advice from Arthur Andersen LLP on accounting, auditing, or
financial reporting issues. The engagement was recommended and approved by the
Company's Board of Directors and ratified by the Company's shareholders and the
Company's annual meeting of shareholders held on May 30, 1997.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law empowers a
corporation to indemnify its directors and officers and to purchase insurance
with respect to liability arising out of their capacity or status as directors
and officers provided that this provision shall not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) arising under Section 174 of the General Corporation Law of Delaware, or
(iv) for any transaction from which the director derived an improper personal
benefit.
The Delaware Corporation Law provides further that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors and officers may be entitled under the corporation's by-laws, any
agreement, vote of shareholders or otherwise.
Article Ten of the Company's Certificate of Incorporation eliminates
the personal liability of directors to the fullest extent permitted by Section
145 of the Delaware Corporation Law.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such persons
in their official capacities if such person acted in good faith and in a manner
that he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
47
<PAGE> 50
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES
ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE
COMPANY PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT
IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION
IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS THEREFORE UNENFORCEABLE.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a Registration Statement on Form SB-2 (the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered by this Prospectus. This Prospectus, filed as part of such
Registration Statement, does not contain all of the information set forth in, or
annexed as exhibits to, the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and this offering, reference is
made to the Registration Statement, including the exhibits filed therewith,
which may be inspected without charge at the Office of the Commission, 450 Fifth
Street, NW, Washington, DC, 20549. Copies of the Registration Statement may
obtained from the Commission at its principal office upon payment of prescribed
fees. Statements contained in this Prospectus as to the contents of any contract
or other document are not necessarily complete and, where the contract or other
document has been filed as an exhibit to the Registration Statement, each
statement is qualified in all respects by reference to the applicable document
filed with the Commission.
48
<PAGE> 51
FINANCIAL STATEMENTS
The Consolidated Financial Statements, together with the report thereon
of Arthur Andersen LLP and Hollander, Gilbert & Co. are included in this report
as follows:
Report of Arthur Andersen LLP F-2
Report of Hollander, Gilbert & Co. F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-4
Consolidated Statements of Operations - F-5
For the Years Ended December 31, 1997 and 1996
Consolidated Statement of Stockholders' Equity - F-6
For the Years Ended December 31, 1997 and 1996
Consolidated Statements of Cash Flows - F-7
For the Years Ended December 31, 1997 and 1996
Notes to Consolidated Financial Statements F-8
Consolidated Balance Sheets as of March 31, 1998 F-23
and December 31, 1997 (Unaudited)
Consolidated Statements of Operations - F-24
Three Months Ended March 31, 1998 and 1997 (Unaudited)
Consolidated Statements of Cash Flows - F-25
Three Months Ended March 31, 1998 and 1997 (Unaudited)
Notes to Consolidated Financial Statements F-26
F-1
<PAGE> 52
Report of Independent Public Accountants
To the Board of Directors and Shareholders of
Saliva Diagnostic Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Saliva Diagnostic
Systems, Inc. (an Oregon Corporation) as of December 31, 1997, and the related
consolidated statement of operations, stockholders' equity and cash flows for
the year ended December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Saliva Diagnostic
Systems, Inc. as of December 31, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Arthur Andersen LLP
Portland, Oregon,
March 23, 1998
F-2
<PAGE> 53
Report of Independent Public Accountants
To the Board of Directors and Stockholders
Saliva Diagnostic Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Saliva Diagnostic
Systems, Inc. and subsidiaries as of December 31, 1996, and the related
consolidated statement of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Saliva Diagnostic
Systems, Inc. and subsidiaries as of December 31, 1996 and the results of
operations, stockholders' equity and cash flows for the year then ended, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's significant operating losses and significant
capital requirements raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Hollander, Gilbert & Co.
Los Angeles, California
March 21, 1997
F-3
<PAGE> 54
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 271,312 $ 776,380
Accounts receivable, less allowance of $42,000(1997)
and $0 (1996) 154,052 178,436
Inventories 458,177 268,431
Prepaid expenses 51,876 34,425
------------ ------------
Total current assets 935,417 1,257,672
Property and equipment, less accumulated
depreciation of $995,853(1997) and $792,309(1996) 434,457 493,649
Deposits 40,162 188,647
Restricted cash 120,500 120,500
Patents and trademarks, less accumulated
amortization of $48,375 (1997) and $39,183 (1996) 108,541 117,733
------------ ------------
$ 1,639,077 $ 2,178,201
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 670,400 $ 277,292
Accrued expenses 1,473,944 540,781
Accrued interest payable 68,240 68,240
Current portion of long-term debt and
obligations under capital leases 33,779 35,057
------------ ------------
Total current liabilities 2,246,363 921,370
Long-term debt and obligations under capital
leases, net of current portion 59,401 96,199
------------ ------------
Total liabilities 2,305,764 1,017,569
Commitments and contingencies (Note 13)
Shareholders' equity:
Preferred stock, no par value, 1,000,000 shares
authorized (1997), none issued and outstanding -- --
Common stock, $.01 par value, 50,000,000
shares authorized (1997), 25,000,000 shares
authorized (1996), issued and outstanding:
29,344,624 (1997) and 22,090,785 (1996) 293,447 220,908
Additional paid-in capital 27,701,417 22,998,052
Note receivable from shareholder for stock (83,825) (83,825)
Currency translation adjustment (51,268) (60,257)
Accumulated deficit (28,526,458) (21,914,246)
------------ ------------
Total stockholders' equity (666,687) 1,160,632
------------ ------------
$ 1,639,077 $ 2,178,201
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-4
<PAGE> 55
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Product sales $ 1,422,296 $ 715,780
Technology licensing income -- 24,870
------------ ------------
Total revenues 1,422,296 740,650
Costs and expenses:
Cost of products sold 1,426,638 894,841
Research and development expense 665,475 617,358
Selling, general and administrative
expense 5,270,955 3,911,587
Write-off of goodwill -- 540,000
Restructuring expense 278,537 --
------------ ------------
Loss from operations (6,219,309) (5,223,136)
Interest income 28,850 99,418
Interest expense (413,993) (28,681)
Other expense (7,760) --
------------ ------------
Net loss $ (6,612,212) $ (5,152,399)
============ ============
Basic and diluted net loss per share $ (0.27) $ (0.26)
============ ============
Shares used in basic and diluted per share calculations 24,894,900 20,100,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 56
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Currency
Common Stock Paid-in Note Translation Accumulated
Shares Amount Capital Receivable Adjustment Deficit Total
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995 13,176,366 $ 131,764 $ 17,726,078 $ (83,825) $ (34,859) $ (16,761,847) $ 977,311
Exercise of warrants 2,580,861 25,807 2,444,711 2,470,518
Exercise of stock options 104,750 1,048 75,802 76,850
Issuance of shares in settlement
agreement 16,500 166 53,584 53,750
Convertible debentures payable
converted into common stock 6,212,308 62,123 2,697,877 2,760,000
Currency translation adjustment (25,398) (25,398)
Net loss (5,152,399) (5,152,399)
--------------------------------------------------------------------------------------------------
Balances, December 31, 1996 22,090,785 220,908 22,998,052 (83,825) (60,257) (21,914,246) 1,160,632
Beneficial conversion feature
related to Convertible
Debentures issued March 1997 375,000 375,000
Conversion of Debentures
into common stock 1,736,824 17,368 1,482,632 1,500,000
Write-off of unamortized
financing costs (99,800) (99,800)
Issuance of common stock
pursuant to Debenture
and private placement
conversion reset provisions 1,399,356 13,994 (13,994) --
Issuance of common stock
in payment of interest
on Debentures 27,604 276 29,119 29,395
Sale of common stock in
private placements 4,082,905 40,829 2,022,585 2,063,414
Exercise of stock options 7,150 72 386 458
Compensation expense on
issuance of stock options 907,437 907,437
Currency translation adjustment 8,989 8,989
Net loss (6,612,212) (6,612,212)
--------------------------------------------------------------------------------------------------
Balances, December 31, 1997 29,344,624 293,447 $27,701,417 $ (83,825) $ (51,268) $ (28,526,458) $ (666,687)
==================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 57
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,612,212) $(5,152,399)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 225,606 290,929
Compensation expense on issuance of stock options 907,437 --
Net loss on disposal of assets 25,900 --
Shares issued in lieu of fees and expenses -- 53,750
Interest expense related to conversion of Debentures 404,395
Write-off of goodwill -- 540,000
Currency translation adjustment 8,989 (25,398)
Changes in current assets and liabilities:
Accounts receivable 24,384 (135,145)
Inventories (189,746) 31,730
Prepaid expenses and deposits (17,451) (5,469)
Accounts payable and accrued expenses 1,326,271 336,532
----------- -----------
Net cash used in operating activities (3,896,427) (4,065,470)
CASH FLOWS FROM INVESTING ACTIVITIES:
Placement of restricted cash -- (120,500)
Acquisitions of property and equipment (62,770) (214,418)
Deposits 48,332 (118,628)
Other assets -- 124
----------- -----------
Net cash used in investing activities (14,438) (453,422)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock, net of
issuance costs 2,063,414 --
Proceeds from convertible debentures, net of
issuance costs 1,380,000 --
Principal payment of convertible debentures -- (25,000)
Notes payable and interim financing, net -- 109,476
Repayment of long term debt and capital lease obligations (38,075) (24,586)
Exercise of Common Stock options and warrants 458 2,547,368
----------- -----------
Net cash provided by financing activities 3,405,797 2,607,258
----------- -----------
Net increase (decrease) in cash and cash equivalents (505,068) (1,911,634)
Cash and cash equivalents, beginning of period 776,380 2,688,014
----------- -----------
Cash and cash equivalents, end of period $ 271,312 $ 776,380
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 7,800 $ 10,144
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION:
Conversion of deposit to property and equipment $ 100,153 $ --
Shares issued in lieu of fees and expenses -- 53,750
Conversion of Debentures into Common Stock 1,380,000 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 58
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Saliva Diagnostic Systems, Inc. (the "Company") develops rapid immunoassays
utilizing immunochromatography for the detection of antibodies to selected
pathogens, such as the HIV, the virus that causes AIDS, and Helicobacter pylori,
a bacteria linked to peptic ulcers and gastric cancer. In addition, the Company
develops proprietary specimen collection devices and other diagnostic devices.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, SDS International, Ltd. and Saliva Diagnostic
Systems (Asia) Ltd. All significant intercompany accounts and transactions have
been eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of cash and short-term highly liquid
investments purchased with original or remaining maturities of three months or
less.
INVENTORIES
Inventories are stated at the lower of cost or market determined on a first-in,
first-out (FIFO) basis.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed on the
straight-line method based upon the estimated useful life of the assets.
Leasehold improvements are amortized over the life of the related lease. Useful
lives are generally as follows:
Office furniture and equipment five to seven years
Machinery and equipment seven years
Exhibits seven years
Vehicles five years
PATENTS AND TRADEMARKS
The costs of patents and trademarks are being amortized on the straight line
method over 17 years.
REVENUE RECOGNITION
Revenue is recognized when products are shipped to customers.
F-8
<PAGE> 59
PRODUCT LIABILITY
The Company has not established any allowance for product liability at present
because of the limited distribution of its product and limited history which
reflect no instance of problems with product liability.
RESEARCH AND DEVELOPMENT
Research and development expenditures include those costs associated with the
Company's on-going research and development activities. All research and
development costs are expensed as incurred.
INCOME TAXES
The Company is in a net deferred tax asset position and has generated net
operating losses to date. Accordingly, no provision for or benefit from income
taxes has been recorded in the accompanying statements of operations. The
Company will continue to provide a valuation allowance for its deferred tax
assets until it becomes more likely than not, in management's assessment, that
the Company's deferred tax assets will be realized.
CURRENCY TRANSLATION
The local currency is the functional currency in the Company's foreign
subsidiaries. Assets and liabilities of the foreign subsidiaries are translated
to U.S. dollars at current rates of exchange, and revenues and expenses are
translated using weighted average rates during the year. Foreign currency
translation adjustments are included as a separate component of shareholders'
equity. Foreign currency transaction gains and losses are included as a
component of other income and expense, in the consolidated statements of
operations.
LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). SFAS 128 changes the standards for computing and presenting earnings per
share (EPS) and supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share." SFAS 128 simplifies the standards for computing earnings per share
and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. This Statement requires restatement of all
prior-period EPS data presented.
As it relates to the Company, the principal differences between the provisions
of SFAS 128 and previous authoritative pronouncements are the exclusion of
common stock equivalents in the determination of Basic Earnings Per Share and
the market price at which common stock equivalents are calculated in the
determination of Diluted Earnings Per Share.
F-9
<PAGE> 60
Basic earnings per common share is computed using the weighted average number of
shares of common stock outstanding for the period. Diluted earnings per common
share is computed using the weighted average number of shares of common stock
and dilutive common equivalent shares related to stock options and warrants
outstanding during the period.
The adoption of SFAS 128 had no effect on previously reported loss per share
amounts for the year ended December 31, 1996. For the years ended December 31,
1997 and 1996, primary loss per share was the same as basic loss per share and
fully diluted loss per share was the same as diluted loss per share. A net loss
was reported in 1997 and 1996, and accordingly, in those years the denominator
was equal to the weighted average outstanding shares with no consideration for
outstanding options and warrants to purchase shares of the Company's common
stock, because to do so would have been anti-dilutive. Stock options for the
purchase of 3,153,500 and 1,815,250 shares at December 31, 1997 and 1996,
respectively, and warrants for the purchase of 1,947,216 and 1,530,000 shares at
December 31, 1997 and 1996, respectively, were not included in loss per share
calculations, because to do so would have been anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short-term nature of
these instruments. Fair value estimates are made at a specific point in time,
based on relevant market information about the financial instrument when
available. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit risk
consist primarily of trade receivables from large domestic and foreign
companies. Sales to one customer accounted for approximately 17% of total
product sales in 1997. Sales to three customers, accounted for approximately
20%, 18%, and 11% respectively, of total product sales in 1996. At December 31,
1997 accounts receivable from two customers comprised 32% and 27%, respectively
of total net accounts receivable. The Company's foreign sales in 1997 and 1996
were 41% and 55% of total sales, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Actual results could differ
from those estimates.
RECLASSIFICATIONS
Certain 1996 balances have been reclassified to conform with the current year's
presentation.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
F-10
<PAGE> 61
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), which establishes requirements
for disclosure of comprehensive income and is effective for the Company's fiscal
year ending December 31, 1998. Reclassification of earlier financial statements
for comparative purposes is required. The Company believes the implementation of
this statement will not have a material effect on its financial statement
disclosures.
2. SUBSTANTIAL DOUBT REGARDING ABILITY TO CONTINUE AS A GOING CONCERN
SIGNIFICANT OPERATING LOSSES - ACCUMULATED DEFICIT
Since July 1990, the Company has been engaged almost exclusively in research and
development activities focused on developing proprietary saliva based collection
devices and rapid assays for infectious diseases. Other than sales of the
Company's collection devices, the Company has not yet commenced any significant
product commercialization. The Company has incurred significant operating losses
since its inception, resulting in an accumulated deficit of $28,526,458 at
December 31, 1997. Such losses are expected to continue for the foreseeable
future and until such time, if ever, as the Company is able to attain sales
levels sufficient to support its operations. There can be no assurance that the
Company will achieve or maintain profitability in the future. Despite the
Company's stock financing in January 1998 (see Note 15), substantial additional
financing will be required in 1998. There can be no assurances that such
financing will be achieved.
The Company's capital requirements have been and will continue to be
significant. The Company's capital base is smaller than that of many of its
competitors, and there can be no assurance that the Company's cash resources
will be able to sustain its business. The Company is dependent upon its effort
to raise capital to finance its future operations, including the cost of
development, manufacturing and marketing of its products, to conduct clinical
trials and submissions for FDA approval of its products and to continue the
design and development of its new products. Marketing, manufacturing and
clinical testing may require capital resources substantially greater than the
resources available to the Company. The Company will continue to seek public or
private placement of its equity securities and corporate partners to develop
products. The Company's future capital needs will depend upon numerous factors,
including the progress of the approval for sale of the Company's products in
various countries, including the United States, the extent and timing of the
acceptance of the Company's products, the cost of marketing and manufacturing
activities and the amount of revenues generated from operations, none of which
can be predicted with much certainty. The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going
concern. The Company's significant operating losses and significant capital
requirements, however, raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
F-11
<PAGE> 62
3. RESTRUCTURING
Results of operations of 1997 included a charge associated with a restructuring
plan designed to reduce costs and improve manufacturing and operational
efficiencies. Under the plan, the Company closed its Singapore manufacturing
operations in October 1997. The Company plans to out-source manufacturing
previously performed in Singapore to qualified sources and locations. Total
costs accrued in connection with the restructuring at the end of the third
quarter of 1997 were $194,000 and included approximately $100,000 related to
termination of employees, approximately $37,000 associated with the settlement
of the lease obligation in Singapore, $47,000 for other costs related to closing
the Singapore location and $10,000 non-cash charge for the write-off of
leasehold improvements. The change in the restructuring reserve during the
fourth quarter of 1997 consisted of approximately $61,000 of additional employee
termination costs and a $24,000 charge related to portion of the cumulative
foreign translation account related to Singapore operation.
4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Raw materials $280,438 $253,000
Work in process 11,569 2,495
Finished goods 166,170 12,936
-------- --------
$458,177 $268,431
======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Office furniture and equipment $ 57,988 $ 114,041
Machinery and equipment 1,105,025 861,957
Leasehold improvements 71,568 97,582
Vehicles 164,774 181,423
Exhibits 30,955 30,955
----------- -----------
1,430,310 1,285,958
Less: accumulated depreciation
and amortization (995,853) (792,309)
----------- -----------
$ 434,457 $ 493,649
=========== ===========
</TABLE>
F-12
<PAGE> 63
6. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
---------- --------
<S> <C> <C>
Accrued wages and salaries $ 493,352 $149,599
Accrued payroll taxes 92,144 131,681
Accrued restructuring expenses 135,522 --
Accrued litigation expenses 750,000 250,000
Other accrued liabilities 2,926 9,501
---------- --------
$1,473,944 $540,781
========== ========
</TABLE>
7. SHAREHOLDERS' EQUITY
On February 20, 1997, at a Special Meeting of Shareholders, the shareholders of
the Company approved an amendment to the Company's Certificate of Incorporation
increasing the number of authorized shares of the Company's Common Stock, par
value $.01 per share, from 25,000,000 to 33,000,000 shares.
On November 21, 1997, at a Special Meeting of Shareholders, the shareholders of
the Company approved an amendments to the Company's Certificate of Incorporation
(i) increasing the number of authorized shares of the Company's Common Stock,
par value $.01 per share, from 33,000,000 to 50,000,000, and (ii) authorizing
the creation of a new class of stock, designated "Preferred Stock." The
Preferred Stock is issuable in one or more series on terms and conditions to be
established by the Board of Directors of the Company. Designations, preferences,
conversion rights, cumulative rights, and relative, participation, optional and
other rights, including voting rights, qualifications, limitations or
restrictions, thereof, are determined by the Board of Directors of the Company.
CONVERSION OF CONVERTIBLE DEBENTURES IN 1996
During 1995, the Company sold privately $3,685,000 of its 9% convertible
debentures payable on October 31, 1996. During 1996, certain debenture holders
converted $2,760,000 principal amount of debentures into 6,212,308 shares of
common stock. At December 31, 1996, all of the debentures had been converted
into shares of common stock.
WARRANTS OUTSTANDING
In March 1993, in connection with its initial public offering, the Company
issued publicly traded warrants to purchase 1,380,000 shares of the Company's
stock at $1.25, which expire on March 31, 1998.
In 1995, in connection with consulting services rendered, the Company issued
warrants to purchase 400,000 shares of the Company's Common Stock at $1.00 per
share, which expire on
F-13
<PAGE> 64
March 31, 1998, of which warrants to purchase 90,000 shares were outstanding at
December 31, 1997.
In November 1995, the Company issued warrants to purchase 95,000 shares of the
Company's Common Stock at 50% of the Nasdaq closing bid price of the day prior
to exercise, which expire on November 1, 2001, of which warrants to purchase
60,000 shares were outstanding at December 31, 1997.
In March 1997, in connection with the sale of Convertible Debentures, the
Company issued warrants to purchase 89,552 shares of the Company's Common Stock
at $1.34 per share, which expire on March 14, 2004, all of which were
outstanding at December 31, 1997.
In September 1997, in connection with private placements, the Company issued
warrants to purchase 194,632 shares of the Company's Common Stock at $0.50 per
share, and 33,032 shares of the Company's Common Stock at $0.72656 per share
which expire on June 30, 2002, and 100,000 shares of the Company's Common Stock
at $1.00 per share which expire on January 1, 2003, all of which were
outstanding at December 31, 1997.
1997 FINANCINGS
In March 1997, the Company raised net proceeds of approximately $1,380,000 (net
of issuance costs of $120,000) from the private sale of the 7.5% convertible
debentures due February 28, 1999 (the "Debentures"). In connection with the
issuance of the Debentures, the Company also issued warrants to Grayson &
Associates, Inc. ("Grayson") in consideration of certain financial consulting
services performed on behalf of the Company related to the sale of the
Debentures. The warrants entitle the holder thereof to purchase up to 89,552
shares of Common Stock from the Company for a purchase price of $1.34 per share
on or before March 14, 2002. (The warrantholder has certain demand and piggyback
registration rights with respect to the shares that may be issued upon exercise
of the warrants.) In May and June 1997, the holders of the Debentures agreed to
an acceleration of conversion and to hold the Common Stock issued pursuant to
such conversion (the "Early Conversion Shares") in accordance generally with the
original conversion schedule. On June 5, 1997, $800,000 in principal amount of
the Debentures were converted into a total of 833,598 shares of the Company's
Common Stock and on June 30, 1997 the remaining $700,000 in principal amount of
the Debentures were converted into a total of 903,226 shares of the Company's
Common Stock. A total of $29,395 of accrued interest on the converted Debentures
payable June 30, 1997 was paid to holders of the Debentures in the form of
27,604 shares of the Company's Common Stock. In addition, the Company agreed to
certain conversion reset provisions, pursuant to which the holders of the Early
Conversion Shares may receive certain additional shares of the Company's Common
Stock under certain conditions. In accordance with such provisions, one holder
of the Debentures exercised his right to receive an additional 57,720 shares on
October 15, 1997 and 342,330 shares on January 9, 1998, and the other holder of
the Debentures exercised its right to receive an additional 305,922 shares on
November 5, 1997 and 856,521 shares on January 9, 1998. No further rights or
obligations for the issuance of Common Stock are outstanding under the terms of
the Debentures.
F-14
<PAGE> 65
The number of shares of Common Stock issuable upon the conversion of the
Debentures was determined by dividing the principal amount of the Debentures
converted by the Conversion Price, as defined in the Debentures. The conversion
price was defined as the lesser of 115% of Company's Common Stock market price
at issuance of the Debenture (i.e. $1.9191 per share) or 80% of the Company's
Common Stock market price at conversion of the Debenture.
A discount had been recorded at the date of issuance of the Debentures,
resulting from an allocation of proceeds to the discounted conversion feature,
which was to be amortized to interest expense over the conversion period.
Additionally, financing costs related to these Debentures were deferred and
amortized, using the effective interest method, over the term of the Debentures.
The discount and remaining unamortized financing costs of $375,000 and $99,800,
respectively, were written off to interest expense and additional paid in
capital, respectively, upon conversion of the Debentures.
On June 30, 1997, the Company entered into two separate common stock
subscription agreements for the issuance and sale of shares of the Company's
Common Stock pursuant to Regulation D, promulgated under the Securities Act of
1933, as amended (the "Offering"). Pursuant to a Common Stock Purchase Agreement
between the Company and certain investors named therein (the "Investors"), the
Company sold a total of 2,420,000 shares of Common Stock to the Investors for an
aggregate purchase price of $1,210,000, $612,500 of which was subscribed for by
Investors as of June 30, 1997. Pursuant to a Common Stock Purchase Agreement
between the Company and The Tail Wind Fund Ltd. ("Tail Wind"), the Company sold
a total of 412,905 shares of Common Stock to Tail Wind for an aggregate purchase
price of $300,000. The closing on $337,500 principal amount of the Offering to
the Investors and $300,000 principal amount of the Offering to Tail Wind took
place on July 14, 1997; the closing of $547,500 principal amount of the Offering
to the Investors took place on July 17, 1997; and the closing of the remaining
$325,000 principal amount of the Offering to the Investors took place on July
22, 1997.
On August 22, 1997, the Company entered into a Common Stock Subscription
Agreement for the issuance and sale of shares of the Company's Common Stock
pursuant to Regulation D, (the "August Offering.") Pursuant to a Common Stock
Purchase Agreement between the Company and an investor named therein (the
"August Investor") the Company sold a total of 1,250,000 shares of Common Stock
for an aggregate purchase price of $750,000. The Closing of the August Offering
took place on August 26, 1997.
Tail Wind and the August Investor are entitled to receive additional shares of
Common Stock under their respective agreements subject to certain conditions
related to the trading price of the Company's Common Stock during a specified
period. In accordance with such provisions, the August Investor exercised his
right to receive an additional 1,035,714 shares on December 16, 1997. Tail Wind
may still be able to exercise its rights under certain circumstances. The Common
Stock purchased in the Offering and the August Offering (collectively referred
to as "the Offerings") is subject to certain resale restrictions. In connection
with the Offerings, the Company also entered into separate registration rights
agreements with the Investors, Tail Wind, and the August Investor under each of
which the Company is required to file a registration
F-15
<PAGE> 66
statement covering resales of shares of the Common Stock sold in the Offering
within 30 days after the date on which the closing relating to those shares
occurred. A registration statement on Form S-3 covering resales of such shares
was declared effective on September 30, 1997. Because the Company is no longer
eligible to file on Form S-3 due to the delisting of the Company's securities
from Nasdaq, the Company intends to file a post effective amendment to the
registration statement on Form SB-2.
In connection with the Offerings, the Company paid a finder's fee to Grayson &
Associates, Inc. ("Grayson") of $104,800 in cash and warrants to purchase
161,600 shares of the Company's Common Stock for an exercise price of $0.50 per
share, and 33,032 shares of the Company's Common Stock for an exercise price of
$0.72656 per share, all of which expire on June 30, 2002. The Company also
issued to Tail Wind warrants to purchase up to 100,000 shares of the Company's
Common Stock, exercisable at any time from January 1, 1998 to January 1, 2003,
at an exercise price of $1.00 per share. Grayson and Tail Wind have certain
registration rights with respect to the shares of Common Stock that may be
issued upon exercise of their respective warrants. The registration statement on
Form S-3 which was declared effective on September 30, 1997, covered resales of
these shares.
NOTE RECEIVABLE RELATED TO SALE OF STOCK
In January 1992, the Company sold to its President, who resigned in December
1996, 366,912 shares of common stock for $92,970 for a note payable to the
Company in that amount. In 1995, $9,145 of principal on the note was paid. The
note bore interest at 6% per annum, and was originally due December 1994, but
later extended until December 1995. In December 1995, the Company extended the
note for another year. The note was due on December 31, 1996 and, at December
31, 1997, $83,825 plus unpaid accrued interest was outstanding.
8. STOCK-BASED COMPENSATION PLANS
The Company has two stock option plans, a "1992 Plan", under which 350,000
shares of its common stock have been reserved for issuance, and a "1994 Plan",
under which 350,000 shares of its common stock have been reserved for issuance.
Under both plans, the Company's Board of Directors may grant either incentive
stock options with an exercise price of not less than the fair market value of
the common stock at the date of grant or non-qualified stock options with an
exercise price of not less than 85% of the fair market value of the common stock
at the date of grant. The Board of Directors shall determine the period of each
option and the time or times at which options may be exercised and any
restrictions on the transfer of stock issued upon exercise of any options. Both
plans also provide for certain automatic grants to each non-employee director at
a price of 100% of fair market value of the common stock at the time of grant.
Options generally vest over a period of six months and are exercisable over a
period of five years. The following table summarizes all stock option activity
for options granted under the 1992 Plan and the 1994 Plan, and for non-plan
options, during the years ended December 31, 1997 and 1996:
F-16
<PAGE> 67
<TABLE>
<CAPTION>
Number of Option Price
Shares Range
---------- --------------
<S> <C> <C>
Outstanding at December 31, 1995 1,623,500 $0.60 - $6.88
Options granted 302,500 0.43 - 2.38
Options exercised (104,750) 0.60 - 2.38
Options expired or canceled (6,000) 0.60- 1.38
---------- --------------
Outstanding at December 31, 1996 1,815,250 0.43 - 6.88
Options granted 1,750,000 0.41
Options exercised (7,150) 0.43 - 0.60
Options expired or canceled (404,600) 0.43 - 2.38
---------- --------------
Outstanding at December 31, 1997 3,153,500 $0.41 -$ 6.88
========== ==============
</TABLE>
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
The Company has adopted the disclosure provisions of Financial Accounting
Standards Board Statement No. 123 ("SFAS 123") which defines a fair value based
method of accounting for employee stock options and similar equity instruments
and encourages all entities to adopt that method of accounting for all employee
stock-based compensation plans. However, SFAS 123 also allows an entity to
continue to measure compensation cost for such plans using the method of
accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25").
Entities electing to remain with the accounting as prescribed by APB 25 must
make pro forma disclosures of net income and, if presented, earnings per share,
as if the fair value based method of accounting defined in SFAS 123 had been
adopted.
The Company has elected to account for its stock-based compensation plans using
APB 25. The Company has computed, for pro forma disclosure purposes, the value
of options granted during fiscal year 1997 and 1996 using the Black-Scholes
pricing model.
The following weighted average assumptions were used in the computations for the
years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- -----
<S> <C> <C>
Expected dividend yield 0% 0%
Expected stock price volatility 203% 150%
Risk-free interest rate 6% 6%
Expected life of options - years five three
</TABLE>
The total value of options granted during 1997 and 1996 was $805,000 and
$366,200, respectively, which vested upon grant. The weighted average fair value
of options granted during 1997 and 1996 was $0.46 and $1.21, respectively.
F-17
<PAGE> 68
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net loss and net loss per share would
have approximated the pro forma amounts show below:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net loss as reported $ (6,612,212) $ (5,152,399)
Net loss pro forma (7,017,212) (5,518,599)
Loss per share as reported (0.27) (0.26)
Loss per share pro forma (0.28) (0.27)
</TABLE>
The effect of applying SFAS 123 in this pro forma disclosure is not indicative
of future results. SFAS 123 does not apply to awards prior to January 1, 1995.
The following table summarizes the information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------- ------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding at Contractual Price Exercisable at Price
Per Share Dec. 31, 1997 Life (months) Per Share Dec. 31, 1997 Per Share
--------- ------------- ------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$0.41 - $0.60 1,852,000 113.3 $0.41 1,852,000 $0.41
$1.00 - $1.38 1,242,000 17.3 1.08 1,240,500 1.08
$2.19 - $2.63 53,500 16.2 2.49 53,500 2.49
$5.25 - $6.88 6,000 9.0 6.07 6,000 6.07
------------ ------------
3,153,500 3,152,000
============ ============
</TABLE>
9. INCOME TAXES
The Company has a net operating loss carryforward of approximately $21 million
which is available to offset future taxable income, if any, expiring through the
year 2012. The Company is in a net deferred tax asset position and has generated
net operating losses to date. Accordingly, no provision for or benefit from
income taxes has been recorded in the accompanying statements of operations. The
Company will continue to provide a valuation allowance for its deferred tax
assets until it becomes more likely than not, in management's assessment, that
the Company's deferred tax assets will be realized.
10. LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
The Company has a note payable to a bank which bears interest at 6.940% per
annum and is payable in equal annual installments over 60 months. The note is
secured by a time deposit in the
F-18
<PAGE> 69
amount of $120,500. The Company has acquired vehicles under notes requiring 48
to 60 payments of $1,842 per month including interest at 6% to 10% per annum.
The following represents the maturity schedule as of December 31, 1997:
<TABLE>
<S> <C>
1998 $33,779
1999 22,536
2000 24,151
2001 12,714
-------
93,180
Less current
portion 33,779
-------
$59,401
=======
</TABLE>
11. OPERATING LEASES
The Company leases its offices and laboratory spaces, under operating leases
with initial terms of three to seven years. Future minimum lease payments by
year and in the aggregate, under noncancelable operating leases with initial or
remaining lease terms in excess of one year, consisted of the following at
December 31, 1997:
<TABLE>
<CAPTION>
Year Ended
December 31,
<S> <C>
1998 $ 162,475
1999 170,059
2000 169,788
2001 165,254
2002 108,282
Thereafter --
-------------
$ 775,858
=============
</TABLE>
Rent expense for the years ended December 31, 1997 and 1996 was $330,920 and
$301,106, respectively.
F-19
<PAGE> 70
12. SEGMENT INFORMATION
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Product sales:
United States $ 584,467 $ 393,635
Asia 453,308 79,218
United Kingdom 384,521 242,927
----------- -----------
Total $ 1,422,296 $ 715,780
=========== ===========
Operating loss:
United States $(5,734,653) $(4,478,691)
Asia (225,307) (621,958)
United Kingdom (259,349) (122,487)
----------- -----------
Total $(6,219,309) $(5,223,136)
=========== ===========
Identifiable assets:
United States $ 1,422,034 $ 1,687,866
Asia -- 368,562
United Kingdom 217,043 121,773
----------- -----------
Total $ 1,639,077 $ 2,178,201
=========== ===========
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
Luc Hardy, a former director and officer of the Company, filed a complaint in
Federal court against the Company and several individual defendants, including
former directors and officers of the Company, making certain allegations,
including breach of Mr. Hardy's employment agreement with the Company,
intentional interference with contract by the individual defendants, slander and
deceptive trade practices, all arising from his termination. The complaint seeks
damages and punitive damages in an unspecified amount. A jury verdict for the
plaintiff, which is not a final judgment, was rendered on July 25, 1997 in the
approximate amount of $740,000. In October 1997, a hearing was held on the
Company's motions to set aside the jury verdict and for a new trial. The Company
is currently awaiting a decision. There can be no assurance such motions will be
granted or that the final judgment in this case will not have a material adverse
effect on the Company.
In January 1997, Lealos v. Saliva Diagnostic Systems, Inc. was filed in Superior
Court in Clark County in the State of Washington by Ronald Lealos, former
President and CEO of the Company. The complaint in the lawsuit alleged various
breach of contract claims. This lawsuit was dismissed without prejudice as a
prerequisite to a settlement agreement between Mr. Lealos and the Company. The
parties did not reach a settlement and, in February 1998, Mr. Lealos filed a
complaint against the Company in the same court which alleged substantially the
same claims. The complaint seeks damages in the approximate amount of
$1,000,000. Management of the
F-20
<PAGE> 71
Company intends to vigorously defend the Company. In March 1998, the Company
filed a response to the complaint and asserted numerous counterclaims against
Mr. Lealos, including breach of fiduciary duty and conversion. There can be no
assurance that the litigation will not be decided adverse to the Company and
that such an adverse decision would not have a material adverse effect on the
Company.
Immuno chromatography, the principle on which the Company's rapid tests are
based is a technology covered by existing patents. The Company has purchased a
license from the principal patent holder, Unilever PLC of the U.K., to whom
royalty payments are due for all rapid tests sold. To obtain the license, the
Company paid approximately $50,000 and will be responsible for royalty fees
equal to 5% of the net sales in all territories where the Unilever patent is
enforceable. Products covered by the license include those related to HIV,
H.pylori, Tuberculosis and Hepatitis A. Additional analyses may be negotiated as
they become available.
14. RELATED PARTIES
A member of the Board of Directors is a partner in a law firm which provides
legal services to the Company. During 1997 and 1996, the Company incurred
437,863 and 36,572, respectively, in services provided by this law firm.
15. SUBSEQUENT EVENTS
JANUARY 1998 FINANCING
On January 26, 1998, the Company entered into a Securities Purchase Agreement
with Biscount Overseas Limited (the "Investor") for the issuance and sale of
shares of the Company's newly designated Series 1998-A Convertible Preferred
Stock, stated value $1,000 per share (the "1998-A Preferred Stock") (the
"Preferred Offering"). Pursuant to the Securities Purchase Agreement, the
Company sold a total of 1,500 shares of the 1998-A Preferred Stock to the
Investor for an aggregate purchase price of $1,500,000. The Investor is entitled
to receive a number of shares of the Company's Common Stock, upon conversion of
the 1998-A Preferred Stock as determined by dividing the purchase price of the
1998-A Preferred Stock by the lesser of (i) $0.3375 (as adjusted for certain
capital events, which would include a reverse stock split), and (ii) 80% of the
average closing bid price of the Common Stock for the five trading days prior to
conversion. The closing of the Preferred Offering took place on January 26,
1998.
The Securities Purchase Agreement provides for an "Additional Offering" of up to
$1,500,000 of an additional series of the Company's preferred stock (the "1998-B
Preferred Stock") which the Investor may purchase at its option upon
substantially the same terms as the Offering. This option, which must be
exercised by the Investor on or prior to September 26, 1998, is subject to
certain limitations as specified in the Securities Purchase Agreement.
The 1998-A Preferred Stock is convertible into shares of Common Stock on or
prior to January 26, 2000, subject to the following restrictions. The Investor
may convert up to (i) 25% the 1998-A Preferred Stock at any time from and after
April 26, 1998; (ii) 50% of the 1998-A Preferred
F-21
<PAGE> 72
Stock at any time from and after May 26, 1998; (iii) 75% of the 1998-A Preferred
Stock at any time from and after June 25, 1998; and (iv) all of the 1998-A
Preferred Stock at any time from and after July 25, 1998.
In connection with the Preferred Offering, the Company also entered into a
separate registration rights agreement with the Investor under which the Company
is required to file a registration statement covering resales of shares of the
Common Stock issuable upon conversion of the 1998-A Preferred Stock sold in the
Preferred Offering. Such registration statement is required to be filed on or
before February 26, 1998 and be declared effective by the Securities and
Exchange Commission by April 26, 1998. A registration statement on Form S-3 was
filed on February 26, 1998. Because the Company is no longer eligible to file on
Form S-3 due to the delisting of the Company's securities from Nasdaq, the
Company intends to file a registration statement on Form SB-2 covering resales
of these shares.
In connection with the Preferred Offerings, the Company paid a cash fee of 7.5%
of the gross proceeds of the Offering to Aryeh Trading, Inc. ("ATI"), and
attorney's fees in connection with the Preferred Offering equal to 0.5% of the
gross proceeds of the Offering to counsel to ATI. The Company also issued to the
Investor warrants to purchase up to 750,000 shares of Common Stock at an
exercise price of $0.3375 per share, which expire on January 26, 2003 (the
"Warrants"). The holder of the Warrants has certain registration rights with
respect to the shares of Common Stock that may be issued upon exercise of the
Warrants. In addition, the Company has agreed to issue to the Investor
additional warrants to purchase up to 250,000 shares of Common Stock on the same
terms as the Warrants if and when the 1998-B Preferred Stock is issued.
PROPOSED REVERSE STOCK SPLIT
The Company held a special meeting of shareholders on February 26, 1998 for
consideration of an amendment to the Company's Certificate of Incorporation
authorizing a reverse stock split of the Company's Common Stock at a ratio of up
to 10:1. The Board sought such authorization to enable the Company to increase
its per share Common Stock price for Nasdaq compliance purposes. See "Market for
Common Equity and Related Stockholder Matters." The shareholders approved the
amendment by an overwhelming majority. In light of pending developments with
Nasdaq, however, the Board of Directors deferred its decision as to whether to
implement the reverse stock split.
NASDAQ DELISTING
Effective with the close of the market on March 10, 1998, the Company's
securities were delisted from The Nasdaq SmallCap Market for failure to meet the
new Nasdaq continued listing requirements. Trading of the Company's securities
is currently being conducted in the over-the-counter market on the OTC Bulletin
Board. See "Market for Common Equity and Related Stockholder Matters."
F-22
<PAGE> 73
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 575,211 $ 271,312
Accounts receivable, less allowance of
$42,000 1998 and 1997 192,690 154,052
Inventories 458,520 458,177
Prepaid expenses 48,609 51,876
------------ ------------
Total current assets 1,275,030 935,417
Property and equipment, less accumulated
depreciation of $977,661 (1998) and
$995,853 (1997) 370,791 434,457
Deposits 31,125 40,162
Restricted cash 120,500 120,500
Patents and trademarks, less accumulated
amortization of $50,673 (1998) and
$ 48,375 (1997) 106,243 108,541
------------ ------------
$ 1,903,689 $ 1,639,077
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 450,859 $ 670,400
Accrued expenses 1,423,429 1,473,944
Accrued interest payable 68,240 68,240
Current portion of long-term debt and
obligations under capital leases 20,557 33,779
------------ ------------
Total current liabilities 1,963,085 2,246,363
Long-term debt and obligations under capital
leases, net of current portion 54,735 59,401
------------ ------------
Total liabilities 2,017,820 2,305,764
Series 1998-A Convertible Redeemable Preferred
Stock, $.01 par value, 1,500 shares
issued and outstanding 1,157,203 --
Stockholders' equity:
Common stock , $.01 par value, 50,000,000
shares authorized; shares issued and
outstanding: 30,543,475 (1998)
and 29,344,624 (1997) 305,435 293,447
Preferred Stock, $.01 par value,
1,000,000 authorized (1,500 Series
1998-A Convertible issued and
outstanding, see above)
Additional paid-in capital 28,183,935 27,650,149
Note receivable from shareholder for stock (83,825) (83,825)
Accumulated deficit (29,676,879) (28,526,458)
------------ ------------
Total stockholders' equity (1,271,334) (666,687)
------------ ------------
$ 1,903,689 $ 1,639,077
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-23
<PAGE> 74
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues $ 197,578 $ 227,034
Costs and expenses:
Cost of products sold 252,700 259,641
Research and development expense 172,379 194,712
Selling, general and administrative
expense 646,377 953,913
------------ ------------
Loss from operations (873,878) (1,181,232)
Interest income 6,575 5,679
Interest expense (1,405) (8,578)
Other income 43,740 9,230
------------ ------------
Net loss (824,968) (1,174,901)
Dividends including deemed dividends on
preferred stock (325,453) --
------------ ------------
Net loss to common stockholders $ (1,150,421) $ (1,174,901)
============ ============
Basic and diluted net loss per share $ (0.04) $ (0.05)
============ ============
Shares used in basic and diluted
per share calculations 30,423,590 22,040,784
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 75
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (824,968) $(1,174,901)
Adjustments to reconcile net loss to net cash
used in operating activities:
Cumulative foreign translation adjustment (2,476) (10,466)
Depreciation and amortization 68,490 69,053
Gain on sale of property and equipment (43,479) --
Changes in current assets and liabilities:
Accounts receivable (38,638) 136,643
Inventories (343) (7,304)
Prepaid expenses and deposits 12,304 (12,377)
Accounts payable and accrued expenses (270,056) 263,569
----------- -----------
Net cash used in operating activities (1,099,166) (735,783)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 33,482 --
Acquisitions of property and equipment (3,536) (18,984)
----------- -----------
Net cash provided by (used in) investing activities 29,946 (18,984)
CASH FLOWS FROM FINANCING ACTIVITIES:
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 (6,881) (8,376)
----------- -----------
Net cash provided by financing activities 1,373,119 1,371,624
----------- -----------
Net increase (decrease) in cash and cash equivalents 303,899 616,857
Cash and cash equivalents, beginning of period 271,312 776,380
----------- -----------
Cash and cash equivalents, end of period $ 575,211 $ 1,393,237
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,405 $ 8,578
Debt extinguished on disposition of property
and equipment $ 11,007 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 76
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 month periods ended March 31, 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 month period ended March 31, 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.
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>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Raw materials $278,608 $280,438
Work in process 10,023 11,569
Finished goods 169,889 166,170
-------- --------
$458,520 $458,177
======== ========
</TABLE>
3. LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). SFAS 128 changes the standards for computing and presenting earnings per
share (EPS) and supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share." This Statement requires restatement of all prior-period EPS data
presented. The Company implemented SFAS 128 for its year ended December 31,
1997.
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.
As it relates to the Company, the principal differences between the provisions
of SFAS 128 and previous authoritative pronouncements are the exclusion of
common stock equivalents in the determination of Basic Earnings Per Share and
the market price at which common stock equivalents are calculated in the
determination of Diluted Earnings Per Share. The adoption of SFAS 128 had no
effect on previously reported loss per share amounts for the quarter ended March
31, 1997. A net loss was reported in the first quarter of 1997, and accordingly,
the denominator was equal to the weighted average outstanding shares with no
consideration for outstanding options
F-26
<PAGE> 77
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 2,195,500
shares, warrants for the purchase of 1,567,216 shares and 11,842,038 shares
which represent the number of common shares that preferred stock would convert
into at March 31, 1998 were not included in loss per share calculations, because
to do so would have been anti-dilutive.
4. ACCRUED EXPENSES
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Accrued wages and salaries $ 471,948 $ 493,352
Accrued payroll taxes 65,959 92,144
Accrued restructuring expenses 135,522 135,522
Litigation contingencies 750,000 750,000
Other accrued liabilities -- 2,926
---------- ----------
$1,423,429 $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. At March 31, 1998, $197,708 had been recorded as deemed dividends,
relating to the beneficial conversion ratio and offering costs.
In connection with the issuance of the 1998-A Preferred Stock, the Company
issued warrants to purchase up to 750,000 shares of Common Stock at an exercise
price of $0.3375 per share, which expire on January 26, 2003. 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 March 31, 1998, $127,745 had
been recorded as deemed dividends 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.
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
F-27
<PAGE> 78
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 in this case consistent with the jury
verdict will have a material adverse effect on the Company.
In January 1997, Lealos v. Saliva Diagnostic Systems, Inc. was filed in Superior
Court in Clark County in the State of Washington by Ronald Lealos, former
President and CEO of the Company. The complaint in the lawsuit alleged various
breach of contract claims. This lawsuit was dismissed without prejudice as a
prerequisite to a settlement agreement between Mr. Lealos and the Company. The
parties did not reach a settlement and, in February 1998, Mr. Lealos filed a
complaint against the Company in the same court which alleged substantially the
same claims. The complaint seeks damages in the approximate amount of
$1,000,000. Management of the Company intends to vigorously defend the Company.
In March 1998, the Company filed a response to the complaint and asserted
numerous counterclaims against Mr. Lealos, including breach of fiduciary duty
and conversion and 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.
F-28
<PAGE> 79
No dealer, sales representative or other individual has been authorized
to give any information or make any representation not contained in this
Prospectus in connection with this offering other than those contained in this
Prospectus and if given or made, such information or representation must not be
relied upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or solicitation of an offer to buy the Common Stock
by anyone in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to any person to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create an implication that the
information contained herein is correct as of any time subsequent to its date.
TABLE OF CONTENTS
Page
Available Information ................................................... 2
Information Incorporated by Reference ................................... 2
Prospectus Summary ...................................................... 3
Risk Factors ............................................................ 5
The Company ............................................................. 13
Management's Discussion and Analysis .................................... 26
Market for Registrant's Common Equity and Related Stockholder Matters.... 34
Management .............................................................. 35
Executive Compensation and Other Matters ................................ 36
Security Ownership of Certain Beneficial Owners and Management .......... 40
Selling Shareholder ..................................................... 42
Description of Securities ............................................... 43
Plan of Distribution .................................................... 45
Legal Matters ........................................................... 46
Experts ................................................................. 46
Changes in Accountants .................................................. 46
Indemnification of Directors and Officers ............................... 47
Additional Information .................................................. 48
Index to Financial Statements ........................................... F-1
Until June __, 1998 (40 days after the date of the Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This delivery requirement is in addition to the obligation of dealers to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
SALIVA DIAGNOSTIC SYSTEMS, INC.
COMMON STOCK
PROSPECTUS
MAY __, 1998
<PAGE> 80
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law empowers a
corporation to indemnify its directors and officers and to purchase insurance
with respect to liability arising out of their capacity or status as directors
and officers provided that this provision shall not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) arising under Section 174 of the General Corporation Law of Delaware, or
(iv) for any transaction from which the director derived an improper personal
benefit.
The Delaware Corporation Law provides further that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors and officers may be entitled under the corporation's by-laws, any
agreement, vote of shareholders or otherwise.
Article Ten of the Company's Certificate of Incorporation eliminates
the personal liability of directors to the fullest extent permitted by Section
145 of the Delaware Corporation Law.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such persons
in their official capacities if such person acted in good faith and in a manner
that he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES
ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE
COMPANY PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT
IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION
IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS THEREFORE UNENFORCEABLE.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the
securities being registered hereby will be borne by the Company and are
estimated to be as follows:
II-1
<PAGE> 81
<TABLE>
<S> <C>
Registration Fee ............................... $ 1,009.21
Legal Fees ..................................... $ 7,500.00*
Accounting Fees ................................ 2,500.00*
Total ..................................... $ 11,009.21*
</TABLE>
- ---------------------
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Except for the sales pursuant to Regulation S, which were made in
compliance with Regulation S, the sales of the following securities were made in
reliance upon the exemption from the registration provisions of the Securities
Act afforded by Section 4(2) thereof and/or Regulation D promulgated thereunder,
as transactions by an issuer not involving a public offering. The purchasers of
these securities described below acquired them for their own account and not
with a view to any distribution thereof to the public. The certificates
evidencing the securities bear legends stating that the shares may not be
offered, sold or transferred other than pursuant to an effective Registration
Statement under the Securities Act, or an exemption from such registration
requirements. The Company placed stop transfer instructions with its transfer
agent with respect to all such securities.
From October 1995 through November 1995, the Company issued 8% convertible
debentures in an aggregate principal amount of $3,685,000 to the following
persons pursuant to Regulation S under the Securities Act of 1933, as amended.
These convertible debentures were ultimately converted into 7,901,380 shares of
Common Stock.
<TABLE>
<CAPTION>
Principal Amount
Name of 9% Convertible Debenture
- ---- ---------------------------
<S> <C>
RBB Bank AG $850,000
Chumuel Lubkowski 200,000
Yacov Barber 250,000
Panshore Services, SA 500,000
Tula Businesses 500,000
International Entertainment Ventures, Ltd. 60,000
Shulamit Pritzker 600,000
EBC Zurich AG 50,000
Rafael Lapidus 175,000
R. Gukovitzky 200,000
Meritxell Ltd. 100,000
Yechiel Herzl 200,000
</TABLE>
In November 1995, the Company received gross proceeds of $300,000 from
a private offering of its securities. The offering consisted of Units; each Unit
cost $100,000 and contained 100,000 shares of Common Stock and warrants to
purchase an additional 150,000 shares at an
II-2
<PAGE> 82
exercise price of 50% of the closing bid price of the shares of Common Stock as
reported by Nasdaq on the date the holder elects to exercise his warrant. The
persons to whom the Company sold the Units are as set forth below:
<TABLE>
<CAPTION>
Name Number of Units
- ---- ---------------
<S> <C>
Eugene Seymour 1
Joel Scheinbaum 1
Ronald Lealos 0.3
Brian Bramell 0.45
Gary Nathanson 0.125
George Stanton 0.125
</TABLE>
In April 1996, the Company issued to Whale Securities Co., L.P.
("Whale") warrants to purchase 1,000,000 shares of Common Stock for $1.00 per
share, in settlement of a dispute between Whale and the Company. All of such
warrants have been exercised.
In May 1996, the Company issued 6,250 shares of Common Stock to each of
Jack Wolff and Peter Lange, in full settlement of various claims Messrs. Wolff
and Lange had against the Company.
In March 1997, the Company sold $1,500,000 in principal amount of its
7.5% Convertible Debentures due February 28, 1999 (the "Debentures") to The Tail
Wind Fund Ltd. Net cash proceeds to the Company were approximately $1,380,000.
As of June 30, 1997, all of the Debentures were converted to a total of
1,764,428 shares of Common Stock. In October and November 1997, the Company
issued to the holders of the Debentures an additional 363,642 shares of Common
Stock upon exercise of their rights to reset shares under the subscription
agreement for the Debentures. In January 1998, the Company issued to such
holders an additional 1,198,851 reset shares of Common Stock.
In March 1997, the Company issued to Grayson & Associates, Inc. a
five-year warrant to purchase 89,552 shares of Common Stock for an exercise
price of $1.34 per share in consideration of certain financial consulting
services performed on behalf of the Company.
In June and August 1997, the Company sold to certain investors a total
of 4,082,905 shares of its Common Stock for an aggregate purchase price of
$2,260,000. Net cash proceeds to the Company were $2,063,000. The persons to
whom the shares were sold are as set forth below.
<TABLE>
<CAPTION>
Number of Shares
Name of Common Stock
- ---- ----------------
<S> <C>
Mark Alt 100,000
Sterling E. Baker 100,000
Linda Bidell 200,000
Collin Bingham Trust 50,000
</TABLE>
II-3
<PAGE> 83
<TABLE>
<S> <C>
Tanner Payne Boyer Trust 50,000
E. Paul Brodsky, CPA, IRA 25,000
Mary L. Brodsky, IRA 25,000
Carol Bruckner 75,000
Center for Aids Research and 100,000
Training, Inc.
The Covette Community Property 100,000
Trust
David Fitzpatrick 50,000
David Freund 1,250,000
Gerald Grayson 200,000
Dean Greenberg 50,000
Harvey Katzman 100,000
Hollywood Pins Co. Pension Plan 200,000
Alan Lerner 20,000
Michael Lipkin 100,000
Sandy Linka 30,000
Kenneth J. McLachlan 200,000
Gary Nathanson 100,000
Lisa Neuhof 25,000
Jack P. Slovak 50,000
Robert A. Slovak 50,000
Stanton Law Corporation 50,000
Profit Sharing Plan
George L. Stanton 100,000
The Tail Wind Fund Ltd. 412,905
Linda Trester 20,000
WCGMG, Inc., DBPP 100,000
Jacob Zamstein, MD 50,000
</TABLE>
In August 1997, the Company issued to The Tail Wind Fund Ltd. a
five-year warrant to purchase 100,000 shares of it Common Stock for an exercise
price of $1.00 per share in consideration of certain finder's services performed
on behalf of the Company.
In August 1997, the Company issued to Grayson & Associates two
five-year warrants to purchase 161,600 and 33,032 shares of Common Stock for an
exercise price of $0.50 and $0.72656 per share, respectively, in consideration
of certain financial consulting services performed on behalf of the Company.
In December 1997, the Company issued to David Freund 1,035,714 shares
of Common Stock upon exercise of his right to additional reset shares under the
subscription agreement for his August 1997 private placement investment.
In January 1998, the Company sold to Biscount Overseas Limited 1,500
shares of its Series 1998-A Convertible Preferred Stock, stated value $1,000 per
share, for an aggregate purchase price of $1,500,000. Net cash proceeds to the
Company were $1,380,000.
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<PAGE> 84
In April 1998, the Company issued to The Tail Wind Fund Ltd. 1,496,630
shares of Common Stock upon exercise of its right to additional reset shares
under the subscription agreement for its June 1997 purchase of Common Stock.
ITEM 27. EXHIBITS.
Exhibit Description
------- -----------
3.1 Certificate of Incorporation, as amended, incorporated by reference
to Exhibits 2.1 through 2.6 of the Company's Registration Statement
No. 33-46648 filed on Form S-1 (the "Form S-1"); and to Exhibit 2.7
of the Company's Annual Report on Form 10-KSB for its fiscal year
ended December 31, 1995
3.2 Certificate of Amendment, dated February 25, 1997, incorporated by
reference to Exhibit 2.2 of the Company's Annual Report on Form
10-KSB for its fiscal year ended December 31, 1996
3.3 Certificate of Amendment, dated November 21, 1997, 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 (the "1997
10-KSB")
3.4 Company's By-laws, as amended, incorporated by reference to Exhibit
3.4 of the 1997 10-KSB
4.1 Specimen of Certificate Representing Common Stock, incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (Registration No. 33-46648)
4.2 Form of Underwriter's Warrant, incorporated by reference to Exhibit
4.2 of the Form S-1
4.3 7.5% Convertible Debenture due February 28, 1999, issued by the
Company to The Tail Wind Fund, Ltd. on March 11, 1997, incorporated
by reference to Exhibit 4 to the Company's Quarterly Report on Form
10-QSB for its fiscal quarter ended March 31, 1997
4.4 Common Stock Purchase Warrant for 89,552 shares, issued by the
Company to Grayson & Associates on March 14, 1997, incorporated by
reference to Exhibit 4.3 of the Company's Registration Statement on
Form SB-2 (Registration No. 333-26795)
4.5 Letter Agreement dated May 28, 1997 between the Company and The Tail
Wind Fund Ltd., incorporated by reference to Exhibit 4.9 to the
Company's Current Report on Form 8-K dated June 5, 1997 (File No.
000-21284) (the "June 1997 8-K")
4.6 Letter Agreement dated June 27, 1997 between the Company and The
Tail Wind Fund Ltd., incorporated by reference to Exhibit 4.10 to
the June 1997 8-K
4.7 Common Stock Subscription Agreement dated as of June 30, 1997 by and
between the Company and The Tail Wind Fund Ltd., incorporated by
reference to Exhibit 4.2 of the June 1997 8-K
4.8 Common Stock Subscription Agreement dated as of June 30, 1997 by and
between the Company and the investors set forth on Schedule A
thereto,
II-5
<PAGE> 85
incorporated by reference to Exhibit 4.3 of the June 1997 8-K
4.9 Registration Rights Agreement dated as of June 30, 1997 between the
Company and The Tail Wind Fund Ltd., incorporated by reference to
Exhibit 4.4 of the June 1997 8-K
4.10 Form of Registration Rights Agreement dated as of June 30, 1997
between the Company and the investors set forth on Schedule A to the
Common Stock Subscription Agreement dated as of June 30, 1997 by and
between the Company and the investors set forth on Schedule A
thereto, incorporated by reference to Exhibit 4.5 of the June 1997
8-K
4.11 Form of Warrant issued to each of Grayson & Associates, Inc. and The
Tail Wind Fund Ltd., incorporated by reference to Exhibit 4.1 of the
June 1997 8-K
4.12 Common Stock Subscription Agreement dated as of August 22, 1997 by
and between the Company and David Freund, incorporated by reference
to Exhibit 10.5 of Amendment No. 1 to the Company's Registration
Statement on Form S-3 dated September 26, 1997 (Registration No.
333-33429) (the "S-3/A")
4.13 Registration Rights Agreement dated as of August 22, 1997 between
the Company and David Freund, incorporated by reference to Exhibit
10.6 of the S-3/A
4.14 Certificate of Designations, Rights and Preferences of the Series
1998-A Convertible Preferred Stock, incorporated by reference to
Exhibit 4.1 of the Company's Current Report on Form 8-K, dated
January 26, 1998
4.15 Warrant dated as of January 26, 1998 issued to Biscount Overseas
Limited, incorporated by reference to Exhibit 4.3 of the Company's
Registration Statement on Form S-3 dated February 26, 1998
(Registration No. 333-46961) (the "1998 S-3")
5 Opinion of Bryan Cave LLP *
10.1 Consulting Agreement, dated May 20, 1996, between the Company and
International Business Consultants Limited, incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form
10-KSB for its fiscal year ended December 31, 1996 (the "1996
10-KSB")
10.2 Consulting Agreement, dated January 27, 1994, between the Company
and Duke Van Kalken, incorporated by reference to Exhibit 10.16 of
the Company's Annual Report on Form 10-KSB for its fiscal year ended
December 31, 1993 (the "1993 10-KSB")
10.3 Employment Agreement, dated August 9, 1994, between the Company and
David Barnes, incorporated by reference to Exhibit 10.3 to the 1996
10-KSB. #
10.4 1992 Stock Option Plan, incorporated by reference to Exhibit 10.1 of
the Form S-1
10.5 1994 Stock Option Plan, incorporated by reference to Exhibit A of
the Proxy Statement for the Company's 1994 Annual Meeting
10.6 Lease Agreement, dated June 13, 1994, between Technology Parks
Private Limited and Saliva Diagnostic Systems (Singapore) Pte. Ltd.,
incorporated by reference to Exhibit 10.2 of the 1995 10-KSB
10.7 Amendment, dated February 20, 1997, to Lease Agreement, dated June
13,
II-6
<PAGE> 86
1994, between Technology Parks Private Limited and Saliva Diagnostic
Systems (Singapore) Pte. Ltd., incorporated by reference to Exhibit
10.7 to the 1996 10-KSB
10.8 Lease Agreement between the Company and East Ridge Business Park,
incorporated by reference to Exhibit 10.14 of the Form S-1
10.9 Lease Agreement for additional premises between the Company and East
Ridge Business Park, incorporated by reference to Exhibit 10.14 of
the Form S-1
10.10 Amendment, dated June 14, 1996, to Lease Agreement between the
Company and East Ridge Business Park, incorporated by reference to
Exhibit 10.10 to the 1996 10-KSB
10.11 License Agreement, dated march 22, 1994, between the Company and
Orgenics, Ltd., incorporated by reference to Exhibit 10.7 of the
1993 10-KSB
10.12 License Agreement between Saliva Diagnostic Systems, Inc. and Saliva
Diagnostic Systems (Singapore) Pte. Ltd., incorporated by reference
to Exhibit 10.10 to the Company's Annual Report on Form 10-KSB for
its fiscal year ended December 31, 1994 (the "1994 10-KSB")
10.13 Securities Purchase Agreement dated as of January 26, 1998 between
the Company and Biscount Overseas Limited, incorporated by reference
to Exhibit 10.1 of the Company's Current Report on Form 8-K, dated
January 26, 1998 (the "January 8-K")
10.14 Registration Rights Agreement dated as of January 26, 1998 between
the Company and Biscount Overseas Limited, incorporated by reference
to Exhibit 10.2 of the Company's January 8-K
10.15 Placement Agent Agreement dated as of January 26, 1998 between the
Company and Aryeh Trading, Inc. incorporated by reference to Exhibit
10.3 of the January 8-K
10.16 Consulting Agreement, dated December 5, 1997, between the Company
and International Business Consultants Limited, incorporated by
reference to Exhibit 10.16 of the 1997 10-KSB
10.17 Sub-License Agreement by and among Saliva Diagnostic Systems, Pte.
Ltd., Saliva Diagnostic Systems, Inc. Fremont Novo Sciences, L.L.C.
and the Company dated February 21, 1995, incorporated by reference
to Exhibit 10.17 of the 1997 10-KSB
10.18 Amendment to Sub-License Agreement, dated March 8, 1995,
incorporated by reference to Exhibit 10.18 of the 1997 10-KSB
10.19 Agreement between Unilever PLC and the Company dated December 15,
1997, incorporated by reference to Exhibit 10.19 of the 1997 10-KSB
21 List of Significant Subsidiaries, incorporated by reference to
Exhibit 21.1 of the Form S-1
23.1 Consent of Hollander, Gilbert & Co.*
23.2 Consent of Arthur Andersen LLP*
23.3 Consent of Bryan Cave LLP (included in Exhibit 5)
24 Powers of Attorney (included at signature page to this registration
statement)
* To be filed by amendment
II-7
<PAGE> 87
ITEM 28. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions or otherwise, the
Company has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(b) The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10 (a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in this Registration Statement;
(iii) include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of a
Registration Statement in reliance upon Rule 430A and contained in the form of
Prospectus filed by Registrant pursuant to Rule 424
II-8
<PAGE> 88
(b)(1) or (4) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(5) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-9
<PAGE> 89
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has duly caused this
Pre-Effective Amendment No. 1 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Vancouver, State of Washington, on May
15, 1998.
SALIVA DIAGNOSTIC SYSTEMS, INC.
By: /s/ Kenneth J. McLachlan
---------------------------------
Kenneth J. McLachlan
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Pre-Effective Amendment No. 1 has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
Director, President, Chief Executive May 15, 1998
/s/ Kenneth J. McLanchlan Officer, Chief Financial Officer and
- ------------------------------ Chief Accounting Officer
Kenneth J. McLachlan
/s/ Eric F. Stoer Director May 15, 1998
- ------------------------------
Eric F. Stoer
/s/ Eric F. Stoer* Director May 15, 1998
- ------------------------------
Hans Vauthier
Chief Operating Officer and
/s/ Eric F. Stoer* Vice President of Marketing May 15, 1998
- ------------------------------
Paul D. Slowey
</TABLE>
- -----------------------
*Attorney-in-fact
