<PAGE> 1
As filed with the Securities and Exchange Commission on September 2, 1998
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REGISTRATION STATEMENT
ON FORM SB-2
UNDER THE SECURITIES ACT OF 1933
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
(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
Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this Registration Statement.
<PAGE> 2
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.
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Title of each maximum maximum
class of securities Amount to be offering price per aggregate Amount of
to be registered registered(1) unit (2) offering price (1) registration fee(3)
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<S> <C> <C> <C> <C>
Common Stock,
par value $.01
per share 1,869,262 shares $1.34 $2,504,811 $738.92
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</TABLE>
(1) Does not include a presently indeterminate number of shares issued or
issuable upon conversion of or otherwise in respect of Registrant's 1998-B
Convertible Preferred Stock, as such numbers may be adjusted in accordance
with Rule 416.
(2) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457(c), based upon the average of the closing bid and ask prices
for the Common Stock of $1.34 on September 1, 1998, as reported on the OTC
Bulletin Board.
<PAGE> 3
PROSPECTUS
SALIVA DIAGNOSTIC SYSTEMS, INC.
COMMON STOCK
Saliva Diagnostic Systems, Inc. (the "Company") is registering for resale
up to 1,869,262 shares of its common stock, $.01 par value (the "Common Stock"),
which include (i) 1,844,262 shares which may be issued upon the conversion of
1,500 shares of the Company's 1998-B Convertible Preferred Stock, par value $.01
per share (the "1998-B Preferred Stock") and (ii) 25,000 shares which may be
issued upon the exercise of warrants granted in connection with the private
placement of the 1998-B Preferred Stock (the "Warrants"), plus an additional
presently indeterminate number of shares which may be issued upon conversion of
the 1998-B Preferred Stock if the market price of the Common Stock is less at
the time of conversion than on the date of this Prospectus (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 Shares and 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 will be deemed to
be "underwriters" within the meaning set forth in the Securities Act, and their
commissions and discounts and other compensation will be regarded as
underwriters' compensation. See "Plan of Distribution." In addition, the Shares
are subject to so-called "penny stock" rules that impose additional sales
practice requirements on brokers and dealers who sell penny stock, which may
limit the ability of purchasers of the Shares to sell the Shares in the
secondary market.
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 $1.34 $1.34
Total (3) $2,504,811 $2,504,811
</TABLE>
(1) Estimated based upon the average of the closing bid and ask prices for the
Common Stock on September 1, 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 $10,750, 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 September __, 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 has been examined and reported upon,
with an opinion expressed by, its independent certified public accountants.
<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. In its limited operating history, the Company has incurred significant
operating losses, resulting in an accumulated deficit of $30,863,043 at June 30,
1998 and additional operating losses to date. The Company is dependent upon its
efforts to raise substantial additional capital to finance its future
operations. There can be no assurance that such financing will be obtained.
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, including
the U.S. in the case of Saliva-Sampler and Omni-Swab, and is currently marketing
two of its three HIV rapid tests (Sero-Strip HIV and Hema-Strip HIV) outside the
United States. Omni-SAL(R) and these two HIV rapid tests are not yet approved
for marketing in the United States. Prior to marketing and distribution in the
U.S., the Company will be required obtain FDA approvals based upon premarket
approval applications ("PMAs") for its Sero-Strip HIV, Hema-Strip HIV and
Saliva-Strip HIV products. Omni-SAL(R) will require specific FDA approval
depending on the usage for which the PMA is submitted. Stat-Simple, Omni-Swab
and Saliva-Sampler (for collection purposes) have been cleared by the FDA for
marketing in the U.S. In order for its HIV products to be cleared for marketing
in the U.S., the Company will be required to complete a major clinical trial.
Financing such a trial will require significant cash reserves or the development
of strategic alliances. 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.
<PAGE> 6
THE OFFERING
Securities Offered 1,869,262 shares of Common Stock (based upon
the assumption of conversion at 80% of the
market price of the Common Stock on the date
of this Prospectus), plus an additional
presently indeterminate number of shares of
Common Stock issuable if the market price of
the Common Stock is less on the date of
conversion than on the date of this
Prospectus. 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.
<TABLE>
<CAPTION>
Balance Sheet Data
------------------
Six Months Ended Six Months Ended Year Ended Year Ended
June 30, 1998 June 30, 1997 December 31, 1997 December 31, 1996
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<S> <C> <C> <C> <C>
Total assets $ 1,310,033 $2,842,943 $1,639,077 $2,178,201
Total liabilities $ 1,990,287 $1,505,772 $2,305,764 $1,017,569
Shareholders' equity (1) $(2,039,495) $1,337,171 $ (666,687) $1,160,632
1998-A Convertible $ 1,359,241 -- -- --
Preferred Stock
</TABLE>
<TABLE>
<CAPTION>
Income Statement Data
---------------------
Six Months Ended Six Months Ended Year Ended Year Ended
June 30, 1998 June 30, 1997 December 31, 1997 December 31, 1996
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 449,109 $ 711,903 $ 1,422,296 $ 740,650
Net loss $(1,669,094) $(2,928,298) $(6,612,212) $(5,152,399)
Basic and diluted net loss
per share $ (0.73) $ (1.32) $ (0.27) $ (0.26)
Common shares used in per 3,179,119 2,220,656 24,894,900 20,100,000
share calculations (1)
</TABLE>
(1) On August 3, 1998, the Company effected a one-for-ten reverse split of
its Common Stock. As a result, share amounts and values in the financial
statements for the quarterly period ended June 30, 1998 have been
restated to reflect the reverse stock split.
<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; "Going Concern"
Opinion in Report of Independent Certified Public Accountants. The Company has
incurred significant operating losses since its inception, resulting in an
accumulated deficit of $30,863,043 and $28,526,458 at June 30, 1998 and December
31, 1997, respectively, and a shareholders' equity of $(2,039,495) and
$(666,687) at June 30, 1998 and December 31, 1997, 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 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. See
"-- Dilution" below.
4. No Assurance of Secondary Market. 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 and in the pink sheets.
As a result, an investor may find it difficult to dispose of, or to obtain
accurate quotations as to the price of, the
5
<PAGE> 8
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. Such rules require additional
disclosures by broker-dealers in connection with any trades involving a stock
defined as a penny stock (generally, any non-Nasdaq equity security that has a
market price of less than $5.00 per share, subject to certain exceptions). Prior
to any penny stock transaction, a broker-dealer must deliver a disclosure
schedule explaining the penny stock market and the risks associated therewith.
The broker-dealer must also comply with various sales practice requirements if
selling penny stock to persons other than established customers and accredited
investors (which are generally institutions). For these types of transactions,
the broker-dealer must make a special suitability determination for the purchase
and have received the purchaser's written consent to the transaction prior to
the sale. 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 or in the pink sheets.
5. Significant Outstanding Options, Warrants and Convertible Securities.
As of September 1, 1998, there were outstanding (i) stock options to purchase an
aggregate of approximately 219,550 shares of Common Stock at exercise prices
ranging from $4.00 to $55.00 per share; (ii) warrants to purchase 138,000 shares
of Common Stock which were issued in the Company's initial public offering, are
exercisable at $12.50 per share, and expire September 30, 1998; (iii) warrants
to purchase approximately 156,722 shares which are exercisable at prices ranging
from $3.375 to $40.00 per share; and (iv) convertible preferred stock, and a
commitment to purchase convertible preferred stock, which is convertible at the
lesser of $1.69 per share and 80% of the market price of the Common Stock at the
time of conversion (currently estimated to be convertible into an aggregate of
approximately 1,844,262 shares based upon the market price of the Common Stock
on the date of this Prospectus).
On September 1, 1998, there were issued and outstanding a total of
5,453,937 shares of Common Stock. Assuming conversion of the outstanding
convertible preferred stock based on the market price of the Company's Common
Stock on the date of this Prospectus, if all options, warrants, convertible
preferred stock which the Company has issued or has an obligation to issue were
deemed exercised and converted, as the case may be, there would be issuable
2,358,534 shares of Common Stock. Upon such exercise and conversion, there would
be outstanding 7,812,471 shares of Common Stock. Of these, the Company currently
has registered for resale approximately 3,600,000 shares (including the Shares
offered hereby) and has granted demand registration rights in respect of
approximately 700,000 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. See "--Possible Effect on Additional Equity Financing" below.
6. Possible Effect on Market Price of Common Stock and Control of
Company. There are currently outstanding 500 shares of the Company's Series
1998-B Convertible Preferred Stock (the "1998-B Preferred Stock"), and a
commitment to purchase an additional 1,000 shares of 1998-B Preferred Stock. The
number of shares of Common Stock issuable upon conversion of the 1998-B
Preferred Stock is essentially unlimited. Upon conversion, the holder of the
1998-B Preferred Stock will be entitled to receive a number of shares of Common
Stock determined by dividing the stated value of the 1998-B 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 $1.69 or 80% 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). Thus,
6
<PAGE> 9
if the market price of the Common Stock during the five-day period prior to
conversion of the 1998-B Preferred Stock is less than the market price of the
Common Stock as of the date of this Prospectus, then the Company will
potentially be required to issue substantially more than the 1,844,262 shares
assumed under this Prospectus to be issuable upon conversion, based upon the
market price of the Common Stock as of the date of this Prospectus.
In connection with the issuance of the 1998-B Preferred Stock, the
Company entered into a registration rights agreement, pursuant to which all
shares issuable by the Company upon conversion of the 1998-B Preferred Stock
will be subject to a registration statement filed with the Securities and
Exchange Commission, of which this Prospectus forms a part. Consequently, all of
such shares will be eligible for resale in the secondary market without
restriction, except to the extent that the holder of the 1998-B Preferred Stock
is deemed to be an "affiliate" of the Company at the time of resale. The sale or
availability for sale of the potentially unlimited number of shares of Common
Stock issuable upon conversion of the 1998-B Preferred Stock in accordance with
the above conversion price formula could adversely affect the market price of
the Common Stock. No assurance can be given that the market price of the Common
Stock will not fall significantly below the price as of the date of this
Prospectus, or that purchasers of the Shares will not suffer significant
additional dilution as a result of any such decline in the market price of the
Common Stock.
In addition, control of the Company will depend upon the market price of
the Common Stock at the time of conversion of the 1998-B Preferred Stock.
Depending upon the market price of the Common Stock at the time of conversion,
the holder of the 1998-B Preferred Stock may be entitled to receive a number of
shares of Common Stock sufficient to elect all of the Company's directors,
determine the outcome of most corporate actions requiring shareholder approval,
and otherwise to control the business of the Company. Such control could
preclude any unsolicited acquisition of the Company and consequently adversely
affect the market price of the Common Stock.
7. Dilution. Holders of the Company's Common Stock will experience
immediate and potentially substantial dilution in net tangible book value per
share upon the exercise of outstanding options and warrants and the conversion
of outstanding convertible preferred stock. 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. The Company will also
likely be required to issue additional shares of Common Stock or securities
convertible into Common Stock in the future in order to obtain additional
financing. The issuance of these securities will have the additional effect of
increasing dilution to purchasers of the Shares offered by this Prospectus.
8. Possible Effect on Additional Equity Financing. The terms upon which
the Company will be able to obtain additional equity capital may be adversely
affected by the Company's significant outstanding options, warrants and
convertible securities. Because 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. Such
exercise will result in the Company being less likely to obtain additional
equity capital on terms favorable to the Company or at all.
7
<PAGE> 10
9. 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. Despite not having had a
material adverse effect on the Company in the past, 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 in the future.
10. Uncertainty of New Product Development. The design and development of
the Company's rapid testing platforms in their current designs have been
completed and limited revenues have been generated from sales thereof. The
Company will be required to devote considerable additional efforts to finalize
the evaluation of its products. Satisfactory completion of development, testing,
evaluations, obtaining regulatory approvals and achieving sufficient production
levels of such products will be required prior to their being available for
commercial sale. The Company's products remain subject to all the risks inherent
in the introduction of new diagnostic products, including unanticipated
problems, as well as the possible insufficiency of funds to continue design and
development which could result in abandonment of, or substantial change in, the
design or development of such products. There can be no assurance that such
products will be successfully developed, be developed on a timely basis or prove
to be as effective as products based on existing or newly developed
technologies. The inability to successfully complete development, or a
determination by the Company, for financial or other reasons, not to undertake
to complete development of any product, particularly in instances in which the
Company has made significant capital expenditures, could have a material adverse
effect on the Company.
11. 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.
12. 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.
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<PAGE> 11
13. 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.
Prior to marketing and distribution in the U.S., the Company will be
required obtain FDA approvals based upon premarket approval applications
("PMAs") for its Sero-Strip HIV, Hema-Strip HIV and Saliva-Strip HIV products.
Omni-SAL(R) will require specific FDA approval depending on the usage for which
the PMA is submitted. Stat-Simple, Omni-Swab and Saliva-Sampler (for collection
purposes) have been cleared by the FDA for marketing in the U.S. In order for
its HIV products to be cleared for marketing in the U.S., the Company will be
required to complete a major clinical trial. Financing such a trial will require
significant cash reserves or the development of strategic alliances. There can
be no assurance that the Company will be able to obtain such financing or that
such financing, if obtained, will result in FDA approval of the Company's HIV
products.
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 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 also subject to regulation in certain foreign markets,
which can be particularly burdensome for HIV products. Although the regulatory
agencies for medical devices in some countries are influenced by FDA clearance
in the U.S., most require clinical trials to prove the efficacy of a medical
device before allowing product sales. The Company is currently involved in
clinical trials for its products in twenty countries in an effort to obtain
approval of the regulatory authorities in those countries. 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.
14. 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.
15. 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
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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.
16. 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) 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.
17. Dependence Upon Third-Party Suppliers. The Company believes that most
of the components used in the manufacture of its proposed products are currently
available from numerous suppliers located in the United States, Europe and Asia.
The Company believes, however, that certain components are available from a
limited number of suppliers. Although the Company believes that it will not
encounter difficulties in obtaining these components, there can be no assurance
that the Company will be able to enter into satisfactory agreements or
arrangements for the purchase of commercial quantities of such components. The
failure to enter into agreements or otherwise arrange for adequate or timely
supplies of components and the possible inability to secure alternative sources
of components could have a material adverse effect on the Company's ability to
manufacture its products. In addition, development and regulatory approval of
the Company's products in the United States are dependent upon the Company's
ability to procure certain components and certain packaging materials from
FDA-approved sources. Since the FDA approval process requires manufacturers to
specify their proposed suppliers of certain components in their PMAs, if any
such component were no longer available from the specified supplier, FDA
approval of a new supplier would be required, resulting in potential
manufacturing delays.
18. 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 and December 31, 1996, 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.
19. 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
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management and scientific personnel. The loss of Mr. McLachlan's services or the
services of other key management or scientific personnel would have a material
adverse effect on the Company's business and prospects. Competition among
biotechnology companies for qualified employees is intense, and the loss of key
personnel or the inability to attract and retain the additional highly skilled
employees required for the Company's activities could adversely affect its
business. There can be no assurance that the Company will be able to hire or
retain such necessary personnel.
20. 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 of 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.
21. 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.
22. 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.
23. Litigation. In February 1998, a lawsuit was filed by Ronald Lealos,
the former President of the Company, who resigned in December 1996. The
complaint alleges that Mr. Lealos was entitled to certain cash payments and
benefits under an employment agreement whereby he would serve as the Company's
president, and that the Company's failure to make such payments and grant such
benefits constituted anticipatory breach and breach of that contract. In
addition, the complaint alleges that the Company wrongfully rescinded options to
purchase 38,500 shares of Common Stock (on a post-split basis) in breach of a
stock option agreement with Mr. Lealos. In March 1998, the Company filed an
answer to the complaint in which it stated that the alleged employment agreement
was not intended to be effective and was rescinded by the parties, and that the
stock option agreement was not breached by the Company. The Company's answer
also asserted numerous counterclaims against Mr. Lealos, including breach of
fiduciary duty and conversion, for which the Company is seeking damages in
excess of $1,500,000. Although
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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
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, a director of the Company agreed to hold the minority
interest (10%) in Saliva Diagnostic Systems, UK, Ltd. in trust for the benefit
of the Company 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 $30,863,043 at June 30, 1998.
Such losses are expected to continue for the foreseeable future and until such
time, if ever, as the Company is able to attain sales levels sufficient to
support its operations. The Company believes that its current cash position and
cash received from the sale of its preferred stock in August 1998, combined with
revenues and other cash receipts, will be sufficient to fund the Company's
operations through 1998. However, substantial additional financing will be
required in 1999. The Company's independent certified public accountants have
included an explanatory paragraph in their reports stating that the Company's
significant operating losses and significant capital requirements raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's capital requirements have been, and will continue to be,
significant. The Company has been dependent on private placements of its debt
and equity securities to fund its capital requirements. The Company is dependent
upon its efforts to raise capital to finance the cost of development,
manufacturing and marketing of its products, to conduct clinical trials and
submissions for FDA approval of its products and to design and develop new
products. Marketing, manufacturing and clinical testing may require capital
resources substantially greater than the resources which will be available to
the Company. There can be no assurance that the Company will be able to obtain
the additional capital resources necessary to implement or continue its
programs, or that such financing will be available on commercially reasonable
terms or at all. See Note 2 of Notes to Consolidated Financial Statements.
Effective with the close of business on March 10, 1998, the Company's
securities were delisted from The Nasdaq SmallCap Market for failure to meet the
new Nasdsaq continued listing requirements. As a result of the Nasdaq delisting,
an investor may find it more 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."
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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). The Company's rapid H. pylori test,
Stat-Simple, was recently approved by the FDA for diagnostic use in humans. In
addition, the Company has conducted preliminary research that indicates its
rapid test format may be expanded to detect other diseases, such as
tuberculosis, measles, malaria, rubella, tetanus, herpes, chlamydia, mumps,
influenza, parvovirus, pertussis, certain cancers, tumor markers and cardiac
disease risk markers. The Company has under development rapid tests for hepatits
and tuberculosis.
RAPID IMMUNOASSAYS. The Company continues to develop rapid immunoassays
utilizing immunochromatography for the detection of antibodies to selected
pathogens, such as HIV, the virus that causes Acquired Immune Deficiency
Syndrome ("AIDS"), and Helicobacter pylori ("H. pylori"), a bacteria linked to
peptic ulcers and gastric cancer. The Company's immunoassays are designed to
require only a few simple steps and minutes to use. The tests produce visual
results in under 20 minutes, and may be used without special equipment, storage
or training. The Company's data and independent evaluations demonstrate that its
tests are generally equivalent in performance to widely used FDA-licensed tests
for HIV.
The Company's rapid tests utilize a capillary flow assay in which all
reagents are provided on solid phases in a dried format (test strip). Buffer
solution is introduced after sample collection. The resulting mixture of sample
and buffer migrate along the test strip by capillary action, reconstituting a
dye conjugate. A red control line will develop at a designated point on the
upper portion of the strip if the assay has been performed properly and if all
reagents are functionally active. The conjugate binds in the presence of
antibodies to pre-applied antigen to form a second red line (positive) at a
designated point on the lower portion of the strip. In the absence of specific
antibodies, a second line does not develop.
Sero-Strip HIV ("Sero-Strip") analyzes a small amount of serum or plasma
to detect HIV antibodies. Sero-Strip is packaged as a multiple-use kit designed
for professional health care settings where many patients are tested and
specimens may be stored. Results are available in 5 to 15 minutes. The test kit
may be stored without refrigeration for up to 18 months after the date of
manufacture.
Hema-Strip HIV ("Hema-Strip") is a single use test kit that collects,
processes and analyzes a minute amount of whole blood to detect HIV antibodies.
Sample collection requires only a few seconds. The principles used in the
Hema-Strip test strip are identical to that utilized in Sero-Strip; however, an
added filter traps red blood cells from the whole blood sample permitting the
migration of serum to flow onto the strip and negating the need for the user to
separate serum from the whole blood sample. The test kit may be stored without
refrigeration for up to 18 months after the date of manufacture.
Saliva-Strip HIV ("Saliva-Strip") is a rapid testing system that
collects, processes and analyzes saliva to detect HIV antibodies. Principles of
the test strip are similar to that used in Sero-Strip and Hema-Strip. The
Company expects to complete development of Saliva-Strip in 1998. The test is
currently designed for single use and incorporates Omni-SAL, the Company's
proprietary saliva collection device. The test is currently designed to obtain
results in 10 to 20 minutes. The Company believes Saliva-Strip's temperature
stability is similar to Sero-Strip and Hema-Strip.
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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 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, including
the U.S. in the case of Saliva-Sampler and Omni-Swab, and is currently marketing
two of its three HIV rapid tests (Sero-Strip HIV and Hema-Strip HIV) outside the
United States. Omni-SAL(R) and these two HIV rapid tests are not yet approved
for marketing in the United States. Prior to marketing and distribution in the
U.S., the Company will be required obtain FDA approvals based upon premarket
approval applications ("PMAs") for its Sero-Strip HIV, Hema-Strip HIV and
Saliva-Strip HIV products. Omni-SAL(R) will require specific FDA approval
depending on the usage for which the PMA is submitted. Stat-Simple, Omni-Swab
and Saliva-Sampler (for collection purposes) have been cleared by the FDA for
marketing in the U.S. In order for its HIV products to be cleared for marketing
in the U.S., the Company will be required to complete a major clinical trial.
Financing such a trial will require significant cash reserves or the development
of strategic alliances.
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
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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 agreements expire by their terms in
November 2000. The Company will purchase proprietary peptides for HIV detection
in its testing kits exclusively from BioChem. 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. The agreements also provide for the sharing of clinical trial
participation and costs in countries where BioChem intends to market or sell the
products and independent clinical trials are required. The Canadian Health
Protection Board recently approved the conducting of trials for the Company's
HIV rapid tests, for which the Company will be responsible to bear two-thirds of
the costs.
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 all of the Company's
rapid tests and medical specimen collection devices (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 territories, which include Canada, Kuwait, Saudi Arabia, Syria,
Algeria, Pakistan, Morocco and United Arab Emirates. APS Canada is a division of
The APS Group of Companies, based in London, England. APS Canada provides
specialized human and veterinary medical testing services and maintains a
laboratory exclusively devoted to saliva testing.
In March 1994, the Company granted a non-exclusive, worldwide license to
Orgenics, Ltd., an Israeli corporation ("Orgenics"), pursuant to which Orgenics
may make or have made diagnostic products incorporating the Company's
Omni-SAL(R) technology, and may use, sell, or license such products worldwide
(the "License Agreement"). The License Agreement expires the later of January
31, 2111 or the date on which any patents for the Omni-SAL(R) technology expire.
Orgenics has paid the Company an initial licensing fee of $200,000 and will pay
4% royalties on sales of Orgenics' products which incorporate the Company's
Omni-SAL(R) technology. In the event the Company ceases production of
Omni-SAL(R), Orgenics, Ltd. has the option, pursuant to the License Agreement,
to purchase from the Company the molds and equipment necessary to produce
Omni-SAL(R) and would thereafter pay to the Company 6% royalties on sales of
Omni-SAL(R) products produced and sold by Orgenics, Ltd. The Company understands
that Orgenics is not currently exploiting its rights under the Company's
license. The Company is pursuing its rights to cancel the license and is
considering a new distribution arrangement with Orgenics. There can be no
assurance that such an agreement will be concluded, or that Orgenics will
manufacture or sell any product which will generate royalties for the Company.
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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.
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. The FDA has determined
that the Company's Vancouver facility is compliant with GMP. In an effort to
minimize capital expenditures and related costs, however, the Company has
determined to forestall full use of its production facilities in Vancouver. The
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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 PMAs, if any such component were no longer
available from the specified supplier, FDA approval of a new supplier would be
required, resulting in potential manufacturing delays.
REGULATION
DOMESTIC REGULATION
FOOD AND DRUG ADMINISTRATION. In the United States, under the Federal Food,
Drug, and Cosmetics Act (the "FDC Act"), the FDA regulates all aspects,
including the manufacturing, testing, and marketing of medical devices that are
made or distributed domestically. Three of the Company's domestically made
and/or distributed products, Omni-Swab and Saliva-Sampler and Stat-Simple, have
received FDA clearance for domestic distribution for certain limited purposes.
See " -- Manufacturing and Supply" above.
All medical devices are categorized by the FDA as Class I, Class II, or
Class III. Class I devices are subject only to general control provisions of the
FDC Act, such as purity, labeling and GMP. Class II devices are required to also
ensure reasonable safety and efficacy through performance standards and other
controls. Class III devices must, in addition to fulfilling all other provisions
of the FDC Act, meet extensive and rigorous FDA standards that may require
clinical trials.
A manufacturer of medical devices which can establish that a new device
is "substantially equivalent" to a legally marketed Class I or Class II medical
device or to a Class III medical device for which the FDA has not required a PMA
can seek FDA marketing clearance for the device by filing a 510(k) Premarket
Notification ("510(k) Notice"). The 510(k) Notice may have to be supported by
various types of information, including performance data, indicating that the
device is as safe and effective for its intended use as a legally marketed
predicate device.
The Company is pursuing several strategies for initiating FDA review of
its products not already approved or cleared for domestic distribution. These
strategies include alliances with other companies and selling limited licensing
rights to the Company's products to companies who agree to seek FDA approval for
them. The Company may also directly apply for FDA approval of those products.
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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. In August 1998, the FDA approved
Stat-Simple as a Class I device.
The Company believes that all of its HIV products that have not been
submitted to the FDA 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. 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 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.
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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 was approved by the FDA as a Class I device in August
1998. The product is currently on sale in Italy, Denmark, Austria, Saudi Arabia
and Mexico, and has been issued a Certificate of Free Sale in the U.K.
COMPETITION
The market in which the Company operates, saliva and blood-based
collection and diagnostic testing, is highly competitive. The Company is aware
of certain entities, including ChemTrak, Inc., Epitope, Inc., Quidel, Inc. and
Trinity Biotech, plc and specialized biotechnology firms, as well as
universities and other research institutions, which have developed or are
developing technologies and products which are competitive with Omni-SAL(R) and
the Company's products under development. Many of these competitors are
established and have substantially greater research, marketing and financial
resources than the Company. The Company expects that the number of products
competing with its products will increase as the perceived benefits of
saliva-based testing become more widely recognized, which may result in lower
prices of the Company's products and reduced revenues. In the biotechnology
industry, technological change and obsolescence is rapid and frequent. There can
be no assurance that the
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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.
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 the manufacture or sale of the
patented products in other countries. The issuance of a patent to the Company is
not conclusive as to validity or as to the enforceable scope of the patent. The
validity or enforceability of a patent can be challenged by litigation after its
issuance, and if the outcome of such litigation is adverse to the owner of the
patent, the owner's rights could be diminished or withdrawn. Additionally, trade
secret protection does not prevent independent discovery and exploitation of a
secret product or technique by other parties.
A large number of individuals and commercial enterprises seek patent
protection for technologies, products and processes in fields related to the
Company's area of product development. To the extent such efforts are
successful, the Company may be required to obtain licenses in order to
accomplish certain of its product strategies. There can be no assurance that
such licenses will be available to the Company or available on acceptable terms.
The Company is aware of certain filed patents issued to developers of diagnostic
products with potential applicability to the Company's diagnostic technology.
There can be no assurance that the Company would prevail if a patent
infringement claim were to be asserted against it.
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EMPLOYEES
As of September 1, 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 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. 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 February 1998, 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 alleges that Mr. Lealos
was entitled to certain cash payments and benefits under an employment agreement
whereby he would serve as the Company's president, and that the Company's
failure to make such payments and grant such benefits constituted anticipatory
breach and breach of that contract. In addition, the complaint alleges that the
Company wrongfully rescinded options to purchase 38,500 shares of Common Stock
in breach of a stock option agreement with Mr. Lealos. In March 1998, the
Company filed an answer to the complaint in which it stated that the alleged
employment agreement was not intended to be effective and was rescinded by the
parties, and that the stock option agreement was not breached by the Company.
The Company's answer also asserted numerous counterclaims against Mr. Lealos,
including breach of fiduciary duty and conversion, for which the Company is
seeking damages in excess of $1,500,000. 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.
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."
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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 $30,863,043 at June
30, 1998. Such losses are expected to continue for the foreseeable future and
until such time, if ever, as the Company is able to attain sales levels
sufficient to support its operations. The Company believes that its current cash
position and cash received from the sale of its preferred stock in August 1998,
combined with revenues and other cash receipts, will be sufficient to fund the
Company's operations through 1998. However, substantial additional financing
will be required in 1999. There can be no assurance that such financing will be
achieved or that financings will be on terms favorable to the Company. The
Company's significant operating losses and significant capital requirements
raise substantial doubt about the Company's ability to continue as a going
concern.
On August 3, 1998, the Company effected a one-for-ten reverse split of shares of
its outstanding common stock. As a result, all share amounts and values
described below reflect the reverse stock split.
RESULTS OF OPERATIONS
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 increased demand for and sales of the
Company's rapid testing systems, Sero-Strip HIV and Hema-Strip HIV, 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 focused on
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cost controls in all departments, including research and development, and thus
intentionally reduced these costs as a percentage of product sales from 86% in
1996 to 47% in 1997.
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 due equally to 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 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.
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SECOND QUARTER AND FIRST SIX MONTHS OF 1998 COMPARED TO SECOND QUARTER
AND FIRST SIX MONTHS OF 1997
REVENUES. The Company's revenues consist of product sales. Revenues decreased
48% to $251,531 in the second quarter of 1998 from $484,869 in the second
quarter of 1997, and decreased 37% to $449,109 in the first six months of 1998
from $711,903 in the first six months of 1997. The decreases in revenue were
primarily attributable to establishing a manufacturing base in Vancouver and
delays in commissioning equipment. See "Cost of products sold" below. Sales to
four customers represented approximately 47% of total revenues in the first six
months of 1998, and sales to one customer represented approximately 24% of total
revenues in the six months ended June 30, 1997.
COST OF PRODUCTS SOLD. Costs of products sold decreased to $315,077 (125% of
product sales) in the second quarter of 1998 from $402,738 (83% of product
sales) in the second quarter of 1997, and decreased to $567,777 (126% of product
sales) in the first six months of 1998 from $600,898 (84% of product sales) in
the first six months of 1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased
9% to $142,659 in the second quarter of 1998 from $156,124 in the second quarter
of 1997, and decreased 10% to $315,038 in the first six months of 1998 from
$350,836 in the first six months of 1997, primarily as a result of reduced
payroll and related expenses. The Company is focused on cost controls in all
departments, including research and development, and thus intentionally reduced
these costs. This has been achieved without compromising standards in research
and development. See "Recent Developments" below.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 25% to $623,792 in the second quarter of 1998
from $826,715 in the second quarter of 1997, and decreased 29% to $1,270,169 in
the first six months of 1998 from $1,780,628 in the first six months of 1997,
primarily as a result of the closure of facilities in Singapore, a reduction in
the number of administrative personnel and continued restraint on expenditures.
INTEREST EXPENSE. Interest expense decreased to $1,300 in the second quarter of
1998 from $400,705 in the second quarter of 1997, and decreased to $2,705 in the
first six months of 1998 from $409,284 in the first six months of 1997 due to a
non-recurring interest charge on the Convertible Debentures, due February 28,
1999, then outstanding.
INCOME TAXES. The Company is in a net deferred tax asset position and has
generated net operating losses to date. Accordingly, no provision for or benefit
from income taxes has been recorded in the accompanying statements of
operations. The Company will continue to provide a valuation allowance for its
deferred tax assets until it becomes more likely than not, in management's
assessment, that the Company's deferred tax assets will be realized.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its capital requirements through
proceeds from its public offering of common stock in March 1993 and the exercise
of common stock purchase warrants pursuant to such offering, proceeds from sales
of convertible debentures, proceeds from private placements of common stock and
preferred stock, and the exercise of common stock purchase warrants and stock
options. In March 1997, the Company raised net proceeds of approximately
$1,380,000 (net of issuance costs of $120,000) from the private sale of $1.5
million Convertible Debentures, due February 28, 1999. In June 1997 and August
1997, the Company entered into three separate common stock subscription
agreements
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for the issuance and sale of a total of 408,290 shares of Common Stock for an
aggregate purchase price of $2,063,000 (net of issuance costs). In January 1998,
the Company entered into a securities purchase agreement with an investor for
the issuance and sale of 1,500 shares of the Company's newly designated Series
1998-A Convertible Preferred Stock (the "1998-A Preferred Stock") for an
aggregate purchase price of $1,380,000 (net of issuance costs of $120,000). In
May 1998, the Company entered into a securities purchase agreement with an
investor for the issuance and sale of 156,250 shares of its common stock for an
aggregate purchase price of $250,000. In August 1998, the Company entered into a
securities purchase agreement with an investor for the issuance and sale of 500
shares of the Company's Series 1998-B Convertible Preferred Stock for an
aggregate purchase price of $470,000 (net of issuance costs of $30,000).
Pursuant to such securities purchase agreement, the investor is obligated to
purchase an additional 500 shares of Series 1998-B Convertible Preferred Stock
for an aggregate purchase price of $470,000 (net of issuance costs of $30,000)
on or before December 3, 1998, and an additional 500 shares of Series 1998-B
Convertible Preferred Stock for an aggregate purchase price of $470,000 (net of
issuance costs of $30,000) on or before April 3, 1999.
Cash used in operating activities in the first six months of 1998 was
$1,739,685. This was primarily a result of a net loss of $1,669,094, adjustments
for depreciation and amortization, and a decrease in accounts payable, accrued
expenses and inventories. Accounts payable and inventories decreased due to
reduced production volume in the first quarter of 1998 resulting from delays in
the transfer of manufacturing to outsourced manufacturing facilities.
Accrued expenses totaled $1,343,849 at June 30, 1998 against $1,473,944 at
December 31, 1997. Accrued wages and salaries decreased to $444,331 at June 30,
1998 from $493,352 at December 31, 1997. Accrued restructuring costs decreased
to $13,040 at June 30, 1998 from $135,522 at December 31, 1997 due to the
completion of the closure of the Singapore operation. The residual amount will
be paid during the statutory liquidation of the Singapore subsidiary. Litigation
contingencies increased by $61,000 in the period to reflect new estimates of
ongoing legal costs related to the lawsuits.
Cash used in investing activities in the first six months of 1998 was $2,103,
which represented acquisition costs of property and equipment related to the
construction of drying facilities and reengineering of molds.
Cash provided by financing activities in the first six months of 1998 was
$1,617,917. This was primarily a result of net proceeds of $1,380,000 from the
sale of its 1998-A Preferred Stock and $250,000 from the sale of its common
stock.
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 into a total of
1,736,824 shares of Common Stock, plus interest in the form of 27,604 shares of
Common Stock. The Company had requested the acceleration in order to increase
equity to meet the listing requirements of The Nasdaq SmallCap Market. 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
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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 shares of its 1998-A Preferred
Stock. Pursuant to the securities purchase agreement, the Company sold a total
of 1,500 shares of the 1998-A Preferred Stock to the investor for an aggregate
purchase price of $1,380,000 (net of issuance costs of $120,000). The investor
is entitled to receive a number of shares of the Company's common stock upon
conversion of the 1998-A Preferred Stock as determined by dividing the purchase
price of the 1998-A Preferred Stock by the lesser of (i) $3.375, and (ii) 80% of
the average closing bid price of the Company's common stock for the five trading
days prior to conversion. As of August 12, 1998, the investor had converted all
shares of the 1998-A Preferred Stock for a total of 1,804,251 shares of the
Company's common stock.
The 1998-A Preferred Stock is convertible into the Company's common stock at a
beneficial conversion ratio, and as a result, a discount of $300,000 was
recorded at the date of issuance of the 1998-A Preferred Stock. The discount
will be accreted to deemed preferred dividends over the conversion period, which
ends July 25, 1998. Additionally, the Company incurred offering costs related to
the 1998-A Preferred Stock totaling approximately $120,000. These offering costs
are reflected as a discount to the 1998-A Preferred Stock and will be accreted
as deemed preferred dividends over the conversion period, which ends July 25,
1998. At June 30, 1998, $195,208 had been recorded as deemed dividends, relating
to the beneficial conversion ratio and offering costs. Initially, the 1998-A
Preferred Stock was redeemable at the option of the holders under certain
conditions which were outside the control of the Company. Accordingly, the
1998-A Preferred Stock has not been classified as stockholders' equity at June
30, 1998. On July 30, 1998, the Company amended the terms of the 1998-A
Preferred Stock such that the 1998-A Preferred Stock will be accounted for as an
equity instrument as of that date.
In connection with the issuance and sale of the 1998-A Preferred Stock, the
Company entered into a separate registration rights agreement with the investor
under which the Company is required to file a registration statement covering
resales of shares of the Common Stock issuable upon conversion of the 1998-A
Preferred Stock. The Agreement provides that the Company will pay certain
amounts to the investor if the registration statement is not filed on or before
February 26, 1998 or is not declared effective
28
<PAGE> 31
by the Securities and Exchange Commission by April 26, 1998. A registration
statement on Form S-3 was filed on February 26, 1998. Because the Company is no
longer eligible to file on Form S-3 due to the delisting of the Company's
securities from Nasdaq, the Company has filed a pre-effective amendment to the
registration statement on Form SB-2. The terms of the 1998-A Preferred Stock
provide that, if the registration statement is not declared effective by April
26, 1998, the Company shall pay, upon demand of the investor, an amount equal to
two percent (2%) of the purchase price of the 1998-A Preferred Stock for the
period from April 26, 1998 until the date the registration statement is declared
effective. The investor has indicated that it will make no demand for payment.
There can be no assurances, however, that the investor will not make demand for
payment or that such a demand would not have a material adverse effect on the
Company.
In connection with the issuance of the 1998-A Preferred Stock, the Company paid
a cash fee to a placement agent of 7.5% of the gross proceeds ($112,500) and
attorney's fees equal to 0.5% of the gross proceeds ($7,500). The Company also
issued warrants to the investor to purchase up to 75,000 shares of Common Stock
at an exercise price of $3.375 per share, which expire on January 26, 2003. The
fair value of these warrants of $248,250 has been reflected as a discount to the
1998-A Preferred Stock and will be accreted as deemed preferred dividends over
the conversion period, which ends July 25, 1998. At June 30, 1998, $111,885 had
been recorded as deemed dividends related to the fair value of the warrants.
On April 28, 1998, the Company issued to the Tail Wind Fund Ltd. ("Tail Wind")
149,663 shares of its common stock, which Tail Wind was entitled to receive
pursuant to the terms of a common stock purchase agreement dated as of June 30,
1997 between Tail Wind and the Company. The agreement provided for the issuance
of such additional reset shares upon the occurrence of certain conditions
related to the market price of the Company's common stock during a specified
period.
Also on April 28, 1998, the Company issued to Biscount Overseas Limited 153,756
shares of its common stock upon the conversion of 140 shares of the 1998-A
Preferred Stock.
On May 26, 1998, the Company entered into a common stock subscription agreement
with Paul Bernstein for the issuance and sale of 156,250 shares of its common
stock for an aggregate purchase price of $250,000.
The Company's capital requirements have been and will continue to be
significant. The Company currently has an accumulated deficit due to its history
of losses. The Company is dependent upon its effort to raise capital to finance
its future operations, including the cost of manufacturing and marketing of its
products, to conduct clinical trials and submissions for FDA approval of its
products and to continue the design and development of its new products.
Marketing, manufacturing and clinical testing may require capital resources
substantially greater than the resources available to the Company.
The Company believes that its current cash position and cash received from the
sale of its preferred stock in August 1998, combined with revenues and other
cash receipts, will be sufficient to fund the Company's operations through 1998.
However, substantial additional financing will be required in 1999. There can be
no assurance that such financing will be achieved or that financings will be on
terms favorable to the Company. The Company will continue to seek public or
private placement of its equity securities and corporate partners to develop
products. The Company's future capital needs will depend upon numerous factors,
including the progress of the approval for sale of the Company's products in
various countries, including the United States, the extent and timing of the
acceptance of the Company's products, the cost of marketing and manufacturing
activities and the amount of revenues generated from operations, none of
29
<PAGE> 32
which can be predicted with certainty. The Company's significant operating
losses and capital requirements raise substantial doubt about the Company's
ability to continue as a going concern.
RECENT DEVELOPMENTS
On July 22, 1998, the Company issued to Biscount Overseas Limited 68,291 shares
of its common stock upon the conversion of 60 shares of the 1998-A Preferred
Stock.
On July 28, 1998, the Company issued to Tail Wind 51,376 shares of its common
stock, which Tail Wind was entitled to receive pursuant to the terms of the
common stock purchase agreement dated as of June 30, 1997 between Tail Wind and
the Company, which provided for the issuance of such additional reset shares
upon the occurrence of certain conditions related to the market price of the
Company's common stock during a specified period. Under the terms of such common
stock purchase agreement, Tail Wind remains entitled to receive an additional
17,410 shares of common stock.
On July 31, 1998, the US Food and Drug Administration notified the Company that
it has granted Certificates of Exportability covering all required countries for
all of the Company's HIV diagnostic devices, after determining that the
Company's Vancouver facility was compliant with FDA Good Manufacturing Practices
(GMP) regulations.
On August 3, 1998, the Company appointed Paul Bernstein as a member of its Board
of Directors.
On August 3, 1998, the Company entered into a securities purchase agreement with
an investor for the issuance and sale of shares of its newly designated Series
1998-B Convertible Preferred Stock (the "1998-B Preferred Stock"). Pursuant to
the securities purchase agreement, the Company sold a total of 500 shares of the
1998-B Preferred Stock to the investor for an aggregate purchase price of
$470,000 (net of issuance costs of $30,000). The investor is entitled to receive
a number of shares of the Company's common stock upon conversion of the 1998-B
Preferred Stock as determined by dividing the purchase price of the 1998-B
Preferred Stock by the lesser of (i) $1.69, and (ii) 80% of the average closing
bid price of the Company's common stock for the five trading days prior to
conversion. In addition, the investor is committed to purchase an additional
1,000 shares of 1998-B Preferred Stock prior to April 3, 1999 for an aggregate
purchase price of $940,000 (net of issuance costs of $60,000).
On August 7, 1998, the US Food and Drug Administration advised the Company that
it has cleared the Company's Stat-Simple(TM) pylori test for diagnostic use in
humans. Stat-Simple(TM) pylori is a finger-prick test for the bacterial
infection responsible for the majority of stomach ulcers and certain other
gastrointestinal diseases in humans, and may allow physicians to diagnose the
infection at the time of patient visit, thereby avoiding the expense and time
consumed in traditional laboratory-based testing.
On August 12, 1998, Biscount Overseas Limited converted all remaining shares of
1998-A Preferred Stock for a total of 1,582,202 shares of Common Stock.
REVERSE STOCK SPLIT
On August 3, 1998, the Company effected a one-for-ten reverse split of shares of
its outstanding common stock, which was previously approved by the Company's
shareholders at a special meeting held on February 28, 1998. The Company's
common stock currently trades on the OTC Bulletin Board under the symbol "SALVD"
to reflect the reverse split, and will resume trading under the symbol "SALV"
beginning September 3, 1998. Warrants to purchase the Company's common stock,
including the Company's
30
<PAGE> 33
publicly-held warrants, and options, preferred stock, and other securities
convertible into shares of the Company's common stock, will be adjusted in
accordance with their terms to reflect the reverse stock split. Upon exercise or
conversion, holders of such securities will be entitled to receive one-tenth of
the number of shares of post-split common stock as they were entitled to receive
of pre-split common stock.
YEAR 2000 ISSUE
Many computer systems experience problems handing dated beyond year 1999. Many
existing computer programs only use two digit to identify a year in the date
field. Such systems and programs must be modified or replaced prior to January
1, 2000 in order to remain functional. The Company has undertaken a company-wide
review of its Year 2000 exposure. The Company has identified its key suppliers
and intends to send written requests for information on their Year 2000
compliance status. As required to address potential failures of these parties to
be Year 2000 ready, the Company will send additional requests and develop
contingency plans.
Failure by the Company and/or the third parties with whom it does business to be
prepared for and properly address the Year 2000 issue could have a material
adverse effect on the Company and its ability to conduct business. The Company
expects to implement successfully the systems and programming changes necessary
to address the Year 2000 issue and does not believe the cost of such actions
will have a material adverse effect on the Company, its results of operations or
financial condition.
31
<PAGE> 34
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
Second Quarter 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. These quotations have not been adjusted to reflect the one-for-ten
reverse split of the Company's common stock, effective August 3, 1998.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
1998
January 1 - March 10 $ 0.44 $ 0.22
March 10 - March 31 0.31 0.15
Second Quarter 0.65 0.08
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.
Effective with the opening of market on August 3, 1998, the Company
effected a one-for ten reverse split of its Common Stock, which was previously
approved by the Company's shareholders at a special meeting held on February 28,
1998. The Common Stock will trade on the OTC Bulletin Board under the symbol
"SALVD" to reflect the reverse split until September 3, 1998, at which point it
will resume trading under the symbol "SALV." Warrants to purchase Common Stock,
including the Company's publicly held warrants, and options, preferred stock and
other securities convertible into shares of Common Stock will be adjusted in
accordance with their terms to reflect the reverse stock split.
32
<PAGE> 35
There were approximately 450 shareholders of record and 8,700 beneficial
owners of the Company's Common Stock at September 1, 1998. There were no cash
dividends declared or paid in fiscal years 1997 or 1996. The Company does not
anticipate declaring such dividends in the foreseeable future.
Warrants to purchase approximately 140,000 shares of the Company's
common stock at $12.50 per share, which have been extended to September 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
Paul P. Bernstein 63 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 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.
PAUL P. BERNSTEIN was appointed to the Board of Directors in July 1998. Mr.
Bertstein is a co-founder and shareholder of Sanford C. Bernstein & Co., Inc.,
an investment banking and research firm.
33
<PAGE> 36
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. Share
amounts and values reflect the reverse stock split, effective August 3, 1998.
34
<PAGE> 37
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 - $180,000 100,000 -
President and 1996 - 51,000 - -
Chief Executive Officer 1995 - - - -
David Barnes, MD (3) 1997 $135,000 - 7,500 -
Managing Director, 1996 135,000 - - -
SDS International, Ltd. 1995 131,750 - 17,500 -
</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 100,000 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 17,500 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 sterling) (approximately US $135,000.00) plus the use of a car. If the
agreement is terminated for any reason, Dr. Barnes is entitled to receive his
base salary for the remaining term of the agreement.
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth, for each of the named executive officers,
information concerning options granted during the fiscal year ended December 31,
1997.
35
<PAGE> 38
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------------- VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PERCENT OF PRICE
TOTAL
OPTIONS
APPRECIATION FOR
GRANTED TO EXERCISE OPTION TERM (2)
OPTIONS EMPLOYEES PRICE EXPIRATION
NAME GRANTED(1) IN 1997 ($/Sh) DATE 5% 10%
---- ---------- ------- ------ ---- --- ----
<S> <C> <C> <C> <C> <C> <C>
Kenneth J. McLachlan 100,000 (3) 57% $4.06 12-05-07 $661,300 $1,053,100
David Barnes, M.D 7,500 4% $4.06 12-05-07 49,600 79,000
</TABLE>
(1) Options were granted at an exercise price equal to the fair market value
of the Company's Common Stock on date of grant. Options granted were
exercisable upon grant, and have a ten year term.
(2) The potential realizable value is calculated based on the term of the
option at time of grant (10 years) and is calculated by assuming that the
stock price on the date of grant appreciates at the indicated annual rate
compounded annually for the entire term of the option and that the option
is exercised and sold on the last day of its term for the appreciated
price. Actual gains, if any, on stock option exercises are dependent on
the future performance of the Common Stock and overall stock market
conditions.
(3) Options were granted to International Business Consultants, a Jersey
company, of which Mr. McLachlan is a principal. See "-- Certain
Relationships and Related Transactions."
OPTION EXERCISE AND HOLDINGS
The following table provides certain information concerning the value of
unexercised options held as of the end of the fiscal year with respect to the
named executive officers. There were no options exercised by the named executive
officers in the last fiscal year. All options held by the named executive
officers are currently exercisable.
36
<PAGE> 39
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS OPTIONS
ACQUIRED VALUE AT FY-END AT FY-END
ON REALIZED EXERCISABLE/ EXERCISABLE/
EXERCISE
NAME (#) ($) UNEXERCISABLE(1) UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kenneth J. McLachlan - - 100,000 / 0 - / -
David Barnes, MD - - 35,800 / 0 - / -
</TABLE>
(1) Share amounts reflect the reverse stock split, effective August 3, 1998.
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 25,000 shares
of the Company's Common Stock at $4.06 per share. IBCO was also granted options
to purchase 75,000 shares of the Company's Common Stock at $4.06 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 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.
37
<PAGE> 40
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 408,290 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 20,000 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 September 1, 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.
38
<PAGE> 41
<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 170,000 (2) 3.4%
Hans R. Vauthier
Steinengraben 28
Ch-4051
Basel, Switzerland 25,000 (3) *
Eric F. Stoer, Esq.
c/o Bryan Cave LLP
700 Thirteenth Street
Washington, DC 20005 25,000 (4) *
David Barnes, M.D.
c/o SDS International Ltd. (UK)
11 Sovereign Close
Sovereign Court
London, England E1 9HW, UK 35,800 (5) *
Biscount Overseas Limited
c/o International Securities Corp.
310 Madison Avenue, Suite 501
New York, NY 10017 3,748,513 (6) 50.6%
All Executive Officers and Directors
as a group (six persons) 419,830 (7) 8.4%
</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 September 1, 1998 are considered
outstanding for the purpose of calculating the percentage of Common Stock
owned by such person but not for the purpose of calculating the percentage
of Common Stock owned by any other person.
(2) Includes 20,000 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 50,000 shares
registered in the name of Reads Trust Company Limited, trustee of an
39
<PAGE> 42
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 100,000 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 25,000 shares of Common Stock.
(4) Includes options to purchase 25,000 shares of Common Stock.
(5) Includes options to purchase 35,800 shares of Common Stock.
(6) Includes an estimated 1,844,262 shares of Common Stock issuable upon
conversion of the 1998-B Convertible Preferred Stock (based on the
assumption of conversion at 80% of the market price of the Company's
Common Stock on the date of this Prospectus). Also includes 25,000 shares
of Common Stock issuable upon the exercise of the Warrants and 75,000
shares of Common Stock issuable upon exercise of warrants.
(7) Includes Kenneth J. McLachlan, Eric F. Stoer, Hans R. Vauthier, Paul
Bernstein, David Barnes and Paul D. Slowey, the current directors and
executive officers of the Company. Includes options to purchase an
aggregate of 193,300 shares of Common Stock.
SELLING SHAREHOLDER
The Selling Shareholder is Biscount Overseas Limited (the "Selling
Shareholder" or "Biscount"). The Selling Shareholder has purchased 500 shares
of the Company's Series 1998-B Convertible Preferred Stock, stated value $1,000
per share (the "1998-B Preferred Stock"), for an aggregate purchase price of
$470,000 (net of issuance costs of $30,000), and has committed to purchase an
additional 1,000 shares of 1998-B Preferred Stock for an aggregate purchase
price of $940,000 (net of issuance costs of $60,000). The Selling Shareholder
also received warrants to purchase 25,000 shares of Common Stock (the
"Warrants") in connection with the private placement of the 1998-B Preferred
Stock.
Of the Shares offered hereby, 1,844,262 shares may be issued upon the
conversion of 1,500 shares of the 1998-B Preferred Stock (based upon the
assumption of conversion at 80% of the market price of the Common Stock on the
date of this Prospectus), plus an additional presently indeterminate number of
shares if the market price of the Common Stock on the date of conversion is less
than on the date of this Prospectus, and 25,000 shares may be issued upon the
exercise of the Warrants. All of the Shares that may be acquired by the Selling
Shareholder upon conversion of the 1998-B Preferred Stock or upon 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-B Preferred Stock" and "--Warrants."
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 upon the exercise of the Warrants, may depress the price of the Common
Stock. As of the date of this Prospectus, the Selling Shareholder owns
1,804,251 shares of Common Stock, which were issued upon conversion 1,500
shares of the Company's Series 1998-A Convertible Preferred Stock. These shares
are registered for resale pursuant to a separate registration statement on file
with the Securities and Exchange Commission. The Selling Shareholder currently
owns no other shares of Common Stock. The Selling
40
<PAGE> 43
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-B 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. Effective with
the opening of business on August 3, 1998, the Company effected a one-for-ten
reverse split of its outstanding Common Stock. As of September 1, 1998, there
were approximately 5,453,937 shares of Common Stock outstanding. All of the
material rights of the holders of Common Stock and 1998-B Preferred Stock are
described below.
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-B PREFERRED STOCK
On August 3, 1998, the Company and the Selling Shareholder entered into
an amendment to securities purchase agreement for the private placement of an
aggregate 1,500 shares of the Company's 1998-B Preferred Stock. Pursuant to the
terms of the agreement, the Selling Shareholder purchased 500 shares of the
1998-B Preferred Stock and committed to purchase an additional 500 shares of
1998-B Preferred Stock prior to December 3, 1998 and an additional 500 shares
of 1998-B Preferred Stock prior to April 3, 1999, for an aggregate purchase
price of $1,410,000 (net of issuance costs of $90,000). To date, the Selling
Shareholder has received 500 shares of 1998-B Preferred Stock for a purchase
price of $470,000 (net of issuance costs of $30,000).
Pursuant to the terms of the 1998-B Preferred Stock, the holder has the
right, exercisable at one or more times, at its option, to convert all of the
shares of 1998-B Preferred Stock at any time. As of the date of this Prospectus,
the holder has not converted any shares of the 1998-B Preferred Stock. Upon
conversion of the 1998-B Preferred Stock, the holder will be entitled to receive
a number of shares of the Company's Common Stock as determined by dividing the
stated value of the 1998-B 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
41
<PAGE> 44
of (i) $1.69, and (ii) 80% of the average closing bid prices of the Common Stock
for the five trading days prior to conversion. The Selling Shareholder will be
entitled to receive approximately 1,844,262 shares of Common Stock (based on the
assumption of conversion at 80% of the market price of the Common Stock on the
date of this Prospectus) upon conversion of all of the 1998-B Preferred Stock.
WARRANTS
In connection with the private placement of the 1998-B Preferred Stock,
the Company issued the Warrants to Biscount. The Warrants entitle the holder
thereof to purchase 25,000 shares of Common Stock from the Company for a
purchase price of $3.375 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. Biscount
has exercised its piggyback registration right in connection with the
registration of the shares to be issued upon conversion of the 1998-B Preferred
Stock.
The foregoing summary is qualified in its entirety by the terms of the
Common Stock, 1998-B 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 will 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
42
<PAGE> 45
offering will be borne by the Company other than the Selling Shareholder's legal
fees. Such brokers and dealers and any other participating brokers or dealers
may, in connection with such sales, be deemed to be underwriters within the
meaning of the Securities Act. Any discounts or commissions received by any such
brokers or dealers may be deemed to be underwriting discounts and commissions
under the Securities Act.
The Company 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, 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, 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 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
43
<PAGE> 46
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 at 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.
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.
44
<PAGE> 47
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 be
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.
45
<PAGE> 48
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-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 June 30, 1998 F-23
and December 31, 1997 (Unaudited)
Consolidated Statements of Operations - F-24
Six Months Ended June 30, 1998 and 1997 (Unaudited)
Consolidated Statements of Cash Flows - F-25
Six Months Ended June 30, 1998 and 1997 (Unaudited)
Notes to Consolidated Financial Statements F-26
</TABLE>
F-1
<PAGE> 49
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. (a Delaware 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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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-8
<PAGE> 56
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. 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.
F-9
<PAGE> 57
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 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 Company believes that its current cash position and cash received from a
private placement of preferred stock (see Subsequent Event Note 15) and an
additional private placement of preferred stock anticipated in July 1998,
combined with revenues and other cash receipts, will be sufficient to fund
operations through the remainder of 1998. The Company intends to finance its
future operations through strategic alliances with major pharmaceutical
F-10
<PAGE> 58
companies, the paring down of operating expenses and growth in product revenues.
The Company has been successful in raising additional financing in the past and
believes that sufficient funds will be available to fund future operations.
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.
3. RESTRUCTURING
During 1996, management of the Company reviewed the need for the Singapore
operations as were originally anticipated and concluded that use of this
location as their primary manufacturing source is no longer required and as such
have deemed it appropriate to write off the remaining goodwill associated with
this location, $540,000, at December 31, 1996. The operations in Singapore were
not cost effective and the Company was evaluating other manufacturing sources.
The Company did not accrue in the December 31, 1996 balance sheet for the
restructuring reserve because on official restructuring plan was not adopted,
envisioned, or approved by management. The vast majority of the restructuring
reserve taken in 1997 related to involuntary employee terminations and
settlement costs and, consistent with EITF 94-3, these costs are not accruable
until the employees have been notified.
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-11
<PAGE> 59
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 March 31, 1998, of which warrants to purchase 90,000
shares were outstanding at December 31, 1997. These warrants were valued at fair
value deemed to be $480,000, which was recorded as a compensation expense charge
in the Company's consolidated financial statements for the fiscal year ended
December 31, 1995.
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.
F-12
<PAGE> 60
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.
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.
F-13
<PAGE> 61
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 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-14
<PAGE> 62
<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.
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>
F-15
<PAGE> 63
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 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-16
<PAGE> 64
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>
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
F-17
<PAGE> 65
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. 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 Stock at any time from and
after May 26, 1998; (iii)
F-18
<PAGE> 66
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-19
<PAGE> 67
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------------ ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 147,441 $ 271,312
Accounts receivable, less allowance of $42,000 (1998)
and $42,000 (1997) 196,989 154,052
Inventories 357,822 458,177
Prepaid expenses 30,007 51,876
---------------- ---------------
Total current assets 732,259 935,417
Property and equipment, less accumulated
depreciation of $1,040,788 (1998) and $995,853 (1997) 339,022 434,457
Deposits 14,307 40,162
Restricted cash 120,500 120,500
Patents and trademarks, less accumulated
amortization of $52,971 (1998) and $48,375 (1997) 103,945 108,541
---------------- ---------------
$ 1,310,033 $ 1,639,077
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 508,108 $ 670,400
Accrued expenses 1,343,849 1,473,944
Accrued interest payable 68,240 68,240
Current portion of long-term debt and
obligations under capital leases 21,766 33,779
---------------- ---------------
Total current liabilities 1,941,963 2,246,363
Long-term debt and obligations under capital
leases, net of current portion 48,324 59,401
---------------- ---------------
Total liabilities 1,990,287 2,305,764
Series 1998-A Convertible Redeemable Preferred Stock,
$.01 par value, 1,360 shares issued and outstanding 1,359,241 --
Stockholders' equity:
Common stock, $.01 par value, 50,000,000
shares authorized, issued and outstanding:
1998: 3,530,017 and 1997: 2,934,462 35,300 29,344
Additional paid-in capital 28,872,073 27,914,252
Note receivable from shareholder for stock (83,825) (83,825)
Accumulated deficit (30,863,043) (28,526,458)
---------------- ---------------
Total stockholders' equity (2,039,495) (666,687)
---------------- ---------------
$ 1,310,033 $ 1,639,077
================ ===============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-20
<PAGE> 68
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------------------- --------------------------------------
1998 1997 1998 1997
----------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues $ 251,531 $ 484,869 449,109 $ 711,903
Costs and expenses:
Cost of products sold 315,077 402,738 567,777 600,898
Research and development expense 142,659 156,124 315,038 350,836
Selling, general and administrative
expense 623,792 891,379 1,270,169 2,301,339
-------------- -------------- -------------- --------------
Loss from operations (829,997) (965,372) (1,703,875) (2,541,170)
Interest income 3,779 8,447 10,354 14,126
Interest expense (1,300) (400,705) (2,705) (409,284)
Other income (expense) (16,608) (1,200) 27,132 8,030
-------------- -------------- -------------- --------------
Net loss (844,126) (1,358,830) (1,669,094) (2,928,298)
Dividends including deemed dividends
on preferred stock (342,038) -- (667,491) --
-------------- -------------- -------------- --------------
Net loss to common stockholders $ (1,186,164) $ (1,358,830) $ (2,336,585) $ (2,928,298)
============== ============== ============== ==============
Basic and diluted net loss per share $ (0.36) $ (0.61) $ (0.73) $ (1.32)
============== ============== ============== ==============
Shares used in per share calculations 3,314,317 2,232,234 3,179,119 2,220,656
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 69
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------------------------------
1998 1997
--------------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,669,094) $ (2,928,298)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 134,533 147,632
Gain on sale of property and equipment (43,479) --
Compensation expense relating to Option Plan -- 397,749
Interest expense related to conversion of Debentures -- 404,395
Other -- (10,459)
Changes in current assets and liabilities:
Accounts receivable (42,937) (49,269)
Inventories 100,355 (165,513)
Prepaid expenses and deposits 47,724 (21,758)
Accounts payable and accrued expenses (266,787) 505,967
------------- ------------
Net cash used in operating activities (1,739,685) (1,719,554)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (35,585) (59,387)
Proceeds from sale of property and equipment 33,482 --
------------- ------------
Net cash provided by (used in) investing activities (2,103) (59,387)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of Common Stock 250,000 --
Exercise of Common Stock options and warrants -- 450
Proceeds from sale of preferred stock, net of issuance costs 1,380,000 --
Proceeds from Convertible Debentures, net of
issuance costs -- 1,380,000
Repayment of long term debt and capital lease obligations (12,083) (17,764)
------------- ------------
Net cash provided by financing activities 1,617,917 1,362,686
------------- ------------
Net decrease in cash and cash equivalents (123,871) (416,255)
Cash and cash equivalents, beginning of period 391,812 776,380
------------- ------------
Cash and cash equivalents, end of period $ 267,941 $ 360,125
============= ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for interest $ 1,405 $ --
Noncash transactions:
Debt extinguished on disposition of property and
equipment 11,007 --
Conversion of Debentures into Common Stock -- 1,380,000
Subscription receivable for Common Stock -- 912,500
Dividends payable on 1998-A Convertible Preferred Stock 34,945 --
Deemed dividends on 1998-A Convertible Preferred Stock 632,546 --
Payment of Common Stock to former employee 25,600 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 70
SALIVA DIAGNOSTIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements as of and for the
three and six month periods ended June 30, 1998 and 1997 have been prepared in
conformity with generally accepted accounting principles. The financial
information as of December 31, 1997 is derived from Saliva Diagnostic Systems,
Inc. (the "Company") consolidated financial statements included in the
Company's Annual Report on Form 10-KSB/A for the year ended December 31, 1997.
Certain information or footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the accompanying consolidated financial statements include all
adjustments necessary (which are of a normal and recurring nature) for the fair
presentation of the results of the interim periods presented. The accompanying
consolidated financial statements should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1997, as
included in the Company's Annual Report on Form 10-KSB/A for the year ended
December 31, 1997.
Operating results for the three and six month periods ended June 30, 1998 are
not necessarily indicative of the results that may be expected for the entire
fiscal year ending December 31, 1998, or any other portion thereof.
Certain amounts have been restated for the consolidated financial statements
for the periods ended June 30, 1998 due to adjustments made as a result of the
audit of the Company's Annual Report on Form 10-KSB/A for the year ended
December 31, 1997.
Subsequent to June 30, 1998, the Company amended the Company's Certificate of
Incorporation declaring that each ten outstanding shares of the Company's
Common Stock be converted and reconstituted into one share of Common Stock. As
a result, all share amounts and values in these financial statements have been
restated to reflect the reverse stock split.
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:
June 30, December 31,
1998 1997
--------------- --------------
Raw materials $ 252,881 $ 280,438
Work in process 16,911 11,569
Finished goods 88,030 166,170
--------------- --------------
$ 357,822 $ 458,177
=============== ==============
3. LOSS PER SHARE
The Company has adopted Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). SFAS 128 changes the standards for computing and presenting earnings per
share (EPS) and supersedes Accounting Principles Board Opinion No. 15,
"Earnings per Share." Basic earnings per common share is computed using the
weighted average number of shares of common stock outstanding for the period.
Diluted earnings per common share is computed using the weighted average number
of shares of common stock and dilutive common equivalent shares related to
stock options and warrants outstanding during the period.
F-23
<PAGE> 71
A net loss was reported in the second quarters and first six months of both
1998 and 1997, and accordingly, the denominator was equal to the weighted
average outstanding shares with no consideration for outstanding options and
warrants to purchase shares of the Company's common stock, because to do so
would have been anti-dilutive. Stock options for the purchase of 219,550
shares, warrants for the purchase of 156,721 shares and approximately 1,034,548
shares which represent the number of common shares that preferred stock would
convert into at June 30, 1998 were not included in loss per share calculations,
because to do so would have been anti-dilutive.
4. ACCRUED EXPENSES
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
Accrued wages and salaries $ 444,331 $ 493,352
Accrued payroll taxes 83,803 92,144
Accrued restructuring expenses 13,040 135,522
Litigation contingencies 801,000 750,000
Other accrued liabilities 1,675 2,926
-------------- --------------
$ 1,343,849 $ 1,473,944
============== ==============
</TABLE>
5. SERIES 1998-A CONVERTIBLE REDEEMABLE PREFERRED STOCK
On January 26, 1998, the Company entered into a Securities Purchase Agreement
with an investor for the issuance and sale of shares of the Company's newly
designated Series 1998-A Convertible Preferred Stock, stated value $1,000 per
share (the "1998-A Preferred Stock") (the "Preferred Offering"). Pursuant to
the Securities Purchase Agreement, the Company sold a total of 1,500 shares of
the 1998-A Preferred Stock to an investor for an aggregate purchase price of
$1,500,000. See Management's Discussion and Analysis-Liquidity and Capital
Resources for additional disclosure regarding the 1998-A Preferred Stock.
The 1998-A Preferred Stock is convertible into Common Stock of the Company at a
beneficial conversion ratio, and as a result, a discount of $300,000 was
recorded at the date of issuance of the 1998-A Preferred Stock. The discount
will be accreted to deemed preferred dividends over the conversion period,
which ends July 25, 1998. Additionally, the Company incurred offering costs
related to the 1998-A Preferred Stock totaling approximately $120,000. These
offering costs are reflected as a discount to the 1998-A Preferred Stock and
will be accreted as deemed preferred dividends over the conversion period,
which ends July 25, 1998. Deemed dividends of $195,208 and $197,708 at June 30,
1998 and March 31, 1998, respectively, have been recorded relating to the
beneficial conversion ratio and offering costs. Dividends payable on conversion
have been accrued for at $34,945. On April 28, 1998, 140 shares of the 1998-A
Preferred Stock were converted into common in accordance with the agreement.
In connection with the issuance of the 1998-A Preferred Stock, the Company
issued warrants to purchase up to 75,000 shares of Common Stock at an exercise
price of $3.375 per share, which expire on January 26, 2003. The fair value of
these warrants of $248,250 has been reflected as a discount to the 1998-A
Preferred Stock and will be accreted as deemed preferred dividends over the
conversion period, which ends July 25, 1998. Deemed dividends of $111,885 and
$127,745 at June 30, 1998 and March 31, 1998, respectively, have been recorded
related to the fair value of the warrants.
6. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130). This statement establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general purpose financial statements. The objective of SFAS
130 is to report a measure of all changes in equity of an enterprise that
result from transactions and other economic events of the
F-24
<PAGE> 72
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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). This statement establishes
accounting and reporting standards requiring that every derivative instrument
be recorded in the balance sheet as either an asset or liability measured at
its fair value. SFAS 133 also requires that changes in the derivative
instrument's fair value be recognized currently in results of operations unless
specific hedge accounting criteria are met. SFAS 133 is effective for fiscal
years beginning after June 15, 1999. The Company expects that adoption of SFAS
133 will have no impact on the Company's financial condition or results of
operations.
7. CONTINGENCIES
Luc Hardy, a former director and officer of the Company, filed a complaint in
Federal court against the Company and several individual defendants, including
former directors and officers of the Company, making certain allegations,
including breach of Mr. Hardy's employment agreement with the Company,
intentional interference with contract by the individual defendants, slander
and deceptive trade practices, all arising from his termination. The complaint
seeks damages and punitive damages in an unspecified amount. A jury verdict for
the plaintiff, which is not a final judgment, was rendered on July 25, 1997 in
the approximate amount of $740,000. In October 1997, a hearing was held on the
Company's motions to set aside the jury verdict and for a new trial. The
Company is currently awaiting a decision. There can be no assurance such
motions will be granted. A final judgment consistent with the jury verdict in
this case will have a material adverse effect on the Company.
In February 1998, a lawsuit was filed by Ronald Lealos, the former President of
the Company, who resigned in December 1996. The complaint alleges that Mr.
Lealos was entitled to certain cash payments and benefits under an employment
agreement whereby he would serve as the Company's president, and that the
Company's failure to make such payments and grant such benefits constituted
anticipatory breach and breach of that contract. In addition, the complaint
alleges that the Company wrongfully rescinded options to purchase 385,500
shares of Common Stock in breach of a stock option agreement with Mr. Lealos.
In March 1998, the Company filed an answer to the complaint in which it stated
that the alleged employment agreement was not intended to be effective and was
rescinded by the parties, and that the stock option agreement was not breached
by the Company. The Company's answer also asserted numerous counterclaims
against Mr. Lealos, including breach of fiduciary duty and conversion, for
which the Company is seeking damages in excess of $1,500,000. There can be no
assurance that the litigation will not be decided adverse to the Company and
that such an adverse decision would not have a material adverse effect on the
Company.
8. SUBSEQUENT EVENTS
Subsequent to June 30, 1998, the Company amended the Company's Certificate of
Incorporation declaring that each ten outstanding shares of the Company's
Common Stock be converted and reconstituted into one share of Common Stock. As
a result, all share amounts and values in these financial statements have been
restated to reflect the reverse stock split.
On July 30, 1998, the Company amended to eliminate the redemption rights
pursuant to the Securities Purchase Agreement for the Series 1998-A Convertible
Preferred Stock which is shown on the mezzanine level in the accompanying
financial statements. As a result of this amendment, these shares will be
accounted for as an equity instrument as of the date of the amendment.
On July 31, 1998, the Company amended the Securities Purchase Agreement with an
investor for the issuance and sale of shares of the Company's newly designated
Series 1998-B Convertible Preferred Stock, stated value $1,000 per share (the
"1998-B Preferred Stock"). Pursuant to the Securities Purchase Agreement, the
Company sold 500 shares of the 1998-B Preferred Stock to the investor for an
aggregate purchase price of $470,000 (net of issuance costs of $30,000). The
investor is committed to purchase an additional 1,000 shares of 1998-B
Preferred Stock prior to April 3, 1999 for an aggregate purchase price of
$940,000 (net of issuance costs of $60,000).
F-25
<PAGE> 73
The 1998-B Preferred Stock is convertible into Common Stock of the Company at a
beneficial conversion ratio and, as a result, a discount of $125,000 will be
recorded at the date of issuance of the 1998-B Preferred Stock. The discount
will be accreted to deemed dividends over the conversion period, which ends
November 1, 1998.
In connection with the issuance of the 1998-B Preferred Stock, the Company
issued warrants to purchase up to 25,000 shares of Common Stock at an exercise
price of $3.375 per share, which expire on January 26, 2003. The fair value of
these warrants of $253,750 will be reflected as a discount to the 1998-B
Preferred Stock and will be accreted as deemed dividends over the conversion
period which ends November 1, 1998.
F-26
<PAGE> 74
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
<TABLE>
<CAPTION>
Page
<S> <C>
Available Information........................................................................2
Prospectus Summary...........................................................................3
Risk Factors.................................................................................5
The Company.................................................................................12
Management's Discussion and Analysis........................................................24
Market for Registrant's Common Equity and Related Stockholder Matters.......................30
Management..................................................................................31
Executive Compensation and Other Matters....................................................32
Security Ownership of Certain Beneficial Owners and Management..............................38
Selling Shareholder.........................................................................39
Description of Securities...................................................................40
Plan of Distribution........................................................................41
Legal Matters...............................................................................41
Experts.....................................................................................41
Changes in Accountants......................................................................41
Indemnification of Directors and Officers...................................................42
Additional Information......................................................................43
Index to Financial Statements..............................................................F-1
</TABLE>
Until October __, 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
SEPTEMBER __, 1998
<PAGE> 75
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:
Registration Fee.......................................$ 738.92
Legal Fees...............................................7,500.00*
Accounting Fees..........................................2,500.00*
Total.............................................$10,738.92*
- ---------------------
* Estimated
II-1
<PAGE> 76
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 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>
II-2
<PAGE> 77
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
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
Training, Inc. 100,000
The Covette Community Property Trust 100,000
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
</TABLE>
II-3
<PAGE> 78
<TABLE>
<S> <C>
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
Profit Sharing Plan 50,000
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.
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.
In May 1998, the Company sold to Paul Bernstein a total of 1,562,500
shares of its Common Stock for an aggregate purchase price of $250,000.
In August 1998, the Company entered into a securities purchase agreement
pursuant to which Biscount Overseas Limited is obligated to purchase an
aggregate 1,500 shares of its Series 1998-B Convertible Preferred Stock over an
eight-month period for an aggregate purchase price of $1,500,000. Net proceeds
to the Company at the end of that period will total $1,410,000.
II-4
<PAGE> 79
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
3.1 Certificate of Incorporation, as amended, incorporated by reference to Exhibits 2.1 through 2.6 of the
Company's Registration Statement No. 33-46648 filed on Form S-1 (the "Form S-1"); and to Exhibit 2.7 of the
Company's Annual Report on Form 10-KSB for its fiscal year ended December 31, 1995
3.2 Certificate of Amendment, dated February 25, 1997, incorporated by reference to Exhibit 2.2 of the Company's
Annual Report on Form 10-KSB for its fiscal year ended December 31, 1996
3.3 Certificate of Amendment, dated November 21, 1997, incorporated by reference to Exhibit 3.3 of the Company's
Annual Report on Form 10-KSB for its fiscal year ended December 31, 1997 (the "1997 10-KSB")
3.4 Certificate of Amendment, dated July 31, 1998, incorporated by reference to Exhibit 3.4 of the Company's
Quarterly Report on Form 10-QSB for its fiscal quarter ended June 30, 1998 (the "1998 10-QSB")
3.5 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, 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
</TABLE>
II-5
<PAGE> 80
<TABLE>
<S> <C>
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")
4.16 Amended Certificate of Designations, Rights and Preferences of the Series 1998-A Convertible Preferred
Stock, incorporated by reference to Exhibit 4.14 of the 1998 10-QSB
4.18 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")
4.19 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
4.20 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
4.21 Certificate of Designations, Rights and Preferences of the Series 1998-B Convertible Preferred Stock,
incorporated by reference to Exhibit 4.16 of the 1998 10-QSB
4.22 Amendment to Securities Purchase Agreement dated as of January 26, 1998, dated as of July 30, 1998 between
the Company and Biscount Overseas Limited
4.23 Amendment to Registration Rights Agreement dated as of January 26, 1998, dated as of July 30, 1998 between
the Company and Biscount Overseas Limited
4.24 Placement Agent Agreement dated as of July 30, 1998 between the Company and Arych Trading Inc.
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
</TABLE>
II-6
<PAGE> 81
<TABLE>
<S> <C>
10.5 1994 Stock Option Plan, incorporated by reference to Exhibit A of the Proxy Statement for the Company's
1994 Annual Meeting
10.6 Lease Agreement, dated June 13, 1994, between Technology Parks Private Limited and Saliva Diagnostic Systems
(Singapore) Pte. Ltd., incorporated by reference to Exhibit 10.2 of the 1995 10-KSB
10.7 Amendment, dated February 20, 1997, to Lease Agreement, dated June 13, 1994, between Technology Parks
Private Limited and Saliva Diagnostic Systems (Singapore) Pte. Ltd., incorporated by reference to Exhibit
10.7 to the 1996 10-KSB
10.8 Lease Agreement between the Company and East Ridge Business Park, incorporated by reference to Exhibit 10.14
of the Form S-1
10.9 Lease Agreement for additional premises between the Company and East Ridge Business Park, incorporated by
reference to Exhibit 10.14 of the Form S-1
10.10 Amendment, dated June 14, 1996, to Lease Agreement between the Company and East Ridge Business Park,
incorporated by reference to Exhibit 10.10 to the 1996 10-KSB
10.11 License Agreement, dated March 22, 1994, between the Company and Orgenics, Ltd., incorporated by reference
to Exhibit 10.7 of the 1993 10-KSB
10.12 License Agreement between Saliva Diagnostic Systems, Inc. and Saliva Diagnostic Systems (Singapore) Pte.
Ltd., incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-KSB for its
fiscal year ended December 31, 1994 (the "1994 10-KSB")
10.15 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
10.16 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
10.17 Amendment to Sub-License Agreement, dated March 8, 1995, incorporated by reference to Exhibit 10.18 of the
1997 10-KSB
10.18 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 Jeffrey S. Gilbert, CPA (successor to the audit firm 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)
</TABLE>
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
II-7
<PAGE> 82
the question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(b) The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10 (a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement;
(iii) include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
(4) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of a
Registration Statement in reliance upon Rule 430A and contained in the form of
Prospectus filed by Registrant pursuant to Rule 424 (b)(1) or (4) under the
Securities Act shall be deemed to be part of the Registration Statement as of
the time it was declared effective.
(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-8
<PAGE> 83
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Vancouver, State of Washington, on September 2,
1998. Each of such persons appoints Kenneth J. McLachlan and Eric F. Stoer or
each of them with full power to act without the other, his true and lawful
attorneys-in-fact and agents of him and on his behalf and in his name, place
and stead, and in any and all capacities, with full and several power of
substitution, to sign and file with the proper authorities any and all
documents in connection with this Registration Statement on Form SB-2, granting
unto said attorneys, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully to all intents and
purposes as he might or could do if personally present, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
SALIVA DIAGNOSTIC SYSTEMS, INC.
By:/s/ Kenneth J. McLachlan
----------------------------
Kenneth J. McLachlan
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Kenneth J. McLachlan Director, President, Chief Executive Officer, September 2, 1998
- ------------------------ Chief Financial Officer and Chief
Kenneth J. McLachlan Accounting Officer
/s/ Eric F. Stoer Director September 2, 1998
- --------------------
Eric F. Stoer
/s/ Hans R. Vauthier Director September 2, 1998
- --------------------
Hans R. Vauthier
/s/ Paul P. Bernstein Director September 2, 1998
- ---------------------
Paul P. Bernstein
/s/ Paul D. Slowey Chief Operating Officer and
- ------------------ Vice President of Marketing September 2, 1998
Paul D. Slowey
</TABLE>
<PAGE> 1
EXHIBIT 4.22
AMENDMENT TO
SECURITIES PURCHASE AGREEMENT
This Amendment to the Securities Purchase Agreement dated as of
January 26, 1998 (the "Agreement") is made and entered into as of July 30, 1998
by and between Saliva Diagnostic Systems, Inc. (the "Company") and Biscount
Overseas Limited (the "Buyer"). All capitalized terms used herein and not
defined shall have the respective meanings assigned to them in the Agreement.
RECITALS
A. Pursuant to the Agreement, the Buyer purchased from the
Company, and the Company issued and sold to the Buyer, 1,500 shares of the
Company's Series 1998-A Convertible Preferred Stock, stated value $1,000 per
share (the "Initial Preferred Stock"), for an aggregate principal amount of
$1,500,000.
B. The Agreement provides to the Buyer an option to purchase up
to an additional $1,500,000 principal amount of an additional series of
Preferred Stock (the "Additional Preferred Stock") on certain terms and
conditions.
C. Subsequent to the execution of the Agreement, circumstances
changed such that it has become in the mutual best interests of the Company and
the Buyer to modify certain terms of the Agreement and related agreements
entered into simultaneously therewith.
D. The Company and the Buyer desire to amend the Agreement to
provide for the purchase, issuance and sale of the Additional Preferred Stock to
be known as the "Series 1998-B Convertible Preferred Stock" on new terms and
conditions and to modify certain terms of the Initial Preferred Stock.
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein, and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties agree as follows:
1. Section 1(a)(v). Section 1(a)(v) of the Agreement is hereby
deleted in its entirety and the following inserted in its stead: "As used
herein, the term "Additional Closing Date" means the First Additional Closing
Date, the Second Additional Closing Date or the Third Additional Closing Date,
as applicable, as each is defined in Section 4(g)(ii) hereof."
2. Section 2(e). The definition of the "Company's SEC Documents"
contained in the last sentence of Section 2(e) of the Agreement is hereby
amended to include the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997 and the Company's Quarterly Report on Form 10-QSB
for the fiscal quarter ended March 31, 1998.
3. Section 2(i). Section 2(i) of the Agreement is hereby deleted
in its entirety.
<PAGE> 2
4. Section 3(b). The last two sentences of Section 3(b) of the
Agreement are hereby deleted and the following inserted in their stead: "The
Company has registered its Common Stock pursuant to Section 12 of the 1934 Act,
and the Common Stock is currently traded on the OTC Bulletin Board. The Company
makes no representation as to its ability to maintain trading of the Common
Stock on the OTC Bulletin Board or otherwise."
5. Section 4(g). Section 4(g) of the Agreement is hereby deleted
in its entirety and the following inserted in its stead:
ADDITIONAL PREFERRED STOCK.
(i) The undersigned hereby agrees to purchase from the
Company an aggregate 1,500 shares of the Additional Preferred Stock,
having the terms and conditions and being in the form attached
hereto as Annex I(B) (the "Additional Certificate of Designations").
The purchase price for the Additional Preferred Stock shall be an
aggregate $1,500,000 and shall be payable in United States Dollars.
(ii) Not later that 1:00 p.m. New York time on the date
which is one New York Stock Exchange trading day after the Company
shall have accepted the Amendment to this Agreement and returned a
signed counterpart of such Amendment to the Buyer or its counsel
and to the placement agent or its counsel (the "First Additional
Closing Date"), the Buyer shall pay to the Company $500,000 of the
purchase price, and the Company shall issue and sell to the Buyer
500 shares of the Additional Preferred Stock. On, or at the option
of the Buyer prior to, the date which is four months following the
First Additional Closing Date (the "Second Additional Closing
Date"), the Buyer shall pay to the Company an additional $500,000
of the purchase price, and the Company shall issue and sell to the
Buyer an additional 500 shares of the Additional Preferred Stock.
On, or at the option of the Buyer prior to, the date which is eight
months following the First Additional Closing Date (the "Third
Additional Closing Date"), the Buyer shall pay to the Company the
remaining $500,000 of the purchase price, and the Company shall
issue and sell to the Buyer the remaining 500 shares of the
Additional Preferred Stock.
(iii) The Buyer shall pay the purchase price for the
Additional Preferred Stock by delivering immediately available good
funds in United States Dollars to the Company or in accordance with
its written instructions. Promptly following payment by the Buyer of
the purchase price for the Additional Preferred Stock, the Company
shall deliver a certificate representing the Additional Preferred
Stock duly executed on behalf of the Company to the Buyer.
(iv) Payment of the purchase price for the Additional
Preferred Stock shall be made to or at the direction of the Company.
Not later than 1:00 p.m.,
2
<PAGE> 3
New York time, on the dates on which payment of the purchase price
is to be made in accordance with this Agreement, the Buyer shall
deposit the purchase price for the Additional Preferred Stock in
currently available funds. Time is of the essence with respect to
such payments, and failure by the Buyer to make any of such payments
shall allow the Company to cancel this Agreement.
6. Section 4(h). Section 4(h) of the Agreement is hereby deleted
and the following inserted in its stead:
The Company shall have authorized and reserved for issuance,
or shall have taken steps to ensure there will be available for
issuance at the time of conversion, shares of Common Stock
sufficient to yield (i) 150% of the number of shares of Common Stock
issuable at conversion as may be required to satisfy the conversion
rights of the Buyer pursuant to the terms and conditions of the
Preferred Stock, and (ii) 100% of the number of shares of Common
Stock issuable upon exercise as may be required to satisfy the
exercise rights of the Buyer pursuant to the terms and conditions of
the Warrants.
7. Section 4(k). Section 4(k) of the Agreement is hereby deleted
in its entirety.
8. Section 7. The last sentence of Section 7(i) of the Agreement is
hereby deleted and the following inserted in its stead:
Each Additional Closing Date shall be such date specified in Section
4(g)(ii) of this Agreement; provided, however, that it shall be a
condition of each Additional Closing Date that each of the
conditions contemplated by Sections 8 and 9 hereof shall have been
satisfied or waived on or before such date. In addition, it shall be
a condition of the First Additional Closing Date that the Company
effect a reverse split of its Common Stock at a ratio sufficient to
yield shares of Common Stock authorized and reserved for issuance
representing 150% of the number of shares of Common Stock issuable
to the Buyer at conversion pursuant to the terms and conditions of
the Additional Preferred Stock. It shall be a condition of the
Second Additional Closing Date and the Third Additional Closing Date
that the Registration Statement covering the Additional Preferred
Stock (as described in the Registration Rights Agreement, as
amended) be effective at such time.
9. Annex 1(A). The Certificate of Designations, Preferences and Rights
of the 1998-A Convertible Preferred Stock attached to the Agreement as Annex
1(A) is hereby removed and replaced with the form of Amended and Restated
Certificate of Designations, Preferences and Rights attached hereto as Exhibit
A.
10. Annex 1(B). The form of Certificate of Designations, Preferences
and Rights of the 1998-B Convertible Preferred Stock attached hereto as Exhibit
B shall be inserted as Annex 1(B) to the Agreement.
3
<PAGE> 4
11. The Agreement and this Amendment shall be read together and shall
have the same effect as if the provisions of the Agreement and this Amendment
were contained in one document. Except as amended by this Amendment, the
Agreement shall remain in full force and effect.
12. This Amendment shall be governed by and construed in accordance
with the laws of the State of Delaware for contracts to be wholly performed
in such state and without giving effect to the principles thereof regarding
the conflict of laws.
13. This Amendment may be executed in one or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Amendment, once executed by and bearing the signature of a
party, may be delivered to the other party hereto by facsimile transmission.
4
<PAGE> 5
IN WITNESS WHEREOF, the undersigned have executed this Amendment to
the Agreement as of the date first above written.
SALIVA DIAGNOSTIC SYSTEMS, INC.
/s/ Kenneth J. McLachlan
------------------------------
Name: Kenneth J. McLachlan
Title: President and Chief Executive Officer
BISCOUNT OVERSEAS LIMITED
/s/ Joseph Owadeyah
-----------------------------
Name: Joseph Owadeyah
Title: President
5
<PAGE> 1
EXHIBIT 4.23
AMENDMENT TO
REGISTRATION RIGHTS AGREEMENT
This Amendment to the Registration Rights Agreement dated as of
January 26, 1998 (the "Agreement") is made and entered into as of July 30, 1998
by and between Saliva Diagnostic Systems, Inc. (the "Company") and Biscount
Overseas Limited (the "Investor"). All capitalized terms used herein and not
defined shall have the respective meanings assigned to them in the Agreement.
RECITALS
A. Pursuant to the Agreement, the Company agreed to provide
certain registration rights under the Securities Act of 1933, as amended, with
respect to the shares of Common Stock issuable upon conversion of the Company's
Preferred Stock and Warrants, which were issued and sold to the Investor
pursuant to a Securities Purchase Agreement dated as of January 26, 1998 by and
between the Company and the Investor (the "Purchase Agreement").
B. Simultaneously with the execution of this Amendment, the
Company and the Investor have executed an Amendment to the Purchase Agreement to
modify certain terms relating to the Preferred Stock.
C. The Company and the Investor desire to amend the Agreement to
reflect the modifications to the Purchase Agreement.
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein, and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties agree as follows:
1. Section 2(a). Section 2(a) of the Agreement is hereby deleted and
the following inserted in its stead:
(a) MANDATORY REGISTRATION. The Company shall prepare and
file with the SEC as soon as possible after the applicable Closing
Date but no later than thirty (30) days following each of the First
Closing Date and the First Additional Closing Date, a Registration
Statement or amendment to an existing registration statement on Form
SB-2 (or other form for which the Company is eligible at such time)
registering for resale by the Investor (i) 150% of the number of
shares of Common Stock issuable at conversion as may be required to
satisfy the conversion rights of the Investor pursuant to the terms
and conditions of the Preferred Stock, and (ii) 100% of the number
of shares of Common Stock issuable upon exercise as may be required
to satisfy the exercise rights of the Investor pursuant to the terms
and conditions of the Warrants (or such lesser number as may be
required by the SEC). Such Registration Statement or amendment shall
state that, in accordance with Rule 416 and 457 under the Securities
Act, it also
<PAGE> 2
covers such indeterminate number of additional shares of Common
Stock as may become issuable upon conversion of the Preferred Stock
and the exercise of the Warrants resulting from adjustment in the
Conversion Price or the Warrant exercise price, as the case may be,
or to prevent dilution resulting from stock splits or stock
dividends.
The Company will use its reasonable best efforts to cause
such Registration Statement to be declared effective not later
than ninety (90) days after the applicable Closing Date. If at any
time the number of shares of Common Stock into which the Preferred
Stock may be converted and which would be issued upon exercise of
the Warrants exceeds the aggregate number of shares of Common Stock
then registered, the Company shall, within ten (10) business days
after receipt of a written notice from the Investor, either (i)
amend the Registration Statement filed by the Company pursuant to
the preceding sentence, if such Registration Statement has not been
declared effective by the SEC, or (ii) file an additional
registration statement with the SEC, if the Registration Statement
has been declared effective by the SEC, to register the additional
shares.
2. Section 2(b)(i). Section 2(b)(i) of the Agreement is hereby
deleted and the following inserted in its stead:
(i) If the Registration Statement covering the
Registrable Securities is not filed in proper for with the SEC
within thirty (30) days after the applicable Closing Date (the
"Required Filing Date"), the Company will make payment to the
Investor in such amounts and at such times as shall be determined
pursuant to this Section 2(b).
3. Section 2(b)(ii). Section 2(b)(ii) of the Agreement is hereby
deleted and the following inserted in its stead:
(ii) If the Registration Statement covering the
Registrable Securities is not effective within ninety (90) days
following the applicable Closing Date (the "Required Effective
Date") or after a Suspension Period (defined below), then the
Company will make payments to the Investor in such amounts and at
such times as shall be determined pursuant to this Section 2(b);
provided, however, that the Company shall not be required to request
that the Registration Statement be declared effective if such
Registration Statement contains information required to be disclosed
in a 1934 Act report not yet filed by the Company (in which case
"Required Effective Date" shall mean the day after the filing of the
1934 Act report).
4. The Agreement and this Amendment shall be read together and shall
have the same effect as if the provisions of the Agreement and this Amendment
were contained in one document. Except as amended by this Amendment, the
Agreement shall remain in full force and effect.
2
<PAGE> 3
5. This Amendment shall be governed by and construed in accordance
with the laws of the State of Delaware for contracts to be wholly performed in
such state and without giving effect to the principles thereof regarding the
conflict of laws.
6. This Amendment may be executed in one or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Amendment, once executed by and bearing the signature of a
party, may be delivered to the other party hereto by facsimile transmission.
IN WITNESS WHEREOF, the undersigned have executed this Amendment to
the Agreement as of the date first above written.
SALIVA DIAGNOSTIC SYSTEMS, INC.
/s/ Kenneth J. McLachlan
-----------------------------
Name: Kenneth J. McLachlan
Title: President and Chief Executive Officer
BISCOUNT OVERSEAS LIMITED
/s/ Joseph Owadeyah
----------------------------
Name: Joseph Owadeyah
Title: President
3
<PAGE> 1
EXHIBIT 4.24
Saliva Diagnostic Systems, Inc.
11719 NE 95th Street
Vancouver, Washington 98682
Gentlemen:
This letter will confirm our mutual agreement to modify the terms of
our engagement as exclusive placement agent to act on behalf of Saliva
Diagnostic Systems, Inc. (the "Company") in connection with the offer and sale
of up to $3,000,000 aggregate principal amount of the Company's Convertible
Preferred Stock, Series 1998-A and 1998-B. Reference is made to the letter dated
January 26, 1998 from Aryeh Trading, Inc. ("Placement Agent") and agreed and
accepted by the Company (the "Original Agreement").
We hereby agree that the following modifications to the Original
Agreement be made, and that that the terms of this letter supersede the terms of
the Original Agreement to the extent set forth below:
1. All of the terms relating to the Second Offering set forth in
Paragraph 2(a) of the Original Agreement (i.e., all of Paragraph 2(a) except the
first two sentences) are replaced with the following terms: Each of the three
closings for the Second Offering will be held on an "Additional Closing Date,"
as defined in the Amendment to the Securities Purchase Agreement by and between
the Company and the Buyer.
2. The Fees described in Paragraph 2(b) of the Original Agreement shall
apply solely to the First Offering. In respect of the Second Offering, the
Company will receive net proceeds of the sale of the 1998-B Preferred Stock
after deducting the Placement Agent's cash fee of 6% of the aggregate principal
amount of 1998-B Preferred Stock.
3. Paragraph 2(c)(ii) of the Original Agreement shall not apply. Shares
of the 1998-B Preferred Stock issued in the Second Offering shall be convertible
into Common Stock at the lesser of (I) 80% of the average closing bid price of
the Common Stock for the five trading days prior to conversion, and (ii) 100% of
the average closing bid price of the Common Stock for the five trading days
prior to the Additional Closing Date with respect to such shares, the price as
reported by the OTC Bulletin Board or other principal securities exchange or
market on which the Common Stock is or may be traded.
4. Exhibit A attached to the Original Agreement shall be replaced with
Exhibit A attached to this letter.
In addition, we agree that the Company shall grant to the Placement
Agent, for a period of ninety (90) days following the execution of this letter,
a right of first refusal with respect to the issuance of securities by the
Company as follows. In the event the Company proposes to undertake an issuance
of any securities which are or are convertible into Common Stock, the Company
shall give notice thereof to the Placement Agent, which notice shall specify in
detail the type of issuance, the price at and the general terms and conditions
upon which the
<PAGE> 2
Company proposes to issue the securities. The Placement Agent shall have the
right, for a period ending at 11:00 p.m. on the fifth business day after the
Company's notice, to purchase or place the securities for the same price and
upon the same general terms and conditions specified in the Company's notice.
The Placement Agent may exercise such right by giving written notice of such
exercise to the Company. In the event the Placement Agent fails to give written
notice of the exercise of its right of first refusal to the Company within the
five day period, the Company may issue the new securities to a third party and
the Placement Agent shall have no rights with respect thereto; provided,
however, that if the price or general terms and conditions of the proposed
issuance change materially from those specified in the Company's notice, the
Company shall give notice thereof to the Placement Agent and the Placement Agent
shall again have a right of first refusal as described above.
Dated: July 30, 1998
ARYEH TRADING, INC.
By: /s/ Moishe Bodner
---------------------
Name: Moishe Bodner
Title: President
Agreed and Accepted:
SALIVA DIAGNOSTIC SYSTEMS, INC.
By: /s/ Kenneth J. McLachlan
---------------------------
Name: Kenneth J. McLachlan
Title: President and CEO
<PAGE> 3
EXHIBIT A
CONVERSION TERMS: The two offerings of Preferred Stock are convertible into
shares of Common Stock according on the following schedule:
a. For the First Offering:
--25% of the Preferred Stock is convertible beginning 90
days after issuance;
--an additional 25% of the Preferred Stock
(cumulative 50%) is convertible beginning 120 days after
issuance;
--an additional 25% of the Preferred Stock
(cumulative 75%) is convertible beginning 150 days after
issuance; and
--100% of the Preferred Stock is convertible beginning
180 days after issuance.
b. For the Second Offering:
--100% of the Preferred Stock is convertible beginning 90
days after issuance.
The securities of each offering are convertible up to two
(2) years from such offering's Closing Date. In the event
that any securities remain outstanding on the second
anniversary of the relevant Closing Date, all remaining
securities must be converted.
WARRANTS: The Buyer or its designee shall be issued transferable
divisible warrants to purchase an aggregate 1,000,000 shares of Common
Stock with an exercise price equal to the average closing bid price of the
common stock for five (5) trading days ending on the trading day prior to
the First Closing Date. Warrants for 750,000 of these shares will be issued
on the First Closing Date and will be exercisable immediately; the warrants
for the remaining 250,000 shares will be issued on the First Additional
Closing Date and will be exercisable commencing no earlier than 10 days
after such Closing Date. No additional warrants will be issued to the Buyer
in connection with closings of the Second Offering. The common stock
underlying the Warrants will be registered pursuant to a registration
rights agreement. The Warrants will have a term of five (5) years from the
First Closing Date.
REGISTRATION
RIGHTS: The Company will agree to file one or more registration
statements or amendments to an existing registration statement covering the
Common Stock underlying the Preferred Stock of each Offering within thirty
(30) days after (i) the First Closing Date with respect to the First
Offering and (ii) the First Additional Closing Date with respect to the
Second Offering, and will cause such registration statement to become
effective no later than the "Required Effective Date," which is ninety (90)
days from the applicable Closing Date.
<PAGE> 4
LATE FILING OR
EFFECTIVENESS: If the Company does not file the registration statement
with SEC on timely basis, or if the registration statement is not declared
effective by the Required Effective Date, the Company will compensate the
Buyer in an amount equal to 2% per month of the principal amount of the
Preferred Stock acquired. Such payment will be made in cash on demand and
will continue to accrue until the registration statement is declared
effective.
AVAILABLE SHARES: The Company will have reserved for issuance, or will have
taken steps to ensure there will be available for issuance at the time of
conversion, to the Buyer at least 150% of the shares then anticipated to be
necessary for issuance upon conversion of all outstanding Preferred Stock
and all Warrants.
DELIVERY OF
CERTIFICATES: On conversion, the Company will direct the transfer agent
to deliver certificates for shares to Buyer within 3 business days. If such
direction is made more than 5 days late, the Company will compensate Buyer
at rate of $100/day for first 10 days and $200/day thereafter for each
$10,000 of purchase price. Buyer will also have right to rescind conversion
notice. In addition, if, after 3rd business day, the Company has not made
its request of transfer agent, if Buyer has sold shares of Common Stock,
the Company will compensate Buyer for extra costs incurred to cover sale.
LIMITATIONS ON
COMPANY'S ISSUANCE: If the Company does not have sufficient authorized but
unissed shares of Common Stock at any time a holder submits a notice of
conversion, the Company shall use its best efforts to take all necessary
action to obtain shareholder approval, as promptly as possible, to
authorize the issuance of sufficient shares of Common Stock to effect the
conversion. In the event that the Company's common stock becomes traded on
The Nasdaq SmallCap Market, the parties will agree to amend the
Certificates of Designations, Preferences and Rights for the Preferred
Stock to provide for automatic redemption of the common stock issuable upon
conversion in excess of the 19.99% exchange cap.
ADJUSTMENTS: Under certain circumstances (including, but not
necessarily limited to, recapitalizations, stock splits, reverse stock
splits) the conversion price and the warrant exercise price will be
adjusted. In the event the Company does a "spin off" transaction prior to
conversion or warrant exercise, additional provisions relating to
adjustment in price and shares of spun off entity will apply.
DILUTIVE EFFECT: The Company will acknowledge possible dilutive effect of
conversion and exercise terms, including possible price adjustment.
<PAGE> 5
HEDGE FUND: The Company will acknowledge that Buyer may be "hedge"
fund and may engage in certain hedging transactions.
NO UNDISCLOSED LIABILITIES
OR EVENTS REQUIRING
DISCLOSURE: The Company will represent that (i) it has no undisclosed
liabilities other than in the ordinary course of business (which
individually or in the aggregate do not have a material adverse effect on
the condition of the Company) and (ii) there are no events or circumstances
requiring public disclosure which have not been disclosed.
REGULATION D: The Company will represent that neither it nor its
affiliates have engaged in any sales or offers which would eliminate the
Regulation D exemption for this transaction.
TRANSFER AGENT
AUTHORIZATION: The Company will authorize the transfer agent to give
public information relating to the Company directly to Buyer or
representatives.
OPINION: The Company counsel will provide an opinion to Buyer
substantially in form attached to Securities Purchase Agreement.
<PAGE> 1
Exhibit 5
September 2, 1998
Saliva Diagnostic Systems, Inc.
11719 NE 95th Street
Vancouver, WA 98682
Ladies and Gentlemen:
We have acted as counsel to Saliva Diagnostic Systems, Inc. (the
"Company") in connection with the registration by the Company of up to 1,869,262
shares of the Company's common stock, par value $.01 per share (the "Shares"),
including (i) 1,844,262 shares which have been issued upon the conversion of
1,500 shares of the Company's 1998-B Convertible Preferred Stock, par value $.01
per share (the "1998-B Preferred Stock"), and (ii) 25,000 shares which may be
issued upon the exercise of warrants granted in connection with the private
placement of the 1998-B Preferred Stock (the "Warrants"). A Registration
Statement on Form SB-2 covering the Shares (Registration No. 333-_______), has
been filed with the Securities and Exchange Commission pursuant to the
Securities Act of 1933, as amended.
In connection herewith, we have examined and relied as to matters of
fact upon such certificates of public officials, such certificates of officers
of the Company and originals or copies certified to our satisfaction of the
Certificate of Incorporation and Bylaws of the Company (each amended through the
date hereof), proceedings of the Board of Directors of the Company and other
corporate records, documents, certificates and instruments as we have deemed
necessary or appropriate in order to enable us to render the opinion expressed
below.
In rendering the following opinion, we have assumed the genuineness of
all signatures on al documents examined by us, the authenticity of all documents
submitted to us as originals and the conformity to authentic originals of all
documents submitted to us as certified or photostatted copies, and we have
relied as to matters of fact upon statements and certifications of officers of
the Company. In addition, we have assumed that the certificate for the Shares
conforms to the specimen thereof examined by us and has been duly registered and
countersigned by the Company's transfer agent, assumptions which we are not
independently verifying by inspection.
Based on the foregoing, we are of the opinion that the Shares are duly
and validly authorized and, as issued or when issued upon conversion of the
Warrants in accordance with their terms, as the case may be, the Shares will be
validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
aforesaid Registration Statement on Form SB-2 and to the use of our name under
the caption "Legal Matters" in the Prospectus filed as a part thereof.
Very truly yours,
Bryan Cave LLP
<PAGE> 1
Exhibit 23.1
Consent of Independent Accountants
To the Board of Directors
Saliva Diagnostic Systems, Inc.
We consent to the use in the Registration Statement on Form SB-2 of Saliva
Diagnostic Systems, Inc. (Registration No. 333-_____), of our report dated March
21, 1997 relating to the consolidated financial statements of Saliva Diagnostic
Systems, Inc. and its subsidiaries, and to the reference to our Firm under the
caption "Experts" in the Prospectus.
/s/ Jeffrey S. Gilbert
Jeffrey S. Gilbert, CPA
(successor to the audit firm
of Hollander, Gilbert & Co.)
Los Angeles, California
September 2, 1998
<PAGE> 1
Exhibit 23.2
Consent of Independent Accountants
To the Board of Directors
Saliva Diagnostic Systems, Inc.
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
Registration Statement File No. 333-_____.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Portland, Oregon
September 2, 1998
