<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 1O-KSB/A
[X] AMENDMENT TO ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number : 0-21284
SALIVA DIAGNOSTIC SYSTEMS, INC.
(Name of small business issuer in its charter)
DELAWARE 91-1549305
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
11719 NE 95TH STREET
VANCOUVER, WA 98682
(Address of principal executive offices and zip code)
(360) 696-4800
(Issuer's telephone number)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: COMMON STOCK,
PAR VALUE
$.01 PER SHARE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: Yes [ X ] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $1,422,296.
The aggregate market value of voting stock held by non-affiliates of the
Registrant at February 27, 1998 was $6,951,919, computed by reference to the
last traded sale price as reported on The Nasdaq SmallCap Market on such date.
The number of shares outstanding of the Registrant's Common Stock as of
February 27, 1998 was 30,543,475 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements, together with the report thereon of
Arthur Andersen LLP and Hollander, Gilbert & Co. are included in this report as
follows:
<TABLE>
<S> <C>
Report of Arthur Andersen LLP F-1
Report of Hollander, Gilbert & Co. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations - F-4
For the Years Ended December 31, 1997 and 1996
Consolidated Statement of Stockholders' Equity - F-5
For the Years Ended December 31, 1997 and 1996
Consolidated Statements of Cash Flows - F-6
For the Years Ended December 31, 1997 and 1996
Notes to Consolidated Financial Statements F-7
</TABLE>
1
<PAGE> 3
Report of Independent Public Accountants
To the Board of Directors and Shareholders of
Saliva Diagnostic Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Saliva Diagnostic
Systems, Inc. (an Oregon Corporation) as of December 31, 1997, and the related
consolidated statement of operations, stockholders' equity and cash flows for
the year ended December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Saliva Diagnostic
Systems, Inc. as of December 31, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Arthur Andersen LLP
Portland, Oregon
March 23, 1998
F-1
<PAGE> 4
Report of Independent Public Accountants
To the Board of Directors and Stockholders
Saliva Diagnostic Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Saliva Diagnostic
Systems, Inc. and subsidiaries as of December 31, 1996, and the related
consolidated statement of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Saliva Diagnostic
Systems, Inc. and subsidiaries as of December 31, 1996 and the results of
operations, stockholders' equity and cash flows for the year then ended, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's significant operating losses and significant
capital requirements raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Hollander, Gilbert & Co.
Los Angeles, California
March 21, 1997
F-2
<PAGE> 5
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 271,312 $ 776,380
Accounts receivable, less allowance of $42,000(1997)
and $0 (1996) 154,052 178,436
Inventories 458,177 268,431
Prepaid expenses 51,876 34,425
------------ ------------
Total current assets 935,417 1,257,672
Property and equipment, less accumulated
depreciation of $995,853(1997) and $792,309(1996) 434,457 493,649
Deposits 40,162 188,647
Restricted cash 120,500 120,500
Patents and trademarks, less accumulated
amortization of $48,375 (1997) and $39,183 (1996) 108,541 117,733
------------ ------------
$ 1,639,077 $ 2,178,201
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 670,400 $ 277,292
Accrued expenses 1,473,944 540,781
Accrued interest payable 68,240 68,240
Current portion of long-term debt and
obligations under capital leases 33,779 35,057
------------ ------------
Total current liabilities 2,246,363 921,370
Long-term debt and obligations under capital
leases, net of current portion 59,401 96,199
------------ ------------
Total liabilities 2,305,764 1,017,569
Commitments and contingencies (Note 13)
Shareholders' equity:
Preferred stock, no par value, 1,000,000 shares
authorized (1997), none issued and
outstanding - -
Common stock, $.01 par value, 50,000,000
shares authorized (1997), 25,000,000 shares
authorized (1996), issued and outstanding:
29,344,624 (1997) and 22,090,785 (1996) 293,447 220,908
Additional paid-in capital 27,701,417 22,998,052
Note receivable from shareholder for stock (83,825) (83,825)
Currency translation adjustment (51,268) (60,257)
Accumulated deficit (28,526,458) (21,914,246)
------------ ------------
Total stockholders' equity (666,687) 1,160,632
------------ ------------
$ 1,639,077 $ 2,178,201
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 6
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-4
<PAGE> 7
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 inancial statements.
F-5
<PAGE> 8
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-6
<PAGE> 9
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Saliva Diagnostic Systems, Inc. (the "Company") develops rapid immunoassays
utilizing immunochromatography for the detection of antibodies to selected
pathogens, such as the HIV, the virus that causes AIDS, and Helicobacter pylori,
a bacteria linked to peptic ulcers and gastric cancer. In addition, the Company
develops proprietary specimen collection devices and other diagnostic devices.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, SDS International, Ltd. and Saliva Diagnostic
Systems (Asia) Ltd. All significant intercompany accounts and transactions have
been eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of cash and short-term highly liquid
investments purchased with original or remaining maturities of three months or
less.
INVENTORIES
Inventories are stated at the lower of cost or market determined on a first-in,
first-out (FIFO) basis.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed on the
straight-line method based upon the estimated useful life of the assets.
Leasehold improvements are amortized over the life of the related lease.
Useful lives are generally as follows:
Office furniture and equipment five to seven years
Machinery and equipment seven years
Exhibits seven years
Vehicles five years
PATENTS AND TRADEMARKS
The costs of patents and trademarks are being amortized on the straight line
method over 17 years.
REVENUE RECOGNITION
Revenue is recognized when products are shipped to customers.
PRODUCT LIABILITY
The Company has not established any allowance for product liability at present
because of the limited distribution of its product and limited history which
reflect no instance of problems with product liability.
RESEARCH AND DEVELOPMENT
Research and development expenditures include those costs associated with the
Company's on-going research and development activities. All research and
development costs are expensed as incurred.
F-7
<PAGE> 10
INCOME TAXES
The Company is in a net deferred tax asset position and has generated net
operating losses to date. Accordingly, no provision for or benefit from income
taxes has been recorded in the accompanying statements of operations. The
Company will continue to provide a valuation allowance for its deferred tax
assets until it becomes more likely than not, in management's assessment, that
the Company's deferred tax assets will be realized.
CURRENCY TRANSLATION
The local currency is the functional currency in the Company's foreign
subsidiaries. Assets and liabilities of the foreign subsidiaries are translated
to U.S. dollars at current rates of exchange, and revenues and expenses are
translated using weighted average rates during the year. Foreign currency
translation adjustments are included as a separate component of shareholders'
equity. Foreign currency transaction gains and losses are included as a
component of other income and expense, in the consolidated statements of
operations.
LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). SFAS 128 changes the standards for computing and presenting earnings per
share (EPS) and supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share." SFAS 128 simplifies the standards for computing earnings per share
and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. This Statement requires restatement of all
prior-period EPS data presented.
As it relates to the Company, the principal differences between the provisions
of SFAS 128 and previous authoritative pronouncements are the exclusion of
common stock equivalents in the determination of Basic Earnings Per Share and
the market price at which common stock equivalents are calculated in the
determination of Diluted Earnings Per Share.
Basic earnings per common share is computed using the weighted average number of
shares of common stock outstanding for the period. Diluted earnings per common
share is computed using the weighted average number of shares of common stock
and dilutive common equivalent shares related to stock options and warrants
outstanding during the period.
The adoption of SFAS 128 had no effect on previously reported loss per share
amounts for the year ended December 31, 1996. For the years ended December 31,
1997 and 1996, primary loss per share was the same as basic loss per share and
fully diluted loss per share was the same as diluted loss per share. A net loss
was reported in 1997 and 1996, and accordingly, in those years the denominator
was equal to the weighted average outstanding shares with no consideration for
outstanding options and warrants to purchase shares of the Company's common
stock, because to do so would have been anti-dilutive. Stock options for the
purchase of 3,153,500 and 1,815,250 shares at December 31, 1997 and 1996,
respectively, and warrants for the purchase of 1,947,216 and 1,530,000 shares at
December 31, 1997 and 1996, respectively, were not included in loss per share
calculations, because to do so would have been anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short-term nature of
these instruments.
F-8
<PAGE> 11
Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument when available. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit risk
consist primarily of trade receivables from large domestic and foreign
companies. Sales to one customer accounted for approximately 17% of total
product sales in 1997. Sales to three customers, accounted for approximately
20%, 18%, and 11% respectively, of total product sales in 1996. At December 31,
1997 accounts receivable from two customers comprised 32% and 27%, respectively
of total net accounts receivable. The Company's foreign sales in 1997 and 1996
were 41% and 55% of total sales, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Actual results could differ
from those estimates.
RECLASSIFICATIONS
Certain 1996 balances have been reclassified to conform with the current year's
presentation.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), which establishes requirements
for disclosure of comprehensive income and is effective for the Company's fiscal
year ending December 31, 1998. Reclassification of earlier financial statements
for comparative purposes is required. The Company believes the implementation of
this statement will not have a material effect on its financial statement
disclosures.
2. SUBSTANTIAL DOUBT ABOUT ABILITY TO CONTINUE AS A GOING CONCERN
SIGNIFICANT OPERATING LOSSES - ACCUMULATED DEFICIT
Since July 1990, the Company has been engaged almost exclusively in research and
development activities focused on developing proprietary saliva based collection
devices and rapid assays for infectious diseases. Other than sales of the
Company's collection devices, the Company has not yet commenced any significant
product commercialization. The Company has incurred significant operating losses
since its inception, resulting in an accumulated deficit of $28,526,458 at
December 31, 1997. Such losses are expected to continue for the foreseeable
future and until such time, if ever, as the Company is able to attain sales
levels sufficient to support its operations. There can be no assurance that the
Company will achieve or maintain profitability in the future. Despite the
Company's preferred stock financing in January 1998 (see Note 15), substantial
additional financing will be required in 1998. There can be no assurances that
such financing will be achieved.
The Company's capital requirements have been and will continue to be
significant. The Company's capital base is smaller than that of many of its
competitors, and there can be no assurance that the Company's cash resources
will be able to sustain its business. The Company is dependent upon its effort
to raise capital to finance its future operations, including the cost of
development, manufacturing and marketing of its products, to conduct clinical
trials and submissions for FDA approval of its products and to continue the
design and development of its new products. Marketing, manufacturing and
clinical testing may require capital resources substantially greater than the
resources available to the Company. The Company will continue to seek public or
private placement of its equity securities and corporate partners to develop
products. The Company's future capital needs will depend upon numerous factors,
including the progress of the approval for sale of the Company's products in
various countries, including the United States, the extent and timing of the
acceptance of the Company's products, the cost of marketing and manufacturing
activities and the amount of revenues generated from operations, none of which
can be predicted with much certainty. The accompanying consolidated financial,
statements have been prepared assuming that the Company will continue as a
going concern. The Company's significant operating losses and significant
capital requirements raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
F-9
<PAGE> 12
3. RESTRUCTURING
Results of operations of 1997 included a charge associated with a restructuring
plan designed to reduce costs and improve manufacturing and operational
efficiencies. Under the plan, the Company closed its Singapore manufacturing
operations in October 1997. The Company plans to out-source manufacturing
previously performed in Singapore to qualified sources and locations. Total
costs accrued in connection with the restructuring at the end of the third
quarter of 1997 were $194,000 and included approximately $100,000 related to
termination of employees, approximately $37,000 associated with the settlement
of the lease obligation in Singapore, $47,000 for other costs related to closing
the Singapore location and $10,000 non-cash charge for the write-off of
leasehold improvements. The change in the restructuring reserve during the
fourth quarter of 1997 consisted of approximately $61,000 of additional employee
termination costs and a $24,000 charge related to portion of the cumulative
foreign translation account related to Singapore operation.
4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996
------------ -------------
<S> <C> <C>
Raw materials $ 280,438 $ 253,000
Work in process 11,569 2,495
Finished goods 166,170 12,936
---------------- -----------------
$ 458,177 $ 268,431
================ =================
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1996
------------ -------------
<S> <C> <C>
Office furniture and equipment $ 57,988 $ 114,041
Machinery and equipment 1,105,025 861,957
Leasehold improvements 71,568 97,582
Vehicles 164,774 181,423
Exhibits 30,955 30,955
------------ -------------
1,430,310 1,285,958
Less: accumulated depreciation
and amortization (995,853) (792,309)
------------ -------------
$ 434,457 $ 493,649
============ =============
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1996
------------- ------------
<S> <C> <C>
Accrued wages and salaries $ 493,352 $ 149,599
Accrued payroll taxes 92,144 131,681
Accrued restructuring expenses 135,522 -
Accrued litigation expenses 750,000 250,000
Other accrued liabilities 2,926 9,501
------------- ------------
$ 1,473,944 $ 540,781
============= ============
</TABLE>
F-10
<PAGE> 13
7. SHAREHOLDERS' EQUITY
On February 20, 1997, at a Special Meeting of Shareholders, the shareholders of
the Company approved an amendment to the Company's Certificate of Incorporation
increasing the number of authorized shares of the Company's Common Stock, par
value $.01 per share, from 25,000,000 to 33,000,000 shares.
On November 21, 1997, at a Special Meeting of Shareholders, the shareholders of
the Company approved an amendments to the Company's Certificate of Incorporation
(i) increasing the number of authorized shares of the Company's Common Stock,
par value $.01 per share, from 33,000,000 to 50,000,000, and (ii) authorizing
the creation of a new class of stock, designated "Preferred Stock." The
Preferred Stock is issuable in one or more series on terms and conditions to be
established by the Board of Directors of the Company. Designations, preferences,
conversion rights, cumulative rights, and relative, participation, optional and
other rights, including voting rights, qualifications, limitations or
restrictions, thereof, are determined by the Board of Directors of the Company.
CONVERSION OF CONVERTIBLE DEBENTURES IN 1996
During 1995, the Company sold privately $3,685,000 of its 9% convertible
debentures payable on October 31, 1996. During 1996, certain debenture holders
converted $2,760,000 principal amount of debentures into 6,212,308 shares of
common stock. At December 31, 1996, all of the debentures had been converted
into shares of common stock.
WARRANTS OUTSTANDING
In March 1993, in connection with its initial public offering, the Company
issued publicly traded warrants to purchase 1,380,000 shares of the Company's
stock at $1.25, which expire on March 31, 1998.
In 1995, in connection with consulting services rendered, the Company issued
warrants to purchase 400,000 shares of the Company's Common Stock at $1.00 per
share, which expire on March 31, 1998, of which warrants to purchase 90,000
shares were outstanding at December 31, 1997.
In November 1995, the Company issued warrants to purchase 95,000 shares of the
Company's Common Stock at 50% of the Nasdaq closing bid price of the day prior
to exercise, which expire on November 1, 2001, of which warrants to purchase
60,000 shares were outstanding at December 31, 1997.
In March 1997, in connection with the sale of Convertible Debentures, the
Company issued warrants to purchase 89,552 shares of the Company's Common Stock
at $1.34 per share, which expire on March 14, 2004, all of which were
outstanding at December 31, 1997.
In September 1997, in connection with private placements, the Company issued
warrants to purchase 194,632 shares of the Company's Common Stock at $0.50 per
share, and 33,032 shares of the Company's Common Stock at $0.72656 per share
which expire on June 30, 2002, and 100,000 shares of the Company's Common Stock
at $1.00 per share which expire on January 1, 2003, all of which were
outstanding at December 31, 1997.
1997 FINANCINGS
In March 1997, the Company raised net proceeds of approximately $1,380,000 (net
of issuance costs of $120,000) from the private sale of the 7.5% convertible
debentures due February 28, 1999 (the "Debentures"). In connection with the
issuance of the Debentures, the Company also issued warrants to Grayson &
Associates, Inc. ("Grayson") in consideration of certain financial consulting
services performed
F-11
<PAGE> 14
on behalf of the Company related to the sale of the Debentures. The warrants
entitle the holder thereof to purchase up to 89,552 shares of Common Stock from
the Company for a purchase price of $1.34 per share on or before March 14, 2002.
(The warrantholder has certain demand and piggyback registration rights with
respect to the shares that may be issued upon exercise of the warrants.) In May
and June 1997, the holders of the Debentures agreed to an acceleration of
conversion and to hold the Common Stock issued pursuant to such conversion (the
"Early Conversion Shares") in accordance generally with the original conversion
schedule. On June 5, 1997, $800,000 in principal amount of the Debentures were
converted into a total of 833,598 shares of the Company's Common Stock and on
June 30, 1997 the remaining $700,000 in principal amount of the Debentures were
converted into a total of 903,226 shares of the Company's Common Stock. A total
of $29,395 of accrued interest on the converted Debentures payable June 30, 1997
was paid to holders of the Debentures in the form of 27,604 shares of the
Company's Common Stock. In addition, the Company agreed to certain conversion
reset provisions, pursuant to which the holders of the Early Conversion Shares
may receive certain additional shares of the Company's Common Stock under
certain conditions. In accordance with such provisions, one holder of the
Debentures exercised his right to receive an additional 57,720 shares on October
15, 1997 and 342,330 shares on January 9, 1998, and the other holder of the
Debentures exercised its right to receive an additional 305,922 shares on
November 5, 1997 and 856,521 shares on January 9, 1998. No further rights or
obligations for the issuance of Common Stock are outstanding under the terms of
the Debentures.
The number of shares of Common Stock issuable upon the conversion of
the Debentures was determined by dividing the principal amount of the
Debentures converted by the Conversion Price, as defined in the Debentures. The
conversion price was defined as the lesser of 115% of Company's Common Stock
market price at issuance of the Debenture (i.e. $1.9191 per share) or 80% of the
Company's Common Stock market price at conversion of the Debenture.
A discount had been recorded at the date of issuance of the Debentures,
resulting from an allocation of proceeds to the discounted conversion feature,
which was to be amortized to interest expense over the conversion period.
Additionally, financing costs related to these Debentures were deferred and
amortized, using the effective interest method, over the term of the Debentures.
The discount and remaining unamortized financing costs of $375,000 and $99,800,
respectively, were written off to interest expense and additional paid in
capital, respectively, upon conversion of the Debentures.
On June 30, 1997, the Company entered into two separate common stock
subscription agreements for the issuance and sale of shares of the Company's
Common Stock pursuant to Regulation D, promulgated under the Securities Act of
1933, as amended (the "Offering"). Pursuant to a Common Stock Purchase Agreement
between the Company and certain investors named therein (the "Investors"), the
Company sold a total of 2,420,000 shares of Common Stock to the Investors for an
aggregate purchase price of $1,210,000, $612,500 of which was subscribed for by
Investors as of June 30, 1997. Pursuant to a Common Stock Purchase Agreement
between the Company and The Tail Wind Fund Ltd. ("Tail Wind"), the Company sold
a total of 412,905 shares of Common Stock to Tail Wind for an aggregate purchase
price of $300,000. The closing on $337,500 principal amount of the Offering to
the Investors and $300,000 principal amount of the Offering to Tail Wind took
place on July 14, 1997; the closing of $547,500 principal amount of the Offering
to the Investors took place on July 17, 1997; and the closing of the remaining
$325,000 principal amount of the Offering to the Investors took place on July
22, 1997.
On August 22, 1997, the Company entered into a Common Stock Subscription
Agreement for the issuance and sale of shares of the Company's Common Stock
pursuant to Regulation D, (the "August Offering.") Pursuant to a Common Stock
Purchase Agreement between the Company and an investor named therein (the
"August Investor") the Company sold a total of 1,250,000 shares of Common Stock
for an aggregate purchase price of $750,000. The Closing of the August Offering
took place on August 26, 1997.
Tail Wind and the August Investor are entitled to receive additional shares of
Common Stock under their respective agreements subject to certain conditions
related to the trading price of the Company's Common Stock during a specified
period. In accordance with such provisions, the August Investor exercised his
right
F-12
<PAGE> 15
to receive an additional 1,035,714 shares on December 16, 1997. Tail Wind may
still be able to exercise its rights under certain circumstances. The Common
Stock purchased in the Offering and the August Offering (collectively referred
to as "the Offerings") is subject to certain resale restrictions. In connection
with the Offerings, the Company also entered into separate registration rights
agreements with the Investors, Tail Wind, and the August Investor under each of
which the Company is required to file a registration statement covering resales
of shares of the Common Stock sold in the Offering within 30 days after the
date on which the closing relating to those shares occurred. A registration
statement on Form S-3 covering resales of such shares was declared effective on
September 30, 1997. Because the Company is no longer eligible to file on Form
S-3 due to the delisting of the Company's securities from Nasdaq, the Company
intends to file a post effective amendment to the registration statement on
Form SB-2.
In connection with the Offerings, the Company paid a finder's fee to Grayson &
Associates, Inc. ("Grayson") of $104,800 in cash and warrants to purchase
161,600 shares of the Company's Common Stock for an exercise price of $0.50 per
share, and 33,032 shares of the Company's Common Stock for an exercise price of
$0.72656 per share, all of which expire on June 30, 2002. The Company also
issued to Tail Wind warrants to purchase up to 100,000 shares of the Company's
Common Stock, exercisable at any time from January 1, 1998 to January 1, 2003,
at an exercise price of $1.00 per share. Grayson and Tail Wind have certain
registration rights with respect to the shares of Common Stock that may be
issued upon exercise of their respective warrants. The registration statement on
Form S-3 which was declared effective on September 30, 1997, covered resales of
these shares.
NOTE RECEIVABLE RELATED TO SALE OF STOCK
In January 1992, the Company sold to its President, who resigned in December
1996, 366,912 shares of common stock for $92,970 for a note payable to the
Company in that amount. In 1995, $9,145 of principal on the note was paid. The
note bore interest at 6% per annum, and was originally due December 1994, but
later extended until December 1995. In December 1995, the Company extended the
note for another year. The note was due on December 31, 1996 and, at December
31, 1997, $83,825 plus unpaid accrued interest was outstanding.
8. STOCK-BASED COMPENSATION PLANS
The Company has two stock option plans, a "1992 Plan", under which 350,000
shares of its common stock have been reserved for issuance, and a "1994 Plan",
under which 350,000 shares of its common stock have been reserved for issuance.
Under both plans, the Company's Board of Directors may grant either incentive
stock options with an exercise price of not less than the fair market value of
the common stock at the date of grant or non-qualified stock options with an
exercise price of not less than 85% of the fair market value of the common stock
at the date of grant. The Board of Directors shall determine the period of each
option and the time or times at which options may be exercised and any
restrictions on the transfer of stock issued upon exercise of any options. Both
plans also provide for certain automatic grants to each non-employee director at
a price of 100% of fair market value of the common stock at the time of grant.
Options generally vest over a period of six months and are exercisable over a
period of five years. The following table summarizes all stock option activity
for options granted under the 1992 Plan and 1994 Plan, and for non-plan
options, during the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Number of Option Price
Shares Range
---------------- -----------------
<S> <C> <C>
Outstanding at December 31, 1995 1,623,500 $0.60 - $6.88
Options granted 302,500 0.43 - 2.38
Options exercised (104,750) 0.60 - 2.38
Options expired or canceled (6,000) 0.60 - 1.38
---------------- -----------------
Outstanding at December 31, 1996 1,815,250 0.43 - 6.88
Options granted 1,750,000 0.41
Options exercised (7,150) 0.43 - 0.60
Options expired or canceled (404,600) 0.43 - 2.38
---------------- -----------------
Outstanding at December 31, 1997 3,153,500 $0.41 - $6.88
================ =================
</TABLE>
F-13
<PAGE> 16
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 $405,000 and
$366,200, respectively, which vested upon grant. The weighted average fair value
of options granted during 1997 and 1996 was $0.46 and $1.21, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net loss and net loss per share would
have approximated the pro forma amounts show below:
<TABLE>
<CAPTION>
1997 1996
---------------- -----------------
<S> <C> <C>
Net loss as reported $ (6,612,212) $ (5,152,399)
Net loss pro forma (7,017,212) (5,518,599)
Loss per share as reported (0.27) (0.26)
Loss per share pro forma (0.28) (0.27)
</TABLE>
The effect of applying SFAS 123 in this pro forma disclosure is not indicative
of future results. SFAS 123 does not apply to awards prior to January 1, 1995.
F-14
<PAGE> 17
The following table summarizes the information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------- ---------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding at Contractual Price Exercisable at Price
Per Share Dec. 31, 1997 Life (months) Per Share Dec. 31, 1997 Per Share
--------- ------------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$0.41 - $0.60 1,852,000 113.3 $0.41 1,852,000 $0.41
$1.00 - $1.38 1,242,000 17.3 1.08 1,240,500 1.08
$2.19 - $2.63 53,500 16.2 2.49 53,500 2.49
$5.25 - $6.88 6,000 9.0 6.07 6,000 6.07
------------ ------------
3,153,500 3,152,000
============ ============
</TABLE>
9. INCOME TAXES
The Company has a net operating loss carryforward of approximately $21 million
which is available to offset future taxable income, if any, expiring through the
year 2012. The Company is in a net deferred tax asset position and has generated
net operating losses to date. Accordingly, no provision for or benefit from
income taxes has been recorded in the accompanying statements of operations. The
Company will continue to provide a valuation allowance for its deferred tax
assets until it becomes more likely than not, in management's assessment, that
the Company's deferred tax assets will be realized.
10. LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
The Company has a note payable to a bank which bears interest at 6.940% per
annum and is payable in equal annual installments over 60 months. The note is
secured by a time deposit in the amount of $120,500. The Company has acquired
vehicles under notes requiring 48 to 60 payments of $1,842 per month including
interest at 6% to 10% per annum.
The following represents the maturity schedule as of December 31, 1997:
<TABLE>
<S> <C>
1998 $ 33,779
1999 22,536
2000 24,151
2001 12,714
---------
93,180
Less current
portion 33,779
---------
$ 59,401
=========
</TABLE>
F-15
<PAGE> 18
11. OPERATING LEASES
The Company leases its offices and laboratory spaces, under operating leases
with initial terms of three to seven years. Future minimum lease payments by
year and in the aggregate, under noncancelable operating leases with initial or
remaining lease terms in excess of one year, consisted of the following at
December 31, 1997:
<TABLE>
<CAPTION>
Year Ended December
31,
<S> <C>
1998 $ 162,475
1999 170,059
2000 169,788
2001 165,254
2002 108,282
Thereafter -
-----------
$ 775,858
===========
</TABLE>
Rent expense for the years ended December 31, 1997 and 1996 was $330,920 and
$301,106, respectively.
12. SEGMENT INFORMATION
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Product sales:
United States $ 584,467 $ 393,635
Asia 453,308 79,218
United Kingdom 384,521 242,927
-------------- --------------
Total $ 1,422,296 $ 715,780
============== ==============
Operating loss:
United States $ (5,734,653) $ (4,478,691)
Asia (225,307) (621,958)
United Kingdom (259,349) (122,487)
-------------- --------------
Total $ (6,219,309) $ (5,223,136)
============== ==============
Identifiable assets:
United States $ 1,422,034 $ 1,687,866
Asia - 368,562
United Kingdom 217,043 121,773
-------------- --------------
Total $ 1,639,077 $ 2,178,201
============== ==============
</TABLE>
F-16
<PAGE> 19
13. COMMITMENTS AND CONTINGENCIES
Luc Hardy, a former director and officer of the Company, filed a complaint in
Federal court against the Company and several individual defendants, including
former directors and officers of the Company, making certain allegations,
including breach of Mr. Hardy's employment agreement with the Company,
intentional interference with contract by the individual defendants, slander and
deceptive trade practices, all arising from his termination. The complaint seeks
damages and punitive damages in an unspecified amount. A jury verdict for the
plaintiff, which is not a final judgment, was rendered on July 25, 1997 in the
approximate amount of $740,000. In October 1997, a hearing was held on the
Company's motions to set aside the jury verdict and for a new trial. The Company
is currently awaiting a decision. There can be no assurance such motions will be
granted or that the final judgment in this case will not have a material adverse
effect on the Company.
In January 1997, Lealos v. Saliva Diagnostic Systems, Inc. was filed in Superior
Court in Clark County in the State of Washington by Ronald Lealos, former
President and CEO of the Company. The complaint in the lawsuit alleged various
breach of contract claims. This lawsuit was dismissed without prejudice as a
prerequisite to a settlement agreement between Mr. Lealos and the Company. The
parties did not reach a settlement and, in February 1998, Mr. Lealos filed a
complaint against the Company in the same court which alleged substantially the
same claims. The complaint seeks damages in the approximate amount of
$1,000,000. Management of the Company intends to vigorously defend the Company.
In March 1998, the Company filed a response to the complaint and asserted
numerous counterclaims against Mr. Lealos, including breach of fiduciary duty
and conversion and seeks damages in excess of $1,500,000. There can be no
assurance that the litigation will not be decided adverse to the Company and
that such an adverse decision would not have a material adverse effect on the
Company.
Immuno chromatography, the principle on which the Company's rapid tests are
based is a technology covered by exising patents. The Company has secured a
license from the principal patent holder, Unilever PLC of the U.K., to whom
royalty payments are due for all rapid tests sold. To obtain the license, the
Company paid approximately $50,000 and will be responsible for royalty fees
equal to 5% of the net sales in all territories where the Unilever patent is
enforceable. Products covered by the license include those related to HIV,
H.pylori, Tuberculosis and Hepatitis A.
14. RELATED PARTIES
A member of the Board of Directors of the Company is a partner in a law firm
which provides legal services to the Company. During 1997 and 1996, the
Company incurred 437,863 and 36,572, respectively, in services provided
by this law firm.
15. SUBSEQUENT EVENTS
JANUARY 1998 FINANCING
On January 26, 1998, the Company entered into a Securities Purchase Agreement
with Biscount Overseas Limited (the "Investor") for the issuance and sale of
shares of the Company's newly designated Series 1998-A Convertible Preferred
Stock, stated value $1,000 per share (the "1998-A Preferred Stock") (the
"Preferred Offering"). Pursuant to the Securities Purchase Agreement, the
Company sold a total of 1,500 shares of the 1998-A Preferred Stock to the
Investor for an aggregate purchase price of $1,500,000. The Investor is entitled
to receive a number of shares of the Company's Common Stock, upon conversion of
the 1998-A Preferred Stock as determined by dividing the purchase price of the
1998-A Preferred Stock by the lesser of (i) $0.3375 (as adjusted for certain
capital events, which would include a reverse stock split), and (ii) 80% of the
average closing bid price of the Common Stock for the five trading days prior to
conversion. The closing of the Preferred Offering took place on January 26,
1998.
The Securities Purchase Agreement provides for an "Additional Offering" of up
to $1,500,000 of an additional series of the Company's preferred stock (the
"1998-B Preferred Stock") which the Investor may purchase at its option upon
substantially the same terms as the Offering. This option, which must be
exercised by the Investor on or prior to September 26, 1998, is subject to
certain limitations as specified in the Securities Purchase Agreement.
The 1998-A Preferred Stock is convertible into shares of Common Stock on or
prior to January 26, 2000, subject to the following restrictions. The Investor
may convert up to (i) 25% the 1998-A Preferred Stock at any time from and after
April 26, 1998; (ii) 50% of the 1998-A Preferred Stock at any time from and
after May 26, 1998; (iii) 75% of the 1998-A Preferred Stock at any time from and
after June 25, 1998; and (iv) all of the 1998-A Preferred Stock at any time from
and after July 25, 1998.
In connection with the Preferred Offering, the Company also entered into a
separate registration rights agreement with the Investor under which the Company
is required to file a registration statement covering resales of shares of the
Common Stock issuable upon conversion of the 1998-A Preferred Stock sold in the
Preferred Offering. Such registration statement is required to be filed on or
before February 26, 1998 and be
F-17
<PAGE> 20
declared effective by the Securities and Exchange Commission by April 26, 1998.
A registration statement on Form S-3 was filed on February 26, 1998. Because the
Company is no longer eligible to file on Form S-3 due to the delisting of the
Company's securities from Nasdaq, the Company intends to file a registration
statement on Form SB-2 covering resales of these shares.
In connection with the Preferred Offerings, the Company paid a cash fee of 7.5%
of the gross proceeds of the Offering to Aryeh Trading, Inc. ("ATI"), and
attorney's fees in connection with the Preferred Offering equal to 0.5% of the
gross proceeds of the Offering to counsel to ATI. The Company also issued to the
Investor warrants to purchase up to 750,000 shares of Common Stock at an
exercise price of $0.3375 per share, which expire on January 26, 2003 (the
"Warrants"). The holder of the Warrants has certain registration rights with
respect to the shares of Common Stock that may be issued upon exercise of the
Warrants. In addition, the Company has agreed to issue to the Investor
additional warrants to purchase up to 250,000 shares of Common Stock on the same
terms as the Warrants if and when the 1998-B Preferred Stock is issued.
The Company held a special meeting of shareholders on February 26, 1998 for
consideration of an amendment to the Company's Certificate of Incorporation
authorizing a reverse stock split of the Company's Common Stock at a ratio of up
to 10:1. The Board sought such authorization to enable the Company to increase
its per share Common Stock price for Nasdaq compliance purposes. (See Item 5 -
"Market for Common Equity and Related Stockholder Matter," below.) The
shareholders approved the amendment by an overwhelming majority. In light of
pending developments with Nasdaq, however, the Board of Directors deferred its
decision as to whether to implement the reverse stock split.
Effective with the close of the market on March 10, 1998, the Companys
securities were delisted from The Nasdaq SmallCap Market for failure to meet the
new Nasdaq continued listing requirements. Trading of the Companys securities is
currently being conducted in the over-the-counter market on the OTC Bulletin
Board (See Item 5 - "Market for Common Equity and Related Stockholder Matters").
F-18
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 13, 1998
SALIVA DIAGNOSTIC SYSTEMS, INC.
By: /s/ KENNETH J. MCLACHLAN
----------------------------
Kenneth J. McLachlan
President and Chief Executive
Officer (and Director)
2
