-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V8UHNAVngq7wnJfc77jpyzLN5Y6uP3tixN2kccunBBqH3pQPZa1db7ZvolfjFJLW 0Y/X88PYRhhqSRKvmEJ7tg== 0000912057-97-024578.txt : 19970721 0000912057-97-024578.hdr.sgml : 19970721 ACCESSION NUMBER: 0000912057-97-024578 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970718 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOCIRCUITS CORP CENTRAL INDEX KEY: 0000855844 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 943088884 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-19975 FILM NUMBER: 97642736 BUSINESS ADDRESS: STREET 1: 1324 CHESAPEAKE TERRACE CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4087451961 MAIL ADDRESS: STREET 1: 1324 CHESAPEAKE TERRACE CITY: SUNNYVALE STATE: CA ZIP: 94089 10-K/A 1 10-K/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A-2 --------------- /X/ ANNUAL REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER 0-19975 ------------------------ BIOCIRCUITS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 94-3088884 (State or other jurisdiction (I.R.S. Employer of Identification No.) incorporation or organization)
1324 CHESAPEAKE TERRACE, SUNNYVALE, CALIFORNIA, 94089 (Address of principal executive offices, including zip code) (408) 745-1961 (Registrant's telephone number, including area code) ------------------------ Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001 PAR VALUE ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ____ The approximate aggregate market value of the Common Stock held by non-affiliates of the Registrant, based upon the last sale price of the Common Stock reported on the National Association of Securities Dealers Automated Quotation National Market System was $7,950,000* as of July 16, 1997. The Number of shares of Common Stock outstanding was 17,335,605 as of July 15, 1997. DOCUMENTS INCORPORATED BY REFERENCE None - ------------------------ * Excludes approximately 9,830,000 shares of Common Stock held by directors, officers and stockholders whose beneficial ownership exceeds five percent of the shares outstanding at July 16, 1997. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that such person is controlled by or under common control with the Registrant. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1: BUSINESS IN ADDITION TO THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN THIS SECTION AND IN ITEM 7. THE COMPANY HAS RECENTLY ENTERED INTO A LETTER OF INTENT (THE "LETTER OF INTENT") WITH THE BECTON-DICKINSON MICROBIOLOGY SYSTEMS DIVISION OF BECTON, DICKINSON AND COMPANY ("BECTON") TO ENTER INTO AN AGREEMENT (THE "AGREEMENT") THAT WOULD GIVE BECTON EXCLUSIVE WORLDWIDE MARKETING RIGHTS TO THE IOS SYSTEM AND ALL CARTRIDGES CURRENTLY AVAILABLE AS WELL AS THOSE THAT WILL BE DEVELOPED IN THE FUTURE. IT IS ALSO POSSIBLE THAT BECTON WILL ASSUME RESPONSIBILITY FOR MANUFACTURING THE IOS INSTRUMENT IN 1998. THE COMPANY CURRENTLY PLANS TO CONTINUE TO MANUFACTURE CARTRIDGES FOR TRANSFER TO BECTON AS WELL AS TO DEVELOP NEW TEST CARTRIDGES. THE LETTER OF INTENT IS NOT LEGALLY BINDING AND THE AGREEMENT, WHICH IS CURRENTLY BEING NEGOTIATED BY THE PARTIES, MAY NEVER BE FINALIZED AND EXECUTED. IF THE AGREEMENT IS EXECUTED, THE COMPANY'S OPERATIONS WILL BE MATERIALLY AFFECTED AND THE COMPANY'S RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED HEREIN. Biocircuits-TM- was founded in 1989 to develop new immunodiagnostic testing systems. Immunodiagnostic tests, or "assays," are performed on samples of bodily fluids to diagnose a variety of infectious diseases and other conditions, such as endocrine dysfunctions, and to conduct therapeutic drug monitoring. Immunodiagnostic tests utilize biological reagents, such as antibodies, and an instrument to detect the presence of a substance of interest, or "analyte," such as a virus or hormone. The Company's IOS-TM- point-of-care immunodiagnostic testing system consists of a compact, inexpensive instrument and disposable test cartridges that can be operated by a user with no special skills or training. The system enables users to perform tests at many locations, including physicians' offices, ambulatory clinics and small clinical laboratories. In the first quarter of 1996, the Company began marketing its IOS system with cartridges capable of performing T4 and T Uptake tests, two tests for assessing thyroid function. In September 1996, the Company announced clearance from the United States Food and Drug Administration ("FDA") to market a qualitative serum pregnancy assay, a test designed to allow physicians to perform this common pregnancy test in their offices during the patient visit where they can provide more immediate pre-natal care to patients. In December 1996, the Company announced FDA clearance to market a quantitative hCG assay, a test to track the progress of early pregnancies. During 1996, the Company developed an improved second generation cartridge for its new assays as well as existing assays. Also in December 1996, the Company launched its Thyroid Stimulating Hormone ("TSH") assay on the second generation cartridge. The TSH assay is a test to assess thyroid function. In March 1997, the Company began shipping the T4 and T Uptake tests on the second generation cartridge. The second generation cartridge will be required for the market launch of all future assays. INDUSTRY BACKGROUND IN VITRO diagnostic testing is the process of analyzing constituents of blood, urine and other bodily fluids outside of the body. The two largest categories of IN VITRO diagnostic tests performed today are clinical chemistry and immunodiagnostic testing. Clinical chemistry testing utilizes relatively simple chemical reactions to measure certain molecules found in relatively high concentrations in certain bodily fluids (usually blood). The most commonly performed clinical chemistry tests include measurements of glucose, cholesterol, and triglyceride levels. In contrast, immunodiagnostic tests involve complex biological reactions and test for molecules which are found in very low concentrations. Immunodiagnostic tests utilize the function of natural human protein molecules called antibodies. Antibodies have the ability to recognize and bind to specific analytes such as bacteria and viruses. Antibodies currently are produced in large commercial scale for use as reagents to detect the presence of specific analytes in a clinical specimen. Existing immunodiagnostic testing typically involves sophisticated 1 instrumentation and multi-step protocols including sample dilution, variable incubation times and wash steps. Substantially all immunodiagnostic tests today are performed in centralized laboratories on complex instruments operated by skilled technicians. There are seven major categories of immunodiagnostic tests, and a small number of tests performed in each of the seven categories account for a significant portion of the total sales volume in each category. The following chart sets forth the primary immunodiagnostic tests the Company believes are most likely to be performed at the point of care: POINT-OF-CARE IMMUNODIAGNOSTIC TESTS
TESTING CATEGORY PRIMARY TESTS - -------------------------------------------------------------------- ------------------------ INFECTIOUS DISEASES Detecting sexually transmitted diseases which can cause infertility Chlamydia in females, endanger the health of newborns or result in death. Gonorrhea Herpes Detecting nonsexually transmitted diseases. Strep A Group B Strep Rubella Candida/Trichomonas ENDOCRINOLOGY Measuring various hormones of the endocrine system to determine T4, T Uptake conditions such as thyroid dysfunction, infertility and pregnancy. TSH, Free T4 hCG, LH, FSH THERAPEUTIC DRUGS Monitoring drugs with a narrow therapeutic range to ensure that Theophylline adequate serum levels are maintained without toxicity. Digoxin Phenytoin DRUGS OF ABUSE Testing for suspected drug abuse and monitoring patients in Cannabinoids substance abuse therapy. Cocaine, Opiates IMMUNOLOGY AND ALLERGY Determining the overall immune status. TUMOR MARKERS Measuring various antigens associated with cancers to assist in PSA diagnosing and monitoring patients following therapy or surgery. CEA AFP METABOLIC Determining nutritional status using certain metabolic markers. Ferritin B12, Folate OTHER HbA1c Cardiac markers
Since its introduction in the 1970's, the fundamental immunodiagnostic testing process has changed very little and remains very procedure-intensive. Current immunodiagnostic systems involve variable multi-step protocols. The protocol and incubation periods vary by assay, and the majority of systems utilize liquid reagents and complex instruments to complete the test process and measure the results. Measurement technologies within instruments include the use of radioisotopes, enzymes, fluorescence polarization, fluorescent labels and chemiluminescent labels. The specific characteristics of some of these detection technologies can limit their use to specific assays. Instrument manufacturers have relied primarily on improvements in electronics and fluid handling systems to automate many of the steps in the testing 2 process. However, these improvements have also increased instrument complexity, and today a typical immunodiagnostic instrument involves a large and expensive grouping of pipetting systems, tubes, pumps, reagent containers, optics and electronics. As a result of this complexity, the market for immunodiagnostic testing contrasts sharply with the market for clinical chemistry testing, where the basic technology and related equipment have become much simpler. The introduction of easy-to-use, automated systems has substantially reduced the cost of clinical chemistry testing, as reflected in reimbursement rates. For example, an independent laboratory may process 600 clinical chemistry tests per hour on one piece of equipment at a reimbursement rate of approximately $12 per 12-test panel (i.e., $1 per test). By contrast, the same laboratory may process only 125 immunodiagnostic tests per day on one piece of equipment at a reimbursement rate of approximately $12 to $30 for each single high-volume test. As a result of the introduction of the inexpensive, easy-to-use systems, point-of-care clinical chemistry testing has become widespread. The Company estimates that approximately 36,000 physician office practices and free-standing alternate site laboratories in the United States currently perform diagnostic testing of some kind, primarily clinical chemistry and hematology, in their offices. Similar advances have not been made in immunodiagnostic testing. The Company believes that the complexity of current immunodiagnostic systems results in two fundamental economic problems: - ADDITIONAL PHYSICIAN/PATIENT COSTS DUE TO LENGTHY TURNAROUND TIME FOR TEST RESULTS. Due to the expensive machinery and the inherent complexity of the test process, essentially all immunodiagnostic testing is performed in large centralized laboratories. After a patient specimen is collected in the physician's office, it usually must be physically delivered to the laboratory in order for the test to be performed. In addition to the costs of expedited delivery, this centralized testing means that information can seldom be returned to the physician in less than 24 hours; and a follow-up conference with the patient is typically required prior to the commencement of the next step in treatment or diagnosis, involving either an additional office visit or a telephone consultation. If test results were available to the physician within approximately 30 minutes, a decision regarding the appropriate next step in treatment or diagnosis could generally be made while the patient was still in the physician's office, thereby eliminating the cost and inconvenience of a second conference or repeat office visit. Faster test results may also reduce the number of unnecessary hospital admissions and reduce the hospital stay for some patients. - HIGH COSTS PER REPORTABLE RESULT. The complexity of existing immunodiagnostic systems requires the attention of highly skilled technicians to perform daily and weekly maintenance, perform periodic calibrations to develop standard curves for each analyte, perform daily quality control for each analyte, as well as prepare reagents, load reagents into instruments, complete instrument calibration, load samples, process data and report results, making this one of the higher cost sections of a clinical laboratory, based on costs per reportable result. The Company believes that labor costs account for approximately 40% to 60% of the cost of each such test, and that the current technology of immunodiagnostic systems inherently limits the ability of the laboratories to reduce these costs. In addition, in recent years cost containment has become a critical issue for health care providers of all kinds, and clinical laboratories have been no exception. As health care costs have consumed an increasing portion of the gross domestic product in the United States and many other countries, payors (such as insurance companies) have sought to limit costs through a variety of mechanisms. These cost containment efforts have included reductions in reimbursement schedules, concentration of work with the most efficient providers, and increased reliance on payment of a fixed fee for treatment of a patient regardless of the procedures performed (e.g., as in health maintenance organizations). In response to these cost containment pressures, all health care providers, including physicians and clinical laboratories, have come under increasing pressure to reduce their cost structures. In view of these factors, the Company believes that demand exists for a method of conducting immunodiagnostic tests which will significantly reduce the costs and turnaround time associated with 3 current testing practices. The Company believes that this demand exists both in clinical laboratories, where the essential requirement is for a lower cost per reportable result, and in physicians' offices and other points of patient care, where the essential demand is for simple systems offering quick, cost effective and accurate results. THE BIOCIRCUITS' SOLUTION Immunodiagnostic tests currently require numerous steps and multiple reagents, which is time consuming and expensive. The timing of each step and the amount of each reagent must be well controlled, thereby resulting in instruments with complex pipetting systems, tubes, pumps and optical systems. A wash step is often needed, which serves to separate reagents bound to either an antibody or antigen from excess reagents free in the solution. In order to develop an immunodiagnostic test that is one step to the user, the system (such as an instrument and cartridge) must carry out these steps with no intervention by the user. The cartridge must be able to perform two fluidic functions: form a homogeneous solution from dry reagents and control when fluids flow into specific chambers within the cartridge. Biocircuits believes that it has developed a proprietary cartridge design for the IOS point-of-care system which allows a simpler and less expensive instrument format than exists today in immunodiagnostics. The Company has filed patents on certain features of the cartridge and instrument designs. See "Business--Patents and Proprietary Information." The Company believes that its IOS system is the first low-cost, commercially available product which permits a physician to perform immunodiagnostic tests at the point of patient care. The IOS point-of-care system contains certain valuable product features that should make immunodiagnostic testing economical at the point of care while ensuring the quality of the test results, including: - The instrument price to the end user is $7,000 versus the $25,000-$50,000 price of existing immunodiagnostic systems, used primarily in the clinical laboratory. - Annual service costs, typically based on instrument price, are expected to be proportionately smaller than the larger instruments. - Factory calibration of IOS cartridges eliminates the need for the end user to establish standard curves by periodically running multiple calibrators for each analyte tested on the system, as is done on other immunodiagnostic systems. - Liquid controls are run weekly on the IOS point-of-care system rather than daily, as is done on other immunodiagnostic systems. - The IOS cartridge contains a reference zone to monitor the stability of reagents prior to performing each assay. - The IOS instrument has on-board systems for checking the instrument optics prior to performing each assay. - A quality control IOS cartridge is supplied with each IOS instrument to check instrument optics daily. The Company's IOS point-of-care system consists of a compact, inexpensive instrument and disposable test cartridges that can be operated by a user with no special skills or training. The system will enable users to perform tests at many locations, including physicians' offices, ambulatory clinics and small clinical laboratories. The instrument is a small bench-top analyzer weighing less than twenty pounds with outside dimensions of approximately 16 inches wide, 10 inches high and 13 inches deep. The instrument is expected to have a throughput of 4-6 tests per hour and is operated with an eighteen button keypad. The only liquid reagent in the instrument is a universal buffer, found in a disposable container. The buffer is used for rehydrating and washing dry biological reagents within the cartridge. The volume of buffer in the container is sufficient to last approximately thirty days for the average user and should take less than five minutes to replace. 4 Disposable test cartridges are sold separately. This cartridge price to the end user varies by test and is approximately one-third of the Medicare reimbursement rate for such test. The cartridge has dimensions of approximately 2.5 inches wide, 3.5 inches long and 1/8 inch thick. It contains one or two tests, depending upon the clinical condition to be diagnosed. Each cartridge includes molded plastic parts and incorporates in a dry form all biological reagents required for a test as well as a bar code containing relevant assay information such as type of test and data necessary for the instrument to interpret test results. The cartridge's capillary design provides for short diffusion distances which allow for rapid test results. The design of the cartridge enables it to test for both large and small molecular weight analytes as well as perform either rate or endpoint assays. To perform a test, the operator inserts the test cartridge into the IOS instrument, which then reads the relevant assay information contained on the cartridge's bar code. The cartridge is then partially released from the instrument, enabling the operator to place the specimen (blood, urine or other samples) into one or two wells in the cartridge, depending on the test. The sample automatically flows to the test zone, where it produces a signal that the instrument uses to determine the test results. The IOS instrument provides a liquid crystal display and a printed output in approximately 20 to 35 minutes, with the time varying by test. Receiving results within this time frame enables the doctor to make a treatment decision before the patient leaves the office, facilitating earlier treatment and obviating the need for an additional visit or telephone call. The Company believes that the IOS point-of-care system will provide the following advantages to the end user: - SIMPLE, ONE-STEP PROCESS. The system can be easily operated, requiring no special skills. - FASTER RESULTS. Results will be available in approximately 20-35 minutes, rather than the 24 hours typically required for tests sent to clinical laboratories. - LABORATORY PRECISION AND ACCURACY. The system will perform with the same level of precision and accuracy as clinical laboratory tests. - INTEGRITY OF SPECIMEN. Tests will be performed at the point of care, eliminating the need for transport, special packaging and handling of the specimen, ensuring its biological integrity. The Company has established its initial manufacturing capability for the single-use cartridges in its IOS point-of-care system and has entered into an agreement with KMC Systems, Inc. ("Kollsman") to be the exclusive North American supplier of the IOS instrument. The IOS instrument and certain materials for the cartridges are available from only single sources. In addition to the Company's reliance on Nalge Nunc International, Inc. ("Nunc"), a sole source supplier, for resin and treatment of the plastic cartridges, Kollsman relies on sole source suppliers for certain components of the IOS instrument and is the Company's sole manufacturer of the IOS instrument. Failure of Kollsman's suppliers or Nunc to deliver the required quantities of such materials on a timely basis and at commercially reasonable prices, or Kollsman's failure to deliver the IOS instruments to the Company on a timely basis could materially adversely affect the Company. See "Business--Manufacturing," and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." There also can be no guarantee that the Company will be successful in developing additional tests for the IOS point-of-care system. The development process is complex and involves many steps, such as: selection and optimization of biological reagents in order that product specifications for precision, accuracy and range are met, systems integration, stability testing, preclinical trials, manufacturing of clinical lots under the FDA's Good Manufacturing Practices ("GMP"), internal clinical trials, external clinical trials and a 510(k) filing with the FDA. See "Business--Government Regulation," and "Business--Additional Risk Factors--Development Stage Company; Products Under Development." There also can be no guarantee that the Company will be successful in selling its products. See "Business--Sales and Marketing," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "Business--Additional Risk Factors--Uncertain Market Acceptance of Point-of-Care Product." 5 BUSINESS STRATEGY The Company's IOS point-of-care system is intended to reduce the costs associated with immunodiagnostic testing by making it economical for the most common tests to occur at the point of care, thereby providing test results more rapidly than current testing procedures. The key elements of the Company's strategy have been as follows: - LAUNCH IOS POINT-OF-CARE SYSTEM. Introduce Biocircuits' system to the point-of-care market with an introductory test menu of T4 and T Uptake assays. - EXPAND TEST MENU. Expand the menu of tests for Biocircuits' IOS point-of-care system to include some of the tests most commonly used at the point of patient care. - DEVELOP NEW APPLICATIONS OF THE COMPANY'S TECHNOLOGIES. Develop other potential medical and non-medical applications for its IOS cartridge and lipid/polymer biomaterial technologies, explore opportunities for collaborations with strategic partners. In the first quarter of 1996, the Company began marketing its IOS system with cartridges capable of performing T4 and T Uptake tests, two tests for assessing thyroid function. In September 1996, the Company announced clearance from the FDA to market a qualitative serum pregnancy assay, a test designed to allow physicians to perform this common pregnancy test in their offices during the patient visit where they can provide more immediate pre-natal care to patients. In December 1996, the Company announced FDA clearance to market a quantitative hCG assay, a test to track the progress of early pregnancies. During 1996, the Company developed an improved second generation cartridge for its new assays as well as existing assays. Also in December 1996, the Company launched its TSH assay on the second generation cartridge. The TSH assay is a test to assess thyroid function. In March 1997, the Company began shipping the T4 and T Uptake tests with the second generation cartridge. The second generation cartridge will be required for the market launch of all future assays. The Company has experienced significant delays in the scheduled completion of its IOS point-of-care system and there can be no assurance that further product development delays will not occur. The Company launched its IOS system in March of 1996 with the T4 & T Uptake tests in a first generation cartridge. While this system was adequate for product introduction, a second generation cartridge was required to complete development of the assay menu. Development of the second generation cartridge and optimization of the assays in the new cartridge took several months longer than was anticipated due to design iterations. Product optimization followed cartridge design completion. Optimization is also an iterative process of developing the specific chemistries and system fluidics to ensure each assay performs at its claimed specifications. As a result, launch of the new assays (TSH, Quantitative hCG & Serum hCG) have experienced delays. To date, the T4 & T Uptake test, as well as the TSH test, have been launched in the new cartridge and all future tests will need to be developed in, or converted to, the second generation cartridge. There can be no assurance that the Company will be able to obtain regulatory clearance for any future assays or products, that any such products can be manufactured in sufficient quantity, at acceptable costs and with appropriate quality, or that any such products, if and when approved, can be successfully marketed. MANUFACTURING Biocircuits has developed a proprietary manufacturing process for producing the test cartridges for its IOS point-of-care system. The Company has established its initial manufacturing capability for the single-use cartridges. Various plastic components and other materials for the cartridges are and will be obtained from contract manufacturers. The Company has experienced cartridge backlogs at various times since the March 1996 launch of the IOS point-of-care system. There can be no assurance that the Company will be able to meet customer demand for cartridges in the future, or that any order backlog will not materially 6 adversely affect the Company's sales and marketing efforts. The Company's cartridge manufacturing milestones include improving manufacturing efficiencies, expanding mold and cartridge manufacturing capacity as both the test menu and test manufacturing volume expand, increasing the level of automation and manufacturing the cartridge at the Company's targeted cost. Following the introduction of the second generation cartridge and several manufacturing process improvements, yields have improved to the targeted level of 90% and the Company has not experienced any backlogs. The Company plans further manufacturing improvements including the use of a multiple cavity mold and a 30% increase in capacity with no increase in direct labor. There can be no assurance that the Company will be successful in meeting all of the manufacturing milestones or that these milestones will be achieved on a timely basis. The April 4, 1997 reduction in work force has reduced the resources available for cost reduction and manufacturing automation programs until such time that manufacturing volumes justify such effort. The Company has registered its manufacturing facility with the FDA and with the Department of Health Services of the State of California, and will be subject to state and federal inspections confirming the Company's compliance with GMP guidelines. Prior to the first sale and shipment of its IOS point-of- care system in March 1996, the Company believes it completed setting up this initial manufacturing capability in compliance with GMP requirements. No assurance can be given as to the ability of the Company to produce commercial quantities of cartridges in compliance with applicable regulations at an acceptable cost. In August and December 1995, the Company entered into agreements with Nunc to manufacture the plastic components of its disposable test cartridges. Under the terms of the agreement, Nunc has the exclusive right to supply the plastic components for the test cartridges for all sales in North America. The Company will be entirely dependent on Nunc as the sole source for the plastic components and the treatment thereof. There can be no assurance that Nunc will be able to deliver the required quantities of test cartridge components on schedule or at costs acceptable to the Company. In December 1992, the Company entered into an agreement with Kollsman pursuant to which Kollsman was appointed the exclusive North American supplier of the IOS instrument. The agreement with Kollsman contained certain minimum purchase requirements and expired three years from the date of first commercial production, subject to certain rights of earlier termination. In April 1996, the Company and Kollsman executed a letter agreement to amend the 1992 agreement (the "Letter Agreement"), pursuant to which Kollsman will be the exclusive supplier of the IOS instrument through 1997, the minimum purchase requirements were eliminated and the Company and Kollsman agreed to an acceptable fixed transfer price to be paid through 1997, the revised term of the agreement. Also pursuant to the Letter Agreement, the Company agreed to issue Kollsman a warrant to purchase 250,000 shares of Common Stock at an exercise price of $7.00 per share, subject to an increase of 50,000 shares under certain circumstances. The warrant was to expire at year end 1997, subject to certain extension rights. In November 1996, the Company and Kollsman amended the Letter Agreement to extend the expiration date of the warrant to June 1998, subject to certain extension rights. In order to secure an adequate supply of IOS instruments, the Company established a standby letter of credit for the benefit of Kollsman. On March 28, 1997, the Company and Kollsman entered into a confidential letter of understanding wherein Kollsman agreed to reduce the amount of the standby letter of credit by $249,000 in exchange for the Company's agreement to reduce the exercise price of the warrant to purchase Common Stock from $7.00 to $2.00 per share. Pursuant to the confidential letter of understanding, the Company also agreed to issue Kollsman a warrant to purchase 50,000 shares of Common Stock with an exercise price of $0.01 per share, such warrant to expire June 30, 1998, in exchange for a one month shutdown of instrument production. In the quarter ending March 31, 1997, the Company recorded a $124,000 expense as manufacturing overhead, $60,000 for the warrant price reduction from $7.00 to $2.00 per share and $64,000 for the issuance of the warrant to purchase 50,000 shares of common stock. Such expense determination was calculated according to Financial Accounting Standard Board Statement No. 123. In early May 1997, the Company subsequently agreed with Kollsman to extend the production shut down until August 1997. The Company has 7 further agreed to and has paid Kollsman $436,000 to cover costs of raw material and work in process currently at Kollsman. Such prepaid inventory will be credited against future deliveries of the IOS system. In return, Kollsman canceled the $700,000 letter of credit and associated funds collateralized by the Company's bank have been released back to the Company resulting in additional available cash to the Company of $264,000. The Company is entirely dependent on Kollsman as the sole source of production of its IOS instruments. Kollsman, in turn, relies upon sole-source suppliers for certain components. Failure of Kollsman's suppliers to deliver the required quantities on a timely basis and at commercially reasonable prices, or Kollsman's failure to deliver the IOS instruments to the Company on a timely basis or at commercially reasonable costs could materially adversely affect the Company. SALES AND MARKETING The Company is targeting the estimated 36,000 physician practices and alternate site laboratories that are licensed under the Clinical Laboratories Improvement Act of 1967 and Amendments of 1988 ("CLIA") for high or moderate complexity testing, most of which currently do not have an immunodiagnostic testing capability. The Company markets its IOS point-of-care system to physicians' offices and alternative site laboratories through distributors supported by its own sales force in the United States. The Company has entered into agreements with medical supply distributors with distribution sites throughout the United States and sales representatives with expertise in selling testing and other medical equipment to the physicians' office laboratory market. Although the Company's first sale and shipment of its IOS system occurred in March 1996, there can be no assurance that the Company will be successful in marketing its products, directly or through distributors. See "Business--Additional Risk Factors--Uncertain Market Acceptance of Point-of-Care Product." In addition, since the Company first established relationships with its distributors, some of the distributors of the Company's products have consolidated with companies or have been purchased by companies that do not market the Company's products. There can be no assurance that such consolidation will not continue, and if it does continue, that such consolidation will not have an adverse impact on the Company's operations. In addition to its relationships with distributors, the Company must maintain its marketing and customer service programs and its sales force in order to penetrate successfully the point-of-care market for immunodiagnostic testing. In order to compete successfully, the Company will be required to provide prompt service to its customers. However, there can be no assurance that the Company will be able to establish the necessary programs or that such programs and service will be consistently reliable. The Company also is exploring opportunities to license its technologies to marketing partners for use in areas of interest other than the point-of-care immunodiagnostic market being pursued by Biocircuits. The Company expects that such agreements could include technology licenses, research funding, milestone payments, collaborative product development, royalties and/or equity investments in Biocircuits. There can be no assurance, however, that the Company will be successful in entering into any such agreements or collaborative relationships. LIPID/POLYMER BIOMATERIAL TECHNOLOGY In addition to its IOS system technology, Biocircuits has developed and patented a new class of biomaterials that combines proteins, lipids and polymers. Proteins can be a capture molecule, e.g., antibodies that endow the biomaterial with the ability to bind to and detect specific analyte molecules. Other proteins, such as enzymes, can be incorporated into the biomaterial to give the biomaterial certain biological functions. Lipids are naturally comparable with biological fluids such as blood, urine and saliva. Biological compatibility makes them more resistant to unwanted biological interference which can cause false test results. Polymers serve as an optical or electrical transducer to convert the analyte binding event to measurable test results. Polymers also should provide a high degree of stability and prolonged shelf life. Biocircuits has developed significant knowledge about lipid/polymer biomaterials in the past eight years that the Company believes could be useful in other diagnostic system applications. In August 1995, 8 Biocircuits entered into an agreement with Beckman Instruments, Inc. ("Beckman") and received $3,500,000 in the form of convertible debt (the "Note") in exchange for granting Beckman options for licensing and marketing rights to certain testing applications using the Company's lipid-polymer technology. Pursuant to the terms of the agreement, Biocircuits completed a feasibility study in August 1996. Because Beckman subsequently elected not to exercise its development license option, Biocircuits regained full rights to the lipid-polymer technology in December 1996, including all improvements made during the feasibility study. In connection with the decision, Beckman also elected to convert the Note into 1,111,727 shares of the Company's Common Stock and a warrant to purchase the Company's Common Stock. The warrant is exercisable for an aggregate of 222,345 shares of the Company's Common Stock at approximately $3.45 per share at any time between December 13, 1996 and August 15, 2000. Based on the Company's work under the Beckman agreement, the Company believes the lipid/ polymer technology may have various applications which the Company could pursue either independently or with licensing partners, including a next generation IOS system. Biocircuits is currently not engaged in any lipid/polymer research or development and if such activities are initiated, there can be no assurance that the Company will be able to enter into any licensing partnerships, that any such relationships would be successful, or that the lipid/polymer technology can be successfully developed for use in future products. RESEARCH AND DEVELOPMENT As of December 31, 1996, the Company's research and development staff numbered 35 individuals, seven of whom had Ph.D. degrees. The Company's research and development expenditures totaled approximately $6.1 million, $5.7 million and $7.1 million in the years ended December 31, 1994, 1995 and 1996, respectively. As a result of the Company's reduction in force which occurred on April 3, 1997, the Company ceased its only research program which focused on the lipid/polymer biotechnology, which at the time of such reduction in force consisted of three full-time scientific employees. The lipid/polymer research program is an early stage program and does not have any effect on the currently marketed products. The Company currently employs fourteen employees in its IOS product development activities, which currently consists of the development of new assays, the support of existing products already in the marketplace and software development for instrument operation. See "Business--Employees" "Management's Discussion and Analysis of Financial Condition and Results of Operations." PATENTS AND PROPRIETARY INFORMATION The Company has aggressively pursued the development of a patent portfolio to protect its technologies. IOS SYSTEM TECHNOLOGY Two IOS cartridge patents have issued in the United States and a third patent is allowed. The Company has three patent applications pending in the United States and two foreign patent applications pending in Europe, Canada and Japan on its cartridge technology. One patent application is also pending in the United States on the IOS instrument. LIPID/POLYMER BIOMATERIAL TECHNOLOGY Nine biomaterial patents have been issued and two patents have been allowed in the United States. These issued patents include claims covering the composition of a class of biomaterials and methods for its use. The Company also has three patent applications pending in the United States on its lipid/polymer biomaterial technology. In addition, Biocircuits has two patent applications pending in Canada and Japan. One application is pending in Canada and Japan and has been issued in Europe. One additional patent application is pending in Japan and has been issued in Europe and Canada. 9 The Company has aggressively pursued the development of a patent portfolio to protect its technology. However, the patent positions of any medical device manufacturer, including Biocircuits, are uncertain and involve complex legal and factual questions for which important legal principles are largely unresolved. In addition, the coverage claimed in a patent application can be significantly reduced before a patent is issued. Consequently, there can be no assurance that any patent applications will result in the issuance of patents or, with respect to issued patents, whether they will provide significant proprietary protection or will be circumvented or invalidated. Since patent applicants in the United States are maintained in secrecy until patents issue, and since publication of discoveries in the scientific or patent literature often lag behind actual discoveries, the Company cannot be certain that it or any licensor was the first to file a patent application for such invention. Moreover, the Company might have to participate in interference proceedings declared by the United States Patent and Trademark Office to eventually determine priority of invention, which could result in substantial costs to the Company, even if the patents, if issued, would be held valid by a court or if a competitor's technology or product would be found to infringe such patents. The Company also relies upon trade secret protection for its confidential and proprietary information. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology, or that the Company can meaningfully protect its trade secrets. Biocircuits requires its employees, consultants and advisors to execute confidentiality agreements upon the commencement of an employment or consulting relationship with the Company. Each agreement provides that all confidential information developed or made known to the individual during the course of the relationship will be kept confidential and not disclosed to third parties except in specified circumstances. In the case of employees, the agreements provide that all inventions conceived by an individual shall be the exclusive property of the Company, other than inventions unrelated to the Company's business and developed entirely on the employee's own time. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for the Company's trade secrets in the event of unauthorized use or disclosure of such information. COMPETITION Human immunodiagnostics is an intensely competitive field in which there are a number of well established companies. Many of these competitors have substantially greater financial resources and larger, more established sales, marketing, and service organizations. The primary bases of competition in the immunodiagnostic testing market are throughput, ease of use, price, breadth of test menu, quality of results and service. There can be no assurance that the Company will be able to compete successfully on any of these bases. The Company believes that its principal competitors will be large companies with a diagnostic division such as Abbott Laboratories; Becton, Dickinson and Company; Boehringer Mannheim, GmbH; Chiron/ Ciba-Corning Diagnostics Corporation; Diagnostic Products Corporation and Johnson & Johnson. Each of these companies has an established position in the clinical laboratory test market with systems based on traditional immunoassay technology. No assurance can be given that the Company's products will compete successfully with existing or future products of such competitors or that new competitors will not enter the market with competing technologies. The Company expects that in the future, one or more of these companies or others will develop and introduce new systems for the point-of-care market. If any such company is able to develop or acquire rights to a better immunodiagnostic testing system, the Company's business would be materially adversely affected. 10 GOVERNMENT REGULATION The Biocircuits IOS point-of-care system is regulated in the United States as a medical device by the FDA and as such, requires regulatory clearance or approval prior to commercialization. Pursuant to the Federal Food, Drug and Cosmetic Act (the "FDC Act"), and the regulations promulgated thereunder, the FDA regulates, among other things, the clinical testing, manufacture, labeling, promotion, distribution, sale and use of medical devices in the United States. Failure of the Company to comply with applicable regulatory requirements can result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, the government's refusal to grant premarket clearance or premarket approval of devices, withdrawal of marketing approvals, and criminal prosecution. In the United States, medical devices are classified into one of three classes, Class I, II or III, based on the controls necessary to reasonably ensure their safety and effectiveness. Class I devices are those devices whose safety and effectiveness can reasonably be ensured through general controls, such as adequate labeling, pre-market notification, and adherence to GMP regulations. Class II devices are those devices whose safety and effectiveness can reasonably be ensured through the use of general special controls, such as performance standards, post-market surveillance, patient registries, and FDA guidelines. Class III devices are devices which must receive pre-market approval by the FDA to ensure their safety and effectiveness. Generally, Class III devices are life-sustaining, life-supporting or implantable devices, or new devices which have been found not to be substantially equivalent to legally marketed devices. Before a new medical device may be introduced into the market in the United States, the manufacturer or distributor generally must obtain either FDA clearance of a section 510(k) premarket notification or FDA approval of a premarket approval ("PMA") application. If the manufacturer or distributor can establish that the 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 (the "predicated device"), the manufacturer or distributor may seek FDA marketing clearance for the device by filing a 510(k) notification. In a 510(k) filing, the manufacturer or distributor is required to demonstrate that the device has the same intended use and the same technological characteristics as the predicate device or has different technological characteristics that do not raise different questions of safety and efficacy than the predicate device. A 510(k) notification must contain information to support the claim of substantial equivalence, which may include laboratory test results or the results of clinical studies. Following submission of a 510(k) notification, the manufacturer or distributor may not place the device into commercial distribution until an order of substantial equivalence is issued by the FDA. The Company understands that the FDA has been requiring a more rigorous demonstration of substantial equivalence in connection with 510(k) notifications. Although it generally takes from four to twelve months from the date of submission to obtain a 510(k) clearance, it may take longer. FDA regulations do not specify the time in which it must respond to a 510(k) submission. The FDA may determine that the proposed device is not substantially equivalent to a legally marketed device, or may require further information, such as additional test data, before the FDA is able to make a substantial equivalence determination. Such determination or request for additional information could delay the Company's market introduction of its future products and could have a materially adverse effect on the Company's continued operations. Further, for any of the Company's devices cleared through the 510(k) process, modifications or enhancements that could significantly change safety or effectiveness or constitute a major change in the intended use of the device will require a new 510(k) submission. The Company's IOS point-of-care instrument tests currently are regulated as Class II medical devices. The Company has received 510(k) clearances for the instrument and the T4 and T Uptake tests, the T4-only test, the qualitative serum pregnancy test, the TSH test and the quantitative hCG test in 1995 and 1996. If a manufacturer or distributor cannot establish that a proposed device is substantially equivalent to another legally marketed predicate device, the manufacturer or distributor must seek pre-market approval 11 of the proposed device through submission of a PMA application. A PMA application must be supported by extensive data, including pre-clinical and clinical trial data to prove the safety and efficacy of the device, as well as extensive manufacturing information. If human clinical trials are required and the device presents "a significant risk," the sponsor of the trial (usually the manufacturer or distributor) is required to file an investigational device exemption ("IDE") application with the FDA before commencing human clinical trials. The IDE application must be supported by data, typically including the results of laboratory and animal testing. If the IDE application is approved by the FDA and one or more appropriate institutional review boards ("IRBs"), human clinical trials may begin at a specific number of investigational sites with a specific number of subjects, as approved by FDA. If the device presents a "nonsignificant risk" to subjects, a sponsor may begin the clinical trial after obtaining approval of one or more appropriate IRBs without the need for FDA approval. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan that may affect its scientific soundness or the rights, safety or welfare of human subjects. A PMA application must contain the results of clinical trials, the results of any relevant bench tests, laboratory and animal studies, a complete description of the device and its components, and a detailed description of the methods, facilities and controls used to manufacture the device. The submission also must include the proposed labeling, advertising and training methods, if required. Upon receipt, the FDA conducts a preliminary review of the PMA application to determine whether the submission is sufficiently complete to permit a substantive review. If sufficiently complete, the submission is declared fileable by the FDA. By statute, the FDA has 180 days to review a PMA application, although the review time often is extended significantly by the FDA asking for more information or clarification of information already provided in the submission. While the FDA has responded to PMA applications within the allotted time period, PMA reviews more often occur over a significantly protracted time period and generally take approximately 12 to 24 months or more from the date of filing to approval. The FDA also will inspect the manufacturing facilities to ensure compliance with the FDA's GMP requirements prior to approval of a PMA. This is a lengthy and expensive process, and there can be no assurance that such approval will be obtained for any future product the Company may develop which may be determined to be subject to such requirements. A number of devices for which PMA marketing clearance has been sought by others have never been cleared for marketing. Modifications to a device that is the subject of an approved PMA, its labeling or manufacturing process may require FDA approval of new PMAs or PMA supplements, which often require submission of the same type of information required for the initial PMA. There can be no assurance that any of the Company's future products will ever obtain the necessary FDA regulatory clearance for commercial distribution. Any products distributed by Biocircuits pursuant to the above described clearances are subject to pervasive and continuing regulation by the FDA. The Company also will be required to manufacture its products in registered establishments and in accordance with GMP regulations. There can be no assurance that the Company or its OEM suppliers' facilities will meet GMP requirements. Failure to meet such requirements could result in certain actions by the FDA, including the possible shutdown of the Company's manufacturing facilities. In addition, the FDA has enacted changes to the GMP regulations that may increase the cost of compliance with GMPs. The Company's facility will be subject to periodic inspections by the FDA for compliance with GMP and other applicable requirements. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. Current FDA enforcement policy strictly prohibits marketing of medical devices for unapproved uses. The export of medical devices also is subject to regulation in certain instances. In addition, the use of the Company's products may be regulated by various state agencies. For example, the Company was required to obtain a license from the State of California to manufacture its proposed products. There can be no assurance that the Company's proposed products will be able to comply successfully with any such requirements or regulations. The potential market for the Company's products may be affected by CLIA. CLIA establishes requirements for any facility that performs laboratory testing on human specimens for the purpose of providing information for diagnosis or treatment of human beings. CLIA covers such testing in virtually all 12 settings, including physicians' offices. Regulations implementing CLIA establish requirements for laboratories in such areas as administration, participation in proficiency testing, patient test management, quality control, personnel, quality assurance and inspection. Under these regulations, the specific requirements that a laboratory must meet depend upon the complexity of the tests performed by the laboratory. Laboratory tests are categorized as either waived tests, tests of moderate complexity or tests of high complexity. Laboratories that perform either moderate or high complexity tests must meet standards in all areas, with the major difference in requirements between moderate and high complexity testing concerning quality control and personnel standards. Quality control standards for moderate complexity testing are being implemented in stages. Laboratories performing high complexity testing must meet all the quality control requirements by the effective date of the regulations. Personnel standards for high complexity testing are more rigorous than those for moderate complexity testing. In general, personnel conducting high complexity testing will need more education and experience than those doing moderate complexity testing. Under the CLIA regulations, all laboratories performing moderately complex or highly complex tests will be required to obtain either a registration certificate or certification of accreditation from the Health Care Financing Administration ("HCFA"). The Company's IOS system has been classified as moderately complex, and thus any laboratory using such products would have to meet the regulatory requirements for testing of moderate complexity testing. The Company understands that laboratories, including physician office laboratories, will be evaluating the requirements of CLIA in determining whether to perform certain types of moderate and high complexity diagnostic tests. The Company believes that the sale of its proposed products will not be adversely affected by CLIA. However, no assurances can be given that the statute and its implementing regulations will not have a materially adverse impact on the Company and its ability to market and sell its IOS system or any future products that the Company may develop. Although Biocircuits believes that it will be able to comply with all applicable regulations regarding the manufacture and sale of diagnostic devices, such regulations are always subject to change and depend heavily upon administrative interpretations. There can be no assurance that future changes in regulations or interpretations made by the U.S. Department of Health and Human Services, FDA, HCFA or other regulatory bodies, with possible retroactive effect, will not adversely affect the Company. In addition to the foregoing, Biocircuits is subject to numerous federal, state and local laws and regulations relating to such matters as safe working conditions, laboratory and manufacturing practices, environmental, fire hazard control, and disposal of hazardous or potentially hazardous substances. To date, compliance with these laws and regulations has not had a material effect on the Company's financial results, capital requirements or competitive position, and the Company has no plans for material capital expenditures relating to such matters. However, there can be no assurance that it will not be required to incur significant costs to comply with such laws and regulations in the future, or that such laws or regulations will not have a materially adverse effect upon the Company's ability to do business. Sales of medical devices outside the United States are subject to foreign regulatory requirements that vary widely from country to country. The time required to obtain registrations or approvals required by foreign countries may be longer or shorter than that required for FDA clearance or approval, and requirements for licensing may differ significantly from FDA requirements. Some countries historically have permitted human studies earlier in the product development cycle than regulations in the United States permit. Other countries have requirements similar to those of the United States. This disparity in the regulation of medical devices may result in slower product clearance in certain countries than in others. Furthermore, the introduction of the Company's IOS system or any future products in foreign markets might require obtaining foreign regulatory clearances. There can be no assurance that the Company will be able to obtain regulatory clearances for its current or any future products in the United States or in foreign markets. 13 REIMBURSEMENT Political, economic and regulatory influences are subjecting the healthcare industry in the United States to fundamental change. Although Congress has failed to pass comprehensive health care reform legislation to date, the Company anticipates that Congress, state legislatures and the private sector will continue to review and assess alternative benefits, controls on health care spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing groups, price controls on pharmaceuticals and other fundamental changes to the health care delivery system. Any such proposed or actual changes could cause any potential partners of the Company to limit or eliminate spending on collaborative development projects. Legislative debate is expected to continue in the future, market forces are expected to demand reduced costs and Biocircuits cannot predict what impact the adoption of any federal or state health care reform measures or future private sector reforms may have on its business. In both domestic and foreign markets, sales of the Company's IOS point-of-care system and other potential products, if any, will depend in part on the availability of reimbursement from third-party payors such as government health administration authorities, private health insurers and other organizations. Third-party payors are increasingly challenging the price and cost effectiveness of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved health care products. There can be no assurance that the Company's products will be considered cost effective or that adequate third-party reimbursement will be available to enable Biocircuits to maintain price levels sufficient to realize an appropriate return on its investment in product development. Legislation and regulations affecting the pricing of health care services may change, which could affect the Company's products and could further limit reimbursement for medical products and services. EMPLOYEES As of December 31, 1996, Biocircuits employed 103 individuals. On April 3, 1997, in response to lower than expected sales and in efforts to reduce the rate of cash consumption, the Company reduced its work force from 92 to 53 employees. Of the existing workforce, 14 employees are engaged in development activities, 21 are engaged in manufacturing, and 18 are devoted to sales, marketing and administrative activities, including 8 sales representatives. ADDITIONAL RISK FACTORS Biocircuits' business is subject to the following risks and uncertainties in addition to those described above. FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING; MAINTENANCE OF NASDAQ LISTING Obtaining additional funds will be critical to the Company's ability to maintain operations through 1998. The Company will therefore continue to seek funding from various equity financing sources. Raising additional funds from public or private sources will result in significant dilution to then existing shareholders. If adequate funding is not available on a timely basis, the Company will be required to curtail its operations significantly or to cease operations. There can be no assurance that the Company will be successful in obtaining additional financing. On April 15, 1997, the Company closed the first tranches in two private placements in which the Company sold its common stock and issued warrants to purchase common stock (defined hereinafter as the "April 1997 Financings"). The first private placement, the April Common Stock Financing, was to consist of the sale of 2,500,000 shares of common stock at $1.00 per share to be issued in three tranches. The second private placement, the April Warrant Financing, was to consist of the sale of 5,447,000 units at $1.00 per unit, each unit consisting of one share of common stock and one warrant to purchase one share of common stock at $0.75 per share, to be issued in two tranches. 14 The closing of the second tranches of the April 1997 Financings were conditional upon the Company installing a minimum of eighty-eight (88) Good Manufacturing Practices ("GMP") units of the IOS system during the three month period ended June 30, 1997 that were sold directly or indirectly by the Company. Although the Company implemented various sales and marketing programs, including evaluation programs targeted to physicians and incentive programs for its sales representatives and distributor sales representatives in order to reach this milestone, the milestone was not met by the Company and the second tranches of the April 1997 Financings did not close. The closing of the third tranche of the April Common Stock Financing was conditional upon the Company installing a minimum of two hundred thirty-five (235) GMP units of the IOS system that are sold directly or indirectly by the Company. Investors in the April Common Stock Financing have elected not to fund the Company in the third tranche. The Company issued 531,250 shares of its common stock in the first tranche of the April Common Stock Financing and 1,157,488 units in the first tranche of the April Units Financing. The April Financing Warrants expire eighteen months after April 15, 1997, subject to certain adjustments. At the Company's option, the Company may shorten the exercise period of the April Financing Warrants in which case they may become redeemable by the Company at $0.01 per share if the closing price for the Company's common stock is greater than or equal to $2.00 per share for ten days. The first tranches of the April 1997 Financings resulted in gross proceeds to the Company of approximately $1.7 million. With these funds, the Company believes its cash resources will be adequate to satisfy its requirements until the end of the second quarter of 1997. On July 3, 1997, the Company closed the July Financing in which the Company sold 6,853,567 units at $0.75 per unit, each unit consisting of one share of common stock and one warrant to purchase one share of common stock at $0.75 per share. The warrants issued in the July Financing expire eighteen months after July 3, 1997, subject to certain adjustments. The July Financing resulted in gross proceeds to the Company of approximately $5.1 million. With these funds, the Company believes its cash resources will be adequate to satisfy its requirements until the end of the second quarter of 1998. The Company believes that maintaining its listing on the Nasdaq National Market ("Nasdaq") is central to its ability to raise additional funds as well as to provide liquidity to investors. The conversion of the Beckman Note resulted in the Company meeting Nasdaq listing requirements at year end 1996. The Company failed temporarily to meet the Nasdaq net tangible asset listing requirement at the end of the first quarter of 1997. However, the proceeds from the first tranche of the April 1997 Financings allowed the Company to meet the Nasdaq net tangible asset listing requirement, on a proforma basis, for the first quarter of 1997. Proceeds from the July Financing allowed the Company to meet the Nasdaq net tangible asset listing requirement, on a proforma basis, for the second quarter of 1997. In addition, the Company believes the proceeds from the July Financing will result in it meeting Nasdaq listing requirements third quarter end 1997. Thereafter, the Company may be required to generate sufficient revenue or raise additional capital to maintain Nasdaq listing requirements through year end 1997. The Company believes its cash requirements may increase in future periods due to higher expenses. The Company expects to incur substantial additional costs, including costs related to ongoing research and development activities, either alone or in collaboration with strategic partners, clinical trials, expansion of manufacturing, research and development and administrative facilities, development of manufacturing capabilities, obtaining regulatory approvals and establishing sales, marketing and distribution capabilities. The Company's long-term capital requirements will depend on numerous factors, including the progress of the Company's research and product development, the timing and cost of obtaining regulatory approvals, the costs associated with patents and other intellectual property rights, the levels of resources devoted to the development of manufacturing and marketing capabilities and potential collaborative partnerships. The Company may also seek additional funding through collaborative relationships and the acquisition of capital equipment, including lease financing, if available on attractive terms. The Company also may attempt to obtain funds through arrangements with strategic partners or others that may require the Company to relinquish rights to certain of its technologies, products or marketing territories in exchange 15 for funding. If adequate funds are not available from these sources, the Company may be required to curtail its operations significantly. No assurance can be given that any additional financing will be available, or, if available, that it will be available on acceptable terms. NEED TO RETAIN AND ATTRACT KEY EMPLOYEES The Company is highly dependent upon the principal members of its management and scientific staff and key individuals in all areas of the Company. Although the Company believes it has retained sufficient employees to achieve its near-term business objectives after its reduction in force on April 3, 1997, there can be no assurance that the loss of services of such employees might not impede the achievement of the Company's business objectives. Furthermore, there can be no assurance that the reduction in force will not adversely affect the Company's ability to retain its remaining employees. The Company has implemented certain programs which it believes will help in retaining key employees. Such programs include retention packages granted to officers and certain Company employees which provide for lump sum payments equal to twelve and six months, respectively, of salary if such employees are employed on the closing date of a merger or sale of the Company prior to March 20, 1998 and the repricing of outstanding options to purchase common stock to the current market price of the Company's common stock on March 20, 1997. The Company faces competition for qualified individuals from numerous manufacturers of medical products and other high technology products, as well as universities and academic institutions. There can be no assurance that the Company will be able to attract new qualified personnel on acceptable terms. DEVELOPMENT STAGE COMPANY; PRODUCTS UNDER DEVELOPMENT Biocircuits was founded in 1989 and is a development stage company. To achieve profitable operations, the Company, alone or with others, must, among other things, successfully develop, obtain regulatory approval for, manufacture, introduce and market its current and potential products. The time frame necessary to develop the Company's products is uncertain. The Company has experienced delays in the scheduled completion of its IOS point-of-care instrument and test cartridges, and there can be no assurance that further product development delays will not occur in the future. The Company's first sale and shipment of its IOS system, with cartridges capable of performing T4 and T Uptake tests, occurred in March 1996. Certain design changes to the IOS instrument were required since the first sale and shipment of the IOS system. In April 1996, problems in some of the IOS instrument's circuitry and software, which caused the instrument to cease operating, required certain parts and software modifications. Further product shipments were suspended at that time while the problems were diagnosed and corrected. In order to correct the problems, the Company changed some electrical components within the instrument, revised an electronic circuit board, revised the embedded software which operates the instrument, and upgraded all systems, including instruments in inventory at the Company's instrument suppliers. All changes were validated and documented, and shipments to distributors were resumed in the middle of June. In addition, all instruments previously shipped to customers were retrofitted. In September 1996, the Company received FDA clearance to market a qualitative serum pregnancy assay. The Company received clearances from the FDA for a TSH assay in November 1996 and a quantitative hCG assay in December 1996. During 1996, the Company developed an improved second generation cartridge for its new assays as well as existing assays. In December 1996, the Company launched its TSH assay on the second generation cartridge. In March 1997, the Company began shipping the T4 and T Uptake tests on the second generation cartridge. The second generation cartridge will be required for the market launch of all future assays. Biocircuits is currently developing three additional assays: a prostate specific antigen ("PSA") test for management of prostate cancer patients, a Digoxin test for monitoring the therapeutic usage of this drug in the treatment of heart disease and a Free T4 test for diagnosing true clinical thyroid status. The Company does not expect to realize any significant revenue until at least 1998. 16 There can be no assurance that the IOS point-of-care system and tests will perform reliably and in accordance with the Company's specifications, that additional design changes may not be required in the future, that the Company will be able to develop successfully or obtain regulatory clearance for additional tests or any other future products, that the reduction in assay development employees will not result in further delays in developing those tests, that the second generation cartridge will perform as planned, that any of the Company's products can be manufactured in sufficient quantity, at acceptable cost and with appropriate quality, or that any products, if and when approved, can be successfully marketed. Failure to meet one or more of these challenges could have a material adverse effect on the Company. UNCERTAIN MARKET ACCEPTANCE OF POINT-OF-CARE PRODUCT Substantially all immunodiagnostic testing currently is performed at large clinical laboratories rather than point-of-care sites. There can be no assurance that the Company will be successful in developing and penetrating the point-of-care market for immunodiagnostic testing. The Company currently employs eight sales representatives to develop its relationships with distributors which supply a substantial portion of medical and test products. The Company believes it must expand its sales force to between 12 and 20 sales representatives and further develop its relationships with distributors which currently supply a substantial portion of medical and test products to physicians. Due to its limited cash resources, the Company is uncertain when or if it will be able to attain a sales force of at least 12 sales representatives. The selling process typically requires the Company's sales force to work closely with distributors, generate qualified physician leads and perform demonstrations for the IOS system in physicians' offices. The selling process can be time-consuming and there can be no assurance that the Company will be successful in marketing the IOS system, that the rate of sales growth will meet expectations or that the marketing programs of the Company will achieve the desired results. To date, the number of instrument sales to distributors and placements in physicians' offices have been, and continue to be, significantly less than the Company's expectations, due primarily to the technical problems the Company encountered with the performance of the IOS system, which resulted in a loss of momentum within the Company's distribution network. The Company believes that if instrument sales continue to be below expectations, the Company's revenue and financial performance will be materially adversely affected. Certain design changes to the IOS instrument were required since the first sale and shipment of the IOS system. In April 1996, problems in some of the instrument circuitry and software required certain parts and software modifications. Further product shipments were suspended at that time while the problems were diagnosed and corrected. All changes were validated and documented, and shipments to distributors were resumed in the middle of June 1996. In addition, all instruments previously shipped to customers were retrofitted. The requirements to make certain design changes to the instrument and the suspension of product shipments had an adverse impact on 1996 revenue and overall financial performance. There can be no assurance that additional design changes may not be required in the future or that the system performance will be reliable over time. In general, market acceptance of the Company's initial point-of-care system will depend upon the Company's ability to demonstrate the accuracy and value of its system and to persuade physicians to perform the Company's initial tests in their own facilities rather than send those tests to clinical laboratories. More specifically, in order for the Company to have success in penetrating the point-of-care immunodiagnostic market and to achieve significant sales of IOS systems and test cartridges, the Company believes it will need to expand its menu of tests. The Company believes that TSH, along with the Company's additional products in development, are test key elements in penetrating the physicians' office market. There can be no assurance that the TSH test will have the desired impact in increasing the market acceptance of the Company's IOS system. HISTORY OF LOSSES; EXPECTATION OF FUTURE LOSSES At March 31, 1997, the Company's accumulated deficit was approximately $55.1 million. Biocircuits expects to incur additional losses over the next several years. The Company expects that currently available 17 funds will be used primarily for sales and marketing programs for its IOS point-of-care system and development of additional tests for the IOS point-of-care system. The losses may vary from period to period, including from quarter to quarter, and may increase, due to the uncertainty of whether the sales and marketing programs of the Company will achieve the desired results. Accordingly, the Company believes that quarter-to-quarter results are not a useful indicator of the Company's performance. There can be no assurance that any products will be manufactured or marketed successfully, or that profitability will ever be achieved. RISK OF PRODUCT LIABILITY; POSSIBLE UNAVAILABILITY OF INSURANCE Testing, manufacturing and marketing of the Company's potential products will entail risk of product liability. The Company currently has product liability insurance. However, there can be no assurance that the Company will be able to maintain such insurance at a reasonable cost or in sufficient amounts to protect the Company against losses due to product liability. An inability to maintain insurance at an acceptable cost or to otherwise protect against potential product liability could prevent or inhibit the commercialization of the Company's products. In addition, a product liability claim or recall could have a material adverse effect on the business or financial condition of Biocircuits. HAZARDOUS MATERIALS The Company's research and development involves the controlled use of hazardous materials and chemicals. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. The Company may incur substantial costs to comply with environmental regulations. ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CERTAIN CHARTER PROVISIONS The Board of Directors has authority to issue up to 10,000,000 shares of Preferred Stock, in addition to the 30,000,000 designated shares of Series A Preferred Stock, of which 11,643,237 were outstanding on July 16, 1997, and to fix the rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of the Common Stock will be subject to, and may be adversely affected by, the rights of the holders of the outstanding Series A Preferred Stock and any other Preferred Stock that may be issued in the future. The outstanding Series A Preferred Stock could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. Furthermore, certain provisions of the Company's Amended and Restated Certificate of Incorporation, such as a classified Board of Directors, its Amended and Restated Bylaws and of Delaware law could delay or make more difficult a merger, tender offer or proxy contest involving the Company. VOLATILITY OF STOCK PRICE The market price of the Company's Common Stock, like that of the common stock of many other medical device and other high technology companies, has been highly volatile. Factors such as delays in obtaining FDA approval for the IOS point-of-care system, fluctuations in the Company's actual or anticipated operating results, announcements of technological innovations or new commercial products by the Company or its competitors, governmental regulation, changes in the current structure of the health care financing and payment systems in the United States, developments in or disputes regarding patent or other proprietary rights, economic and other external factors and general market conditions may have a significant effect on the market price of the Common Stock. 18 CONCENTRATION OF SHARE OWNERSHIP Based upon the shares owned and outstanding as of July 16, 1997, the Company's officers, directors and 5% stockholders of the Company as a group beneficially owned approximately 65% of the Company's outstanding common stock, on an as converted basis. As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. ITEM 2: PROPERTIES The Company's principal administrative offices, research laboratories and manufacturing area are located at 1324 Chesapeake Terrace, Sunnyvale, California, where the Company leases and occupies approximately 36,600 square feet. The Company relocated to this facility in May 1993. The Company's monthly rental cost is approximately $44,000. The Company also established a deposit related to the initiation of a $732,000 letter of credit, which decreased to $478,000 in 1996, as security for certain tenant improvements. The lease expires on April 30, 2000. ITEM 3: LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings as of the date of this report. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 19 PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock was first traded on May 14, 1992 on the Nasdaq National Market System under the symbol "BIOC." The following table sets forth, for the periods indicated, the high and low sales prices per share for the Common Stock as reported on the Nasdaq National Market System:
YEAR ENDED DECEMBER 31, 1995 HIGH LOW - -------------------------------------------------------------------------------------- --------- --------- First Quarter......................................................................... $ 4.00 $ 2.50 Second Quarter........................................................................ 5.72 1.00 Third Quarter......................................................................... 10.00 3.76 Fourth Quarter........................................................................ 10.00 5.50
YEAR ENDED DECEMBER 31, 1996 HIGH LOW - -------------------------------------------------------------------------------------- --------- --------- First Quarter......................................................................... $ 8.63 $ 6.38 Second Quarter........................................................................ 7.75 5.63 Third Quarter......................................................................... 6.00 3.75 Fourth Quarter........................................................................ 3.75 2.38
The Company had approximately 237 holders of record of its Common Stock as of July 17, 1997. The Company has never paid any cash dividends and does not anticipate paying cash dividends in the foreseeable future. RECENT SALES OF UNREGISTERED SECURITIES On January 29, 1996, the Company amended outstanding warrants to purchase 2,666,514 shares of the Company's Series A Preferred Stock, one half of which became exercisable for an exercise price of $1.46 per share, and the other half of which became exercisable for an exercise price equal to 70% of the stock's fair market value at time of conversion. Such amended warrants were issued to 29 persons and institutional accredited and non-accredited investors in reliance on Section 3(a)(9) of the Securities Act of 1933, as amended (the "Securities Act"). Also on January 29, 1996, the Company closed a private placement pursuant to which the Company issued new warrants to purchase 1,426,499 shares of Series A Preferred Stock at an exercise price of $1.46 per share and new warrants to purchase 1,426,499 shares of Series A Preferred Stock at an exercise price equal to 70% of the fair market value of such stock. The new warrants (collectively with the amended warrants, the "1996 Series A Warrants") were issued to 19 persons and institutional accredited and non-accredited investors in reliance on Rule 506 ("Rule 506") under the Securities Act. In consideration for the issuance of the 1996 Series A Warrants, the Company received the right to require the exercise of one half of the 1996 Series A Warrants upon the occurrence of corporate certain milestones. The Company's Series A Preferred Stock is convertible, at the option of the holder, into the Company's Common Stock at a rate of one share of Common Stock for every four shares of Series A Preferred Stock. During the twelve month period ended December 31, 1996, the Company issued 1,848,965 shares of Common Stock upon the conversion of 7,395,927 shares of its Series A Preferred Stock to 35 persons who were holders of the Company's Series A Preferred Stock in reliance on Section 3(a)(9) of the Securities Act. Pursuant to an April 1996 manufacturing agreement entered into between the Company and Kollsman, the Company issued Kollsman a warrant to purchase up to 250,000 shares of Common Stock at an exercise price of $7.00 per share in reliance on Section 4(2) of the Securities Act. In March 1996 and June 1996, the Company issued warrants to purchase up to 7,628 shares of Common Stock at an exercise price of 70% of the fair market value of such stock at the time of conversion 20 to Venture Lending in connection with a standby letter of credit and a line of credit agreement entered into between the Company and Venture Lending. The issuance of the Warrants was made in reliance on Section 4(2) of the Securities Act. On October 21, 1996, the Company sold an aggregate of 1,930,462 shares of Common Stock and warrants to purchase an additional 965,231 shares of Common Stock at an exercise price of $3.43 per share to 29 persons and institutional accredited investors, in reliance on Rule 506. The aggregate offering price of such shares of Common Stock and warrants was $5,791,386, including the placement agent's fee of $474,894. In November 1996, the Company amended warrants to 19 persons and institutional accredited and non-accredited investors to purchase up to 3,513,213 shares of Series A Preferred Stock to extend the term of such warrants from December 18, 1996 to February 14, 1997, in reliance on Section 3(a)(9) of the Act. In December 1996, the Company issued 1,111,727 shares of Common Stock and a warrant to purchase up to 222,345 shares of Common Stock at an exercise price of $3.45 to Beckman upon the conversion of a secured promissory note in principal amount of $3,500,000, plus accrued interest of $332,000, issued in connection with a feasibility study and option agreement entered into between the Company and Beckman. The Common Stock and the Warrants were issued in reliance on Section 4(2) of the Securities Act. During the twelve month period ended December 31, 1996, the Company received an aggregate of approximately $7,856,000 from the exercise of warrants to purchase a total of 6,852,064 shares of the Company's Series A Preferred Stock by individual and institutional accredited and non-accredited investors. The shares of Series A Preferred Stock were issued in reliance on Rule 506 and Section 4(2) of the Securities Act. On April 15, 1997, the Company sold an aggregate of 1,688,738 shares of Common Stock and warrants to purchase an additional 1,157,488 shares of Common Stock at an exercise price of $0.75 per share to 30 persons and institutional accredited investors, in reliance on Rule 506. The aggregate offering price of such shares of Common Stock and warrants was $1,688,738. On July 3, 1997, the Company sold an aggregate of 6,853,567 shares of Common Stock and warrants to purchase an additional 6,853,567 shares of Common Stock at an exercise price of $0.75 per share to 20 persons and institutional accredited investors, in reliance on Rule 506. The aggregate offering price of such shares of Common Stock and warrants was $5,140,175.25. 21 ITEM 6: SELECTED FINANCIAL DATA The following selected financial data is derived from audited financial statements as of and for the years ended December 31, 1992, 1993, 1994, 1995 and 1996 and for the period from March 7, 1989 (inception) to December 31, 1996. The data set forth below should be read in conjunction with the financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," both appearing elsewhere herein.
PERIOD FROM MARCH 7, 1989 (INCEPTION) TO YEAR ENDED DECEMBER 31, DECEMBER ----------------------------------------------------- 31, 1992 1993 1994 1995 1996 1996 --------- --------- --------- --------- --------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: REVENUES: Product sales.................. $ -- $ -- $ -- $ -- $ 421 $ 421 OPERATING COSTS AND EXPENSES: Cost of sales.................. -- -- -- -- 2,310 2,310 Research and development....... 4,513 6,545 6,086 5,669 7,081 34,357 Sales, general and administrative............... 1,577 2,801 2,239 2,686 5,416 16,278 --------- --------- --------- --------- --------- ----------- Total operating costs and expenses......................... 6,090 9,346 8,325 8,355 14,807 52,945 Loss from operations............... (6,090) (9,346) (8,325) (8,355) (14,386) (52,524) Net interest and other income...... 88 256 117 118 38 976 --------- --------- --------- --------- --------- ----------- Net loss........................... $ (6,002) $ (9,090) $ (8,208) $ (8,237) $ (14,348) $ (51,548) --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- ----------- Net loss per share................. $ (4.06) $ (3.76) $ (3.30) $ (2.89) $ (2.71) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Shares used in computing net loss per share........................ 1,480 2,420 2,489 2,849 5,299 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
DECEMBER 31, ---------------------------------------------------------- 1992 1993 1994 1995 1996 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital....................................... $ 11,379 $ 9,371 $ 1,925 $ 6,191 $ 5,355 Total assets.......................................... 14,042 13,964 5,552 9,267 8,726 Long-term obligations................................. 761 948 505 3,707 72 Deficit accumulated during the development stage...... (11,665) (20,755) (28,963) (37,200) (51,548) Total stockholders' equity............................ 11,818 11,560 3,474 4,063 7,078
22 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IN ADDITION TO THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION, AS WELL AS IN ITEM 1. THE COMPANY HAS RECENTLY ENTERED INTO A LETTER OF INTENT WITH BECTON TO ENTER INTO AN AGREEMENT THAT WOULD GIVE BECTON EXCLUSIVE WORLDWIDE MARKETING RIGHTS TO THE IOS SYSTEM AND ALL CARTRIDGES CURRENTLY AVAILABLE AS WELL AS THOSE THAT WILL BE DEVELOPED IN THE FUTURE. IT IS ALSO POSSIBLE THAT BECTON WILL ASSUME RESPONSIBILITY FOR MANUFACTURING THE IOS INSTRUMENT IN 1998. THE COMPANY CURRENTLY PLANS TO CONTINUE TO MANUFACTURE CARTRIDGES FOR TRANSFER TO BECTON AS WELL AS TO DEVELOP NEW TEST CARTRIDGES. THE LETTER OF INTENT IS NOT LEGALLY BINDING AND THE AGREEMENT, WHICH IS CURRENTLY BEING NEGOTIATED BY THE PARTIES, MAY NEVER BE FINALIZED AND EXECUTED. IF THE AGREEMENT IS EXECUTED, THE COMPANY'S OPERATIONS WILL BE MATERIALLY AFFECTED AND THE COMPANY'S RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED HEREIN. OVERVIEW Since its inception in 1989, the Company has been engaged in research and development and marketing of medical diagnostic applications of its technologies. The Company has incurred a loss in each period since its inception. At December 31, 1996, the Company's accumulated deficit was $51.5 million. Biocircuits expects to incur additional losses over the next several years. The Company expects that currently available funds will be used primarily for sales and marketing programs for its IOS point-of-care system and development of additional assays for the IOS point-of-care system. The losses may vary from period to period, including from quarter to quarter, and may increase, due to the uncertainty of whether the sales and marketing programs of the Company will achieve the desired results. Accordingly, the Company believes that quarter-to-quarter results are not a useful indicator of the Company's performance. The Company's first sale and shipment of its IOS system occurred in March 1996, with cartridges capable of performing the T4 and T Uptake tests. The selling process typically requires the Company's sales force to work closely with distributors, generate qualified physician leads and perform demonstrations of the IOS system in physicians' offices. The selling process can be time-consuming and there can be no assurance that the Company will be successful in marketing the IOS system, that the rate of sales growth will meet expectations or that the marketing programs of the Company will achieve the desired results. Certain design changes to the IOS instrument were required since the first sale and shipment of the IOS system. In April 1996, problems in some of the IOS instrument's circuitry and software, which caused the instrument to cease operating, required certain parts and software modifications. Further product shipments were suspended at that time while the problems were diagnosed and corrected. In order to correct the problems, the Company changed some electrical components within the instrument, revised an electronic circuit board, revised the embedded software which operates the instrument, and upgraded all systems, including instruments in inventory at the Company's instrument supplies. All changes were validated and documented and shipments to distributors were resumed in the middle of June. In addition, all instruments previously shipped to customers were retrofitted. The requirements to make certain design changes to the instrument and the suspension of product shipments had an adverse impact on 1996 revenue and overall financial performance. There can be no assurance that additional design changes may not be required in the future or that the system performance will be reliable over time. To date, the number of instrument sales to distributors and placements in physicians' offices have been, and continues to be, significantly less than the Company's expectations. As a result, the Company has 23 incurred significant losses. The Company believes that if instrument sales continue to be below expectations, the Company's revenue and financial performance will be materially adversely affected. On April 3, 1997, in order to reduce its losses and conserve approximately $250,000 per month, the Company reduced its work force from 92 employees to 54 employees. As a result of the Company's reduction in force, the Company ceased its existing lipid/polymer research programs, which at the time of such reduction in force consisted of three full-time scientific employees. The lipid/polymer research program is an early stage program and does not have any effect on the currently marketed products. In order for the Company to have success in penetrating the point-of-care immunodiagnostic market and to achieve significant sales of IOS systems and test cartridges, the Company believes it will need to continue to expand its menu of tests. In September 1996, the Company received FDA clearance to market a qualitative serum pregnancy assay. The Company also received clearances from the FDA for a TSH assay in November 1996 and a quantitative hCG assay in December 1996. During 1996, the Company developed an improved second generation cartridge for its new assays as well as existing assays. Development of the second generation cartridge and optimization of the assays in the new cartridge took several months longer than anticipated due to design iterations. Product optimization followed cartridge design completion. Optimization is also an iterative process of developing the specific chemistries and system fluidics to ensure each assay performs at its claimed specifications. As a result, launch of the new assays (TSH, Quantitative hCG & Serum hCG) have experienced delays. In December 1996, the Company launched its TSH assay on the second generation cartridge. In March 1997, the Company began shipping the T4 and T Uptake tests on the second generation cartridge. The second generation cartridge will be required for the market launch of all new assays. There can be no assurance that the conversion of assays to the new second generation cartridge will occur according to schedule or that the second generation cartridge will perform as planned. In addition, existing assays will be converted to the new cartridge in the near future. Biocircuits is currently developing three additional assays: a PSA test for management of prostate cancer patients, a Digoxin test for monitoring the therapeutic usage of this drug in the treatment of heart disease and a Free T4 test for diagnosing true clinical thyroid status. In the past, the Company has experienced delays in completing the development of new tests. Furthermore, the April 1997 reduction in force reduced the number of employees responsible for developing the three additional assays. There can be no assurance that the reduction in assay development employees will not result in further delays in completing the development of these new tests. There can be no assurance that the Company will be successful in expanding its menu of tests and according to schedule, as well as obtaining regulatory approvals for such tests. Biocircuits has developed a proprietary manufacturing process for producing the test cartridges for its IOS point-of-care system. The Company has established its initial manufacturing capability for the single-use cartridges. Various plastic components and other materials for the cartridges are and will be obtained from contract manufacturers. The Company has experienced cartridge backlogs at various times since the March 1996 launch of the IOS point-of-care system. There can be no assurance that the Company will be able to meet customer demand for cartridges in the future, or that any order backlog will not materially adversely affect the Company's sales and marketing efforts. The Company's cartridge manufacturing milestones include improving manufacturing efficiencies, expanding mold and cartridge manufacturing capacity as both the test menu and test manufacturing volume expand, initiating manufacturing automation efforts and manufacturing the cartridge at the Company's targeted cost. There can be no assurance that the Company will be successful in achieving these milestones or that these milestones will be achieved on a timely basis. The cartridge manufacturing scale-up process will require the Company to develop advanced manufacturing techniques and rigorous process controls. The automation effort will be critical to meeting the Company's longer-term cartridge manufacturing demands and cost targets. There can be no assurance that the Company will be successful in these efforts or that such efforts will result in the Company meeting expected cartridge demand or achieving the Company's longer-term cartridge manufacturing cost targets. 24 In August and December 1995, the Company entered into agreements with Nunc to manufacture the plastic components of its disposable test cartridges. Under the terms of the agreement, Nunc has the exclusive right to supply the plastic components for the test cartridges for all sales in North America. The Company will be entirely dependent on Nunc as the sole source for the plastic components and treatment thereof. There can be no assurance that Nunc will be able to deliver the required quantities of test cartridge components on schedule or at costs acceptable to the Company. In December 1992, the Company entered into an agreement with Kollsman pursuant to which Kollsman was appointed the exclusive North American supplier of the IOS instrument. The agreement with Kollsman contained certain minimum purchase requirements and expired three years from the date of first commercial production, subject to certain rights of earlier termination. In April 1996, the Company and Kollsman executed a letter agreement to amend the 1992 agreement (the "Letter Agreement"), pursuant to which Kollsman will be the exclusive supplier of the IOS instrument through 1997, the minimum purchase requirements were eliminated and the Company and Kollsman agreed to an acceptable fixed transfer price to be paid through 1997, the revised term of the agreement. Also pursuant to the Letter Agreement, the Company agreed to issue Kollsman a warrant to purchase 250,000 shares of Common Stock at an exercise price of $7.00 per share, subject to an increase of 50,000 shares under certain circumstances. The warrant expires at year end 1997, subject to certain extension rights. In November 1996, the Company and Kollsman amended the Letter Agreement to extend the expiration date of the warrant to June 1998, subject to certain extension rights. In order to secure an adequate supply of IOS instruments, the Company established a standby letter of credit for the benefit of Kollsman. In late March 1997, the Company and Kollsman agreed to reduce the amount of the standby letter of credit by $249,000 in exchange for reducing the exercise price of the warrant from $7.00 to $2.00 per share. Also in late March 1997, the Company and Kollsman agreed to issue Kollsman a warrant to purchase 50,000 shares of Common Stock in exchange for a one month shutdown of instrument production. In the quarter ended March 31, 1997, the Company recorded a $124,000 expense as manufacturing overhead, $60,000 for the warrant price reduction from $7.00 to $2.00 per share and $64,000 for the issuance of the warrant to purchase 50,000 shares of Common Stock. Such expense determination was calculated according to Financial Accounting Standard Board Statement No. 123. In early May 1997, the Company subsequently agreed with Kollsman to extend the instrument production line shutdown until August 1997. The Company further agreed to and has paid Kollsman $436,000 to cover the cost of raw material and work in process currently at, or to be delivered to, Kollsman. Such prepaid inventory will be credited back against future deliveries of IOS instruments to Biocircuits. In return, Kollsman canceled the $700,000 standby letter of credit and the associated funds collateralized by the Company's bank have been released back to the Company. The Company is entirely dependent on Kollsman as the sole source of production of its IOS instruments. Kollsman, in turn, relies upon sole-source suppliers for certain components. Failure of Kollsman's suppliers to deliver the required quantities on a timely basis and at commercially reasonable prices, or Kollsman's failure to deliver the IOS instruments to the Company on a timely basis or at commercially reasonable costs could materially adversely affect the Company. In June 1995, the Company closed a private placement of 17,399,000 units consisting of convertible Preferred Stock and Warrants at $0.50 per unit. Proceeds to the Company were approximately $8.5 million, net of issuance costs. Each unit consisted of one share of Series A Preferred Stock and one warrant to purchase approximately .60 shares of Series A Preferred Stock at $0.60 per share (Common Stock equivalent price of $2.40 per share and the "1995 Warrants"). Series A Preferred Stock converts to .25 shares of Common Stock. In January 1996, the Company amended outstanding 1995 Warrants to purchase 2,666,514 shares of Series A Preferred Stock and closed a private placement pursuant to which the Company issued new warrants (the "1996 Warrants") to purchase 2,852,998 shares of Series A Preferred Stock. One half of the amended 1995 Warrants and one half of the 1996 Warrants were exercisable at a purchase price of 70% of the current market price upon exercise and expired on May 31, 1996. Ninety-six percent of the warrants 25 expiring on May 31, 1996 were exercised at an average purchase price of $1.18 per share (Common Stock equivalent price of $4.72 per share). Proceeds to the Company were approximately $3.0 million, net of issuance costs. The remaining one half of the amended 1995 Warrants and 1996 Warrants were exercised pursuant to automatic exercise provisions at a purchase price of $1.46 per share (Common Stock equivalent price of $5.84 per share) upon the Company's shipment of the first ten IOS instruments and accompanying cartridges, which occurred in March 1996. Proceeds to the Company were approximately $3.9 million, net of issuance costs. On October 21, 1996, the Company closed a private placement which consisted of the sale of 965,231 units at $6.00 per unit. Proceeds to the Company were approximately $5.2 million, net of issuance costs. A unit consisted of two shares of Common Stock and a Financing Warrant expiring October 20, 1997, to purchase one share of Common Stock at $3.43 per share. The Financing Warrants contain an automatic exercise provision which occurs, upon notice from the Company, at any time beginning six months prior to the expiration date when the average market value for the Company's Common Stock equals or exceeds $5.25 per share for 10 consecutive trading days. If the Financing Warrants are exercised, the Company will receive gross proceeds of up to an additional $3.3 million. On April 15, 1997, the Company closed the first tranches in the April 1997 Financings in which the Company sold its common stock and issued warrants to purchase common stock. The first private placement, the April Common Stock Financing, was to consist of the sale of 2,500,000 shares of common stock at $1.00 per share to be issued in three tranches. The second private placement, the April Warrant Financing, was to consist of the sale of 5,447,000 units at $1.00 per unit, each unit consisting of one share of common stock and one warrant to purchase one share of common stock at $0.75 per share, to be issued in two tranches. The closing of the second tranches of the April 1997 Financings were conditional upon the Company installing a minimum of eighty-eight (88) Good Manufacturing Practices ("GMP") units of the IOS system during the three month period ended June 30, 1997 that were sold directly or indirectly by the Company. Although the Company implemented various sales and marketing programs, including evaluation programs targeted to physicians and incentive programs for its sales representatives and distributor sales representatives in order to reach this milestone, the milestone was not met by the Company and the second tranches of the April 1997 Financings did not close. The closing of the third tranche of the April Common Stock Financing was conditional upon the Company installing a minimum of two hundred thirty-five (235) GMP units of the IOS system that are sold directly or indirectly by the Company. Investors in the April Common Stock Financing have elected not to fund the Company in the third tranche. The Company issued 531,250 shares of its common stock in the first tranche of the April Common Stock Financing and 1,157,488 units in the first tranche of the April Units Financing. The April Financing Warrants expire eighteen months after April 15, 1997, subject to certain adjustments. At the Company's option, the Company may shorten the exercise period of the April Financing Warrants in which case they may become redeemable by the Company at $0.01 per share if the closing price for the Company's common stock is greater than or equal to $2.00 per share for ten days. The first tranches of the April 1997 Financings resulted in gross proceeds to the Company of approximately $1.7 million. With these funds, the Company believes its cash resources will be adequate to satisfy its requirements until the end of the second quarter of 1997. On July 3, 1997, the Company closed the July Financing in which the Company sold 6,853,567 units at $0.75 per unit, each unit consisting of one share of common stock and one warrant to purchase one share of common stock at $0.75 per share. The warrants issued in the July Financing expire eighteen months after July 3, 1997, subject to certain adjustments. The July Financing resulted in gross proceeds to the Company of approximately $5.1 million. With these funds, the Company believes its cash resources will be adequate to satisfy its requirements until the end of the second quarter of 1998. 26 Biocircuits has developed significant knowledge about lipid/polymer biomaterials in the past eight years that the Company believes could be useful in other diagnostic system applications. In August 1995, Biocircuits entered into an agreement with Beckman Instruments, Inc. ("Beckman") and received $3,500,000 in the form of convertible debt (the "Note") in exchange for granting Beckman options for licensing and marketing rights to certain testing applications using the Company's lipid-polymer technology. Pursuant to the terms of the agreement, Biocircuits completed a feasibility study in August 1996. Because Beckman subsequently elected not to exercise its development license option, Biocircuits regained full rights to the lipid-polymer technology in December 1996, including all improvements made during the feasibility study. In connection with the decision, Beckman also elected to convert the Note into 1,111,727 shares of the Company's Common Stock and a warrant to purchase the Company's Common Stock. The warrant is exercisable for an aggregate of 222,345 shares of the Company's Common Stock at approximately $3.45 per share at any time between December 13, 1996 and August 15, 2000. RESULTS OF OPERATIONS Following the Company's March 1996 launch of the IOS system, the Company recorded revenue of $421,000 in 1996. The Company's total operating costs and expenses increased from $8.33 million in 1994 to $8.36 million in 1995 and increased to $14.81 million in 1996. In early 1994, the Company announced a decision to reformulate the test method in the proprietary assay cartridge used in its IOS system replacing the lipid/ polymer technology with fluorescence technology and redesigning the cartridge. As a result, the Company recorded a one-time charge in the first quarter of 1994 of $992,000 as a research and development expense in 1994 for equipment ($720,000) and purchase commitments ($272,000) related to this reformulation. The $720,000 included manufacturing equipment, tooling and raw materials specific to the obsoleted technology. The $272,000 consisted primarily of raw material for instruments. Excluding this non-recurring charge, operating costs and expenses increased from an adjusted $7.33 million in 1994 to $8.36 million in 1995, followed by an increase to $14.8 million in 1996. The Company recorded $2.31 million of cost of sales in 1996. These costs, in connection with the launch of the IOS system, consisted primarily of manufacturing overhead and startup costs associated with the production of revenue generating product. The Company's research and development expenses decreased from $6.09 million in 1994 to $5.67 million in 1995, and increased to $7.08 million in 1996. Research and development expenses were 73%, 68% and 48% of total operating costs and expenses in 1994, 1995 and 1996, respectively. The 1994 expense includes the non-recurring reformulation charge of $992,000 as discussed above. Excluding the non-recurring charge, research and development expenses decreased to an adjusted $5.09 million or 69% of total adjusted operating costs and expenses in 1994. The increase from an adjusted 1994 to 1995 was primarily the result of increased staffing and outside services while the increase from 1995 to 1996 was due primarily to increased outside services. Sales, general and administrative expenses were $2.24 million in 1994, $2.69 million in 1995 and $5.42 million in 1996. The increase in sales, general and administrative expenses each year was due primarily to expanded sales and marketing expenses resulting from the preparation for and launch of the IOS point-of-care system and general operating expenses. Interest income increased from $283,000 in 1994 to $317,000 in 1995 and to $345,000 in 1996. These changes are primarily attributable to fluctuations in cash and cash equivalents and investment balances resulting from sales of common and preferred stock and from collaboration funds, offset by operating losses, purchases of property and equipment and payments on long-term obligations. Interest and other expense was $166,000 in 1994, $199,000 in 1995 and $307,000 in 1996. The increase in interest and other expense was due primarily to interest on the $3.5 million note to Beckman. 27 The Company incurred net losses of $8.21 million in 1994, $8.24 million in 1995 and $14.35 million in 1996. The losses per share were $3.30, $2.89 and $2.71 in 1994, 1995 and 1996, respectively. The 1994 results include the non-recurring charge of $992,000, or $0.40 per share. As of December 31, 1996, the Company had net operating loss carryforwards of approximately $36.5 million and research and development credit carryforwards of approximately $1 million for federal income tax purposes. Upon the closing of the Company's June 1995 private placement, the Company experienced a "change in ownership" as defined by Section 382 of the Internal Revenue Code. As a result, the utilization of the Company's pre-change net operating loss and certain credit carryforwards will be subject to an annual limitation based upon the Company's pre-change values and may expire prior to utilization. The Company has determined that a valuation allowance for deferred tax assets of $21.1 million is required to reduce the deferred tax assets to the amount realizable, currently estimated to be zero at December 31, 1996 based upon the Company's history of losses. The Company believes that inflation has not had a material impact on its results of operations. LIQUIDITY AND CAPITAL RESOURCES The Company historically has financed its operations primarily through sales of common and preferred stock, interest income on the cash balances available after such financings, long term debt and capital asset lease financings. Since its inception through December 31, 1996, the Company raised a total of approximately $54.2 million in the sale of common and preferred stock. The Company's cash and cash equivalents and short-term investments were $4.94 million as of December 31, 1996, compared to $6.63 million at the end of 1995. The decrease was due primarily to operating losses in 1996 offset by the completion of various financings. The Company's bank informed it in late March 1997 that the Company was no longer in compliance with the bank's terms for the Kollsman standby letter of credit. As a result, the bank collateralized the full amount of the standby letter of credit, resulting in a $949,000 reduction in available cash to the Company. Subsequently, also in late March 1997, the Company and Kollsman reached an agreement to reduce the current amount of the standby letter of credit to $700,000, resulting in an increase of available cash of $249,000 in exchange for reducing the exercise price from $7.00 to $2.00 per share of the warrant issued in April 1996 to purchase 250,000 shares of Common Stock. See "Note 11. Commitments." The collateralization of the standby letter of credit meant that the Company's remaining available cash would satisfy its requirements until only mid-April 1997. In late March, the Company and Kollsman agreed to issue Kollsman a warrant to purchase 50,000 shares of Common Stock in exchange for a one month shutdown of instrument production. In the quarter ending March 31, 1997, the Company recorded a $124,000 expense as manufacturing overhead, $60,000 for the warrant price reduction from $7.00 to $2.00 per share and $64,000 for the issuance of the warrant to purchase 50,000 shares of Common Stock. Such expense determination was calculated according to Financial Accounting Standard Board Statement No. 123. In early May 1997, the Company subsequently agreed with Kollsman to extend the instrument production line shutdown until August 1997. The Company further agreed to and has paid Kollsman $436,000 to cover the cost of raw material and work in process currently at, or to be delivered to Kollsman. Such prepaid inventory funds will be credited back against future deliveries of IOS instruments to Biocircuits. In return, Kollsman has canceled the $700,000 standby letter of credit and the associated funds collateralized by the Company's bank have been released back to the Company. On April 15, 1997, the Company closed the April 1997 Financings which consisted of the sale of common stock and warrants to purchase common stock in three tranches. With the receipt of funds from the April 1997 Financings, the Company received adequate cash resources to satisfy its requirements through the end of the second quarter 1997. With the proceeds from the July Financing, which closed on July 3, 1997, the Company believes its cash resources will be adequate to satisfy its requirements through the second quarter 1998. 28 Obtaining additional funds will be critical to the Company's ability to maintain operations through 1998. The Company will therefore continue to seek funding from various equity financing sources. Raising additional funds from public or private sources will result in significant dilution to then existing shareholders. If adequate funding is not available on a timely basis, the Company will be required to curtail its operations significantly or to cease operations. There can be no assurance that the Company will be successful in obtaining additional financing. The Company believes that maintaining its listing on the Nasdaq National Market System ("Nasdaq") is central to its ability to raise additional funds as well as to provide liquidity to investors. The conversion of the Beckman Note resulted in the Company meeting Nasdaq listing requirements at year end 1996. The Company failed temporarily to meet the Nasdaq net tangible assets listing requirement at the end of the first quarter of 1997. However, the proceeds from the first tranche of the April 1997 Financings allowed the Company to meet the Nasdaq listing requirement, on a proforma basis, for the first quarter of 1997. Proceeds from the July Financing allowed the Company to meet the Nasdaq net tangible asset listing requirement, on a proforma basis, for the second quarter of 1997. In addition, the Company believes the proceeds from the July Financing will result in it meeting Nasdaq listing requirements through third quarter 1997. Thereafter, the Company may be required to generate sufficient revenue or raise additional capital to maintain Nasdaq listing requirements through year end 1997. The Company believes its cash requirements may increase in future periods due to higher expenses. The Company expects to incur substantial additional costs, including costs related to ongoing research and development activities, either alone or in collaboration with strategic partners, clinical trials, expansion of manufacturing, research and development and administrative facilities, development of manufacturing capabilities, obtaining regulatory approvals and establishing sales, marketing and distribution capabilities. The Company's long-term capital requirements will depend on numerous factors, including the progress of the Company's research and product development, the timing and cost of obtaining regulatory approvals, the costs associated with patents and other intellectual property rights, the levels of resources devoted to the development of manufacturing and marketing capabilities and potential collaborative partnerships. The Company intends to seek additional funding through collaborative relationships and public or private financings. Other methods of financing the acquisition of capital equipment, including lease financing, may be utilized if available on attractive terms. Raising additional funds from public or private financings may result in further dilution to then-existing shareholders. The Company also may attempt to obtain funds through arrangements with strategic partners or others that may require the Company to relinquish rights to certain of its technologies, products or marketing territories in exchange for funding. If adequate funds are not available from these sources, the Company will be required to curtail its operations significantly. No assurance can be given that any additional financing will be available, or, if available, that it will be available on acceptable terms. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data of the Company required by this item are included herein and are listed under Item 14(a)(1) and (2). ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 29 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS DIRECTORS Set forth below is biographical information for each director of the Company. DIRECTORS CONTINUING IN OFFICE UNTIL THE 2000 ANNUAL MEETING OF STOCKHOLDERS CLASS I DIRECTORS ROBERT CURRY, PH.D. Robert Curry, Ph.D., age 51, has served as a Director of the Company since May 1991. He has been a General Partner of the Sprout Group, a submanager of various Merrill Lynch venture capital funds, since May 1991, and is currently Vice President of DLJ Capital Corp., the management company for the Sprout Group. From August 1984 to May 1991, Dr. Curry was employed at ML Venture Capital, Inc., and ML R&D Management Inc., each a venture capital management company, most recently as President of both companies. Dr. Curry is a Director of Connective Therapeutics, Inc., Diatide, Inc. and Photon Technology International, Inc. Dr. Curry holds a Ph.D. and an M.S. in Analytical Chemistry from Purdue University and a B.S. in Physics from the University of Illinois. Dr. Curry is the chairman of the Compensation Committee and a member of the Disinterested Compensation Committee. DAVID RUBINFIEN David Rubinfien, age 75, has served as a Director of the Company since December 1990. From January 1989 to January 1991, Mr. Rubinfien was employed by Systemix, Inc., a biotechnology company, most recently as President, Chief Executive Officer and Chairman of the Board. From September 1985 to March 1989, he was Chairman and Chief Executive Officer of Microgenics Corporation, a biotechnology company. Mr. Rubinfien serves as a Director of Molecular Biosystems, Inc., ChemTrak Incorporated, and Matritech Inc. He holds an M.S. in Mathematics and Physics from the Illinois Institute of Technology and an M.B.A. from the University of Chicago. Mr. Rubinfien is a member of the Compensation Committee, the Disinterested Compensation Committee and became a member of the Audit Committee in May 1997. DIRECTORS CONTINUING IN OFFICE UNTIL THE 1998 ANNUAL MEETING OF STOCKHOLDERS CLASS II DIRECTOR PATRICK LATTERELL Patrick Latterell, age 39, has served as a Director of the Company since September 1989. Mr. Latterell is a General Partner of Venrock Associates, a venture capital investment group, which he joined in April 1989. Prior to joining Venrock Associates, Mr. Latterell was a Senior Vice President at Rothschild Ventures, Inc., a venture capital investment group, and a general partner of several affiliated venture capital partnerships. Mr. Latterell is a Director of Vical Inc., Pharmacyclics, Inc. and Geron Corporation. Mr. Latterell holds an M.B.A. from Stanford University and S.B. degrees in Biological Sciences and Economics from the Massachusetts Institute of Technology. Mr. Latterell is a member of the Audit Committee and the Disinterested Compensation Committee. 30 DIRECTORS CONTINUING IN OFFICE UNTIL THE 1999 ANNUAL MEETING OF STOCKHOLDERS CLASS III DIRECTOR JOHN KAISER John Kaiser, age 60, has served as President and Chief Executive Officer of the Company since April 1990 and as a Director since June 1990. In March 1992, he was appointed Chairman of the Board. In April 1997, Mr. Kaiser was temporarily appointed Acting Secretary of the Company, and served in that capacity until June 5, 1997. From 1981 to 1990, Mr. Kaiser was employed by Boehringer Mannheim, GmbH, a multinational medical products corporation, where he most recently served as President of the Physician Laboratory Products Division. From 1970 to 1981, Mr. Kaiser was employed by Abbott Laboratories, a multinational medical products company, where he served in various positions including Business Unit Manager, Small Instruments Group and Marketing Manager, Noninfectious Diseases, of the diagnostics division. Mr. Kaiser has been a Director of Instrumentation Metrics, Inc. since December 1994. Mr. Kaiser holds a B.S. in Economics from the University of Wisconsin. EXECUTIVE OFFICERS The names of the executive officers of the Company and certain biographical information about them is set forth below:
NAME AGE POSITION - ----------------------------- --- ------------------------------------------------------------------ John Kaiser 60 President, Chief Executive Officer Lawrence J. Blecka, Ph.D. 52 Vice President, Research and Development R. Jeffrey Green 54 Vice President, Quality Assurance and Regulatory Affairs Donald B. Hawthorne 41 Vice President and Chief Financial Officer Robert D. Testorff 51 Vice President, Human Resources James H. Welch 39 Secretary, Treasurer and Controller William M. Wright, III 49 Vice President, Operations
LAWRENCE J. BLECKA, PH.D., age 52, has served as Vice President, Research and Development of Biocircuits since July 1996. From December 1994 to July 1996, Dr. Blecka served as Vice President of Product Development of Biocircuits. From 1992 to 1994, Dr. Blecka was Vice President, Research and Development for Sigma Diagnostics, a division of the Sigma Chemical Co. unit of Sigma-Aldrich Corp., a chemical company. From 1979 to 1991, Dr. Blecka held various positions with Abbott Laboratories, Inc. From 1989 to 1991, he started and directed Abbott's Nucleic Acid Probes Diagnostics business venture and from 1986 to 1988 Dr. Blecka was general manager of Abbott's Cancer Business Unit. Other positions held by Dr. Blecka at Abbott included Director of Research and Development, Manager of TDx Reagent Development and Manager of Regulatory Affairs. Dr. Blecka received his Ph.D. in Microbiology/Zoology from Southern Illinois University and has held academic posts at the University of Illinois College of Medicine. R. JEFFREY GREEN, age 54, joined Biocircuits as Vice President, Quality Assurance and Regulatory Affairs in January 1996. From 1993 to 1995, Mr. Green was Department Head and Director of Quality Assurance and Regulatory Affairs for Sigma Diagnostics, a division of the Sigma Chemical Co. unit of Sigma-Aldrich Corp., a chemical company. From 1992 to 1993, Mr. Green was Vice President, Quality Assurance/Regulatory Affairs for the Dade Division of Baxter Diagnostics, Inc., a manufacturer of IN VITRO diagnostic reagents and analytical instrumentation; and from 1988 to 1992 he was Director, Quality and Regulatory Affairs for Smith & Nephew Inc./Dyonics, a manufacturer of medical products. Mr. Green received a B.S in Chemistry and Biology from the University of South Carolina. 31 DONALD B. HAWTHORNE, age 41, served as Vice President and Chief Financial Officer of the Company from January 1991 until June 13, 1997 when he tendered his resignation from the Company to pursue other employment. Mr. Hawthorne also served as Secretary of the Company from March 1992 to April 1997. Mr. Hawthorne relocated to the east coast in April 1997. See "Employment Agreements." In 1990 Mr. Hawthorne served as Vice President, Finance and Administration and Chief Financial Officer of Oclassen Pharmaceuticals, Inc., a pharmaceutical company. From 1985 to 1990, he was employed by Genelabs Incorporated, a biotechnology company, most recently as Chief Financial Officer. From 1983 to 1985, Mr. Hawthorne was employed by Syntex Corporation, a pharmaceutical company, most recently as Financial Planning Manager and Controller of the Ophthalmics Division. Mr. Hawthorne holds an M.B.A. from Stanford University and a B.S. in Mathematics from Harvey Mudd College. ROBERT D. TESTORFF, age 51, was appointed Vice President, Human Resources in November 1996. Mr. Testorff had served as Director, Human Resources since joining Biocircuits in February 1993. From 1990 to 1993, Mr. Testorff was employed as an organizational development consultant for Howard Consulting, serving clients in aerospace, biotechnology and software industries. From 1989 to 1990, he served as Director, Human Resources of Print Technology, a retail start-up. From 1985 to 1989, he worked for Bernard Hodes, an Ominicom Group Company, as a human resources management consultant for a variety of high technology clients in the Bay area and Los Angeles basin. From 1973 to 1985, Mr. Testorff was employed by Rockwell International where his last position was Director, Human Resources, Telecommunications Group. Other employment included Fairchild Industries. Mr. Testorff received a Juris Doctorate degree from Southern Methodist University School of Law and a B.S. in History/Political Science from Wichita State University. JAMES H. WELCH, age 39, joined Biocircuits as Corporate Controller in July 1992. Mr. Welch was appointed Secretary and Treasurer in June 1997. From 1988 to 1992 Mr. Welch held various positions at NeXT Computer, Inc., most recently as Division Controller and from 1985 to 1988 he held various positions at Avantek, Inc., a telecommunications company, where his most recent position was a Senior Finance Manager. Mr. Welch received his M.B.A. from Washington State University and received his B.A. in Business Administration from Whitworth College. WILLIAM M. WRIGHT III, age 49, joined Biocircuits as Vice President, Operations in November 1995. From 1984 to 1995, Mr. Wright was Vice President of Site Operations with Dade International Inc., a medical products manufacturing company. Mr. Wright received a B.S. in Industrial Technology from California State University at Long Beach. A brief description of the educational background and business experience of Mr. Kaiser appears above. There are no family relationships between any of the directors, nominees or executive officers of the Company. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely upon a review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended December 31, 1996, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with, except for the following: 32 During fiscal 1996, Mr. Hewett, who at that time was an executive officer of the Company, timely reported a transaction but reported an incorrect number of shares owned at the end of the reporting month. This error was corrected on a Form 4 report and by amending a previous Form 4 report. During fiscal 1996, Dr. Ribi timely reported a transaction but inadvertently understated the number of shares disposed of during the reporting month. This error was corrected on a Form 4 and by amending a previous Form 4 report. During fiscal 1996, Mr. Wright inadvertently failed to timely report one transaction. This error was corrected on a Form 4 report. ITEM 11: EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS Directors of the Company currently receive no cash compensation for serving on the Board or on Board committees. The members of the Board of Directors are eligible for reimbursement for their expenses incurred in connection with attendance at Board meetings and committee meetings in accordance with Company policy. Current directors of the Company have each been granted options under the Company's Dual Option Plan or the Restated 1992 Non-Employee Directors' Plan (the "Directors' Plan"). Each non-employee director of the Company receives stock option grants under the Directors' Plan. Only non-employee directors of the Company or any affiliate of the Company who is not otherwise an employee of the Company or any affiliate are eligible to receive options under the Directors' Plan. Options granted under the Directors' Plan are not intended by the Company to qualify as incentive stock options under the Internal Revenue Code (the "Code"). Option grants under the Directors' Plan are non-discretionary. Upon initial adoption of the Directors' Plan, each non-employee director was granted an option to purchase 1,250 shares of Common Stock of the Company. Each person who, in the future, becomes a non-employee directors of the Company shall, upon the date of initial election to be a non-employee director, be granted an option to purchase 3,750 shares of Common Stock of the Company. On November 1 of each year, each non-employee director who has been a non-employee director for at least one year is automatically granted an option to purchase 5,000 shares of Common Stock of the Company. The exercise price of options granted under the Directors' Plan is equal to 85% of the fair market value of the Common Stock subject to such options on the date such option is granted. Options vest in three equal annual installments, beginning on the date one year after the date of the option grant, provided that the non-employee director has, during the entire period prior to the date of such vesting installment, continuously served as a non-employee director or as an employee of or consultant to the Company or its affiliate. The term of options granted is ten years. In the event of the dissolution or liquidation of the Company, merger or consolidation in which the Company is not the surviving corporation, a reverse merger in which the Company is the surviving corporation but the shares of the Company's Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, or any capital reorganization in which more than 50% of the shares of the Company entitled to vote are exchanged, the vesting of any outstanding options under the Directors' Plan shall accelerate and such options shall terminate if unexercised prior to the consummation of the transaction. During the last fiscal year, the Company granted options covering 5,000 shares to each non-employee director of the Company, at an exercise price per share of $2.44. The fair market value of the such Common stock on the date of the grant was $2.875 per share (based on the closing bid price reported in the Nasdaq National Market for the date of the grant). As of April 16, 1997, no options had been exercised under the Director's Plan. 33 COMPENSATION OF EXECUTIVE OFFICERS SUMMARY OF COMPENSATION The following table shows for the fiscal years ending December 1996, 1995 and 1994, compensation awarded or paid to, or earned by the Company's Chief Executive Officer and its four other executive officers whose total annual salary and bonuses exceeded $100,000 at December 31, 1996 (the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS ANNUAL ------------- COMPENSATION SECURITIES ALL OTHER ------------- UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY ($) OPTIONS (#) ($) - -------------------------------------------------- --------- ------------- ------------- ------------- John Kaiser ...................................... 1996 200,000 0 22,157(1) President and Chief Executive Officer 1995 186,408 202,550 19,989(1) 1994 161,700 11,250(2) 19,914(1) Donald B. Hawthorne(3) ........................... 1996 155,000 0 0 Vice President and Chief Financial Officer 1995 146,693 72,400 0 1994 122,249 13,125(2) 0 Byron Hewett(4) .................................. 1996 150,000 0 0 Vice President, Sales and Marketing 1995 144,496 45,000 34,695(5) 1994 130,000 13,750(2) 25,600(5) Lawrence J. Blecka ............................... 1996 175,000 0 7,384(5) Vice President, Product Development 1995 157,000 67,000 16,620(5) 1994 11,976(6) 18,750 0 William Wright III ............................... 1996 137,040 0 41,858(5) Vice President, Operations 1995 18,711(7) 0 0 1994 0 0 0
- ------------------------ (1) Reflects forgiveness of the principal of and interest on an outstanding loan made by the Company to Mr. Kaiser in connection with relocation expenses. See "Certain Transactions." (2) Options granted in 1993 were canceled and regranted in 1994 at the then fair market value. (3) Recently relocated to the northeastern United States. See "Employment Agreements." Resigned from the Company, effective June 13, 1997. (4) Resigned from the Company in April 1997. (5) Relocation expenses associated with commencement of employment. (6) Employment commenced in December 1994. (7) Employment commenced in November 1995. 34 STOCK OPTION GRANTS AND EXERCISES The Company grants options to its executive officers under the Dual Option Plan. As of March 15, 1997, options to purchase a total of 1,038,985 shares were outstanding under the Dual Option Plan, and options to purchase 529,114 shares remained available for grant thereunder. Option grants under the Dual Option Plan typically have an exercise price equal to the fair market value of the Company's Common Stock on the date of the grant, vest 20% after one year and 5% every three months thereafter, and expire after ten years. The following table sets forth information with respect to the number and value of vested and unvested options held at December 31, 1996 for each of the Named Executive Officers. No options were granted to or exercised by the Named Executive Officers in the fiscal year ended December 31, 1996. FISCAL YEAR 1996 YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT DECEMBER 31, 1996 AT DECEMBER 31, 1996 NAME EXERCISABLE/UNEXERCISABLE(#) EXERCISABLE/UNEXERCISABLE($)(1) - ---------------------------------------- ------------------------------ ------------------------------ John Kaiser............................. 73,263/143,035 5,275/0 Donald B. Hawthorne..................... 38,126/53,024 11,869/0 Byron Hewett............................ 23,312/35,438 0/0 Lawrence J. Blecka...................... 26,350/59,400 0/0 William Wright III...................... 9,000/47,250 0/0
- ------------------------ (1) Based on the fair market value of $2.91 per share, the closing price on the Nasdaq National Market on December 31, 1996, minus the exercise price, multiplied by the number of shares underlying the options. EMPLOYMENT AGREEMENTS In January 1997, the Company and Mr. Hawthorne entered into an employment agreement whereby the Company agreed to employ Mr. Hawthorne as Vice President and Chief Financial Officer of the Company until the earlier of September 30, 1997 or the termination, either voluntary or for cause, of Mr. Hawthorne's employment, (the "Employment Term"). During the Employment Term, Mr. Hawthorne was permitted to devote a reasonable amount of time to pursue other employment, if consistent with Mr. Hawthorne's responsibilities to the Company. Pursuant to the employment agreement, Mr. Hawthorne's compensation during the Employment Term was his base salary in effect prior to entering into the employment agreement until July 1, 1997, and 50% of his base salary thereafter. Following the Employment Term, Mr. Hawthorne will serve as a consultant to the Company for two years with no compensation, except for the continued vesting of stock options. Mr. Hawthorne resigned from the Company, effective June 13, 1997. In April 1997, the Company granted employee retention packages to certain Company employees. The executive officers who were granted retention packages included Mr. Kaiser, Mr. Wright and Dr. Blecka. Mr. Hawthorne was also granted a retention package, conditional upon his being employed by the Company upon the date of a merger or sale of the Company occurring before March 20, 1998. Mr. Hawthorne resigned from the Company, effective June 13, 1997 and his retention package was therefore terminated. The retention packages for officers provide for a lump sum payment to be made to each officer, equal to twelve months salary, or $220,000 to Mr. Kaiser, $145,000 to Mr. Wright and $186,000 to Dr. Blecka, if the officer is employed on the closing date of a merger or sale of the Company occurring before March 20, 1998. 35 REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION (1) COMPENSATION PROGRAM The Compensation Committee of the Board of Directors (the "Compensation Committee") consists of Dr. Curry (Chairman) and Mr. Rubinfien, each currently an outside Director of the Company. Mr. Kaiser, the President and Chief Executive Officer of the company, serves the Compensation Committee solely in an advisory capacity and takes no part in the deliberation or determination of his own compensation. The Board of Directors has delegated to the Compensation Committee the authority to make recommendations to the Board concerning the salaries and incentive compensation for employees and consultants who are not also directors of the Company. In addition, the Company's Disinterested Director Compensation Committee, which in 1996 consisted of Drs. Curry and Hixson and Messrs. Latterell and Rubinfien, all outside Directors at that time, administers the Company's Dual Stock Option Plan with respect to employees and consultants who are also Directors of the Company. Together, the two Committees are referred to herein as the "Committees." The Company's executive compensation programs are designed to attract and retain executives capable of leading the Company to meet its business objectives and to motivate them to enhance long term stockholder value. Annual compensation of the officers can consist of a mix of base salary, a cash bonus and stock option grants. In determining the total compensation and the mix of the various elements, the Committees consider a variety of factors, both personal and corporate. These factors include the compensation paid by comparable companies to individuals in comparable positions, the contributions of each officer to the progress of the Company and the progress of the Company toward its short term and long term objectives. For purposes of establishing competitive executive compensation, the Compensation Committee annually reviews the results of the "Biotechnology Compensation and Benefits Study" conducted by Radford Associates/Alexander & Alexander Consulting Group (the "Radford Study"), which provides information on the compensation of management at biotechnology and other health care companies nationwide. The data available in the Radford Study is broken down by company size, and also separately provides data for companies located in the San Francisco Bay Area. The Compensation Committee uses a mix of data from companies with fewer than 100 employees from the national study and data from the San Francisco Bay Area study. It is the goal of the Compensation Committee to set competitive compensation levels generally in the middle range of competitive companies of comparative size in similar industries. Annual performance reviews for executive officers are conducted by the Committees, comparing actual Company progress against detailed annual plans. Elements of the plan such as progress on product development, financial matters, including attracting capital and expense control, strategic planning, including attracting capital and expense control. Strategic planning, including corporate collaborations, and organization development are considered, with product development, financing and sales of products being the most important factors. The Committees then develop recommendations for each executive officer that are presented to the full Board for review and approval. Following a complete and thorough review of the Company's progress in 1995, including the filing and approval of several 510(k) applications, in January of 1996 the Committee recommended and the Board approved a merit increase for all officers that ranged from 3.8% to 11.5%. In addition, Dr. Ribi, who was at that time Senior Vice President and Chief Scientific Officer of the Company, was given a one time adjustment of 8.5% to bring his salary more into line with competitive salaries as represented by the Radford study data. Following a company wide performance review by the Compensation committee and the Committee's particular consideration to the - ------------------------ (1) The material in this report is not "soliciting material," is not deemed filed with the SEC, and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained in any filing. 36 need to retain employees and remain competitive, a merit increase was also implemented in January 1996 for all non officer employees. LIMITATION ON DEDUCTION OF COMPENSATION PAID TO CERTAIN EXECUTIVE OFFICERS Section 162(m) of the Internal Revenue Code (the "Code") limits the Company to a deduction for federal income tax purposes of no more than $1 million of compensation paid to certain Named Executive Officers in a taxable year. Compensation above $1 million may be deducted if it is "performance-based compensation" within the meaning of the Code. The Committees believe that at the present time it is quite unlikely that the compensation paid to any Named Executive Officer in a taxable year which is subject to the deduction limit will exceed $1 million. Therefore, the Committees have not yet established a policy of determining which forms of incentive compensation awarded to its Named Executive Officers shall be designed to qualify as "performance-based compensation." The Committees intend to continue to evaluate the effects of the statute and any Treasury regulations and to comply in the future with Code Section 162(m) to the extent consistent with the best interests of the Company. COMPENSATION OF THE CHIEF EXECUTIVE OFFICER IN 1996 Mr. Kaiser is evaluated by the Disinterested Director Compensation Committee based on the criteria outlined above for all other executive officers of the Company, including his contributions for the prior year, his success in managing and motivating the Company's employees, and the challenges to be faced in the year ahead, as well as the desire to offer a competitive salary. The Disinterested Director Compensation Committee have set Mr. Kaiser's total annual compensation, including salary and option grants, at a level they believe is competitive with that of other Chief Executive Officers at other companies in the biotechnology industry, although in the middle of the range. In addition, Mr. Kaiser's salary and option grants were set at a level the Disinterested Director Compensation Committee believe will properly motivate and retain Mr. Kaiser as the Chief Executive Officer of the Company. Mr. Kaiser earned $200,000 in 1996 as his annual base salary, a 7.3% increase over 1995. Mr. Kaiser received no other compensation, bonuses or options during 1996. David Rubinfien Robert Curry, Ph.D. Patrick Latterell COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. During 1996, Dr. Curry and Mr. Rubinfien served as members of the Compensation Committee. The members of the Disinterested Directors Compensation Committee during 1996 were Drs. Curry and Hixson and Messrs. Latterell and Rubinfien. None of these individuals has ever served as an officer or employee of the Company. In June 1995, the Company issued Series A Preferred Stock and warrants to purchase Series A Preferred Stock in a private placement. In January 1996, the Company amended the warrants issued in June 1995. The Sprout Group and Venrock Associates participated in these financings on the same terms and conditions as the other purchasers. Dr. Curry is a general partner of the Sprout Group and Mr. Latterell is a General Partner of Venrock Associates. In January 1996, the Company issued additional warrants to purchase Series A Preferred Stock in a private placement. Venrock Associates and Dr. Rubinfien participated in this financing on the same terms and conditions as the other purchasers. In November 1996, February 1997 and March 1997, the Company amended the outstanding 1995 Warrants (the "Extended Warrants"). The Sprout Group and Venrock Associates, of which Dr. Curry and Mr. Latterell are General Partners, respectively, held Extended Warrants. In April 1997, the Company issued Common Stock in a private placement. The Sprout Group participated in this financing on the same 37 terms and conditions as the other purchasers. See Item 13: Certain Relationships and Related Transactions. PERFORMANCE MEASUREMENT COMPARISON (1) The following chart shows total stockholder return of the H&Q Health Care Sector Index, the Wilshire 5000 Index and the Company since May 29, 1992: (2) BIOCIRCUITS CORPORATION EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
May 29, 1992 Dec '92 Dec '93 Dec '94 Dec '95 Dec '96 Biocircuits 100.00 135.00 85.00 15.00 40.00 14.53 H&Q Heatlhcare Sector 100.00 108.62 84.41 85.14 143.08 147.69 Wilshire 5000 Total Return 100.00 108.30 120.54 120.45 164.29 199.18 Prices Biocircuits 20.00 27.00 17.00 3.00 8.00 2.91 H&Q Healthcare Sector 358.16 389.04 302.34 304.92 512.44 528.96 Wilshire 5000 Total Return 11.20 12.13 13.50 13.49 18.40 22.31
- ------------------------ (1) The material in this section is not "soliciting material," is not deemed filed with the SEC, and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained in any filing. (2) The total return on investment (change in year end stock price plus reinvested dividends) for the Company, the H&Q Health Care Sector Stock Index and the Wilshire 5000 Stock Index, based on May 29, 1992 equals 100. The performance of the Company's stock over the period shown is not necessarily indicative of future performance. May 29, 1992 was the last trading day of the month of the Company's Initial Public Offering on May 14, 1992. 38 ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock and Series A Convertible Preferred Stock ("Series A Stock") as of July 15, 1997, by: (i) each stockholder who is known by the Company to own beneficially more than 5% of the Common Stock or Series A Stock; (ii) each executive officer of the Company named in the Summary Compensation Table; (iii) each director of the Company; and (iv) all directors and executive officers of the Company as a group.
NUMBER OF SHARES NUMBER OF SHARES OF OF COMMON STOCK SERIES A CONVERTIBLE BENEFICIALLY PERCENT BENEFICIALLY PREFERRED STOCK PERCENT BENEFICIALLY BENEFICIAL OWNER OWNED(1) OWNED(1) BENEFICIALLY OWNED(2) OWNED(2) - ----------------------------------- ----------------- ---------------------- --------------------- ---------------------- Entities affiliated with Special 9,345,899 37.73% -- -- Situations Fund III, L.P. (3) 153 East 53rd Street 51st Floor New York, NY 10022-4611 Robert Curry, Ph.D. (4) 3,892,567 18.61% 8,000,000 68.7% c/o Biocircuits Corporation 1324 Chesapeake Terrace Sunnyvale, CA 94089 Entities Affiliated with The Sprout 3,892,567 18.61% 8,000,000 68.7% Group (4) World Financial Center North Tower, 27th Floor New York, NY 10281 H&Q Biocircuits Investors, L.P. (5) 3,032,192 14.1% -- -- Beckman Instruments, Inc. (6) 1,334,072 6.5% -- -- 2500 Harbor Boulevard Fullerton, CA 92834-3100 Glenbrook Partners, L.P. (7) 1,152,840 5.55% -- -- Patrick Latterell (8) 907,174 4.48% 2,992,622 25.7% c/o Venrock Associates 755 Page Mill Road, Suite A230 Palo Alto, CA 94304 Entities affiliated with Venrock 900,570 4.4% 2,992,622 25.7% Associates (9) 30 Rockefeller Plaza, Room 5508 New York, NY 10112 John Kaiser (10) 443,122 2.12% 70,000 * c/o Biocircuits Corporation 1324 Chesapeake Terrace Sunnyvale, CA94089 Lawrence J. Blecka (11) 96,221 * -- -- Byron Hewett 41,698 * 103,794 * Donald B. Hawthorne (12) 59,251 * -- --
39
NUMBER OF SHARES NUMBER OF SHARES OF OF COMMON STOCK SERIES A CONVERTIBLE BENEFICIALLY PERCENT BENEFICIALLY PREFERRED STOCK PERCENT BENEFICIALLY BENEFICIAL OWNER OWNED(1) OWNED(1) BENEFICIALLY OWNED(2) OWNED(2) - ----------------------------------- ----------------- ---------------------- --------------------- ---------------------- William M. Wright, III (13) 33,537 * 37,900 * David Rubinfien (14) 25,116 * 35,000 * James H. Welch (15) 21,688 * -- -- R. Jeffrey Green (16) 15,313 * -- -- Robert D. Testorff (17) 8,565 * -- -- All executive officers and 5,544,252 26.0% 11,239,316 96.5% directors as a group (11 persons) (See footnotes 1-19)
- ------------------------ * Less than 1%. (1) This table is based upon information supplied by officers, directors and principal stockholders and Schedules 13D and 13G, if any, filed with the Securities Exchange Commission (the "SEC"). Common Stock amounts include Common Stock issuable upon conversion of outstanding Series A Stock. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based on 17,335,605 shares of Common Stock outstanding on July 14, 1997, adjusted as required by rules promulgated by the SEC. Includes shares which certain executive officers, directors and principal stockholders of the Company have the right to acquire within 60 days after the date of this table pursuant to outstanding options ("vested options") and warrants. (2) Numbers based upon information supplied by officers, directors and principal stockholders and Schedules 13D and 13G, if any, filed with the SEC. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Numbers are based on 11,643,237 shares of Series A Stock outstanding on July 14, 1997, adjusted as required by rules promulgated by the SEC. The Series A Stock is convertible into Common Stock at a ratio of four shares of Series A Stock for one share of Common Stock. (3) Includes 626,667 shares of Common Stock held by record by Special Situations Cayman Fund, L.P. ("SSCF"); 51,042 shares of Common Stock issuable upon the exercise of warrants held of record by SSCF; 63,750 shares of Common Stock issuable upon the exercise of April Financing Warrants held of record by SSCF; 533,333 shares of Common Stock issuable upon the exercise of July Financing Warrants held by SSCF; 2,037,983 shares of Common Stock held of record by Special Situations Fund III, L.P. ("SSFIII"); 153,125 shares of Common Stock issuable upon the exercise of warrants held of record by SSFIII; 255,000 shares of Common Stock issuable upon the exercise of April Financing Warrants held of record by SSFIII; 1,733,333 shares of Common Stock issuable upon the exercise of July Financing Warrants held by SSFIII; 1,945,833 shares of Common Stock held of record by Special Situations Private Equity Fund, L.P. ("SSPEF"); 212,500 shares of Common Stock issuable upon the exercise of April Financing Warrants held of record by SSPEF; 1,733,333 shares of Common Stock issuable upon the exercise of July Financing Warrants held by SSPEF. (4) Includes 42,362 shares of Common Stock held of record by DLJ Capital Corporation ("DLJ"); 25,870 shares of Common Stock issuable upon the exercise of July Financing Warrants held by DLJ; 310,440 shares of Series A Convertible Preferred Stock held by DLJ; 508,886 shares of Common Stock held of record by Sprout Capital VII, L.P. ("SCVII"); 310,770 shares of Common Stock issuable upon the exercise of July Financing Warrants held by SCVII; 3,729,240 shares of Series A Convertible Preferred 40 Stock held of record by SCVII; 267,502 shares of Common Stock held of record by Sprout Capital VI, L.P. ("SCVI"); 163,360 shares of Common Stock issuable upon the exercise of July Financing Warrants held by SCVI; 1,960,320 shares of Series A Convertible Preferred Stock held of record by SCVI; 401,734 shares of Common Stock held by record by ML Venture Partners II, L.P. ("ML Venture"); 166,667 shares of Common Stock issuable upon the exercise of July Financing Warrants held by ML Venture; 2,000,000 shares of Series A Convertible Preferred Stock held of record by ML Venture, all of which Robert Curry, Ph.D., a director of the Company and a general partner of the Sprout Group (the submanager of ML Venture), disclaims beneficial ownership of, except to the extent of any partnership interest therein; and 5,416 shares subject to stock options held by Dr. Curry, exercisable within 60 days of the date of this table, all of such options shall be assigned to ML Venture upon exercise. (5) Includes 212,500 shares of Common Stock issuable upon the exercise of warrants held of record by H&Q Biocircuits Investors, L.P. and 1,050,000 shares of Common Stock issuable upon the exercise of July Financing Warrants. (6) Includes 222,345 shares of Common Stock issuable upon the exercise of currently exercisable warrants held of record by Beckman Instruments. (7) Includes 42,000 shares of Common Stock issuable upon the exercise of warrants held of record by Glenbrook Partners, L.P. ("Glenbrook"); 27,200 shares of Common Stock issuable upon the exercise of April Financing Warrants held of record by Glenbrook; and 485,100 shares of Common Stock issuable upon the exercise of July Financing Warrants. (8) Includes 152,415 shares of Common Stock held of record by Venrock Associates ("Venrock"), 2,423,282 shares of Series A Stock held of record by Venrock, 569,340 shares of Series A Stock held of record by Venrock Associates II, L.P. ("Venrock II"), of which Mr. Latterell, a general partner of Venrock and Venrock II, disclaims beneficial ownership except to the extent of his partnership interests therein, 1,188 shares of Common Stock held directly by Mr. Latterell, and 5,416 shares of Common Stock subject to stock options granted to Mr. Latterell exercisable within 60 days of the date of this table. (9) Includes 152,415 shares of Common Stock held of record by Venrock, 2,423,282 shares of Series A Stock held of record by Venrock, 569,340 shares of Series A Stock held of record by Venrock II, of which Mr. Latterell, a general partner of Venrock and Venrock II, disclaims beneficial ownership except to the extent of his partnership interests therein. (10) Includes 78,252 shares of Common Stock and 70,000 shares of Series A Stock held of record by the Kaiser Living Trust under a Trust dated March 7, 1991; 126,550 shares of Common Stock held of record by the Kaiser Survivor's Trust; 21,250 shares of Common Stock issuable upon the exercise of April Financing Warrants held of record by the Kaiser Survivor's Trust; 105,300 shares of Common Stock issuable upon the exercise of July Financing Warrants held by the Kaiser Survivor's Trust; and 94,270 shares of Common Stock subject to stock Options held by Mr. Kaiser exercisable within 60 days of the date of this table. (11) Includes 35,675 shares of Common Stock subject to stock options held by Dr. Blecka exercisable within 60 days of the date of this table. (12) Includes 16,568 shares of Common Stock beneficially owned by Donald Hawthorne and Dianne Ritter Hawthorne and 42,683 shares of Common Stock subject to stock options held by Mr. Hawthorne exercisable within 60 days of the date of this table. (13) Includes 37,900 shares of Series A Stock held of record by Mr. Wright and 18,562 shares of Common Stock subject to stock options held by Mr. Wright exercisable within 60 days of the date of this table. 41 (14) Includes 7,616 shares of Common Stock subject to stock options held by Mr. Rubinfien exercisable within 60 days of the date of this table. (15) Includes 11,358 shares of Common Stock subject to stock options held by Mr. Welch exercisable within 60 days of the date of this table. (16) Includes 13,125 shares of Common Stock subject to stock options held by Mr. Green exercisable within 60 days of the date of this table. (17) Includes 8,565 shares of Common Stock subject to stock options held by Mr. Testorff exercisable within 60 days of the date of this table. 42 ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH MANAGEMENT AND 5% STOCKHOLDERS In January 1996, the Company amended warrants issued in 1995 (the "1995 Warrants") to purchase 2,666,514 shares of Series A Preferred Stock and closed a private placement (the "January 1996 Private Placement") pursuant to which the Company issued new warrants to purchase 2,852,998 shares of Series A Preferred Stock. Mr. Kaiser, Mr. Hewett, Dr. Blecka, and Mr. Hawthorne, officers and in some cases, directors of the Company at the time, each received amended 1995 Warrants on the same terms and conditions as the other participants. In addition, Dr. Ribi, a director of the Company at the time, and Venrock Associates, of which Mr. Latterell, a director of the Company is a General Partner, also received amended 1995 Warrants on the same terms and conditions as the other participants. Mr. Kaiser and Mr. Wright, officers of the Company, and Mr. Rubinfien, a director of the Company, and Venrock Associates each received warrants in the January 1996 Private Placement on the same terms and conditions as the other purchasers. In November 1996, February 1997, and March 1997, the Company extended the term of outstanding 1995 Warrants to purchase an aggregate of 3,513,213 shares of Series A Preferred Stock (the "Extended Warrants"). As a result of these extensions, the Extended Warrants were exercisable until April 15, 1997, at which time they expired. Mr. Hawthorne, an officer of the Company at the time, and Dr. Ribi and Mr. Rubinfien, directors of the Company at the time, all held 1995 Warrants that became Extended Warrants, except that Extended Warrants that were held by Dr. Ribi were not extended in March 1997. In addition, Venrock Associates and the Sprout Group, of which Mr. Latterell and Dr. Curry, both of whom are directors of the Company, are General Partners, respectively, held 1995 Warrants that became Extended Warrants. In April 1997, the Company closed the first tranche of a private placement of the Company's Common Stock, the April Common Stock Financing, which consisted of the sale of up to 2,500,000 shares of its Common Stock at $1 per share, to be issued in three tranches, with the second and third tranches subject to the Company's satisfaction of certain milestones during the second quarter of fiscal year 1997 and during the second half of fiscal year 1997. Also on April 15, 1997, the Company closed the first tranche of a private placement of the Company's securities, the April Units Financing, which consisted of the sale of up to 5,447,000 units ("Units") at $1 per Unit, each consisting of one share of Common Stock and one warrant ("Warrant") to purchase one share of Common Stock at an exercise price of $0.75 per share, to be issued in two tranches, with the second tranche subject to the Company's satisfaction of certain milestones during the second quarter of fiscal year 1997. Affiliates of the Sprout Group, a greater than 5% holder of the Company's Common Stock of which Robert Curry, a director of the Company, is a general partner, purchased 425,000 shares of Common Stock in the first tranche of the April Common Stock Financing. John Kaiser, the Company's Chairman, President and Chief Executive Officer, purchased 21,250 Units in the first tranche of the April Units Financing. In addition, the following holders of 5% or more of the Company's Common Stock also participated in the April Units offering: entities affiliated with Special Situations Fund III, L.P. purchased 531,250 Units in the first tranche; and H&Q Biocircuits Investors L.P. purchased 212,500 Units in the first tranche. Investors have elected not to fund the second and third tranches of the April 1997 Financings. In July 1997, the Company closed the July Financing which consisted of the sale of 6,853,567 shares of the Company's Common Stock and warrants to purchase an additional 6,853,567 shares of the Company's Common Stock at a price of $0.75 per share. Affiliates of the Sprout Group purchased 666,667 shares of Common Stock and warrants to purchase 666,667 shares of Common Stock in the July Financing. Mr. Kaiser purchased 105,300 shares of Common Stock and warrants to purchase 105,300 shares of Common Stock in the July Financing. In addition, the following holders of 5% or more of the Company's Common Stock also participated in the July Financing: entities affiliated with Special Situations Fund III, L.P. purchased 3,999,999 shares of the Company's Common Stock and warrants to purchase 3,999,999 43 shares of Common Stock; and H&Q Biocircuits Investors L.P. purchased 1,050,000 shares of the Company's Common Stock and warrants to purchase 1,050,000 shares of Common Stock. PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) INDEX TO FINANCIAL STATEMENTS The financial statements required by this item are submitted in a separate section beginning on page 47 of this report.
PAGE ----- Report of Ernst & Young LLP, Independent Auditors.......................................................... 46 Balance Sheets at December 31, 1995 and 1996............................................................... 47 Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and for the period March 7, 1989 (inception) through December 31, 1996............................................................... 48 Statement of Stockholders' Equity for the period from March 7, 1989 (inception) through December 31, 1996..................................................................................................... 49 Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and for the period March 7, 1989 (inception) through December 31, 1996............................................................... 51 Notes to Financial Statements.............................................................................. 52
(a)(2) INDEX TO FINANCIAL STATEMENT SCHEDULES Financial Statement Schedule II--Valuation and Qualifying Accounts is included on page 67 of this report. All other financial statement schedules are omitted because they are not applicable, or the information is included in the financial statements or notes thereto. (a)(3) EXHIBITS See Index to Exhibits beginning on page 68. (b) REPORTS ON FORM 8-K Form 8-K filed July 18, 1997 44 BIOCIRCUITS CORPORATION SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale, County of Santa Clara, State of California, on the 18th day of July, 1997. BIOCIRCUITS CORPORATION By /s/ JOHN KAISER ----------------------------------------- John Kaiser CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER By /s/ JAMES WELCH ----------------------------------------- James Welch SECRETARY, TREASURER AND CONTROLLER Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K/A has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- Chairman of the Board, /s/ JOHN KAISER President and Chief - ------------------------------ Executive Officer July 18, 1997 John Kaiser (Principal Executive Officer) Secretary, Treasurer and /s/ JAMES WELCH Controller (Principal - ------------------------------ Financial and Accounting July 18, 1997 James Welch Officer) /s/ ROBERT CURRY* - ------------------------------ Director July 18, 1997 Robert Curry /s/ PATRICK LATTERELL* - ------------------------------ Director July 18, 1997 Patrick Latterell /s/ DAVID RUBINFIEN* - ------------------------------ Director July 18, 1997 David Rubinfien *By: /s/ JOHN KAISER ------------------------- John Kaiser, ATTORNEY-IN-FACT 45 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Biocircuits Corporation We have audited the accompanying balance sheets of Biocircuits Corporation (a development stage company) as of December 31, 1995 and 1996, the related statements of operations and cash flows for each of the three years in the period ended December 31, 1996 and for the period from March 7, 1989 (inception) through December 31, 1996, and the statement of stockholders' equity for the period from March 7, 1989 (inception) through December 31, 1996. 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 audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Biocircuits Corporation (a development stage company) at December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, and for the period from March 7, 1989 (inception) through December 31, 1996 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that Biocircuits Corporation will continue as a going concern. As more fully described in Note 1, the Company has incurred recurring losses from operations and has not generated significant revenues from product sales. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans as to these matters are also described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability or classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty. /s/ Ernst & Young LLP Palo Alto, California January 13, 1997 46 BIOCIRCUITS CORPORATION (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ---------------------- 1995 1996 ---------- ---------- ASSETS Current assets: Cash and cash equivalents............................................................... $ 6,028 $ 4,944 Short-term investments.................................................................. 605 -- Accounts receivable (net of allowance for doubtful accounts of $43 in 1996)............. -- 201 Inventory............................................................................... -- 928 Prepaid inventory....................................................................... 418 375 Prepaid expenses and other current assets............................................... 544 381 Restricted cash......................................................................... 93 102 ---------- ---------- Total current assets...................................................................... 7,688 6,931 Property and equipment, net of accumulated depreciation and amortization of $1,671 ($1,298 in 1995)................................................................................ 975 1,375 Restricted cash........................................................................... 479 376 Other assets.............................................................................. 125 44 ---------- ---------- $ 9,267 $ 8,726 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................................................................ $ 547 $ 1,108 Accrued liabilities..................................................................... 205 208 Accrued compensation and related expenses............................................... 198 142 Current portion of capital lease obligations............................................ 547 118 ---------- ---------- Total current liabilities................................................................. 1,497 1,576 Long-term portion of capital lease obligations............................................ 114 72 Long-term convertible debt................................................................ 3,593 -- Commitments and contingencies............................................................. Stockholders' equity: Preferred stock, $0.001 par value, 40,000,000 shares authorized, issuable in series: Series A convertible, 30,000,000 shares designated, 12,455,137 issued and outstanding (12,999,000 shares issued and outstanding at December 31, 1995), aggregate liquidation preference of $6,850,325.............................................................. 6,320 9,903 Common stock, $0.001 par value, 70,000,000 shares authorized, 8,589,930 shares issued and (3,673,390 shares issued and outstanding at December 31, 1995).................... 35,172 48,784 Deficit accumulated during the development stage........................................ (37,200) (51,548) Notes receivable secured by common stock................................................ (99) (15) Deferred compensation and other......................................................... (130) (46) ---------- ---------- Total stockholders' equity................................................................ 4,063 7,078 ---------- ---------- $ 9,267 $ 8,726 ---------- ---------- ---------- ----------
See accompanying notes. 47 BIOCIRCUITS CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
PERIOD FROM MARCH 7, 1989 YEAR ENDED DECEMBER 31, (INCEPTION) -------------------------------- THROUGH DECEMBER 1994 1995 1996 31, 1996 --------- --------- ---------- ------------------ REVENUES: Product sales............................................. $ -- $ -- $ 421 $ 421 OPERATING COSTS AND EXPENSES: Cost of sales............................................. -- -- 2,310 2,310 Research and development.................................. 6,086 5,669 7,081 34,357 Sales, general and administrative......................... 2,239 2,686 5,416 16,278 --------- --------- ---------- -------- 8,325 8,355 14,807 52,945 Loss from operations........................................ (8,325) (8,355) (14,386) (52,524) Interest income............................................. 283 317 345 2,348 Interest and other expense.................................. (166) (199) (307) (1,372) --------- --------- ---------- -------- Net loss.................................................... $ (8,208) $ (8,237) $ (14,348) $ (51,548) --------- --------- ---------- -------- --------- --------- ---------- -------- Net loss per share.......................................... $ (3.30) $ (2.89) $ (2.71) --------- --------- ---------- --------- --------- ---------- Shares used in computing net loss per share................. 2,489 2,849 5,299 --------- --------- ---------- --------- --------- ----------
See accompanying notes. 48 BIOCIRCUITS CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA) FOR THE PERIOD MARCH 7, 1989 (INCEPTION) THROUGH DECEMBER 31, 1996
DEFICIT ACCUMULATED NOTES CONVERTIBLE DURING THE RECEIVABLE DEFERRED PREFERRED COMMON DEVELOPMENT SECURED BY COMPENSATION STOCK STOCK STAGE COMMON STOCK AND OTHER ----------- ----------- ------------ ------------- --------------- Issuance of 1,887,500 shares of Series A convertible preferred stock at $2.00 per share for cash or in exchange for convertible promissory notes and accrued interest, net of issuance costs of $99.................. $ 3,676 $ -- $ $ -- $ -- Issuance of 2,616,514 shares of Series B convertible preferred stock at $2.60 per share for cash, net of issuance costs of $33................................... 6,770 -- -- -- -- Issuance of 1,126,003 shares of common stock for conversion of Series A and B convertible preferred stock................................................... (10,446) 10,446 -- -- -- Issuance of 535,817 shares of common stock at $20.00 per share for cash, net of issuance costs of $1,411......... -- 9,305 -- -- -- Issuance of 437,500 shares of common stock at $22.00 per share for cash, net of issuance costs of $984........... -- 8,641 -- -- -- Issuance of 163,650 shares of common stock at $22.40 per share for cash, net of issuance costs of $100........... -- 3,566 -- -- -- Issuance of 176,500 shares of common stock at $.48 to $.80 per share for cash and notes secured by common stock.... -- 101 -- (99) -- Issuance of options to purchase 1,354 shares of common stock for services rendered............................. -- 11 -- -- -- Issuance of warrants to purchase 17,125 shares of common stock................................................... -- 74 -- -- -- Issuance of 28,883 shares of common stock upon exercise of stock options at $.48 to $25.60 per share for cash...... -- 53 -- -- -- Issuance of 6,219 shares of common stock through the Employee Stock Purchase Plan at $14.44 to $18.72 per share for cash.......................................... -- 92 -- -- -- Deferred compensation resulting from grant of options through May 14, 1992.................................... -- 177 -- -- (177) Amortization of deferred compensation..................... -- -- -- -- 125 Net loss.................................................. -- -- (20,755) -- -- ----------- ----------- ------------ ----- ----- Balances, December 31, 1993............................... -- 32,466 (20,755) (99) (52) Issuance of 11,178 shares of common stock primarily upon exercise of stock options at $.48 to $25.60 per share for cash................................................ -- 12 -- -- -- Issuance of 7,856 shares of common stock through the Employee Stock Purchase Plan at $2.12 to $14.44 per share for cash.......................................... -- 60 -- -- -- Amortization of deferred compensation and unrealized loss on available-for-sale investments....................... -- -- -- -- 50 Net loss.................................................. -- -- (8,208) -- -- ----------- ----------- ------------ ----- ----- Balances, December 31, 1994............................... $ -- $ 32,538 $ (28,963) $ (99) $ (2) TOTAL STOCKHOLDERS' EQUITY ------------- Issuance of 1,887,500 shares of Series A convertible preferred stock at $2.00 per share for cash or in exchange for convertible promissory notes and accrued interest, net of issuance costs of $99.................. $ 3,676 Issuance of 2,616,514 shares of Series B convertible preferred stock at $2.60 per share for cash, net of issuance costs of $33................................... 6,770 Issuance of 1,126,003 shares of common stock for conversion of Series A and B convertible preferred stock................................................... -- Issuance of 535,817 shares of common stock at $20.00 per share for cash, net of issuance costs of $1,411......... 9,305 Issuance of 437,500 shares of common stock at $22.00 per share for cash, net of issuance costs of $984........... 8,641 Issuance of 163,650 shares of common stock at $22.40 per share for cash, net of issuance costs of $100........... 3,566 Issuance of 176,500 shares of common stock at $.48 to $.80 per share for cash and notes secured by common stock.... 2 Issuance of options to purchase 1,354 shares of common stock for services rendered............................. 11 Issuance of warrants to purchase 17,125 shares of common stock................................................... 74 Issuance of 28,883 shares of common stock upon exercise of stock options at $.48 to $25.60 per share for cash...... 53 Issuance of 6,219 shares of common stock through the Employee Stock Purchase Plan at $14.44 to $18.72 per share for cash.......................................... 92 Deferred compensation resulting from grant of options through May 14, 1992.................................... -- Amortization of deferred compensation..................... 125 Net loss.................................................. (20,755) ------------- Balances, December 31, 1993............................... 11,560 Issuance of 11,178 shares of common stock primarily upon exercise of stock options at $.48 to $25.60 per share for cash................................................ 12 Issuance of 7,856 shares of common stock through the Employee Stock Purchase Plan at $2.12 to $14.44 per share for cash.......................................... 60 Amortization of deferred compensation and unrealized loss on available-for-sale investments....................... 50 Net loss.................................................. (8,208) ------------- Balances, December 31, 1994............................... $ 3,474
49 BIOCIRCUITS CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) FOR THE PERIOD MARCH 7, 1989 (INCEPTION) THROUGH DECEMBER 31, 1996
DEFICIT ACCUMULATED NOTES CONVERTIBLE DURING THE RECEIVABLE DEFERRED PREFERRED COMMON DEVELOPMENT SECURED BY COMPENSATION STOCK STOCK STAGE COMMON STOCK AND OTHER ----------- ----------- ------------ ------------- --------------- Balance forward........................................... $ -- $ 32,538 $ (28,963) $ (99) $ (2) Issuance of 7,647 shares of common stock uon exercise of stock options at $.48 to $3.50 per share for cash....... -- 11 -- -- -- Issuance of 10,625 shares of common stock through the Employee Stock Purchase Plan at $2.56 per share for cash.................................................... -- 27 -- -- -- Issuance of warrants to purchase 12,242 shares of common stock................................................... -- 18 -- -- -- Issuance of 6,729 shares of common stock for services rendered................................................ -- 24 -- -- -- Issuance of 17,399,000 shares of Series A convertible preferred stock and 10,500,836 warrants to purchase Series A convertible preferred stock at $.50 per unit, net of issuance costs of $179........................... 8,520 -- -- -- -- Issuance of 213,840 shares of Series A convertible preferred stock upon exercise of warrants at $.60 per share................................................... 128 -- -- -- -- Issuance of 1,153,429 shares of common stock upon the conversion of 4,613,840 shares of Series A convertible preferred stock......................................... (2,328) 2,328 -- -- -- Deferred compensation resulting from vesting of conditional stock options and grant of below market stock options........................................... -- 226 -- -- (226) Amortization of deferred compensation and unrealized gains on available-for-sale investments....................... -- -- -- -- 98 Net loss.................................................. -- -- (8,237) -- -- ----------- ----------- ------------ ----- ----- Balances, December 31, 1995............................... 6,320 35,172 (37,200) (99) (130) Issuance of 6,721 shares of common stock upon exercise of stock options at $3.00 to $3.50 per share for cash...... -- 22 -- -- -- Issuance of 18,665 shares of common stock through the Employee Stock Purchase Plan at $2.55 to $4.89 per share for cash................................................ -- 48 -- -- -- Issuance of warrants to purchase 257,628 shares of common stock................................................... -- 288 -- -- -- Issuance of 1,930,462 shares of common stock and warrants to purchase 965,231 shares of common stock at $6.00 per unit for cash, net of issuance costs of $612............ -- 5,180 -- -- -- Issuance of 1,111,727 shares of common stock and a warrant to purchase 222,345 shares of common stock upon conversion of convertible debt at $3.45 per share, net of issuance costs of $40................................ -- 3,792 -- -- -- Issuance of 6,852,064 shares of Series A convertible preferred stock upon exercise of warrants at $.60 to $1.46 per share......................................... 7,856 -- -- -- -- Issuance of 1,848,965 shares of common stock upon the conversion of 7,395,927 shares of Series A convertible preferred stock......................................... (4,273) 4,273 -- -- -- Deferred compensation resulting from the grant of below market stock options.................................... -- 9 -- -- (9) Payment of note secured by common stock................... -- -- -- 84 -- Amortization of deferred compensation and unrealized gains on available-for-sale investments....................... -- -- -- -- 93 Net loss.................................................. -- -- (14,348) -- -- ----------- ----------- ------------ ----- ----- Balances, December 31, 1996............................... $ 9,903 $ 48,784 $ (51,548) $ (15) $ (46) ----------- ----------- ------------ ----- ----- ----------- ----------- ------------ ----- ----- TOTAL STOCKHOLDERS' EQUITY ------------- Balance forward........................................... $ 3,474 Issuance of 7,647 shares of common stock uon exercise of stock options at $.48 to $3.50 per share for cash....... 11 Issuance of 10,625 shares of common stock through the Employee Stock Purchase Plan at $2.56 per share for cash.................................................... 27 Issuance of warrants to purchase 12,242 shares of common stock................................................... 18 Issuance of 6,729 shares of common stock for services rendered................................................ 24 Issuance of 17,399,000 shares of Series A convertible preferred stock and 10,500,836 warrants to purchase Series A convertible preferred stock at $.50 per unit, net of issuance costs of $179........................... 8,520 Issuance of 213,840 shares of Series A convertible preferred stock upon exercise of warrants at $.60 per share................................................... 128 Issuance of 1,153,429 shares of common stock upon the conversion of 4,613,840 shares of Series A convertible preferred stock......................................... -- Deferred compensation resulting from vesting of conditional stock options and grant of below market stock options........................................... -- Amortization of deferred compensation and unrealized gains on available-for-sale investments....................... 98 Net loss.................................................. (8,237) ------------- Balances, December 31, 1995............................... 4,063 Issuance of 6,721 shares of common stock upon exercise of stock options at $3.00 to $3.50 per share for cash...... 22 Issuance of 18,665 shares of common stock through the Employee Stock Purchase Plan at $2.55 to $4.89 per share for cash................................................ 48 Issuance of warrants to purchase 257,628 shares of common stock................................................... 288 Issuance of 1,930,462 shares of common stock and warrants to purchase 965,231 shares of common stock at $6.00 per unit for cash, net of issuance costs of $612............ 5,180 Issuance of 1,111,727 shares of common stock and a warrant to purchase 222,345 shares of common stock upon conversion of convertible debt at $3.45 per share, net of issuance costs of $40................................ 3,792 Issuance of 6,852,064 shares of Series A convertible preferred stock upon exercise of warrants at $.60 to $1.46 per share......................................... 7,856 Issuance of 1,848,965 shares of common stock upon the conversion of 7,395,927 shares of Series A convertible preferred stock......................................... -- Deferred compensation resulting from the grant of below market stock options.................................... -- Payment of note secured by common stock................... 84 Amortization of deferred compensation and unrealized gains on available-for-sale investments....................... 93 Net loss.................................................. (14,348) ------------- Balances, December 31, 1996............................... $ 7,078 ------------- -------------
See accompanying notes. 50 BIOCIRCUITS CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PERIOD FROM MARCH 7, 1989 YEAR ENDED DECEMBER 31, (INCEPTION) ------------------------------- THROUGH 1994 1995 1996 DECEMBER 31, 1996 --------- --------- --------- ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss....................................................... $ (8,208) $ (8,237) $ (14,348) $ (51,548) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................................ 1,109 454 475 3,531 Other........................................................ -- 42 288 366 Changes in: Accounts receivable........................................ -- -- (201) (201) Other current assets....................................... 154 (366) 163 (451) Prepaid inventory.......................................... -- (418) 43 (375) Inventory.................................................. -- -- (928) (928) Other assets............................................... -- 298 81 12 Other current liabilities.................................. 156 (167) 508 1,456 --------- --------- --------- -------- Net cash used in operating activities.................... (6,789) (8,394) (13,919) (48,138) --------- --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment............................. (128) (46) (676) (1,928) Short-term investments purchased............................... -- (3,595) -- (30,337) Short-term investments sold/redeemed........................... 3,060 4,000 596 30,337 Restricted cash................................................ (467) 594 94 (511) --------- --------- --------- -------- Net cash provided by (used in) investing activities.......... 2,465 953 14 (2,439) --------- --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of preferred stock, net of issuance costs............. -- 8,648 7,856 26,933 Issuance of common stock, net of issuance costs................ 72 38 5,532 27,301 Issuance of long-term debt, net of accrued interest............ -- 3,594 -- 4,949 Payments on long-term obligations.............................. (489) (412) (567) (3,662) --------- --------- --------- -------- Net cash provided by (used in) financing activities.......... (417) 11,868 12,821 55,521 --------- --------- --------- -------- Net increase (decrease) in cash and cash equivalents............. (4,741) 4,427 (1,084) 4,944 Cash and cash equivalents, beginning of period................... 6,342 1,601 6,028 -- --------- --------- --------- -------- Cash and cash equivalents, end of period......................... $ 1,601 $ 6,028 $ 4,944 $ 4,944 --------- --------- --------- -------- --------- --------- --------- -------- SUPPLEMENTAL DISCLOSURES: Property and equipment acquired through capital lease.......... $ -- $ 110 $ 96 $ 2,494 --------- --------- --------- -------- --------- --------- --------- -------- Conversion of preferred shares for common stock................ $ -- $ 2,328 $ 4,273 $ 17,047 --------- --------- --------- -------- --------- --------- --------- -------- Conversion of convertible debt for common stock................ $ -- $ -- $ 3,792 $ 3,792 --------- --------- --------- -------- --------- --------- --------- -------- Issuance of note receivable for common stock................... $ -- $ -- $ -- $ 99 --------- --------- --------- -------- --------- --------- --------- -------- Issuance of common stock warrants.............................. $ -- $ 18 $ 288 $ 380 --------- --------- --------- -------- --------- --------- --------- -------- Issuance of common stock for services rendered................. $ -- $ 27 $ -- $ 35 --------- --------- --------- -------- --------- --------- --------- -------- Cash paid for interest......................................... $ 217 $ 87 $ 63 $ 898 --------- --------- --------- -------- --------- --------- --------- --------
See accompanying notes 51 BIOCIRCUITS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS AND FINANCING Biocircuits Corporation (a development stage company) (the "Company") was incorporated in Delaware on March 7, 1989. The Company is engaged in developing and commercializing new immunodiagnostic testing systems. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company's first sale and shipment of its IOS system with cartridges capable of performing T4 and T Uptake tests occurred in March 1996. The Company has incurred a loss in each period since its inception. The Company's accumulated deficit was $51,548,000 at December 31, 1996. Biocircuits expects to incur additional losses over the next several years. Obtaining additional funds will be critical to the Company's ability to maintain operations during 1997. The Company will continue to seek funding from various equity financing sources. Raising additional funds from public or private sources will result in significant dilution to then existing shareholders. If adequate funding is not available on a timely basis, the Company will be required to curtail its operations significantly or to cease operations. See "Subsequent Events (Unaudited)" below. SUBSEQUENT EVENTS (UNAUDITED) The Company's bank informed it in late March 1997 that the Company was no longer in compliance with the bank's terms for the Kollsman standby letter of credit. As a result, the bank collateralized the full amount of the standby letter of credit, resulting in a $949,000 reduction in available cash to the Company. Subsequently, also in late March 1997, the Company and Kollsman reached an agreement to reduce the current amount of the standby letter of credit to $700,000, resulting in an increase of available cash of $249,000 in exchange for reducing the exercise price from $7.00 to $2.00 per share of the warrant issued in April 1996 to purchase 250,000 shares of Common Stock. See "Note 11. Commitments." The collateralization of the standby letter of credit meant that the Company's remaining available cash would satisfy its requirements until only mid-April 1997. In late March, the Company and Kollsman agreed to issue Kollsman a warrant to purchase 50,000 shares of Common Stock in exchange for a one month shutdown of instrument production. In the quarter ending March 31, 1997, the Company recorded a $124,000 expense as manufacturing overhead, $60,000 for the warrant price reduction from $7.00 to $2.00 per share and $64,000 for the issuance of the warrant to purchase 50,000 shares of Common Stock. Such expense determination was calculated according to Financial Accounting Standard Board Statement No. 123. In early May 1997, the Company subsequently agreed with Kollsman to extend the instrument production line shutdown until August 1997. The Company further agreed to and has paid Kollsman $436,000 to cover the cost of raw material and work in process currently at, or to be delivered to Kollsman. Such prepaid inventory funds will be credited back against future deliveries of IOS instruments to Biocircuits. In return, Kollsman has canceled the $700,000 standby letter of credit and the associated funds collateralized by the Company's bank have been released back to the Company. On April 3, 1997, in order to reduce its losses and conserve cash, the Company reduced its work force from 92 to 54 employees. 52 BIOCIRCUITS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) On April 15, 1997, the Company closed the April 1997 Financings which consisted of the sale of common stock and warrants to purchase common stock in three tranches. The sale resulted in gross proceeds of approximately $1.7 million to Company. With the receipt of these funds from the April 1997 Financings, the Company received adequate cash resources to satisfy its requirements through the end of the second quarter 1997. With the approximately $5.1 million of proceeds from the July Financing, which closed on July 3, 1997, the Company believes its cash resources will be adequate to satisfy its requirements through the second quarter 1998. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash and cash equivalents include demand deposits held in US banks, interest bearing money market funds, commercial paper, state agency notes and commercial bonds with original maturities of less than three months. Short-term investments consist of corporate bonds with original maturities of less than one year. The Company has not experienced any losses on its investments. ACCOUNTS RECEIVABLE The Company performs ongoing credit evaluations of its customers, all of whom are in the U.S. and generally does not require collateral. The Company maintains reserves for potential credit losses and has experienced minimal losses to date. PROPERTY AND EQUIPMENT Property and equipment is stated at cost, less accumulated depreciation and amortization. Depreciation of property and equipment is provided over the estimated useful lives of the respective assets, estimated to be five years, on a straight-line method. Amortization of leasehold improvements is provided over the estimated useful lives of leased assets or the term of the lease, whichever is shorter. RESEARCH AND DEVELOPMENT Research and development costs include personnel costs, materials consumed in research and development activities, manufacturing start-up, depreciation on equipment, outside services and the cost of the facilities used for research and development activities. INVENTORIES Inventories are stated at the lower of cost (first in, first out basis) or market (estimated net realizable value). 53 BIOCIRCUITS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION Except in certain cases where distributors have a right of return, net revenues are recorded upon shipment. The Company records revenue, net of discounts and amounts it estimates may be returned by distributors which have a right of return. During 1996, sales to two distributors accounted for 55% of revenue. The percentages of the two distributors are 34% and 21%. ADVERTISING COSTS The Company expenses advertising costs as incurred. Advertising costs totaled $0, $50,000 and $214,000 for the years ended December 31, 1994, 1995 and 1996, respectively. STOCK BASED COMPENSATION The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. The Company generally grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. Under APB 25, for employee stock options with an exercise price equal to the market price of the underlying stock on the date of grant, no compensation expense is recorded. The Company recognizes compensation expense for those stock options granted with an exercise price less than fair value. PER SHARE INFORMATION Net loss per share is computed on the basis of the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation as their effect is antidilutive. Following is supplemental pro forma earnings per share, calculated giving effect to the conversion of the outstanding convertible preferred stock on an if converted basis. Such shares are excluded from earnings per share as reported, as they are antidilutive (in thousands, except per share data):
YEAR ENDED DECEMBER 31, -------------------------------- 1994 1995 1996 --------- --------- ---------- Net loss as reported......................................... $ (8,208) $ (8,237) $ (14,348) --------- --------- ---------- --------- --------- ---------- Shares used in computing net loss per share as reported...... 2,489 2,849 5,299 Adjustment to include outstanding convertible preferred stock...................................................... -- 1,982 3,321 --------- --------- ---------- Shares used in computing pro forma net loss per share........ 2,489 4,831 8,620 --------- --------- ---------- --------- --------- ---------- Pro forma net loss per share................................. $ (3.30) $ (1.71) $ (1.66) --------- --------- ---------- --------- --------- ----------
54 BIOCIRCUITS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 2. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. The carrying amounts approximate fair values of the Company's financial instruments at December 31, 1996. The following methods and assumptions were used in estimating its fair value disclosures for financial instruments: CASH AND CASH EQUIVALENTS: The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. INVESTMENT SECURITIES: The fair values for marketable debt securities are based on quoted market prices. ACCOUNTS RECEIVABLE AND PAYABLE: The carrying amount reported in the balance sheet for accounts payable approximates its fair value. 3. ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES The Company determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. All such securities have been classified as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported in stockholders' equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. There have been no realized gains and losses or declines in value judged to be other than temporary on available-for-sale securities. As of December 31, 1996, the Company has no available-for-sale-securities. The following is a summary of available-for-sale securities as of December 31, 1995 (in thousands):
GROSS GROSS ADJUSTED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE ----------- ------------- ------------- ----------- Corporate debt securities...................... $ 5,060 $ 8 $ -- $ 5,068 State and subdivision securities............... 1,100 -- -- 1,100 ----------- --- --- ----------- $ 6,160 $ 8 $ -- $ 6,168 ----------- --- --- ----------- ----------- --- --- -----------
Net unrealized losses and gains on available-for-sale securities are included in stockholders' equity, recorded as "Other," and totaled a gain of $8,000 at December 31, 1995. All debt securities had original maturities of less than one year. At December 31, 1995, there were $5,563,000 available-for-sale securities with original maturities of less than three months which were classified as cash equivalents and $605,000 classified as short-term investments. During the years ended December 31, 1995 and 1996 there were no sales of available-for-sale securities prior to maturity date and no realized gains or losses. The net adjustment to unrealized holding gains and losses on available-for-sale securities included as a separate component of stockholders' equity was a loss of $8,000 in 1996 ($10,000 gain in 1995). 55 BIOCIRCUITS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 4. PROPERTY AND EQUIPMENT Property and equipment, at cost, including property and equipment under capital leases ($1,824,000 in 1995, $781,000 in 1996), consists of the following (in thousands):
DECEMBER 31, -------------------- 1995 1996 --------- --------- Furniture and equipment.................................................. $ 1,679 $ 2,451 Leasehold improvements................................................... 594 595 --------- --------- 2,273 3,046 Less accumulated depreciation and amortization........................... (1,298) (1,671) --------- --------- $ 975 $ 1,375 --------- --------- --------- ---------
Depreciation expense was $214,000, $360,000 and $373,000 in 1994, 1995 and 1996, respectively. 5. INVENTORIES Inventories consist of the following (in thousands):
DECEMBER 31, -------------------- 1995 1996 --------- --------- Raw materials............................................................ $ -- $ 528 Work in Process.......................................................... -- 18 Finished Goods........................................................... -- 382 --------- --------- $ -- $ 928 --------- --------- --------- ---------
6. LEASE COMMITMENTS The Company leases its facilities under a noncancelable operating lease which expires on April 30, 2000. Under the terms of this lease, the Company was required to establish a $732,000 letter of credit, which decreased according to its terms to $478,000 in 1996, as security for certain tenant improvements in the facility. The related cash is presented as restricted cash in the accompanying balance sheet. Rent expense for 1994, 1995 and 1996 was approximately $497,000, $504,000 and $525,000, respectively. The Company leases certain property and equipment under capital leases. Cash security deposits are required under certain capital lease financings which are recorded in "Prepaid expenses and other current assets" and "Other assets." During 1995, in connection with capital leases, the Company issued warrants, which expire in March and June 1997, allowing lessors to purchase up to 8,938 fully paid and nonassessable shares of the Company's common stock at $4.00 per share. The Company estimated the value of these warrants at $12,000. 56 BIOCIRCUITS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 6. LEASE COMMITMENTS (CONTINUED) At December 31, 1996, future minimum payments under the noncancelable operating and capital leases are as follows (in thousands):
OPERATING CAPITAL LEASES LEASES ----------- ----------- Years ending December 31: 1997................................................................... $ 524 $ 131 1998................................................................... 546 54 1999................................................................... 553 23 2000................................................................... 138 -- 2001................................................................... -- -- Thereafter............................................................. -- -- ----------- ----- Total minimum lease payments............................................. $ 1,761 208 ----------- ----------- Amount representing interest............................................. (18) ----- Present value of future minimum lease payments........................... 190 Current portion.......................................................... (118) ----- Long-term capital lease obligations...................................... $ 72 ----- -----
7. LONG-TERM DEBT In April 1991, the Company and Technology Funding Secured Investors II ("TFI") entered into an agreement whereby TFI loaned $800,000 to the Company. All principal and interest payments have been made. In addition, the Company granted TFI warrants, which expired in January 1996, to purchase 10,000 shares of common stock at $8.00 per share. The estimated value of the warrants, $42,000, was recorded as a discount to the note payable. On August 16, 1995, the Company entered into a collaborative relationship with Beckman Instruments, Inc. ("Beckman") and received $3,500,000 in the form of convertible debt in exchange for granting Beckman certain options for licensing and marketing rights to testing applications using Biocircuits' proprietary lipid/polymer technology. On December 13, 1996, Beckman exercised its option to convert its debt and accrued interest at 7.125% per annum of $332,000 into common stock at $3.45 per share. Under the terms of the convertible debt arrangement, in connection with the Beckman conversion, the Company issued a warrant, expiring August 2000, to purchase 222,345 shares of Common Stock at $3.45 per share. At December 31, 1995, $93,000 of accrued interest was included as a component of long-term convertible debt. 8. STOCKHOLDERS' EQUITY AUTHORIZED SHARES AND REVERSE STOCK SPLIT In April 1995, the Board of Directors authorized an amendment to the Company's Restated Certificate of Incorporation to increase the authorized number of shares of Common Stock from 20,000,000 shares to 70,000,000 shares and increase the authorized number of shares of Preferred Stock 57 BIOCIRCUITS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 8. STOCKHOLDERS' EQUITY (CONTINUED) from 10,000,000 shares to 40,000,000 shares. The Board of Directors also approved an amendment to the Company's Restated Certificate of Incorporation to effect a one-for-four reverse stock split of the Common Stock. These amendments were subsequently approved at the Annual Meeting of Stockholders held on June 15, 1995 and the one for four reverse split of the Common Stock became effective on December 31, 1995. All share and per share amounts have been retroactively restated. PRIVATE PLACEMENTS The Company closed a private placement on June 19, 1995 which consisted of the sale of 17,399,000 units at $0.50 per unit. Proceeds to the Company were approximately $8,520,000, net of issuance costs. A unit consisted of one share of Series A Preferred Stock and one warrant to purchase approximately .60 shares of Series A Preferred Stock at $0.60 per share (the "1995 Warrants"). The 1995 Warrants, expiring December 18, 1996, contained a provision which allowed the Company, at its discretion, to reduce the number of shares of preferred stock issuable upon exercise of the 1995 Warrants, in the event the Company receives, prior to December 1, 1995, additional funds from corporate partnering transactions. In November 1995, the Company exercised the provision to reduce the number of shares of preferred stock issuable upon exercise of the 1995 Warrants by 5,333,334 shares of Series A Convertible Preferred Stock (proceeds of $3,200,000) due to the corporate partnering proceeds received from Beckman Instruments, Inc. On November 14, 1996, the Board of Directors extended the expiration date for the remaining 1995 Warrants two additional months to February 14, 1997. At December 31, 1996, the Company had 1995 Warrants, expiring February 14, 1997, to purchase 3,513,213 shares (4,953,663 at December 31, 1995) of Series A Preferred Stock outstanding at $.60 per share. On January 29, 1996, as a result of the Beckman transaction, the Company amended outstanding 1995 Warrants to purchase 2,666,514 shares of Series A Preferred Stock (the "Amended 1995 Warrants") and closed a private placement pursuant to which the company issued new warrants (the "1996 Warrants") to purchase 2,852,998 shares of Series A Preferred Stock. One half of the amended 1995 Warrants and one half of the 1996 Warrants were exercisable at a purchase price of 70% of the current market price upon exercise and expired on May 31, 1996. Prior to their expiration on May 31, 1996, warrants to purchase 2,651,847 shares of Series A Preferred stock were exercised at an average price of $1.18 per share. The remaining one half of the amended 1995 Warrants and 1996 Warrants were subject to automatic exercise at a purchase price of $1.46 per share upon the Company's shipment of the first ten IOS-TM- instruments and accompanying cartridges. These latter warrants were called by the Company and the funds were received by the Company in March 1996. On October 21, 1996, the Company closed a private placement which consisted of the sale of 965,231 units at $6.00 per unit (the "October 1996 Financing"). Proceeds to the Company were approximately $5,200,000, net of issuance costs. A unit consisted of two shares of Common Stock and one warrant (the "Financing Warrants"), expiring October 20, 1997, to purchase one share of Common Stock at $3.43 per share. The Financing Warrants contain an automatic exercise provision which occurs, upon notice from the Company, at any time beginning six months prior to the expiration date when the average market value for the Company's Common Stock equals or exceeds $5.25 per share for 10 consecutive trading days. At December 31, 1996, the Company had October 1996 Warrants, to purchase 965,231 of common stock outstanding. 58 BIOCIRCUITS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 8. STOCKHOLDERS' EQUITY (CONTINUED) COMMON STOCK In May 1992, the Company issued 535,817 shares of common stock in its initial public offering followed by public offerings of 163,650 and 437,500 shares of registered common stock in December 1992 and February 1993, respectively. In 1989, 125,000 shares of common stock were issued to the founder of the Company for $1,000 and a $59,000 note secured by the common stock. The note and accrued interest at 8.2% per annum was paid on July 23, 1996. In April 1990, options to purchase 50,000 shares of common stock were granted to an officer and subsequently exercised for $400 in cash and a $39,600 note secured by the common stock. The note, including accrued interest at 7.98% per annum, was due in April 1996. Such note was extended one additional year and partially paid. Common shares issued to the founder and officer were subject to certain repurchase rights by the Company in the event of termination of employment, death or disability. In January 1993, the Company issued warrants, which expired in May 1995, to purchase 500 shares of common stock at a price of $20.00 per share to a supplier of manufacturing equipment. In 1995, the Company issued warrants, expiring in July 1997, to purchase 625 and 2,680 shares of the Company's common stock at $3.00 and $4.00, respectively. In March 1996 and June 1996 the company issued additional warrants, expiring in April 2006 and September 2006, to purchase 2,500 and 5,128 shares, respectively, of common stock at a purchase price of 70% of the current market price upon exercise. At December 31, 1996, 1,507,447 shares, of the Company's common stock were reserved for issuance upon exercise of all warrants to purchase common stock. PREFERRED STOCK Thirty million shares of the Company's authorized preferred stock are designated as Series A Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock votes with the Company's common stock on an as-converted basis and has a liquidation preference of $0.55 per share plus any declared and unpaid dividends. At any time, at the option of the stockholder, each outstanding share of Series A Convertible Preferred Stock currently converts into .25 shares of common stock. Conversion is automatic upon the earlier of (i) the closing of an underwritten public offering of common stock on a Form S-1 Registration Statement at a per share price of not less than $8.00 and gross proceeds of not less than $10,000,000, (ii) the vote or written consent of holders of at least 66 2/3% of the then outstanding shares of Series A Convertible Preferred Stock, or (iii) the date after June 19, 1997 at which the market value of the Company's common stock, as reported by The Nasdaq National Market System, has been at least $2.00 per share for 20 consecutive trading days. The conversion rate of the preferred stock is subject to adjustment in the event of stock splits, stock dividends, recapitalizations and the like. Series A Convertible Preferred stockholders are entitled to receive non-cumulative annual dividends at a per share rate equal to the dividends declared, if any, by the Company's Board of Directors for stockholders of the Company's common stock. At December 31, 1996 the Company had reserved 3,992,087 shares of Common Stock for issuance upon conversion of the Series A Preferred Stock. 59 BIOCIRCUITS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 9. INCOME TAXES As of December 31, 1996, the Company had net operating loss carryforwards of approximately $36.5 million and research and development credit carryforwards of approximately $1,138,000 for federal income tax purposes, both expiring in the years 2004 through 2011. Upon the closing of its private placement on June 19, 1995, the Company experienced a "change in ownership" as defined by Section 382 of the Internal Revenue Code. As a result, the utilization of the Company's pre-change net operating loss and certain credit carryforwards will be subject to an annual limitation based upon the Company's pre-change value and may expire prior to utilization. Significant components of the Company's deferred tax assets and liabilities for federal and state income taxes are as follows (in thousands):
DECEMBER 31, -------------------- 1995 1996 --------- --------- Net operating loss carryforwards......................................... $ 8,178 $ 13,463 Research credits......................................................... 1,360 1,666 Research expenses capitalized for tax purposes........................... 5,237 5,528 Other.................................................................... 470 411 --------- --------- Total deferred tax assets................................................ 15,245 21,068 Valuation allowance for deferred tax assets.............................. (15,245) (21,068) --------- --------- Total deferred tax assets................................................ $ -- $ -- --------- --------- --------- ---------
During 1996, the valuation allowance increased by $5,823,000 ($2,737,000 in 1995). 10. STOCK PLANS DUAL STOCK OPTION PLAN On May 1, 1989, the Company adopted a Dual Stock Option Plan (the "Plan"). Under the Plan, 1,375,000 shares of common stock were reserved for issuance to employees, including officers, directors and consultants at December 31, 1995. The Plan is comprised of an employee plan and a non-employee plan. Options granted under the Plan expire ten years from date of grant and become exercisable at such times and under such conditions as determined by the Company's Board of Directors. The options for most participants become exercisable over five years at the rate of 20% after one year and an additional 5% every three months thereafter. The aggregate fair market value of the stock with respect to which incentive stock options are first exercisable by an individual in any calendar year may not exceed $100,000. In June 1994, the Board of Directors offered all option holders the right to amend the terms of their outstanding options to lower the exercise price to the fair market value on the date of the Board's decision with the condition that the amended options could not be exercised for a period of twelve months after the amendment date. Such amended options are reported as cancellations and re-grants in 1994. On March 26, 1996, the Board of Directors approved an amendment to increase the shares reserved under the Plan to 1,675,000 shares of common stock, a 300,000 share increase. Such amendment was approved by Shareholders at the Shareholders' meeting held in May 1996. 60 BIOCIRCUITS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 10. STOCK PLANS (CONTINUED) The Company has recorded deferred compensation expense for the difference between the grant price and the deemed fair value of the Company's common stock for options at time of grant and for the vesting of conditional stock options. Such amount is amortized over the vesting period (a total deferred compensation of $412,000, of which $366,000 is amortized at December 31, 1996). The following summarizes activity in the Dual Stock Option Plan:
WEIGHTED AVERAGE NUMBER OF OPTION EXERCISE OPTIONS PRICE PRICE ----------- ----------------- ------------- Balances at December 31, 1993................... 161,032 $ .48 - $28.00 $ 12.95 Granted......................................... 127,824 2.96 - 18.00 3.26 Exercised....................................... (10,803) .48 - 25.60 .95 Canceled........................................ (104,586) .48 - 28.00 19.21 ----------- ----------------- ------ Balances at December 31, 1994................... 173,467 $ .48 - $ 4.00 $ 2.68 Granted......................................... 780,282 2.50 - 7.50 4.80 Exercised....................................... (7,647) .48 - 3.50 1.56 Canceled........................................ (17,763) .80 - 4.50 3.34 ----------- ----------------- ------ Balances at December 31, 1995................... 928,339 $ .48 - $ 7.50 $ 4.46 Granted......................................... 180,900 2.88 - 7.38 6.12 Exercised....................................... (6,721) 3.00 - 3.50 3.06 Canceled........................................ (160,672) 3.00 - 7.38 5.08 ----------- ----------------- ------ Balances at December 31, 1996................... 941,846 $ .48 - $ 7.50 $ 4.68 ----------- ----------------- ------ ----------- ----------------- ------
At December 31, 1996, options for a total of 294,614 shares were exercisable at a weighted average exercise price of $3.95 per share. At December 31, 1995, options for a total of 80,005 shares were exercisable at a weighted average exercise price of $2.32.
OPTIONS OUTSTANDING EXERCISABLE OPTIONS -------------------------- WEIGHTED AVERAGE -------------------------- WEIGHTED REMAINING WEIGHTED EXERCISE PRICE AVERAGE CONTRACTUAL LIFE AVERAGE RANGE NUMBER EXERCISE PRICE (IN YEARS) NUMBER EXERCISE PRICE - -------------- --------- --------------- ------------------- --------- --------------- $0.48 - $0.48 688 $ 0.48 2.8 688 $ 0.48 0.80 - 1.04 27,679 0.85 4.1 27,679 0.85 2.50 - 3.50 117,548 3.11 8.0 70,308 3.07 4.00 - 6.00 629,231 4.56 8.6 177,732 4.50 6.13 - 8.25 166,700 6.91 9.0 18,207 6.93 --------- ----- --- --------- ----- 941,846 $ 4.68 8.4 294,614 $ 3.95 --------- ----- --- --------- ----- --------- ----- --- --------- -----
61 BIOCIRCUITS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 10. STOCK PLANS (CONTINUED) NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN In March 1992, the Company adopted the 1992 Restated Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). The Directors' Plan provides for the automatic grant of options to purchase shares of common stock to non-employee directors of the Company. Upon its adoption, the Directors' Plan provided for an automatic issuance of options to purchase an aggregate of 3,750 shares of common stock to three non-employee directors at an exercise price of $4.00. The Directors' plan further provides that each future non-employee director of the Company would automatically be granted an option to purchase 3,750 shares of common stock at an exercise price equal to 85% of the fair market value of the stock on the date of grant. Options granted under the plan expire ten years from date of grant and vest over a period of three years from the date of the grant. As a result of a series of amendments, the number of shares authorized for issuance under the plan was 63,750 shares as of December 31, 1995. Such amendments were approved by the Board and stockholders of the Company. In October 1995, the Board of Directors adopted an amendment to the Directors' Plan to change the periodic grants of additional options under the Directors' Plan to authorize annual grants of options to purchase 5,000 shares of common stock on November 1 of each year to non-employee directors of the Company. On March 26, 1996, the Board of Directors adopted an amendment to increase the shares authorized for issuance under the plan to 113,750 shares, a 50,000 share increase. Such amendments were approved by shareholders at the Shareholders' meeting in May 1996. Options to purchase 20,000 shares were granted to non-employee directors at $2.44 per share on November 1, 1996 and options to purchase 20,000 shares were granted at an exercise price of $6.38 on November 1, 1995. At December 31, 1996, options to purchase 58,750 shares were outstanding at prices ranging from $2.44 to $6.38 with a weighted-average purchase price of $4.01 and a weighted-average remaining contractual life of 8.7 years. At December 31, 1995, options to purchase 38,750 shares were outstanding at prices ranging from $2.98 to $6.38 with a weighted-average purchase price of $4.83. At December 31, 1996, options for a total of 20,414 shares were exercisable at a weighted average exercise price of $4.27 per share. At December 31, 1995, options for a total of 8,750 shares were exercisable at a weighted average exercise price of $3.41. Unless terminated earlier by the Board of Directors, the Directors' Plan will terminate in February 2002. EMPLOYEE STOCK PURCHASE PLAN In March 1992, the Company's Board of Directors adopted the 1992 Employee Stock Purchase Plan (the "Purchase Plan") which provided for the issuance of up to 31,250 shares of common stock to employees of the Company. The Purchase Plan was subsequently amended to increase the number of authorized shares to 75,000 shares in 1995. Under the Purchase Plan, all eligible employees are entitled to purchase shares of common stock from Board authorized share offerings through payroll deductions of up to 15% of an employees' earnings, as defined by the Purchase Plan. The price per share at which shares are sold in an offering is the lesser of 85% of the fair market value of the stock on the date of the purchase or on the date of the offering. Unless terminated earlier by the Board of Directors, the Purchase Plan will terminate in February 2002. 62 BIOCIRCUITS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 10. STOCK PLANS (CONTINUED) As of December 31, 1996, the Board had authorized four offerings for the issuance of 52,500 shares of common stock, of which 43,365 shares of common stock have been issued, with 22,500 shares available for future offerings under the Purchase Plan. STOCK-BASED COMPENSATION As permitted under FASB Statement No. 123, "Accounting for Stock-Based Compensation" (FASB 123), the company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for stock-based awards to employees. Under APB 25, the company generally recognizes no compensation expense with respect to such awards. Pro forma information regarding net loss and net loss per share is required by FASB 123 for awards granted after December 31, 1994 as if the Company had accounted for its stock-based awards to employees under the fair value method of FASB 123. The fair value of the Company's stock-based awards to employees was estimated using a Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded option which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. The fair value of the Company's stock-based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:
OPTIONS ESPP -------------------- -------------------- 1995 1996 1995 1996 --------- --------- --------- --------- Expected life (years).............................. 6.0 6.0 0.5 0.5 Expected volatility................................ 0.744 0.744 0.744 0.744 Risk-free interest rate............................ 5.86% 6.02% 5.86% 6.02%
For pro forma purposes, the estimated fair value of the Company's stock-based awards to employees is amortized over the options' vesting period (for options) and the six-month purchase period (for stock purchases under the ESPP). The Company's pro forma information follows (in thousands except for earnings (loss) per share information):
1995 1996 --------- ---------- Net loss As reported $ (8,237) $ (14,348) Pro forma $ (8,481) $ (14,920) Primary loss per share As reported $ (2.89) $ (2.71) Pro forma $ (2.98) $ (2.82)
Because FASB 123 is applicable only to awards granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until approximately 1999. 63 BIOCIRCUITS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 10. STOCK PLANS (CONTINUED) The weighted-average exercise price and weighted-average fair value of options to purchase 180,900 shares of Common Stock granted at market value in 1996, were $6.12 and $4.29 per share, respectively. The weighted-average exercise price and weighted-average fair value of options to purchase 20,000 shares of Common Stock granted below market value in 1996, were $6.38 and $2.08 per share, respectively. The weighted-average exercise price and weighted-average fair value of options to purchase 769,032 shares of Common Stock granted at market value in 1995, were $4.80 and $3.35 per share, respectively. The weighted-average exercise price and weighted-average fair value of options to purchase 31,250 shares of Common Stock granted below market value in 1995, were $6.20 and $5.28 per share, respectively. The weighted-average fair value of employee stock purchase rights during 1995 and 1996 was $1.28 and $2.25 per share, respectively. 11. COMMITMENTS In December 1992, the Company entered into an exclusive manufacturing agreement with a third party for IOS-TM- instruments. Under the terms of the agreement, the Company has and will reimburse the manufacturer for certain costs for the transition from prototyping to production phases. In 1994, the Company established a letter of credit as security for inventory purchased under the manufacturing agreement. As of December 31, 1996 the letter of credit had been exercised and the related amount is presented in the accompanying balance sheet as a prepayment for future deliveries of inventory. In April 1996, the Company executed a letter agreement to amend the 1992 agreement (the "Letter Agreement"), pursuant to which the manufacturer will be the exclusive supplier of the IOS instrument through 1997, the minimum purchase requirements were eliminated and the Company and manufacturer agreed to an acceptable transfer price to be paid through 1997, the revised term of the agreement. Under the terms of the Letter Agreement the Company agreed to establish a $949,000 standby letter of credit as security for raw materials purchased under the manufacturing agreement. Also pursuant to the Letter Agreement, the Company issued the manufacturer a warrant to purchase 250,000 shares of Common Stock at $7.00 per share which expire on June 30, 1998 and are subject to an increase of 50,000 shares or an extension of the expiration date under certain circumstances. See "Note 1. Summary of Significant Accounting Policies-- Subsequent Events (Unaudited)." In April 1996, the Company entered into a $2,500,000 revolving line of credit to be secured by accounts receivable at an interest rate of prime interest rate plus 1%. Under terms of this agreement, the Company may draw in advance and convert up to $1,000,000 of the line of credit to a one year term loan. Such right of conversion is used as security for the letter of credit entered into in the above mentioned Letter Agreement. As of December 31, 1996, the Company has not drawn on the line of credit. See "Note 1. Summary of Significant Accounting Policies--Subsequent Events (Unaudited)." In December 1995, the Company entered into an exclusive manufacturing agreement with a third party for cartridges. Management believes that other suppliers could provide similar services on comparable terms, however, a change in suppliers could cause a delay in manufacturing and a possible loss of sales, which would adversely affect future operating results. 64 BIOCIRCUITS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 11. COMMITMENTS (CONTINUED) The Company has entered into a license agreement for the patent rights to develop, manufacture and distribute a future potential product. Under the terms of the agreement, the Company is required to pay a license fee and, upon commercialization, royalties. 12. ONE-TIME CHARGE In the first quarter of 1994, the Company announced a decision to reformulate the test method in its proprietary assay cartridge used in conjunction with its diagnostic testing system. As a result, the Company recorded a one-time charge of $992,000 as a research and development expense in the first quarter of 1994 for equipment ($720,000) and purchase commitments ($272,000) related to this reformulation. The equipment written off included equipment purchased specifically for the development and manufacturing of product which utilized the technology employed prior to the reformulation. The purchase commitment related to instrument related raw material purchased, which became obsolete due to the reformulation. 65 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO CHARGED ALLOWANCE FOR BEGINNING COSTS AND TO OTHER BALANCE AT DOUBTFUL ACCOUNTS OF YEAR EXPENSES ACCOUNTS WRITE-OFFS END OF YEAR - ----------------------------------------------------- ------------- --------------- ------------- ------------- --------------- 1996................................................. $ -- $ 43 $ -- $ -- $ 43 1995................................................. -- -- -- -- -- 1994................................................. -- -- -- -- --
66 INDEX TO EXHIBITS ITEM 14(A)(3). EXHIBITS
MANNER OF NUMBER DESCRIPTION FILING - --------- ------------------------------------------------------------------------------------------- ------------- 3.1 Amended and Restated Certificate of Incorporation of the Registrant. (10) 3.2 Amended and Restated By-laws of the Registrant. (1) 4.1 Specimen warrant. (9) 4.3 Specimen Series A Convertible Preferred Stock Certificate. (8) 4.4 Form of Series A Convertible Preferred Stock Warrant. (8) 4.5 Form of Common Stock Warrant. (8) 4.6 Form of Series A Convertible Preferred Amended Warrant. (8) 4.7 Form of Series A Convertible Preferred Stock Warrant. (8) 4.8 Form of Warrant Issued pursuant to Common Stock and Warrant Purchase Agreement (16) 4.9 Form of Warrant Issued to KMC Systems, Inc. (16) 10.4 Early Exercise Stock Purchase Agreement between Mr. Kaiser and the Registrant, dated May 23, 1991. (1) 10.9 Co-Sale Agreement between Mr. Kaiser and the Registrant, dated May 24, 1991. (1) 10.15 Master Lease Agreement between Phoenix Leasing Incorporated and the Registrant, dated November 1, 1992. (3) 10.16 Form of Confidential Nondisclosure Agreement entered into between the Registrant and its consultants. (3) 10.17 Form of Mutual Confidential Nondisclosure Agreement entered into between the Registrant and potential business partners. (3) 10.18 Form of Proprietary Information Agreement entered into between the Registrant and employees. (3) 10.19 Form of Contractor Agreement entered into between the Registrant and independent contractors. (3) *10.20 Employee Stock Purchase Plan, as amended. *10.21 Restated 1992 Non-Employee Directors Stock Option Plan. (5) *10.22 Restated Dual Stock Option Plan. (11) 10.23 Restated Promissory Note and Agreement in the principal amount of $59,000, between the Registrant and Dr. Ribi, dated April 19, 1992. (1) 10.24 Full Recourse Promissory Note in the principal amount of $39,600, between the Registrant and John Kaiser, dated May 23, 1991, as amended. (2) ++10.25 Manufacturing Agreement, dated December 30, 1992, between the Registrant and Kollsman Manufacturing Company, Inc. (2) 10.26 Lease Agreement, dated January 21, 1993, by and between the Registrant and South Bay/Caribbean. (2) 10.28 Irrevocable Letter of Credit dated March 17, 1993 between the Registrant and South Bay/Caribbean. (3) 10.29 Promissory Note dated April 7, 1993 issued by John Kaiser to the Registrant in the principal amount of $53,700. (3) ++10.30 License Agreement dated July 28, 1993 between the Registrant and Research Corporation Technologies Incorporated. (4) ++10.31 Feasibility Study and Option Agreement between the Registrant and Beckman Instruments, Inc., dated August 15, 1995. (7) ++10.32 Patent Security Agreement between the Registrant and Beckman Instruments, Inc. dated August 15, 1995. (7)
67
MANNER OF NUMBER DESCRIPTION FILING - --------- ------------------------------------------------------------------------------------------- ------------- ++10.33 Convertible Secured Promissory Note issued by the Registrant to Beckman Instruments, Inc., dated August 15, 1995. (7) 10.34 Investor Rights Agreement between the Registrant and Beckman Instruments, Inc., dated August 15, 1995. (7) 10.35 Convertible Note Purchase Agreement between the Registrant and Beckman Instruments, Inc., dated August 15, 1995. (7) ++10.36 Letter Agreement between the Registrant and Nunc, Inc., dated August 10, 1995. (7) 10.37 Form of Non-Exclusive Distribution Agreement between the Registrant and the entities listed on Exhibit A thereto. (9) ++10.38 Supply Agreement between Nalge Nunc International, Inc. and the Registrant, dated December 20, 1995. (9) ++10.39 Confidential letter of understanding dated April 18, 1996 between the Registrant and KMC Systems, Inc. (12) 10.40 Warrant Amendment Agreement dated January 4, 1996 by and among the Registrant and the Warrant Holders named therein. (8) 10.41 Warrant Purchase Agreement dated January 4, 1996 by and among the Registrant and the Purchasers named therein. (8) 10.42 Form of Common Stock and Warrant Purchase Agreement by and among the Registrant and the purchasers named therein. (13) 10.43 Form of Warrant issued to Beckman Instruments. (14) 10.44 Form of Warrant issued to Kollsman Manufacturing Company. (14) 10.45 Form of Warrant issued to Venture Lending. (14) ++++10.46 Confidential letter of understanding dated November 1, 1996 between the Registrant and KMC Systems, Inc. (15) 10.47 Employment Agreement between the Registrant and Mr. Hawthorne, dated January 27, 1997. (15) 10.48 Confidential letter of understanding dated March 28, 1997 between the Registrant and KMC Systems, Inc. (15) 10.49 Form of Warrant issued to KMC Systems, Inc. (15) 10.50 Form of Retention Letter to Employees from the Company dated April 3, 1997. (15) 10.51 Common Stock Purchase Agreement, dated April 15, 1997, among the Registrant and the Purchasers named therein. (16) 10.52 Common Stock and Warrant Purchase Agreement, dated April 15, 1997, among the Registrant and the Purchasers named therein. (16) 10.53 Common Stock and Warrant Purchase Agreement, dated July 2, 1997, among the Registrant and the Purchasers named therein. (17) 10.54 Form of Warrant issued pursuant to the Common Stock and Warrant Purchase Agreement, dated July 2, 1997. (17) 23.1 Consent of Ernst & Young LLP, Independent Auditors. 24.1 Power of Attorney. (15) 27.1 Financial Data Schedule (15)
- ------------------------ * Indicates management contracts or compensatory plans or arrangements filed pursuant to Item 601(b)(10). ++ Confidential treatment has previously been granted for portions of this Exhibit. ++++ Registrant has applied for confidential treatment with respect to portions of this Exhibit. 68 (1) Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-1 (No. 33-46587), as amended, which became effective May 13, 1992. (2) Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-1 (No. 33-56836), as amended, which became effective February 10, 1993. (3) Incorporated by reference to identically numbered exhibits filed with the Registrant's Annual Report on Form-10K for the fiscal year ended December 31, 1993. (4) Incorporated by reference to identically numbered exhibits filed with the Registrant's Quarterly Report on Form-10Q for the fiscal quarter ended June 30, 1994. (5) Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-8 (No. 33-89006) which became effective January 31, 1995. (6) Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-3 (No. 33-93736), as amended, which became effective August 8, 1995. (7) Incorporated by reference to identically-numbered exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995. (8) Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-3 (No. 333-00284) which became effective January 29, 1996. (9) Incorporated by reference to identically-numbered exhibits filed with the Registrant's Registration Statement on Form S-1 (No. 333-1434), filed with the Commission on February 20, 1996. (10) Incorporated by reference to the exhibits filed with the Registrant's Registration Statement on Form S-3 (33-93736), which became effective August 5, 1995. (11)Incorporated by reference to identically numbered exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the fiscal period ended March 31, 1996. (12)Incorporated by reference to identically numbered exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the fiscal period ended June 30, 1996. (13)Incorporated by reference to the exhibits filed with the Registrant's Registration Statement on Form S-3 (No. 333-13673) which became effective October 21, 1996. (14) Incorporated by reference to the exhibits filed with the Registrant's Registration Statement on Form S-3 (No. 333-19797) filed with the Commission on January 15, 1997. (15) Incorporated by reference to identically numbered exhibits filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (16) Incorporated by reference to the exhibits filed with the Registrant's Registration Statement on Form S-3 (333-26079) filed with the Commission on April 29, 1997. (17) Incorporated by reference to the exhibits filed with the Registrant's Amendment No. 1 to the Registration Statement on Form S-3 (333-26079) filed with the Commission on July 18, 1997. 69 EX-10.20 2 EXHIBIT 10.20 Exhibit 10.20 BIOCIRCUITS CORPORATION EMPLOYEE STOCK PURCHASE PLAN Adopted by the Board of Directors March 13, 1992 Approved by the Stockholders April 22, 1992 Amended by the Board of Directors April 3, 1995 Approved by the Stockholders June 15, 1995 (Reverse Stock Split (1:4) December 31, 1995) 1. PURPOSE. (a) The purpose of the Employee Stock Purchase Plan (the "Plan") is to provide a means by which employees of Biocircuits Corporation, a Delaware corporation (the "Company"), and its Affiliates, as defined in subparagraph 1(b), which are designated as provided in subparagraph 2(b), may be given an opportunity to purchase stock of the Company. (b) The word "Affiliate" as used in the Plan means any parent corporation or subsidiary corporation of the Company, as those terms are defined in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended (the "Code"). (c) The Company, by means of the Plan, seeks to retain the services of its employees, to secure and retain the services of new employees, and to provide incentives for such persons to exert maximum efforts for the success of the Company. (d) The Company intends that the rights to purchase stock of the Company granted under the Plan be considered options issued under an "employee stock purchase plan" as that term is defined in Section 423(b) of the Code. 2. ADMINISTRATION. (a) The Plan shall be administered by the Board of Directors (the "Board") of the Company unless and until the Board delegates administration to a Committee, as provided in subparagraph 2(c). Whether or not the Board has delegated administration, the Board shall have the final power to determine all questions of policy and expediency that may arise in the administration of the Plan. (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine when and how rights to purchase stock of the Company shall be granted and the provisions of each offering of such rights (which need not be identical). 1 (ii) To designate from time to time which Affiliates of the Company shall be eligible to participate in the Plan. (iii) To construe and interpret the Plan and rights granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iv) To amend the Plan as provided in paragraph 13. (v) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company. (c) The Board may delegate administration of the Plan to a Committee composed of not fewer than two (2) members of the Board (the "Committee"). If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 3. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of paragraph 12 relating to adjustments upon changes in stock, the stock that may be sold pursuant to rights granted under the Plan shall not exceed in the aggregate seventy-five thousand (75,000) shares of the Company's $0.001 par value common stock (the "Common Stock"). If any right granted under the Plan shall for any reason terminate without having been exercised, the Common Stock not purchased under such right shall again become available for the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 4. GRANT OF RIGHTS; OFFERING. The Board or the Committee may from time to time grant or provide for the grant of rights to purchase Common Stock of the Company under the Plan to eligible employees (an "Offering") on a date or dates (the "Offering Date(s)") selected by the Board or the Committee. Each Offering shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem appropriate. If an employee has more than one right outstanding under the Plan, unless he or she otherwise indicates in agreements or notices delivered hereunder: (1) each agreement or notice delivered by that employee will be deemed to apply to all of his or her rights under the Plan, and (2) a right with a lower exercise price (or an earlier-granted right, if two rights have identical exercise prices), will be exercised to the fullest 2 possible extent before a right with a higher exercise price (or a later-granted right, if two rights have identical exercise prices) will be exercised. The provisions of separate Offerings need not be identical, but each Offering shall include (through incorporation of the provisions of this Plan by reference in the Offering or otherwise) the substance of the provisions contained in paragraphs 5 through 8, inclusive. 5. ELIGIBILITY. (a) Rights may be granted only to employees of the Company or, as the Board or the Committee may designate as provided in subparagraph 2(b), to employees of any Affiliate of the Company. Except as provided in subparagraph 5(b), an employee of the Company or any Affiliate shall not be eligible to be granted rights under the Plan, unless, on the Offering Date, such employee has been in the employ of the Company or any Affiliate for such continuous period preceding such grant as the Board or the Committee may require, but in no event shall the required period of continuous employment be equal to or greater than two (2) years. In addition, unless otherwise determined by the Board or the Committee and set forth in the terms of the applicable Offering, no employee of the Company or any Affiliate shall be eligible to be granted rights under the Plan, unless, on the Offering Date, such employee's customary employment with the Company or such Affiliate is at least twenty (20) hours per week and at least five (5) months per calendar year. (b) The Board or the Committee may provide that, each person who, during the course of an Offering, first becomes an eligible employee of the Company or designated Affiliate will, on a date or dates specified in the Offering which coincides with the day on which such person becomes an eligible employee or occurs thereafter, receive a right under that Offering, which right shall thereafter be deemed to be a part of that Offering. Such right shall have the same characteristics as any rights originally granted under that Offering, as described herein, except that: (i) the date on which such right is granted shall be the "Offering Date" of such right for all purposes, including determination of the exercise price of such right; (ii) the Purchase Period (as defined below) for such right shall begin on its Offering Date and end coincident with the end of such Offering; and (iii) the Board or the Committee may provide that if such person first becomes an eligible employee within a specified period of time before the end of the Purchase Period (as defined below) for such Offering, he or she will not receive any right under that Offering. (c) No employee shall be eligible for the grant of any rights under the Plan if, immediately after any such rights are granted, such employee owns stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Affiliate. For purposes of this subparagraph 5(c), the rules of Section 424(d) of the Code shall apply in determining the stock ownership of any employee, and stock 3 which such employee may purchase under all outstanding rights and options shall be treated as stock owned by such employee. (d) An eligible employee may be granted rights under the Plan only if such rights, together with any other rights granted under "employee stock purchase plans" of the Company and any Affiliates, as specified by Section 423(b)(8) of the Code, do not permit such employee's rights to purchase stock of the Company or any Affiliate to accrue at a rate which exceeds twenty-five thousand dollars ($25,000) of the fair market value of such stock (determined at the time such rights are granted) for each calendar year in which such rights are outstanding at any time. (e) Officers of the Company and any designated Affiliate shall be eligible to participate in Offerings under the Plan, provided, however, that the Board may provide in an Offering that certain employees who are highly compensated employees within the meaning of Section 423(b)(4)(D) of the Code shall not be eligible to participate. 6. RIGHTS; PURCHASE PRICE. (a) On each Offering Date, each eligible employee, pursuant to an Offering made under the Plan, shall be granted the right to purchase up to the number of shares of Common Stock of the Company purchasable with a percentage designated by the Board or the Committee not exceeding fifteen percent (15%) of such employee's Earnings (as defined in Section 7(a)) during the period which begins on the Offering Date (or such later date as the Board or the Committee determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no more than twenty-seven (27) months after the Offering Date (the "Purchase Period"). In connection with each Offering made under this Plan, the Board or the Committee shall specify a maximum number of shares which may be purchased by any employee as well as a maximum aggregate number of shares which may be purchased by all eligible employees pursuant to such Offering. In addition, in connection with each Offering which contains more than one Exercise Date (as defined in the Offering), the Board or the Committee may specify a maximum aggregate number of shares which may be purchased by all eligible employees on any given Exercise Date under the Offering. If the aggregate purchase of shares upon exercise of rights granted under the Offering would exceed any such maximum aggregate number, the Board or the Committee shall make a pro rata allocation of the shares available in as nearly a uniform manner as shall be practicable and as it shall deem to be equitable. (b) The purchase price of stock acquired pursuant to rights granted under the Plan shall be not less than the lesser of: (i) an amount equal to eighty-five percent (85%) of the fair market value of the stock on the Offering Date; or 4 (ii) an amount equal to eighty-five percent (85%) of the fair market value of the stock on the Exercise Date. 7. PARTICIPATION; WITHDRAWAL; TERMINATION. (a) An eligible employee may become a participant in an Offering by delivering a participation agreement to the Company within the time specified in the Offering, in such form as the Company provides. Each such agreement shall authorize payroll deductions of up to the maximum percentage specified by the Board or the Committee of such employee's Earnings during the Purchase Period. "Earnings" is defined as the total compensation paid to an employee, including all salary, wages (including amounts elected to be deferred by the employee, that would otherwise have been paid, under any cash or deferred arrangement established by the Company), overtime pay, commissions, bonuses, and other remuneration paid directly to the employee, but excluding profit sharing, the cost of employee benefits paid for by the Company, education or tuition reimbursements, imputed income arising under any Company group insurance or benefit program, traveling expenses, business and moving expense reimbursements, income received in connection with stock options, contributions made by the Company under any employee benefit plan, and similar items of compensation. The payroll deductions made for each participant shall be credited to an account for such participant under the Plan and shall be deposited with the general funds of the Company. A participant may reduce (including to zero), increase or begin such payroll deductions after the beginning of any Purchase Period only as provided for in the Offering. A participant may make additional payments into his or her account only if specifically provided for in the Offering and only if the participant has not had the maximum amount withheld during the Purchase Period. (b) At any time during a Purchase Period a participant may terminate his or her payroll deductions under the Plan and withdraw from the Offering by delivering to the Company a notice of withdrawal in such form as the Company provides. Such withdrawal may be elected at any time prior to the end of the Purchase Period except as provided by the Board or the Committee in the Offering. Upon such withdrawal from the Offering by a participant, the Company shall distribute to such participant all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire stock for the participant) under the Offering, without interest, and such participant's interest in that Offering shall be automatically terminated. A participant's withdrawal from an Offering will have no effect upon such participant's eligibility to participate in any other Offerings under the Plan but such participant will be required to deliver a new participation agreement in order to participate in subsequent Offerings under the Plan. (c) Rights granted pursuant to any Offering under the Plan shall terminate immediately upon cessation of any participating employee's employment with the Company and any designated Affiliate, for any reason, and the Company shall distribute to such terminated employee all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire stock for the terminated employee), under the Offering, without interest. 5 (d) Rights granted under the Plan shall not be transferable, and shall be exercisable only by the person to whom such rights are granted. 8. EXERCISE. (a) On each exercise date, as defined in the relevant Offering (an "Exercise Date"), each participant's accumulated payroll deductions and other additional payments specifically provided for in the Offering (without any increase for interest) will be applied to the purchase of whole shares of stock of the Company, up to the maximum number of shares permitted pursuant to the terms of the Plan and the applicable Offering, at the purchase price specified in the Offering. No fractional shares shall be issued upon the exercise of rights granted under the Plan. The amount, if any, of accumulated payroll deductions remaining in each participant's account after the purchase of shares which is less than the amount required to purchase one share of stock on the final Exercise Date of an Offering shall be held in each such participant's account for the purchase of shares under the next Offering under the Plan, unless such participant withdraws from such next Offering, as provided in subparagraph 7(b), or is no longer eligible to be granted rights under the Plan, as provided in paragraph 5, in which case such amount shall be distributed to the participant after said final Exercise Date, without interest. The amount, if any, of accumulated payroll deductions remaining in any participant's account after the purchase of shares which is equal to the amount required to purchase whole shares of stock on the final Exercise Date of an Offering shall be distributed in full to the participant after such Exercise Date, without interest. (b) No rights granted under the Plan may be exercised to any extent unless the Plan (including rights granted thereunder) is covered by an effective registration statement pursuant to the Securities Act of 1933, as amended (the "Securities Act"). If on an Exercise Date of any Offering hereunder the Plan is not so registered, no rights granted under the Plan or any Offering shall be exercised on said Exercise Date and the Exercise Date shall be delayed until the Plan is subject to such an effective registration statement, except that the Exercise Date shall not be delayed more than two (2) months and the Exercise Date shall in no event be more than twenty-seven (27) months from the Offering Date. If on the Exercise Date of any Offering hereunder, as delayed to the maximum extent permissible, the Plan is not registered, no rights granted under the Plan or any Offering shall be exercised and all payroll deductions accumulated during the purchase period (reduced to the extent, if any, such deductions have been used to acquire stock) shall be distributed to the participants, without interest. 9. COVENANTS OF THE COMPANY. (a) During the terms of the rights granted under the Plan, the Company shall keep available at all times the number of shares of stock required to satisfy such rights. (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the rights granted under the Plan. If, after reasonable efforts, 6 the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such rights unless and until such authority is obtained. 10. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to rights granted under the Plan shall constitute general funds of the Company. 11. RIGHTS AS A STOCKHOLDER. A participant shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to rights granted under the Plan unless and until certificates representing such shares shall have been issued. 12. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the stock subject to the Plan, or subject to any rights granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the Plan and outstanding rights will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan and the class(es) and number of shares and price per share of stock subject to outstanding rights. (b) In the event of: (1) a dissolution or liquidation of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) any other capital reorganization in which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged, then, as determined by the Board in its sole discretion (i) any surviving corporation may assume outstanding rights or substitute similar rights for those under the Plan, (ii) such rights may continue in full force and effect, or (iii) participants' accumulated payroll deductions may be used to purchase Common Stock immediately prior to the transaction described above and the participants' rights under the ongoing Offering terminated. 13. AMENDMENT OF THE PLAN. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in paragraph 12 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: 7 (i) Increase the number of shares reserved for rights under the Plan; (ii) Modify the provisions as to eligibility for participation in the Plan (to the extent such modification requires stockholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code or to comply with the requirements of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended ("Rule 16b-3")); or (iii) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code or to comply with the requirements of Rule 16b-3. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to employee stock purchase plans and/or to bring the Plan and/or rights granted under it into compliance therewith. (b) Rights and obligations under any rights granted before amendment of the Plan shall not be altered or impaired by any amendment of the Plan, except with the consent of the person to whom such rights were granted or except as necessary to comply with any laws or governmental regulation. 14. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on February 1, 2002. No rights may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any rights granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except with the consent of the person to whom such rights were granted or except as necessary to comply with any laws or governmental regulation. 15. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no rights granted under the Plan shall be exercised unless and until the Plan has been approved by the stockholders of the Company. 8 EX-23.1 3 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Our audits included the financial statement schedule of Biocircuits Corporation listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-48296, No. 33-50642, No. 33-64066, No. 33-89006, No. 333-07447 and No. 333-21257) pertaining to the Employee's Stock Purchase Plan, the Non-Employee Directors' Stock Option Plan, the Dual Stock Option Plan and the Written Compensation Contract of Biocircuits Corporation and in the Registration Statements (Form S-3 No. 333-13673, No. 333-19797 and No. 333-26079) and the related Prospectuses, of our report dated January 13, 1997 with respect to the financial statements of Biocircuits Corporation included in the Annual Report (Form 10-K/A-2) for the year ended December 31, 1996, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K/A-2) of Biocircuits Corporation. /s/ Ernst & Young LLP Palo Alto, California July 18, 1997 -----END PRIVACY-ENHANCED MESSAGE-----