-----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, IEbja4n8M4cvHfcLrdTMWReQegoiieNah29tb4ZjmYN7y22NiMcOYb8GcfwFxLcR yu0MtLv1lBosn0+N5YstKg== 0001079973-03-000230.txt : 20031224 0001079973-03-000230.hdr.sgml : 20031224 20031224143217 ACCESSION NUMBER: 0001079973-03-000230 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030731 FILED AS OF DATE: 20031224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PURE BIOSCIENCE CENTRAL INDEX KEY: 0001006028 STANDARD INDUSTRIAL CLASSIFICATION: MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT [3590] IRS NUMBER: 330530289 STATE OF INCORPORATION: CA FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-21019 FILM NUMBER: 031073727 BUSINESS ADDRESS: STREET 1: 1725 GILLESPIE WAY STREET 2: STE H CITY: EL CAJON STATE: CA ZIP: 92020 BUSINESS PHONE: 6195968600 MAIL ADDRESS: STREET 1: 1725 GILLESPIE WAY STREET 2: SUITE H CITY: EL CAJON STATE: CA ZIP: 92020 FORMER COMPANY: FORMER CONFORMED NAME: PURE BIOSCIENCES DATE OF NAME CHANGE: 20031029 FORMER COMPANY: FORMER CONFORMED NAME: INNOVATIVE MEDICAL SERVICES DATE OF NAME CHANGE: 19960122 10KSB/A 1 form10ksbamend1_073103.txt ANNUAL REPORT AMENDMENT NO 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-KSB/A ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 31, 2003 Commission file number 0-21019 PURE Bioscience (Exact name of registrant as specified in its charter) California 33-0530289 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1725 Gillespie Way, El Cajon, California 92020 (Address of principal executive offices, including Zip Code) (619) 596-8600 (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 (Title of Class) 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-B 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-KSB or any amendments to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year: $2,589,500 Aggregate market value of the voting stock held by non-affiliates of the registrant: Approximately $10,123,000 as of October 24, 2003. Indicate the number of shares outstanding of each of the issuer's classes of common stock: 13,454,088 shares of common stock as of December 23, 2003. Documents incorporated by reference: Certain Exhibits PART I - ------ ITEM 1. DESCRIPTION OF BUSINESS Company Overview PURE Bioscience (formerly Innovative Medical Services) began as a provider of pharmaceutical water purification products. Although our current revenues are still primarily from the pharmacy industry, we have expanded from our niche pharmacy market into other, broader markets with new products, including residential and commercial water filtration systems, and bioscience products based upon our silver ion bioscience technologies and boric acid based pesticide technologies. Because of this business development evolution, in September 2003, shareholders approved a name change from Innovative Medical Services to PURE Bioscience. Water Treatment Division The Fillmaster(R) pharmaceutical water purification, dispensing and measuring products include the Pharmapure(R) water purification system, the FMD 550 dispenser, the patented Fillmaster 1000e computerized dispenser and the patented Scanmaster(TM) bar code reader. We also market proprietary National Sanitation Foundation certified replacement filters for the Fillmaster Systems. Our Nutripure(R) line of water treatment and filtration systems includes the Nutripure 3000S-Series whole-house water softening systems, the Nutripure Elite reverse osmosis point-of-use systems, the Nutripure 2000 countertop water filtration system and the Nutripure Sport filtered sport bottle. We distribute our various Nutripure products in several ways, including retail sales, catalogue placement, business-to-business sales, internet promotion and in-home sales presentations. Bioscience Division Our bioscience division features a patented, aqueous disinfectant called Axenohl(R). A patented new molecule, silver dihydrogen citrate, Axenohl is an electrolytically generated source of stabilized ionic silver that can serve as the basis for a broad range of products in diverse markets. Axenohl liquid is colorless, odorless, tasteless and non-caustic and formulates well with other compounds. Axenohl-based antimicrobial technology is distinguished from competitors in the marketplace because of its superior efficacy combined with reduced toxicity. In March 2003, we obtained Environmental Protection Agency (EPA) registration for our Axen-30(TM) hard surface disinfectant. Axen-30 is a 30-part per million use dilution formula of Axenohl. We plan to pursue additional EPA and FDA regulatory approvals for other applications. The bioscience division also includes a patent-pending pesticide technology, Triglycylboride(TM) which, like Axenohl, provides effective results without human toxicity and is an alternative to traditional poisons. Triglycylboride has been formulated into EPA approved RoachX(TM) and AntX(TM), the key products in the Company's Innovex(TM) line of pest control products. In addition, the Innovex line features two formulas of EPA-exempt non-toxic TrapX rodent lure, Pro's Choice(TM) caulk for pest control operators, and EPA approved CleanKill(TM), the Axen-based hard surface disinfectant for the pest control industry. The pest control products are being marketed to both commercial pest control and consumer products companies. History PURE Bioscience was incorporated in the State of California on August 24, 1992, to pursue the immediate business of manufacturing and marketing the Fillmaster and subsequently a broadly based business of delivering advanced technology, equipment and supplies to not only the pharmacy industry, but also other healthcare markets and to retail consumers. In the past five years, PURE Bioscience transitioned from a one-product company supplying a niche market to a multi-division company managing new products and programs. In addition to expanding the Fillmaster product line with the Fillmaster 1000e and the Scanmaster, we launched a line of residential water treatment and filtration products. Through acquisition, we have also expanded into the bioscience arena with our Axenohl antimicrobial products and our Innovex pesticide products. In 1997, we developed and launched the now-patented Fillmaster 1000e computerized, electronic dispenser as an upgrade dispenser to the Fillmaster pharmaceutical water purification and dispensing system. In 1997 and 1998 we developed our entry-level residential water system, Nutripure(R) NP2000CT. After 18 months of extensive market research, PURE Bioscience completed development of this carbon countertop system and released the product in June 1998. 1 In October 1998, PURE Bioscience acquired AMPROMED, Rio de Janeiro, Brazil, and certain assets of Export Company of America Inc. (EXCOA), Fort Lauderdale, FL, and established a new Nevada corporation to hold and operate the export/import operation. AMPROMED's primary business is the sale of medical, dental and veterinary disposable products. In addition to medical supplies, we plan to distribute water treatment and silver ion products to Brazil through AMPROMED. Since the acquisition, the economic conditions in the region have declined and implementation of the project has been delayed. We no longer have immediate plans to import medical and dental supplies into Brazil but we believe, however, that Ampromed is a vital part of our plan to market and sell Axenohl, RoachX and the Nutripure line of water treatment products. In 1999 we developed and launched yet another enhancement to our Fillmaster pharmaceutical water purification and dispensing system, the Scanmaster bar code reader. Designed as an add-on upgrade to the Fillmaster 1000e computerized dispenser, the Scanmaster allows the user to scan a prescription's NDC bar code in front of the dispenser, and the Fillmaster 1000e displays the product name and required water quantity. The Fillmaster System then dispenses the prescription with one touch of a button. Also in 1999, we began investigating marketing opportunities for a silver-ion based technology called Axenohl. The Axenohl patent was owned at the time by NVID International. Early in 2000, after concluding that we wished to pursue development and marketing of the Axenohl technology, we engaged in a marketing and licensing agreement with NVID International for Axenohl for specific market segments in specific geographic areas. In 2000 we launched the Nutripure Dealer program which expanded our product line to include whole-house water conditioning systems and other point-of-use water treatment equipment while expanding our distribution network by offering these products to independent water treatment for sale to the public under PURE Bioscience's Nutripure brand. In 2001 we acquired the marketing rights and patent to our boric acid pesticide technologies. The first of these products developed, RoachX, launched in October 2001. In late 2001, as part of a litigation settlement with NVID regarding the marketing rights to Axenohl, we acquired the patent to the Axenohl technology. In mid-2002 we expanded our Innovex line of pesticides to include RoachX, AntX75, two formulas of TrapX, Pro's Choice silicone caulk and CleanKill, a hard surface disinfectant for use in the pest control industry that uses Axenohl disinfecting technology. In 2002 we relaunched the Nutripure Dealer program and changed our Nutripure.com wholly-owned subsidiary to Nutripure Corporation. The corporation is now being used to operate the Nutripure Dealer program. In March 2003, we received Environmental Protection Agency (EPA) registration for our new Axen-30 formulated Category IV hard surface disinfectant product for commercial, industrial and consumer applications. Axen-30 is a 30-part per million (ppm) use-dilution formula of our patented antimicrobial technology, Axenohl. The additional EPA approval allows us to expand the existing Axen efficacy claims as a hard surface disinfectant to include a 30 second kill time on standard indicator bacteria, a 24 hour residual kill on standard indicator bacteria, a 2 minute kill time on some resistant strains of bacteria, 10 minute kill time on fungi, 30 second kill time on HIV Type I, and 10 minute kill time on other viruses. These claims distinguish the efficacy of Axen-30 from many of the leading commercial and consumer products currently on the market, while maintaining lower toxicity ratings. In July 2003 we received a second United States patent granted for the unique disinfectant Axenohl. United States patent 6,583,176 was issued on June 24, 2003 and covers the formulation of the Axenohl aqueous disinfectant in combination with ethyl alcohol. United States patent 6,583,176 is a division of the first United States patent 6,197,814 issued on March 6, 2001 covering the basic Axenohl formulation and the method of making. In September 2003, PURE Bioscience announced the first significant commercialization of its hard surface disinfectant, Axen-30(R), which is sold by EnvirOx L.L.C. of Danville, Illinois, as Critical Care(TM), a new commercial disinfectant-fungicide-virucide. Also in September 2003, the Company announced an agreement with Therapeutics, Inc., a drug development company based in La Jolla, California, for the development and commercialization of Food and Drug Administration (FDA) regulated Axenohl-based products. Therapeutics, Inc. will fund and direct all development activities and FDA regulatory filings and will initially focus on development of Axenohl-based products for the treatment of bacterial, viral and fungal mediated diseases and conditions. 2 Principal Products and Markets WATER TREATMENT DIVISION Pharmaceutical Water Treatment Fillmaster(R) The Fillmaster dispensing apparatus, connected to the Pharmapure(R) reverse osmosis water filtration system, provides measured amounts of purified water for reconstitution of liquid oral antibiotics and certain other pharmacy applications. Pharmapure is a six-stage water purification unit featuring an electronic water purity testing module and an auxiliary faucet for dispensing purified water. Fillmaster is a calibrated volumetric measuring and dispensing apparatus. The entire system (the "Fillmaster System") integrates with the building's tap water plumbing and is closed and pressurized to prevent contamination. The Fillmaster System saves time and money for pharmacies. According to our testing, the Fillmaster has a fill rate at least three times that of previous bottle-and-hose methods, and direct and indirect costs associated specifically with bottled water are reduced or eliminated. Pharmacy storage space can be reallocated to more profitable items, labor savings accompany the efficiencies, and the expense of bottled water purchases of up to $1.25 per gallon is replaced by one annual filter change. Under optimum usage, a pharmacy reduces the cost of "purified water" to approximately $.04 per gallon. In addition to efficiency and cost savings, the Fillmaster System increases prescription integrity by greatly reducing the possibility of human error while dispensing prescriptions. The patented Fillmaster 1000e employs multiple microprocessors to provide accurate and even-flow dispensing. We sell Fillmaster 1000e dispensers as an upgrade to existing installations and as a component of new installations. The Scanmaster, launched in August 1999, is a pager-sized, modular upgrade to the Fillmaster 1000e. A user simply scans a prescription's NDC bar code in front of the dispenser, and the Fillmaster 1000e displays the product name and required water quantity. The Fillmaster System then dispenses the prescription with one touch of a button. The advanced technology of the Fillmaster 1000e computerized dispenser and the Scanmaster bar code reader ensures accuracy of measurement and assurance of compliance to minimize liability. This is a finite, niche market in which our significant customers to date consist primarily of domestic retail chain pharmacies. There are approximately 72,000 pharmacies in the United States and Canada, with many thousands more worldwide. Water-mixed antibiotic prescriptions, for which the Fillmaster is primarily used, make up approximately 12.6% of a pharmacy's total prescriptions and approximately 20% of a pharmacy's gross profit. We have installed over 22,000 Fillmaster dispensers in pharmacies across the nation, including Wal-Mart, Walgreens, Albertson's/American Stores, Eckerd, Fred Meyer, Target, CVS, Kroger, Smith's Food and Drug, Longs Drugs, Rite-Aid, Drug Emporium, Fry's, Hi-School Pharmacies, H-E-B, Fleming, Giant and Snyders. Also included in the customer base are many United States Military Clinics, including Bethesda Naval Hospital; the Kaiser Foundation for Medical Care; the Mayo Clinic and several hundred Independent and Hospital Pharmacies. Fillmaster(R) System Filters We also market unique and proprietary NSF certified filter replacements for the Fillmaster's Pharmapure water purification system, which require changing at intervals of approximately 12 months or sooner as indicated by the purity testing module. The filter replacements represent a significant continuing source of revenues to us. Customer Service Plan 2000(TM) PURE Bioscience offers outstanding service to its pharmacy customers with its exclusive Customer Service Plan 2000 (CSP 2000). The CSP 2000 provides an extended unlimited warranty on all PURE Bioscience's pharmacy products, regardless of age or quantity; significant discounts on maintenance item costs; free software upgrades for the Fillmaster 1000e and Scanmaster; a secure web site that allows pharmacy customers to monitor history, scheduled maintenance and account status; automatic replacement filter shipments; and simplified, annual invoicing. Motivated by the cost savings and the extended warranty coverage, most of our chain customers have entered into multi-year contracts for the CSP 2000. Residential Water Treatment PURE Bioscience's Nutripure Water Dealer Program offers existing independent water treatment dealers a line of residential water softening and other point-of-use water treatment equipment for sale to the public under PURE Bioscience's Nutripure brand. In addition, the program provides complementary, industry-unique financing that extends credit to consumers for the purchase of water treatment equipment from participating dealers. We realize revenues from both the sale of Nutripure equipment and the financing. 3 The Nutripure whole-house water softening systems, like most water softening systems on the market, are typically professionally installed in a customer's basement or garage and require electricity. The Nutripure water softening systems, comprised of a resin tank, brine tank and controller, extract minerals from the water through an ion exchange process. Nutripure whole house systems are often installed in conjunction with Nutripure reverse osmosis systems. We have formed alliances with independent dealer groups, finance companies and leading equipment component manufacturers to create a marketing program to sell and finance whole-house water treatment systems through existing dealers. We believe this marketing strategy provides consumers and independent dealers a name and image they can trust. The programmable systems come equipped with microprocessors and electronic water meters to monitor daily water usage and provide automatic, demand-based water conditioning. An electronic memory stores operating system information, and battery backup keeps it current if power is lost. PURE Bioscience's Nutripure Water Dealer Program also offers a Nutripure line of residential drinking water systems that combines reverse osmosis technology with carbon filtration to improve the taste, smell, quality and safety of standard tap water. Reverse osmosis is a water treatment process that removes contaminants from water by using pressure to force the water molecules through a semi-permeable membrane. Carbon, sometimes referred to as activated carbon, is a water treatment medium commonly used for dechlorination and for reducing trace and soluble materials from water. We also market unique and proprietary filter replacements for the Nutripure residential drinking water systems that require changing every 12 months. The Nutripure reverse osmosis filtration system is comprised of a storage tank, a faucet and a water filtration apparatus which includes a sediment filter, pre- and post-carbon filters and a reverse osmosis membrane. Nutripure requires neither professional installation nor electricity to operate. The Nutripure system filters to .001 micron and reduces heavy metals, chemicals and microorganisms, such as cryptosporidium and giardia, as well as reducing bad taste and odor from drinking water. A micron is a measurement unit equal to one millionth of a meter. Micron measurements are applied to water filtration systems to indicate the particle size at which suspended solids larger than that size will be removed. Nutripure(R) 2000 PURE Bioscience entered the retail venue with its Nutripure 2000 Countertop Water Filtration System. Nutripure 2000, developed specifically for mass merchandising, offers water filtration technology at competitive pricing. Nutripure's filter component is a one-micron, carbon microfilter that reduces dirt, chemicals, lead and parasites to improve the taste, quality and safety of tap water. The Nutripure 2000 requires no assembly, mounts directly to a faucet and features a 2,000-gallon capacity filter, an automatic bypass shutoff valve, an electronic monitor that reminds users when to change the filter, and an exclusive filter design that prevents leaking and contamination because water flows only through the completely sealed filter cartridge. We distribute Nutripure 2000 through retail outlets in the United States. The filter component, manufactured by Omnipure Filter Company of Caldwell, Idaho, has been tested by Spectrum Laboratories to meet or exceed National Sanitation Foundation Standard No. 53 Health Effects and Standard No. 42 Aesthetic Effects. These tests determine if the product meets the most stringent standards set by the NSF for consumer water filtration. Spectrum Labs, Inc. is an independent laboratory in New Brighton, Minnesota. The testing on the Nutripure product was paid for by Omnipure Filter Company, Caldwell, Idaho. The test reports were submitted by Spectrum Labs, Inc. to Omnipure on April 6, 1998. We had no prior relationship with Spectrum Labs when the tests were conducted. We selected the Omnipure filter component for the Nutripure 2000 in part because it had this testing available, though there are several other similar quality filter components readily available. Other than purchase orders there is no written agreement between us and Omnipure. Spectrum Labs' Product Testing Department conducted testing on the product for chlorine reduction in accordance with test protocol contained in NSF International Standard Number 42 "Drinking Water Treatment Units/Aesthetic Effects," Appendix B, "Chemical Unit Test Methods," Section I, "Procedure - Plumbed-In and Faucet Mounted Taste, Odor and Chlorine Reduction Units Without Reservoir," revised June 1988. The product was found to meet the requirements for compliance under Standard Number 42 for taste, odor and chlorine reduction for Class I filters. In addition, Spectrum Labs evaluated the product for cyst and turbidity reduction and structural integrity in accordance with test protocol contained in NSF International Standard Number 53, "Drinking Water Treatment Unites/Health Effects," Section 6.12, "Mechanical Filtration Test Methods," and Section 6.6, "Structural Integrity Performance. The filter media evaluation was performed based on test protocol contained in NSF Standard Number 53, Section 6.7, "Filter Media." Influent and effluent samples were analyzed for cyst reduction using American Society for Testing and Materials Method Number F796 which is a standard particle counting method. Samples evaluated for turbidity were analyzed using EPA Method Number 180.1 which is a nephelometric method. NSF Standard Number 53, Section 6.6.1.2 protocol was used to perform the pressure evaluation for structural integrity. The product was found to meet the requirements for compliance under NSF Standard Number 53 for cyst and turbidity reduction, filter media evaluation and structural integrity performance. 4 Nutripure(R) 2000 Replacement Filters We also market replacement filters for the Nutripure 2000 water system. The Nutripure 2000 contains a 2,000-gallon filter that must be changed every year. Nutripure(R) Sport Filtered Sport Bottle The Nutripure Filtered Sport Bottle, also offered as a private label or premium item, provides clean, great-tasting water for on-the-go consumers. The Nutripure Filtered Sport Bottle features a small carbon filter at the bottom end of the plastic straw so that, as the consumer drinks through the straw, the water is drawn up through the filter. An innovative alternative to buying expensive bottled water, Nutripure Sport filters an average of approximately 30 microns, reducing sediment and chlorine, and can be refilled 60 times before an inexpensive filter change is required. The Nutripure Sport program provides recurring revenue through sales of the replacement filter twin pack. RETAIL PRODUCTS DIVISION Medifier(TM) We also market the Medifier, a patented universal prescription bottle label magnifier. The Medifier holds various sized prescription bottles in position under a magnifier strip that enlarges dosage and use instructions to a clearly readable size. The Medifier is marketed to PURE Bioscience's existing sales channels, as well as through catalogue sales and promotional products distributors. BIOSCIENCE DIVISION Our bioscience division features a patented, aqueous disinfectant called Axenohl(TM). Based on the EPA toxicity categorization of antimicrobial products that ranges from Category I (high toxicity) down to Category IV, Axen, with its combination of the biocidal properties of ionic silver and citric acid, is an EPA Category IV antimicrobial for which precautionary labeling statements are normally not required. This compares with Category II warning statements for most leading brands of antimicrobial products. The initial EPA registration for use of Axenohl and Axen (12-parts per million formula) as hard surface disinfectants was issued in 2001. In March 2003, we received Environmental Protection Agency (EPA) registration for our new Axen-30(TM) formulated Category IV hard surface disinfectant product for commercial, industrial and consumer applications. Axen-30 is a 30-part per million (ppm) use-dilution formula of our patented antimicrobial technology, Axenohl(TM) (silver dihydrogen citrate). The recent EPA approval allows us to expand the existing Axen efficacy claims as a hard surface disinfectant to include a 30 second kill time on standard indicator bacteria, a 24 hour residual kill on standard indicator bacteria, a 2 minute kill time on some resistant strains of bacteria, 10 minute kill time on fungi, 30 second kill time on HIV Type I, and 10 minute kill time on other viruses. These claims distinguish the efficacy of Axen-30 from many of the leading commercial and consumer products currently on the market, while maintaining lower toxicity ratings. The tests conducted to obtain the recent EPA approval were performed by nationally recognized independent laboratories Nelson Laboratories of Salt Lake City, Utah and AppTec ATS, St. Paul, Minnesota, under AOAC protocol and GLP regulations in accordance with EPA regulations. Specific Axen test results include: o 30-Second Kill Time ---At 30 ppm, Axen demonstrated a 30-second, 99.9999% kill of standard indicator organisms including Staphylococcus aureus ATCC 6538, Pseudomonas aeruginosa ATCC 15442 and Salmonella choleraesuis ATCC 10708. Each is regarded as ever present in nearly every person's life and is also a frequent human pathogen. o Residual Kill Activity --- The residual activity of Axen was tested at 0, 1, 6, and 24 hours after application to a hard surface against standard indicator organisms (Staphylococcus aureus ATCC 6538, Pseudomonas aeruginosa ATCC 15442 and Salmonella choleraesuis ATCC 10708). Quantitative residual results at 24 hours after initial application show a 99.99% reduction in all three bacteria tested. o Bacteria---Additional testing of Axen against Methicillin Resistant Staphylococcus aureus ATCC 700698 (MRSA), Vancomycin Resistant Enterococcus faecium ATCC 700221 (VRE) and Escherichia coli OH157 ATCC 43888 demonstrated a 99.9999% kill in 2 minutes. These specific bacteria are especially problematic in hospitals because of their resistance to antibiotics. Further, Axen showed a 99.9999% kill in 30 seconds against Listeria monocytogenes ATCC 19111. Food processing operations are challenged to keep this bacterium under control. 5 o Fungus --- Axen demonstrated a 99.9999% kill in 10 minutes of the common athlete's foot fungus, Trichophyton mentagrophytes ATCC 9533. This data allows the Company to add a fungicidal claim to its hard surface disinfectant label. o Viruses --- Axen also demonstrated 99.9999% virucidal efficacy against HIV Type 1 in 30 seconds, Herpes simplex virus type 1 in one minute, and Influenza A virus ATCC VR-544, Rhinovirus type R 37 ATCC VR-1147, Strain 151-1 and Poliovirus type 2 ATCC VR-1022, Strain Lansing in 10 minutes. After review and approval by the EPA, this data allows the Company to add these virucidal claims to its hard surface disinfectant label. In September 2003, PURE Bioscience announced the first significant commercialization of its hard surface disinfectant, Axen-30(R), which is sold by EnvirOx L.L.C. of Danville, Illinois, as Critical Care(TM), a new commercial disinfectant-fungicide-virucide. We plan to pursue additional EPA and FDA regulatory approvals for other applications. Additional possible uses for this product include wound care, topical infection care, personal disinfecting retail products, food processing, and food safety applications which may require FDA approvals, as well as municipal water treatment and point-of-use/point-of-entry water treatment products, which may require additional EPA approvals. Also in September 2003, the Company announced an agreement with Therapeutics, Inc., a drug development company based in La Jolla, California, for the development and commercialization of Food and Drug Administration (FDA) regulated Axenohl-based products. Therapeutics, Inc. will fund and direct all development activities and FDA regulatory filings and will initially focus on development of Axenohl-based products for the treatment of bacterial, viral and fungal mediated diseases and conditions. Our bioscience division also includes a line of pesticide technologies. Branded as Innovex(TM), the product line launched in October 2001 with our EPA-approved, patent-pending RoachX(TM). Subsequently, we have developed and launched additional products in the Innovex product line, including the EPA-approved AntX75(TM), two formulas of EPA-exempt non-toxic TrapX rodent lure, Pro's Choice(TM) caulk for pest control operators, and EPA approved CleanKill(TM), the Axen-based hard surface disinfectant for the pest control industry. United States Department of Agriculture testing confirms that RoachX is over 96% effective in three to four days with one application for indoor and outdoor eradication of cockroaches, and can be used near children and food preparation areas. Boric acid is a well-known and effective deterrent of cockroaches and will kill them on contact, but cockroaches do not naturally eat the repellent. Although many pesticide products contain boric acid as the listed active ingredient, we believe RoachX to be new because of the endothermic reaction caused by the combination of boric acid and polyglycol that produces three unique results: 1) The formula protects the boric acid from water and humidity, 2) When combined with an attractant, the cockroaches perceive the formulation as food and will actually eat the polyglycol-encapsulated boric acid, and 3) The formula acts as a time-released pesticide, allowing the cockroach to return to the nest before it dies and then becomes a "bait station" for other roaches in the colony. We believe the product line, containing particular formulas and attractants for specific pests, is effective against cockroaches, ants, palmetto bugs, silverfish, waterbugs, ticks, fleas, lice and garden pests. Like the Axenohl antimircrobial technology, the boric acid based pesticides are very competitive with regard to efficacy when compared to leading brands while maintaining lower toxicity ratings. PURE Bioscience is currently maintaining its initial strategy of marketing its Innovex pest control product line to industry wholesalers, but the Company is in the process of significantly expanding its marketing reach. The Company has taken a high level, executive-to-executive approach with leading national pest control companies, including the two largest companies in this sector which, as of the date of this report, are both evaluating the product line. The Company has also launched an aggressive marketing program to directly target individual pest control operators to either sell directly or create a grass roots demand from pest control professionals for the products to be carried by their distributors. As a final measure to maximize market reach, the Company plans to offer a private label program which should fortify sales to pest control professionals as well as provide a cost-effective entry into the consumer retail marketplace. The company believes the competitive advantages of these products should allow favorable outcomes from both of the additional marketing strategies. Competition Although we have only one known competitor in our pharmaceutical water purification market, we face very strong competition in the residential water treatment markets where many large, long-established competitors currently hold 6 most of the market share and have the capital resources available to invest in large national marketing campaigns. The market for Axenohl is highly competitive because we must work to displace traditional disinfecting technologies sold by well-known international industry leaders. The market is similar for our pesticide products. Although recent changes in EPA regulations may ease our ability to enter the market, ongoing strong market presence of existing pesticide companies may make it difficult to compete. On June 8, 2000, the United States EPA reclassified the Dow Chemical product Dursban (also sold as Lorsban). Over 800 products containing the organophosphate pesticide chlorpyrifos are reclassified and now may only be sold in a significantly diluted form. Sales of original, stronger formulations of such products to retailers ended February 1, 2001, and retailers must remove the products from shelves by December 31, 2001. The current formulations are also banned for commercial and agriculture professionals as of December 31, 2000. Professional pest control companies must use a 100 to 1 diluted version of the current product strength and obtain a waiver of responsibility from the home or business owner. As of June 6, 2001, the product underwent a further 10 to 1 dilution, creating a 1000 to 1 diluted treatment. Our ProChoice caulk, a companion product to our pesticide products, is a repackaged readily available food-grade silicone caulk manufactured by General Electric. Although competition is significant because the caulk is commercially available from multiple manufacturers in standard 10-11 ounce tubes, we have repackaged it for the convenience of our customers into 4 ounce tubes that fit bait guns used by the pest control operators. We recognize that innovative marketing methods are required in such competitive markets. We work to focus on the high quality and value price of our products in their markets. Patents and Intellectual Property We own patents on the Medifier, the Fillmaster 1000e Electronic Dispenser and the Axenohl technology. In addition, we have a patent application pending for RoachX and related pesticide products. Except for the Nutripure whole-house water treatment systems, our other water treatment products are comprised of combinations of our own proprietary components, custom made components and patented, off-the-shelf components and are assembled and packaged by us. The Nutripure whole-house water treatment systems sold through the Nutripure dealer program are purchased from a variety of manufacturers as private label products for PURE Bioscience. These manufacturers use patented key components in their products. The Medifier patent, which expires in March 2010, protects a device for use as a magnifying implement which has a housing member designed to accommodate prescription bottles of various popular sizes therein in a fixed position. A longitudinally moveable magnifying lens slideably mounted in the housing member is utilized to magnify the print contained on an instruction label located on the side of the prescription bottle. Alternate embodiments allow different size medicine bottles to be alternately mounted in concentric fashion, or with the side of the medicine bottles facing the lens in a fixed position. The Fillmaster 1000e patent expires in August 2017 and protects a method and apparatus for dispensing fluids in response to a user request for a specified amount of the fluid. A microprocessor opens and closes a fluid port for predetermined amounts of time to control the amount of fluid dispensed. The microprocessor monitors the elapsed time and the amount of fluid that has been dispensed since the last time the filter was serviced. In one preferred embodiment, the amount of fluid that is dispensed is measured by continuously monitoring the volume of fluid flowing through the apparatus. A pressure measurement device allows the microprocessor to monitor the fluid pressure. The microprocessor prevents fluid from being dispensed if the pressure is not within a predetermined range of tolerances. The fluid port is opened and closed by activating and deactivating a solenoid. A keypad allows the user to input the amount of fluid that is to be dispensed. A "Wait" period is imposed between the time that the user initiates the first stage and the time the user may initiate the second stage. The microprocessor does not open the fluid port if a "Failure" condition exists. An LCD is provided to display the amount of fluid that the user has requested. In an alternative embodiment, a bar code scanner or other input device allows the user to automatically input the amount of fluid that is to be dispensed. On November 30, 2001, the Company acquired the patent for Axenohl, a silver ion based technology and its method of making which is the basis for the Company's silver ion products. The Company previously licensed the use of this patent. The Company purchased the patent for 700,000 shares of its common stock plus certain expenses. The Company valued the patent at $1,540,600 based on the market price of the stock exchanged. In addition, the Company agreed to pay royalties in the amount of 5% of gross Axenohl sales until March 2018, the end of the life of the patent. There are minimum royalties due of $1,000,000 for the 7 period of November 2001 to July 31, 2004 and for each fiscal year thereafter. PURE Bioscience has the right, in its sole and absolute discretion, to pay the minimum royalty in cash or in common stock at prevailing market prices. If the Company determines it does not wish to pay the minimum royalty payment, it has the option at any time to transfer the patent back to the prior owner rather than pay the minimum royalty. The United States patent for Axenohl was issued on March 6, 2001, and a supplemental patent has been filed to cover the substitution of 14 other organic acids for citric acid in the formulation. In June 2003, we received a second United States patent granted for Axenohl that covers the formulation of the Axenohl aqueous disinfectant in combination with ethyl alcohol. In addition, the Company has received national patents in Australia and New Zealand as well as regional patents in the Eurasian and OAPI regions of the world. National patent applications are now pending in Brazil, Canada, China, Japan and Mexico as well as the European and the ARIPO regions of the world. The Axenohl International Patent Application was published by the World Intellectual Property Organization (www.wipo.org) on April 22, 1999 under publication Number WO 99/18790. A patent application for RoachX and related products was filed in February 1998 to protect a nonaqueous form of insecticide consisting of a desiccant, preferably boric acid, with additional ingredients for binding, stability and target insect attraction. Manufacturing The Fillmaster and Nutripure water systems are assembled in our manufacturing facility at our corporate offices primarily from custom manufactured components. It is our goal to perform minor manufacturing in our facility to minimize wages, equipment expense and insurance. No components of the systems have permanent or unequivocally restricted availability. Many manufacturers are available to produce the components, and a change in suppliers would result in virtually no lost production. The original Fillmaster dispenser and the new Fillmaster 1000e dispenser are both assembled in our manufacturing facility at our corporate offices mostly from proprietary and custom parts fabricated to our specifications from injection-molded plastic and fabricated acrylic. The Nutripure Sport bottle is also assembled in our manufacturing facility at our corporate offices from proprietary and custom components manufactured under exclusive agreements with several different manufacturers. Alternative manufacturers exist, and a change in suppliers would result in virtually no lost production. There are no plans to alter production methods. We manufacture RoachX, AntX and TrapX in our manufacturing facility at our corporate offices and outsource some of the packaging functions. The active and inactive ingredients of these products are readily available through multiple manufacturers in the US and abroad. We purchase caulk manufactured by General Electric for our ProChoice product from a General Electric authorized distributor and repackager. This caulk is readily available through several other manufacturers. We blend the Axenohl products in our manufacturing facility at our corporate offices from concentrate produced by our subsidiary, ETI-H2O. Silver, the primary active ingredient, is a readily available commodity, and the other active and inactive ingredients of Axenohl are readily available from chemical supply companies. We purchase water softening and filtering equipment from a variety of manufacturers for the Nutripure water dealer program which they produce and label as Nutripure equipment. We resell to participating water treatment equipment dealers. Research and Development Research and Development costs that have no alternative future uses are charged to operations when incurred and are included in operating expenses. The total amounts charged to Research and Development expense were $981,500 and $780,500 in the fiscal years ended July 31, 2003 and 2002, respectively. Employees As of October 24, 2003, PURE Bioscience employed twenty-six people, all of whom are full-time individuals: seven employees in product assembly and shipping, five employees in sales, marketing and customer service, five employees in research and development and eight employees in management and administration. We choose to outsource more expensive, specialized functions including public relations and selected engineering projects. 8 ITEM 2. PROPERTIES Our business operates in a 13,067 square foot facility located in a light industrial/office park in El Cajon, California. This location houses all administrative, executive, sales, assembly, shipping and manufacturing functions. The space is leased from an unaffiliated third party under a sixty-five month agreement commencing on July 1, 1996. The monthly rental is $0.80 per square foot plus $0.15 per square foot for maintenance of common areas. There is also a fixed yearly increase of 4%. We have also signed an amendment to the lease and exercised an option to lease the building for an additional five years. ITEM 3. LEGAL PROCEEDINGS The following is an update of developments in the previously disclosed litigation involving PURE Bioscience filed in the Circuit Court of Pinellas County, Florida by Zedburn Corporation, against us for breach of contract in October 1997. The breach of contract alleged was for payment of fees for Mr. David Reitz's and Mr. Steven Durland's services of arranging a public offering of our common stock. We have filed counterclaims based upon the Racketeer Influenced and Corrupt Organization (RICO) Act against David Reitz, Zedburn Corporation, Capital Development Group, Steven Durland and other defendants. It is our position that Mr. Reitz and others perpetrated a scheme to defraud us of cash fees and securities in connection with purported services of arranging a public offering of our common stock. In October 1997, Mr. Reitz and Zedburn filed for protection under the Federal bankruptcy laws. In August 1998, Mr. Reitz voluntarily dismissed his bankruptcy and as a result thereof we have named Mr. Reitz as a defendant to our counterclaims. We believe that the defendants had perpetrated similar schemes against other parties. We also believe we have substantially completed discovery and compiled compelling evidence to prove our claims. Several of the Defendants filed Motions to Dismiss our counterclaims. A hearing on the Motions was held on October 1, 1998. Certain of the Motions were granted pending our amendment of our Counterclaim. We amended our Counterclaims in accordance with the judge's rulings. Certain Defendants filed second Motions to Dismiss the amended Counterclaims. A hearing on these latest motions was held in March 1999, before a different judge than the judge who ruled on the first motions. On April 20, 1999, orders were entered granting the Defendants' Motions to Dismiss. However these Orders did not state the basis for the Orders, nor was our legal counsel provided notice of the Orders or a copy of the new judge's correspondence offering a "formal ruling" upon request. In May 1999, we filed an Appeal of the Orders and Motions for Reconsideration based upon inconsistency of the Orders with the previous judge's rulings and the lack of notice to us. In August 2001, the Court of Appeals reversed the trial court's ruling and reinstated our claim against the defendants with the exception of PURE Biosicence's RICO action. We intend to pursue a trial as soon as possible. On September 5, 2003 the Circuit Court for Pinellas County, determined this case is appropriate for mediation, and ordered the parties to attend mediation. On August 8, 2002, Billy Stapleton and Susie Stapleton filed a complaint for patent infringement in the United States District Court Eastern District of Tennessee at Knoxville, against PURE Bioscience' product RoachX. On August 12, 2002 Billy and Susie Stapleton filed an amended complaint. On May 2, 2003 PURE Bioscience filed its answer to amended complaint, denying allegations generally and specifically, and stating nine affirmative defenses to the amended complaint. PURE Bioscience believes Stapleton's amended complaint is frivolous and without merit. We have neither accrued a liability in our financial statements regarding this litigation nor disclosed the matter in the footnotes thereof. We have not done so because we do not believe there is any merit to Mr. Reitz's claims and that the likelihood that we will realize a loss from these matters is believed remote. In addition, we believe that in the unlikely event that we settle, the amount of any such settlement would not be material to our financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to shareholders in the fourth quarter of the fiscal year. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (1) Market Information: PURE Bioscience's common stock is traded on the NASDAQ SmallCap Market under the symbol "PURE". (2) High and Low Bid Prices: The following table sets forth high and low bid prices for each fiscal quarter, as reported by NASDAQ, for the last two fiscal years. Such quotations represent inter-dealer prices without retail mark-ups, mark-downs, or commissions and, accordingly, may not represent actual transactions.
Fiscal 2003 Fiscal 2002 Quarter Ended High Low Quarter Ended High Low ------------------------- ---------- -- ---------- ----------------------- ---------- -- ----------- July 31, 2003 $0.98 $0.56 July 31, 2002 $1.76 $0.47 April 30, 2003 $1.10 $0.55 April 30, 2002 $2.29 $1.58 January 31, 2003 $1.23 $0.26 January 31, 2002 $2.55 $1.85 October 31, 2002 $0.82 $0.25 October 31, 2001 $3.47 $1.90
(3) Security Holders: As of October 24, 2003, we had approximately 172 holders of record of our common stock. This does not include beneficial owners holding common stock in street name. The closing price per share on October 24, 2003 was $0.80. (4) Dividend Plans: We have paid no common stock cash dividends and have no current plans to do so. (5) Preferred Stock: There are no shares of preferred stock presently outstanding. (6) Changes in Securities: During the fourth quarter of the fiscal year, we conducted a $60,000 private placement in which the Company issued 120,000 shares of common stock to three accredited investors at a price of $0.50 per share. With respect to the sales made, we relied on Section 4(2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The securities were offered solely to accredited or sophisticated investors who were provided all of the current public information available on PURE Bioscience. (7) Securities Authorized for Issuance under Equity Compensation Plans
--------------------- ------------------------- ----------------------------- ---------------------------- Number of securities remaining available for Number of securities to future issuance under be issued upon exercise Weighted-average exercise equity compensation plans of outstanding options, price of outstanding (excluding securities warrants and rights options, warrants and rights reflected in column (a)) Plan Category (a) (b) (c) --------------------- ------------------------- ----------------------------- ---------------------------- Equity compensation plans approved by security holders 3,129,375 1.86 5,987,278 --------------------- ------------------------- ----------------------------- ---------------------------- Equity compensation plans not approved by security holders 1,015,000 1.63 533,000 --------------------- ------------------------- ----------------------------- ---------------------------- Total 4,144,375 1.83 6,520,278 --------------------- ------------------------- ----------------------------- ----------------------------
The following equity compensation plans were not approved by security holders: 1. 2001 ETIH2O Stock Option Plan: Adopted by the Board in January 2001 with 1,000,000 shares authorized under this Plan. The options have a five-year term with vesting ratably over a five-year period. 2. 2001 Consultants and Advisors Stock Option Plan: Adopted by the Board in January 2001 with 500,000 shares authorized under this Plan. The maximum number of shares subject to options granted under this Plan to any one participant shall not exceed 50,000 shares in any 12-month period. The options have a five-year term with vesting ratably over a five-year period. 3. Executive Officers and Directors are not eligible participants under these plans. 9 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for the historical information contained herein, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled Competition and elsewhere in this Form 10KSB. Our consolidated financial data includes Export Company of America, Inc., Ampromed Comercia Importacao e Exportacao Ltda., ETI-H2O Corporation, and Nutripure Water Corporation. The following discussion and analysis should be read in conjunction with the audited financial statements of PURE Bioscience. Results of Operations for the Year Ended July 31, 2003 Versus Year Ended July 31, 2002 During the year, we continued to realize revenues from multiple product lines in our different divisions. In order to be more informative regarding distribution of revenues, discussion of revenues will be in terms of our water treatment segment and our bioscience segment, which includes silver ionization and pesticide divisions. Revenues of $2,589,500 in the year ended July 31, 2003 were 19% lower than the $3,206,400 in revenues reported for the year ended July 31, 2002. The decrease was due to a decrease in sales in the biosciences division. During the year, water treatment division revenues of $2,473,800 were 13% higher than the $2,188,900 in the prior year. Bioscience segment revenues in the current year of $115,700 were 89% lower than the $1,017,500 in the prior year and reflect a large decrease in both silver ionization and pesticide product sales. The increase of $284,900 in water treatment division revenues was comprised of an increase of $116,000 in Fillmaster pharmaceutical water system replacement filter sales, an increase of $48,800 in Residential Water Treatment sales and an increase of $120,100 in the Nutripure dealer program revenues. Fillmaster pharmaceutical water system sales remained unchanged at approximately $1,160,700 from the prior year; however, at July 31, 2003 the Company had a backlog of Fillmaster systems of $273,400. The market continues to be very competitive, and we expect revenues from our commercial/retail water treatment products to continue their historic steady growth. The decrease in pesticide product sales was due to the change in sales strategy implemented earlier this year, including a change from salaried sales employees to commissioned outside sales representatives. During the year, we refocused our market strategy from marketing primarily to the pest control industry wholesalers to include marketing directly to major industry leaders. The change in sales and marketing strategy resulted in a decrease in sales as we restructure the pesticide division to more effectively target the professional pest control industry's need for highly effective but least toxic pest control products. We believe that our restructuring will result in increased sales, but we recognize that we face significant competition from larger, better capitalized companies in this market. We expect to see a shift toward increasing pest control product sales in the coming year. The decrease in silver ionization sales was solely due to lack of sales of Axen to Dodo & Company. In March 2001, we signed a five-year contract to provide Axenohl to Dodo & Company, a Korean cosmetics manufacturer and marketer. During prior fiscal year, Dodo & Company expanded its A-Clinic Club line to include over 10 different products, all of which contain Axenohl as an active ingredient. Because of Dodo & Company's significant investment in the product line, we believed we would be able to renegotiate the contract to the satisfaction of both parties; however, in early December 2002, we were informed by the Chairman of Dodo & Company that Dodo & Company has begun a bankruptcy reorganization process. We have not yet renegotiated the contract but have resumed incremental shipments to Dodo & Company on a pre-paid, ex-factory basis. The antimicrobial market is highly competitive, and we anticipate that market acceptance of a brand new technology may be a long term achievement. In addition to competition challenges, we believe that the investment necessary to pursue research testing and regulatory approval for Axenohl products will continue to be significant. As we receive additional regulatory approvals for Axenohl, however, we expect revenues to develop quickly. For example, now that we have received EPA approval on Axen-30(R), our Axenohl-based hard surface disinfectant, and we expect to see a shift toward increasing Axenohl division product sales in the coming year, and we believe that sales of Axen-30 will have a significant impact on revenues in future. For example, in September 2003, PURE Bioscience announced the first significant commercialization of its hard surface disinfectant, Axen-30(R), which is sold by EnvirOx L.L.C. of Danville, Illinois, as Critical Care(TM), a new commercial disinfectant-fungicide-virucide, Also in September 2003, the Company announced an agreement with Therapeutics, Inc., a drug development company based in La Jolla, California, for the development and commercialization of Food and Drug Administration (FDA) regulated Axenohl-based products. Therapeutics, Inc. will fund and direct all development activities and FDA regulatory filings and will initially focus on development of Axenohl-based products for the treatment of bacterial, viral and fungal mediated diseases and conditions. We continue to believe that pesticide technologies will have a material impact on revenues in the coming year, and we continue to believe that the silver ion technologies will ultimately become the largest revenue generator for PURE Bioscience. Gross profit for the year ended July 31, 2003 was $1,055,500 versus $1,607,900 in 2002. Gross profit percentage of 41% in 2003 was lower when compared to 50% in 2002 because of the decrease in Axenohl sales associated with higher margins and the increase in Nutripure dealer program revenues which have proportionally lower margins. 10 Net loss from for the year ended July 31, 2003 was $3,284,000 versus net loss of $2,222,500 for the same period in 2002. During the year, General and Administrative expenses increased $154,200, or 8%, from $2,027,900 at in fiscal 2003 versus $2,182,100 in fiscal 2002. Administrative expenses include an increase in amortization costs associated with purchased patents and licenses. Selling expense decreased approximately $283,100, or 38%, from $749,300 in 2002 to $466,200 in 2003 because of a decreased use of salaried sales personnel and an increase in the use of commissioned salespeople. Research and Development increased approximately 26%, or $201,000, over the same period in 2002 from $780,500 to $981,500. This increase was the result of continued time and resources devoted to the development and testing of our emerging pesticide and silver ion technology product lines. Of the loss in the current period, $1,204,000 is attributable to non-cash items: $635,400 of non-cash start-up cost attributed to 651,000 warrants valued at $0.976 per warrant used to acquire a three-part cross marketing and licensing agreement described below in the Liquidity and Capital Recourses section, $225,400 of services paid with stock and warrants, $155,500 of amortization and $187,700 of depreciation. LIQUIDITY AND CAPITAL RESOURCES From inception through the present, we have financed our operations primarily through our initial public offering in August of 1996 and by subsequent private placement stock sales. In addition, the Company had obtained short term financing through a $500,000 line of credit. In September 2002 the Company renegotiated its line of credit and extended it until November 2003. The extension includes an increase from $500,000 to $600,000 at an interest rate of 1 1/2 % per month secured against the entire assets of the Company excluding the Axenohl patent. The terms of the line of credit required the Company to maintain current accounts receivable of a minimum of $350,000. At the end of year, the Company was in technical violation with this provision. The Company has neither requested nor received a waiver of this provision. The Company believes that this violation has no implications because the Company intends to pay off this line of credit with the sale of the trust deed and water treatment division as discussed below. In July 2003, the Company issued a $300,000 convertible debenture at an interest rate of 10% per annum due July 2004. The Company is currently attempting to strengthen its liquidity position by working with an investment banker because the Company requires an outside source of capital to fund planned projects relating to new product development and related product launches, research and development projects, regulatory approvals. The Company's operations alone may not generate cash flows, within the next twelve months, sufficient to fund planned expansion. In August of 2003, the Company completed a financing arrangement which included the acquisition of a $1,600,000 Trust Deed asset in exchange for the issuance of 2,000,000 shares of the Company's common stock to a party unrelated to the grantor. In October 2003, the Company signed a term sheet to sell the Trust Deed asset for cash at face value. The purchasing party is also acquiring the water treatment division for $2,750,000 in cash plus up to $1,250,000 in deferred payments over the next year. Completion of the divestment of the water treatment division is subject to approval by PURE Bioscience shareholders. The Company intends to use a portion of the proceeds of this transaction to satisfy outstanding debt. The remaining proceeds should be sufficient to sustain operations and fund product development and commercialization until our bioscience technologies result in positive cash flow. Although the Company has no plans to continue to fund operations with additional private placements of stock, we may evaluate opportunities to sell additional equity or debt securities, or obtain credit facilities from lenders to strengthen our financial position. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. Our liquidity is unaffected by the financing program offered to participating dealers in the Nutripure water dealer program. We receive funds from our lender and disperse the funds to the dealer, less a commission charged by us, upon completion of the contract. The lender disperses funds to us. We record a liability when the funds are received and relief of liability when funds are dispersed, and we do not retain liability on the credit extended. July 31, 2003, our current assets to liabilities ratio decreased from 1.07 to 0.35. Current assets decreased $590,200 from $1,299,800 at July 31, 2002 to $709,600 at July 31 2003 due to a decrease in inventories associated with lower sales volume and a large decrease in officer and employee loans and prepaid expenses. Current liabilities increased $800,300 from $1,120,000 to $2,010,300. This increase was due mainly to an increase in loans from shareholders of $100,000, the addition of a convertible debenture of $180,500 and an increase in accounts payable of approximately $488,100. Net fixed assets decreased approximately $181,200 due mainly to depreciation of equipment. Noncurrent assets decreased approximately $151,100 due to amortization. Non-current assets of $2,484,600 consist almost entirely of Patents and Licenses. Cash flows used from operations were $851,600 in the year ended July 31, 2003 and $1,035,300 in 2002. For fiscal 2003, cash flows used in investing activities included $500 for the purchase of machinery and equipment and $4,300 for the purchase of patents and licenses. In fiscal 2002 cash flows used in investing activities included $71,500 for the purchase of machinery and equipment and $165,200 for the purchase of patents and licenses. Cash flows from financing activities were $956,300 in fiscal 2003 and $1,216,200 in fiscal 2002. Financing activities for the current period included the addition of $100,000 in loans from shareholders from a line of credit renegotiated in September 2002 and $300,000 from a convertible debenture issued in July of 2003. Cash flows from financing activities also included an increase of common stock of $556,325. During the current year, the Company conducted a $250,000 private placement in which the Company issued 933,332 shares of common stock to six accredited investors at a price of $0.30 per share (less costs), a $200,000 private placement in which the Company issued 400,000 shares of common stock to six accredited investors at a price of $0.50 per share and a $60,000 private placement in which the Company issued 120,000 shares of common stock to three accredited investors at a price of $0.50 per share The Company also received $81,325 from the exercise of options. In the prior period, cash flows from financing activities included the addition of $500,000 in notes payable from a line of credit established in September 2001. Cash flows from financing activities in the prior period also included an increase of common stock of $435,300 which included a $400,000 private placement in which the Company issued 250,000 shares of common stock to eleven accredited investors at a price of $1.60 per share. The Company also received approximately $68,000 from the exercise of options. 11 Commitments As a condition of the purchase agreement of the Axenohl patent, the Company agreed to make certain royalty payments to NVID of 5% of the gross product sales with a minimum royalty payment total of $1,000,000 for the period from November 15, 2001 to July 31, 2004 and subsequently $1,000,000 per year for the remaining life of the patent. The contract states that at July 31, 2004 the Company shall have the right, in its sole and absolute discretion, to do one of the following: a) pay the initial minimum royalty payment of $1,000,000 in cash or common stock of the Company to NVID, less royalty amounts already paid, on or before July 31, 2004, b) transfer the patent back to NVID, at which time the Company would be released of any future minimum payments and granted a license to manufacture and distribute products covered by the patent while retaining all Axen and Axenohl related patents filed by the Company, including retention of all of its previously granted license rights to sell, distribute and manufacture all Axenohl based products, or c) cancel any royalty obligation under the contract by selling, transferring or assigning its ownership of the primary patent to a third party and paying NVID a percentage of the gross proceeds of 10% or 5%, depending on how near the date of the transfer is to July 31, 2004, while retaining all Axen and Axenohl related patents filed by the Company, including retention of all of its previously granted license rights to sell, distribute and manufacture all Axenohl based products. The Company has not recorded or accrued an amount for the minimum royalty payments in the financial statements because the Company has determined that it is unlikely to choose the option to pay the minimum royalty. In January 2003, the Company signed a cross-marketing and licensing agreement with Nickel Ltd., a manufacturer and distributor of wet wipes in Europe to acquire two "Super Distribution Agreements" and establish a 50/50 joint venture between PURE Bioscience and Nickel, to be known as CARLINE AMERICA LTD(TM). In exchange, and as total consideration on the Company's part, the Company agreed to issue a warrant to Nickel Ltd. to purchase 651,000 shares of common stock for $0.0001 per share valued at $635,000. This amount was expensed as start-up costs in the second quarter of the year. No cash was expended to acquire these agreements. Because of Nickel's failure to pay for product and failure to fulfill key material obligations under the contract, Company does not consider the warrant vested or exercisable and neither the warrant nor the common stock underlying the warrant will be issued. 12 PURE BIOSCIENCE CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended July 31, 2003 and July 31, 2002 13 Independent Accountants' Report Board of Directors PURE Bioscience We have audited the accompanying consolidated balance sheets for PURE Bioscience as of July 31, 2003 and 2002, and the related consolidated statements of operations, statement of accumulated deficits and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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. The accompanying financial statements as of July 31, 2002 and for the year then ended have been restated to correct errors as described in Note 2. In our opinion, the consolidated financial statements, referred to above, present fairly, in all material respects, the financial position of PURE Bioscience as of July 31, 2003 and July 31, 2002, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles in the United States of America. /s/ Miller and McCollom - ----------------------------------- MILLER AND MCCOLLOM, CPAs 4350 Wadsworth Boulevard, Suite 300 Wheat Ridge, Colorado October 21, 2003 14
CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------------------- July 31 July 31 2003 2002 (Restated) (See Note 2) ---------- ------------- ASSETS Current Assets Cash and cash equivalents $ 251,087 $ 151,257 Accounts receivable, net of allowance for doubtful accounts of $ 63,500 at July 31, 2003 and $111,000 at July 31, 2002 163,895 166,601 Due from officers and employees 61 209,437 Inventories 287,940 595,071 Prepaid expenses 6,654 177,445 ---------- ---------- Total current assets 709,637 1,299,811 ---------- ---------- Property, Plant and Equipment Property, plant and equipment 432,744 613,909 ---------- ---------- Total property, plant and equipment 432,744 613,909 ---------- ---------- Noncurrent Assets Deposits 9,341 8,954 Patents and licenses 2,475,280 2,626,376 ---------- ---------- Total noncurrent assets 2,484,621 2,635,330 ---------- ---------- Total assets $ 3,627,002 $ 4,549,050 =========== =========== LIABILITIES AND STOCKHOLDERS EQUITY Current Liabilities Accounts payable $ 1,079,128 $ 591,031 Accrued liabilities 150,688 118,975 Notes payable 180,513 - Loans from shareholders 600,000 500,000 ---------- ---------- Total current liabilities 2,010,329 1,210,006 ---------- ---------- Stockholders' Equity Class A common stock, no par value: authorized 50,000,000 shares, issued and outstanding 10,594,088 at July 31, 2003 and 8,400,899 at July 31, 2002 14,758,203 13,976,448 Warrants: issued and outstanding 1,037,429 warrants 788,473 8,610 Accumulated deficit (13,930,003) (10,646,014) ----------- ----------- Total stockholders' equity 1,616,673 3,339,044 ---------- ---------- Total liabilities and stockholders' equity $ 3,627,002 $ 4,549,050 =========== ===========
The accompanying notes are an integral part of these financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------------------------- For the Year Ended July 31 2003 2002 (Restated) (See Note 2) ------------ ------------- Net revenues $ 2,589,496 $ 3,206,448 Cost of sales 1,533,970 1,598,553 ------------ ------------- Gross profit 1,055,526 1,607,895 ------------ ------------- Selling expenses 466,198 749,348 General and administrative expenses 2,182,097 2,027,875 Research and development 981,493 780,510 Start-up costs 635,376 47,831 ------------ ------------- Total operating costs 4,265,164 3,605,564 ------------ ------------- Loss from operations (3,209,638) (1,997,669) ------------ ------------- Other income and (expense): Interest income 1,333 9,999 Interest expense (98,765) (39,024) Other 23,081 (2,400) ------------ ------------- Total other income (expense) (74,351) (31,425) ------------ ------------- Loss from continuing operations (3,283,989) (2,029,094) ------------ ------------- Discontinued operations: Loss from discontinued operations - 152,405 Loss from disposal of discontinued operations - 41,049 ------------ ------------- Total discontinued operations - 193,454 ------------ ------------- Net loss $ (3,283,989) $ (2,222,548) ============ ============= Net loss per common share, basic and diluted Continuing operations $ (0.36) $ (0.27) Discontinued operations - (0.02 ------------ ------------- Net loss $ (0.36) $ (0.29) ============ =============
The accompanying notes are an integral part of these financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------------------------------- For the Year Ended July 31 2003 2002 (Restated) (See Note 2) ------------ ------------- Cash flows from operating activities Net loss $(3,283,989) $(2,222,547) Adjustments to reconcile net income to net cash provided by operating activities: Amortization 155,461 187,870 Depreciation 181,697 266,530 Services paid for with stock and warrants 885,509 100,000 Changes in assets and liabilities: (Increase) decrease in accounts receivable 2,706 404,133 (Increase) decrease in due from officers and employees 209,376 30,564 (Increase) decrease in prepaid expense 171,087 13,721 (Increase) decrease in inventory 307,131 115,947 (Increase) decrease in deposits (387) (827) Increase (decrease) in accounts payable 488,097 47,039 Increase (decrease) in accrued liabilities 31,713 22,283 ------------ ------------- Net cash provided (used) by operating activities (851,599) (1,035,287) ------------ ------------- Cash flows from investing activities Purchase of patents and licenses (4,365) (71,495) Purchase of property, plant and equipment (531) (165,236) ------------ ------------- Net cash (used) in investing activities (4,896) (236,731) ------------ ------------- Cash flows from financing activities Proceeds from debt obligations 400,000 500,000 Proceeds from sale of common stock 556,325 716,183 ------------ ------------- Net cash provided by financing activities 956,325 1,216,183 ------------ ------------- Net increase (decrease) in cash and cash equivalents 99,830 (55,835) ------------ ------------- Cash and cash equivalents at beginning of period 151,257 207,092 ------------ ------------- Cash and cash equivalents at end of period $ 251,087 $ 151,257 ============ ============= Supplemental disclosures of cash flow information Cash paid for interest paid $ 98,765 $ 39,024 Cash paid for taxes paid $ 3,500 $ 2,400 Noncash investing and financing activities: Value of shares issued in exchange for Silver Ion Technology patent $ 1,540,600
The accompanying notes are an integral part of these financial statements PURE Bioscience Notes to Consolidated Financial Statements See Independent Accountants' Report Note 1. Organization and Summary of Significant Accounting Policies This summary of significant accounting policies of PURE Bioscience (formerly Innovative Medical Services) is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management who is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles in the United States of America and have been consistently applied in the preparation of the financial statements. The financial statements are stated in United States of America dollars. Organization and Business Activity The Company was incorporated as Innovative Medical Services in San Diego, California on August 24, 1992 as a provider of pharmaceutical water purification products. Based on revenues, the Company's primary business is the sale and manufacture of residential and commercial water filtration systems. In addition, the Company produces, manufactures and licenses silver ion bioscience technologies (Axenohl and Axen) and produces products for the pesticide industry (Innovex). In September 2003 the Company effected a name change as approved by shareholders to PURE Bioscience. In October of 1998, the Company formed a subsidiary, EXCOA Nevada to purchase the assets of Export Company of America, Inc. (EXCOA), a privately held Fort Lauderdale, Florida-based distributor of disposable medical, dental and veterinary supplies. The major asset of this company was its 45% interest in Ampromed Comercio Importacao E Exportacao Ltda (AMPROMED), a Rio de Janeiro-based import company that sells medical, dental and veterinary supplies and water filtration products to practitioners, retail outlets and government agencies. The Company acquired the remaining 55% interest in AMPROMED from a private individual and transferred it to EXCOA Nevada. In November 2000, PURE Bioscience acquired 100% of the stock of ETIH2O, Inc, a privately held technology corporation that developed Axenohl and is responsible for processing, and production of Axenohl and Axen. ETI-H2O is also responsible for all supervision of all research, studies, data and quality control of the Axenohl/Axen product line. Basis of Presentation and Principles of Consolidation The accompanying financial statements include the consolidated accounts of PURE Bioscience and its subsidiaries. All inter-company balances and transactions have been eliminated. Revenue Recognition Generally, the company recognizes income based upon concluded arrangements with customers and when all events have occurred by delivery or performance. Certain income is recognized upon shipment where the sale is made f.o.b. shipping point including sales to dealers and pharmacies. Customer acceptance provisions and installation procedures accompanying delivery are minor in nature, and the Company has not experienced any material expense in satisfying warranties and returns. The Company has a program of providing financing to independent dealers for equipment of other manufacturers and not the Company's products. The Company receives funds from its primary lender and disperses the funds to the dealer, less a commission charged by the Company, upon completion of the contract. The Company records the commissions earned as revenues when received. Most of the Company's chain customers have entered into multi-year contracts for the Customer Service Plan 2000. The CSP 2000 provides an extended warranty on PURE Bioscience's Fillmaster pharmacy products; significant discounts on maintenance item costs; free software upgrades for the Fillmaster 1000e and Scanmaster; automatic replacement filter shipments; and simplified, annual invoicing. When the customer buys a dispenser on the Customer Service Plan 2000 it agrees to pay a fixed annual fee that covers replacement filters and parts. The filters should be replaced once a year. In order to match income with related costs, and for simplicity in accounting and billing, the Company bills the customer the annual fee and recognizes the revenue in the same month that it ships the replacement filters to the store. This is done one year after the store is added to the Plan and each year thereafter. Future warranty costs associated with the CSP 2000 Plan are discussed in Note 18. Accounts Receivable The Company sells on terms of cash or net 30 days. Invoices not paid within stated terms are considered delinquent. The Company analyzes its accounts receivable periodically and recognizes an allowance for doubtful accounts based on estimated collectibility. Individual accounts deemed uncollectible are charged to the allowance. At July 31, 2003, $47,500 was considered past due, determined by 90 day after invoice date. Stock-Based Compensation The Company follows FASB Statement No. 123, 'Accounting for Stock-Based Compensation' ('FAS 123'). The provisions of FAS 123 allow companies to either expense the estimated fair value of stock options or to continue to follow the intrinsic value method set forth in APB Opinion 25, 'Accounting for Stock Issued to Employees' ('APB 25') but disclose the pro forma effects on net income (loss) had the fair value of the options been expensed. The Company has elected to continue to apply APB 25 in accounting for its stock option plans. For awards that generate compensation expense as defined under APB 25, the Company calculates the amount of expenses and recognizes the expense over the vesting period of the award. In March 2000, the FASB issued FASB Interpretation No. 44, 'Accounting for Certain Transactions involving Stock Compensation' ('FIN 44'), which contains rules designed to clarify the application of APB 25. FIN 44 became effective on July 1, 2000 at which time the Company adopted it. The impact of the adoption of FIN 44 was not material to the earnings or financial position of the Company. Research and Development Research and Development costs that have no alternative future uses are charged to operations when incurred and are included in operating expenses. The total amount charged to Research and Development expense was $981,500 and $780,500 in the fiscal years ended July 31, 2003 and 2002, respectively. Depreciation Method The cost of property, plant and equipment is depreciated on a straight-line basis over the estimated useful lives of the related assets. The useful lives of property, plant, and equipment for purposes of computing depreciation are: Computers and equipment 7.0 years Furniture and fixtures 10.0 years Website 3.0 years Vehicle 5.0 years to 7.0 years Leasehold improvements are being depreciated over the life of the lease, which is equal to 120 months. Amortization of Intangible Assets The cost of patents acquired is amortized on a straight-line basis over the remaining lives of the patents. Licenses are amortized on a straight-line basis over periods ranging from 15 to 20 years. The weighted average amortization period for all patents and licenses is 17.56 years. The estimated amortization expense over each of the next five years is $155,700. Amortization expense for the years ended July 31, 2003 and July 31, 2002 was $155,500 and $187,900, respectively. Long-Lived Assets In accordance with Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for Impairment of Long-Lived Assets, and for Long-Lived Assets to be Disposed, the Company periodically analyzes its intangible assets and long-lived assets for potential impairment, assessing the appropriateness of lives and recoverability of unamortized balances through measurement of undiscounted operation cash flows on a basis consistent with accounting principles generally accepted in the United States of America. Inventory Inventories are stated at the lower of cost or net realizable value using the average cost method. Inventories at July 31 consisted of: 2003 2002 --------------- -------------- Finished Goods $ 133,900 $ 257,600 Work in Progress 0 29,900 Raw Materials 181,900 334,600 --------------- -------------- $ 315,800 $ 622,100 --------------- -------------- 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments The carrying amounts for cash equivalents, receivables, and payables approximate fair value because of the short maturity, generally less than three months, of these instruments. The carrying value of the Company's line of credit approximates fair value since the current borrowing rates available for financing are similar in terms. Advertising and Promotional Costs Cost of advertising and promotion are expensed as incurred. Such costs were $466,200 and $448,800 for the years ended July 31, 2003 and July 31, 2002, respectively. Net Income (Loss) Per Common Share The Company adopted FASB Statement No. 128, Earnings Per Share ("SFAS 128"), which is effective for periods ending after December 15, 1997. Entities that have only common stock outstanding are required to present basic earnings per share amounts. All other entities are required to present basic and diluted per share amounts. Diluted per share amounts assume the conversion, exercise or issuance of all potential common stock instruments unless the effect is to reduce a loss or increase the income per common share from continuing operations. Following is a reconciliation of the weighted average number of shares actually outstanding with the number of shares used in the computations of loss per common share:
For the Years Ended July 31, 2003 July 31, 2002 ----------------- ----------------- Shares outstanding 10,594,088 8,400,899 Weighted average number of shares actually 9,153,887 7,607,146 outstanding Stock Options 4,144,375 3,586,875 Warrants 1,037,429 15,000 ----------- ----------- Total weighted average shares 14,335,691 11,009,021 ------------ ------------ Loss from continuing operations $ (3,174,259) $ (2,251,439) Loss from discontinued operations - (193,454) ------------- ------------ Net loss $ (3,174,259) $ (2,444,893) ------------ ------------ Net loss per common share Continued operations $ (0.35) $ (0.30) Discontinued operations (0.00) (0.02) ------------ ------------ Net loss $ (0.35) $ (0.32) ============ ============
Income Taxes The Company records deferred taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The statement requires recognition of deferred tax assets and liabilities for temporary differences between the tax bases of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. Other The Company's fiscal year end is July 31. The Company paid no cash dividends during the periods presented. Shipping and handling costs payable by the Company are charged to cost of sales. Certain comparative figures have been reclassified to conform to the current year presentation. All of the Company's assets are located in the United States. Note 2. Restatement of Financial Statements - Start-up Costs and Warranty Liability The accompanying financial statements have been restated to correct an error in the recording and reporting of Start-up Costs and the Warranty Liability of the Company. The Company expended $230,000 during the year ended July 31, 2001 and an additional $47,831 during the July 31, 2002 fiscal year in an effort to acquire and set up a Korean corporation. The Company capitalized these costs as Deferred Acquisition costs as incurred. The Company later determined the venture was not feasible and decided not to go forward with the project. The total costs of $277,831 were written-off as Abandoned Projects at July 31, 2002. We now believe the treatment of these costs was not correct. The accompanying financial statements now show these costs as expensed when incurred as Start-up Costs. The effect of this restatement was to increase the net loss at July 31, 2001 by $230,000 and to decrease the net loss at July 31, 2002 by $230,000. In previous years the Company had not recorded a liability for its future warranty obligation. Because the Company has now computed and booked this liability the accompanying financial statements have been restated to include this obligation.. A liability of $42,430 at July 31, 2003 and $41,445 at July 31, 2002 are included in Accrued Liabilities. The income statement effect of these items was to reduce net loss at July 31, 2001 by $729 and to increase net loss at July 31, 2002 by $7,654. The accompanying financial statements also include 15,000 warrants issued for $8,310 that were omitted from the July 31, 2002 balance sheet in error. Note 3. Cash and Cash Equivalents For purposes of the balance sheets and statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At July 31, 2003, the Company had deposits of $124,842 in excess of FDIC insured limits. At July 31, 2002, the Company had no deposits in excess of FDIC insured limits. Note 4. Due from Officers and Employees (Related Parties) At July 31, 2003, there were no amounts due from officers and $61 represents amounts due from employees. At July 31, 2002, there were notes receivable of $64,075 due from officers and $145,362 due from employees. All notes receivable are due and payable within one year. The carrying value of the notes, based on the terms at which those same loans would be made currently, approximate their fair value. All notes in excess of $10,000 have interest accrued at 6%. Advances to employees of amounts under $10,000 are not charged interest. The total of these loans to employees of under $10,000 was $61 at July 31, 2002 and $7,620 at July 31, 2002. Note 5. Property, Plant and Equipment The following is a summary of property, plant, and equipment - at cost, less accumulated depreciation:
July 31, 2003 July 31, 2002 ----------------- ------------------- Computers and equipment $ 1,081,046 $ 1,076,466 Furniture and fixtures 108,129 103,855 Website - 207,916 Vehicle 50,985 50,985 Leasehold improvements 309,830 307,606 ----------------- ------------------- 1,549,990 1,746,828 Less: accumulated depreciation and amortization 1,117,246 1,091,870 ----------------- ------------------- Total $ 432,744 $ 654,958 ----------------- -------------------
Depreciation expense charged to general and administrative expense for the years ended July 31, 2003 and July 31, 2002 was $320,500 and $266,500, respectively. Note 6. Notes Payable The details relating to note payable are as follows:
July 31, 2003 July 31, 2002 ------------------ ------------------ Convertible Debenture, interest payable quarterly at 10% per annum due and payable on July 24, 2004. $ 300,000 $ - Discount (119,487) - Current maturities of notes payable included in current liabilities 180,513 ------------------ ------------------ Total long term debt $ - $ - ------------------ ------------------
The note contains a provision that the holder can demand the note be paid in full in cash if the Company obtains any future financing (whether debt or equity) of at least $500,000. If held to maturity, principal is automatically converted to common shares of the Company at the conversion price of $0.50 per share. The conversion price can be reset after 180 days and again after one year to 75% of the trading price of the stock if the per share price falls below $0.75 on those dates. The note was contained in a Unit Purchase Agreement in which the holder of the note receives 300,000 five-year warrants to purchase common stock of the Company at an exercise price of $0.75. The recorded value of the note payable and the warrants were apportioned based on their respective fair values. This resulted in the note being recorded at its discounted value of $180,513. The discount of $119,487 will be amortized over the one-year life of the note. If the contract were to have settled on July 31, 2003, the Company would have had to pay the holder of the note 600,000 shares of common stock. The maximum amount of shares the Company would be required to pay under the contract is the lower of 75% of the price of the Company's common stock at the 180 day or one-year reset dates divided by the $300,000 face value of the note. Note 7. Loans from Shareholder The details relating to loans from shareholders are as follows:
July 31, 2003 July 31, 2002 ---------------- -------------- Line of Credit (from shareholder) $600,000 line of credit, interest at 18% Due and payable November 13, 2003 Secured by total assets of the Company $ 600,000 $ 500,000 Excluding the Axenohl patent Current maturities of loans payable included in current liabilities 600,000 500,000 ---------------- ------------ Total long term debt $ - $ - ---------------- -------------
The terms of the line of credit required the Company to maintain current accounts receivable of a minimum of $350,000. At the end of year, the Company was in technical violation with this provision. The Company has neither requested nor received a waiver of this provision. Note 8. Warranty Liability In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". Interpretation 45 is effective for financial statements of interim or annual periods fiscal years ending after December 15, 2002 and requires the following disclosures of the Company's product warranties: The Company provides a standard warranty of two years for replacement parts on all Fillmaster systems sold. Most of the Company's chain customers have entered into multi-year contracts for the Customer Service Plan 2000. The CSP 2000 provides an extended unlimited warranty on all PURE Bioscience pharmacy products; significant discounts on maintenance item costs; free software upgrades for the Fillmaster 1000e and Scanmaster; automatic replacement filter shipments; and simplified, annual invoicing. When the customer buys a dispenser on the Customer Service Plan 2000 it agrees to pay a fixed annual fee that covers replacement filters and parts. The Company monitors the costs of providing replacement parts other than filters. This cost has remained steady and is computed as a percentage of related revenues. The following is a summary of changes in the Company's product warranty liability.
Beginning Expense Warranty Ending Liability Incurred Payments Liability ---------- ---------- ----------- --------- Year ended July 31, 2002 $ 33,791 $ 39,602 $ 31,948 $ 41,445 ========= ========== ======== ======= Year ended July 31, 2003 $ 41,445 $ 33,692 $ 32,707 $ 42,430 ========= ========== ====== =======
Note 9. Commitments On May 14, 1996, the Company entered into an operating lease agreement for its home office which expires (under extension) in October 2006. The lease includes a yearly increase of 4%. The rental expense recorded in general and administrative expenses for the years ended July 31, 2003 and July 31, 2002 was $160,545 and $144,348, respectively. Future minimum rental payments required for each of the 5 succeeding years assuming exercise of the option are as follows: Year Ended July 31 Amount ------------------ ------ 2004 $166,967 2005 $173,645 2006 $180,591 2007 $187,815 2008 $195,328 The Company has an employment contract with its Chief Executive Officer/President which includes a provision for him to be paid an amount equal to 3% of the Company's net income before taxes, if any. On November 30, 2001 the Company acquired the patent for Axenohl, a silver ion based technology (Note 17). As a condition of the purchase agreement of the Axenohl patent, the Company agreed to make certain royalty payments to NVID of 5% of the gross product sales with a minimum royalty payment total of $1,000,000 for the period from November 15, 2001 to July 31, 2004 and subsequently $1,000,000 per year for the remaining life of the patent. The contract states that at July 31, 2004 the Company shall have the right, in its sole and absolute discretion, to do one of the following: a) pay the initial minimum royalty payment of $1,000,000 in cash or common stock of the Company to NVID, less royalty amounts already paid, on or before July 31, 2004, b) transfer the patent back to NVID, at which time the Company would be released of any future minimum payments and granted a license to manufacture and distribute products covered by the patent while retaining all Axen and Axenohl related patents filed by the Company, including retention of all of its previously granted license rights to sell, distribute and manufacture all Axenohl based products, or c) cancel any royalty obligation under the contract by selling, transferring or assigning its ownership of the primary patent to a third party and paying NVID a percentage of the gross proceeds of 10% or 5%, depending on how near the date of the transfer is to July 31, 2004, while retaining all Axen and Axenohl related patents filed by the Company, including retention of all of its previously granted license rights to sell, distribute and manufacture all Axenohl based products. The Company has not recorded or accrued an amount for the minimum royalty payments in the financial statements because the Company has determined that it is unlikely to choose the option to pay the minimum royalty. There are potential minimum royalties due of $1,000,000 for the period of November 2001 to July 31, 2004 and for each fiscal year thereafter. Future minimum royalty payments required for each of the 5 succeeding years are as follows: Year Ended July 31 Amount ------------------ ------ 2004 $1,000,000 2005 $1,000,000 2006 $1,000,000 2007 $1,000,000 2008 $1,000,000 The maximum royalty payments cannot be estimated because they are based on future sales. In June 2003, the Company signed a Letter of Engagement with GunnAllen Financial to become the Company's exclusive financial advisor. In the agreement the Company agreed to pay GunnAllen Financial a fee of $10,000 per month for a period of two years. As additional compensation, in August of 2003 the agreement was amended to include a warrant to purchase 200,000 shares of common stock of the Company at a strike price of $0.80. Note 10. Equity and Common Stock The following schedule summarizes the change in equity:
Common Common Stock Stock Warrants Warrants Accumulated Shares $ Issued $ Deficit Total --------- ---------- ---------- ----------- ------------ --------- Balance, July 31, 2001 6,954,699 $11,510,915 4,472,500 $108,750 $(8,423,467) $3,196,198 --------- ---------- --------- ------- ----------- --------- Sale of Stock 35,200 75,183 75,183 Private Placement 511,000 641,000 641,000 Shares Issued for Services 200,000 100,000 100,000 Warrants Issued for Services 15,000 8,610 8,610 Expiration of Warrants 108,750 (4,472,500) (108,750) Purchase of Patents 700,000 1,540,600 1,540,600 Net Loss 0 0 0 0 (2,222,547) (2,222,547) --------- --------- --------- --------- ----------- ------------ Balance, July 31, 2002 8,400,899 13,976,448 15,000 8,610 (10,646,014) 3,339,044 Sale of Stock 72,500 81,325 81,325 Private Placement 1,788,439 475,000 371,429 144,487 619,487 Shares Issued for Services 332,250 225,430 225,430 Warrants Issued for Services 666,000 635,376 635,376 Net Loss 0 0 0 0 (3,283,989) (3,283,989) --------- --------- --------- --------- ----------- ------------ Balance, July 31, 2003 10,594,088 $14,758,203 1,037,429 $ 788,473 $(13,930,003) $1,616,673 ========== =========== ============ ========= ============= ==========
The Company also has 5,000,000 shares of preferred stock authorized, no preferred stock has been issued. The following schedule summarizes the outstanding warrants:
Weighted Average Date Exercise Exercise Expiration Issued For Issued Amount $ Amount Price Price Date - ------------------ -------- ---------- ---------- ---------- ------- ---------- Services 6/14/02 15,000 $8,610 $1.00 $1.00 6/14/07 Private Placement 1/31/03 71,429 25,000 $0.30 $0.30 1/31/08 Start-up Costs 1/15/03 651,000 635,376 $0.001 $0.001 1/15/08 Private Placement 7/24/03 300,000 119,487 $0.75 $0.75 7/24/08 ------- ------- Total 1,037,429 $788,473 ========= ========
The Company had issued Class A warrants which entitled the holder to acquire an additional common share for $5.25 per common share beginning August 8, 1997 and expiring August 8, 2001. The Class A Warrants were redeemable by the Company for $0.05 per warrant, at the Company's option, commencing one year after the effective date of the offering provided the closing bid price for the Company's common shares shall have averaged in excess of $9.00 per share for thirty consecutive business days ending within five days of the date of notice of redemption. The Company had issued Class Z warrants which entitled the holder to acquire an additional common share for $10.00 per common share beginning August 8, 1998 and expiring August 8, 2001. The Class Z Warrants were redeemable by the Company for $0.10 per warrant, at the Company's option, commencing one year after the effective date of the offering provided the closing bid price for the Company's common shares shall have averaged in excess of $15.00 per share for thirty consecutive business days ending within five days of the date of notice of redemption. On August 8, 2001 the total 3,687,500 Class A warrants and the total 785,000 Class Z warrants expired without exercise. Note 11. Related Party Transactions See Note 7. Note 12. Stock Option Plans The Company has the following stock option plans (the Plans) pursuant to which options to acquire common stock have been granted. 1996 Incentive Stock Option Plan: Approved by Shareholders in April, 1996 with 1,000,000 shares authorized under this Plan. The options have a five-year term with vesting ratably over a five-year period. 1996 Directors and Officers Stock Option Plan: Adopted by the Board in April, 1996 with 1,000,000 shares authorized under this Plan. The maximum number of shares subject to options granted under this Plan to any one Director or Officer shall not exceed 200,000 shares in any 12-month period. The options have a five-year term with vesting ratably over a five-year period. Amended 1998 Directors and Officers Stock Option Plan: Approved by Shareholders in December, 1998 with 2,000,000 shares authorized under this Plan. The maximum number of shares subject to options granted under this Plan to any one Director or Officer shall not exceed 200,000 shares in any 12-month period. The options have a five-year term with vesting ratably over a five-year period. 2001 Directors and Officers Stock Option Plan: Approved by Shareholders in January 2001 with 1,000,000 shares authorized under this Plan. The maximum number of shares subject to options granted under this Plan to any one Director or Officer shall not exceed 200,000 shares in any 12-month period. The options have a five-year term with vesting ratably over a five-year period. 2001 ETIH2O Stock Option Plan: Adopted by the Board in January 2001 with 1,000,000 shares authorized under this Plan. The options have a five-year term with vesting ratably over a five-year period. 2001 Consultants and Advisors Stock Option Plan: Adopted by the Board in January 2001 with 500,000 shares authorized under this Plan. The maximum number of shares subject to options granted under this Plan to any one participant shall not exceed 50,000 shares in any 12-month period. The options have a five-year term with vesting ratably over a five-year period. On March 11, 2002, the Company's shareholders approved the PURE Bioscience 2002 Employee Incentive Stock Option Plan. The purpose of the Plan is to advance the business and development of the Company and its shareholders by affording to the key employees and non-employee directors of the Company the opportunity to acquire a propriety interest in the Company by the grant of Options to acquire shares of the Company's common stock. The Options granted are "Incentive Stock Options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, for certain key employees. The Plan is administered by an Administrative Committee whom shall serve a one-year term. Subject to anti-dilution provisions, the Plan may issue Options to acquire up to 4,000,000 shares to Key Employees. The exercise price for Options shall be set by the Administrative Committee but shall not be for less than the fair market value of the shares on the date the Option is granted. The period in which Options can be exercised shall be set by the Administrative Committee not to exceed five years from the date of Grant. The Plan may be terminated, modified or amended by the Board of directors upon the recommendation of the Administrative Committee. The options vest ratably over a five-year period. On March 11, 2002, the Company's shareholders approved the PURE Bioscience 2002- Non-Qualified Stock Option Plan. The purpose of the Plan is to advance the business and development of the Company and its shareholders by affording Eligible Plan Participants the opportunity to acquire a propriety interest in the Company by the grant of Options to acquire shares of the Company's common stock. Eligible Plan Participants include the Directors and Officers of the Company, consultants, advisors and other individuals deemed by the Compensation Committee to provide valuable services to the Company but who are not otherwise eligible to participate in the Employee Incentive Stock Option Plan. The Plan is administered by an Administrative Committee whom shall serve a one-year term. The Administrative Committee is composed of the Board's Compensation/Administration Committee. Subject to anti-dilution provisions, the Plan may issue Options to acquire up to 2,000,000 shares to Eligible Plan Participants. The Company will not receive any consideration for the grant of options under the Plan and approximate market value of the shares to be reserved for the plan is $4,000,000 based upon the average thirty trading day closing price for the Company's common stock for the period ending January 31, 2002. The exercise price for Options shall be set by the Administrative Committee but shall not be for less than the fair market value of the shares on the date the Option is granted. Fair market value shall mean the average of the closing price for ten consecutive trading days at which the Stock is listed in the Nasdaq quotation system ending on the day prior to the date an Option is granted. The period in which Options can be exercised shall be set by the Administrative Committee not to exceed five years from the date of Grant. The Company estimates a fair value method of accounting for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). In accordance with SFAS 123, the Company has chosen to continue to account for employee stock-based compensation utilizing the intrinsic value method. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Also, in accordance with SFAS 123, the Company has provided footnote disclosure with respect to stock-based employee compensation. The cost of stock-based employee compensation is measured at the grant date based on the value of the award and is recognized over the service period. The value of the stock based award is determined using a pricing model whereby compensation cost is the excess of the fair value of the stock as determined by the model at grant date or other measurement date over the amount an employee must pay to acquire the stock. The Company accounts for non-employee stock based compensation by recording the fair value of the stock options granted over the anticipated service period. The effect of applying FAS 123 on the years ended July 31, 2003 and 2002 pro forma net loss as stated below is not necessarily representative of the effects on reported net loss for future years due to, among other things, the vesting period of the stock options and the fair value of additional stock options in future years. Had compensation cost for the Company's stock option plans been determined based upon the fair value at the grant date for awards under the plans consistent with the methodology prescribed under FAS 123, the Company's net loss in the years ended July 31, 2003 and 2002 would have been approximately $4,014,900 and $2,856,400 or $(0.44) per share and $(0.38) per share, respectively, on a diluted basis. Compensation cost for non-employees of $191,600 was charged to income in the year ended July 31, 2003 and $27,300 in the year ended July 31, 2002. The weighted average fair value of the options granted during the years ended July 31, 2003 and 2002 are estimated at $1.16 per share and $1.13 per share, respectively, on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for grants in 2003 and 2002; no dividend yield, volatility of 137.78% and 101.48%, respectively; a risk-free interest rate of 2.25% and 5.25%, respectively and an expected life of 2.24 and 2.98 years from date awarded. A summary of stock option activity is as follows:
Weighted-Average Number of Shares Exercise Price ($) --------------------- -------------------- Balance at July 31, 2001 2,734,966 1.72 Granted 1,850,000 1.56 Exercised (35,200) 1.93 Forfeited (338,091) 1.63 ---------- Balance at July 31, 2002 4,211,675 1.74 Granted 637,500 0.50 Exercised (156,875) 0.55 Forfeited (0) 0.00 ---------- Balance at July 31, 2003 4,692,300 1.64 ==========
Outstanding Exercisable Range of Number Weighted Average Weighted Average Weighted Exercise Shares Remaining Life Exercise Number Average Prices Outstanding (in years) Price Exercisable Price ($) -------------------- ------------------- ------------------ ------------------- ------------------ ----------------- $0.50 to $0.74 1,125,000 3.30 $0.53 892,500 0.53 $1.00 523,750 0.70 $1.00 518,125 1.00 $1.31 to $1.90 547,300 3.70 $1.72 537,500 1.73 $2.00 1,600,000 2.25 $2.00 1,300,000 2.00 $2.10 to $2.50 460,000 3.18 $2.11 460,000 2.11 $2.93 to $3.56 436,250 1.31 $3.05 436,250 3.05 ----------- ------------ 4,692,300 2.24 $1.61 4,144,375 1.64 =========== ============
Note 13. Pension Plan The Company participates in a Small SEP program under which the employer makes contributions to a SEP, which includes a salary reduction arrangement (SARSEP). Employees who participate in the SARSEP may elect to have the employer: (a) make contributions to the SEP on their behalf, or (b) pay them cash. A salary reduction arrangement may be used only in years in which the SEP meets requirements that the IRS may impose to ensure distribution of excess contributions. Annual contributions of an employer under a SEP are excluded from the participant's gross income. No employer contributions were made during the fiscal years ending July 31, 2003 and July 31, 2002. Note 14. Income Taxes The current provisions for income taxes of $3,200 for fiscal year ended July 31, 2003 and $2,400 for July 31, 2002 is the minimum franchise tax paid to the State of California regardless of income or loss. The Company files federal and California consolidated tax returns with its subsidiaries. At July 31, 2003, the Company had federal, and California tax net operating loss carryforwards of approximately $12,030,000 and $4,945,700 respectively. At July 31, 2001, the Company had federal, and California tax net operating loss carryforwards of approximately $9,796,900 and $3,717,500 respectively. The difference between the financial reporting and the federal tax loss carryforwards is primarily due to accrued expenses and valuation allowances reported in the financials but not deductible for tax purposes. The difference between federal and California tax loss carryforwards is primarily due to the limitation on California loss carryforwards. The federal tax loss carryforwards will begin expiring in the fiscal year ended July 31, 2011, unless previously utilized and will completely expire in fiscal year ended July 31, 2023. The California tax loss carryforwards will begin to expiring in fiscal year ended July 31, 2011, unless previously utilized and will completely expire in fiscal year ended July 31, 2023. The Company has total deferred tax assets of approximately $4,726,000 and $3,325,700 for the fiscal years ended July 31, 2003 and 2002, respectively. Realization of these deferred tax assets, which relate to operating loss carryforwards and timing differences, is dependant on future earnings. The timing and amount of future earnings are uncertain and therefore, the valuation allowance had been established. The increase in the valuation allowance on the deferred tax asset during the fiscal year ended July 31, 2003 was $950,300. Significant components of the Company's deferred tax assets are as follows:
July 31, 2003 July 31, 2002 ------------- ------------- Net operating loss carryforward $ 4,551,000 $ 3,547,800 Depreciation and amortization 124,600 90,500 Calculation allowances (292,800) (292,100) Stock options and warrant 385,400 29,800 Other (42,200) (50,300) -------- -------- Total deferred tax assets 4,726,000 3,325,700 Valuation allowance for deferred tax assets (4,276,000) (3,325,700) ----------- ----------- Net deferred tax assets $ 0 $ 0 ============ =============
A reconciliation of income taxes computed using the statutory income tax compared to the effective tax rate is as follows:
2003 2002 ------ ------ Federal tax benefit at the expected statutory rate 34 % 34 % State income tax, net of federal tax benefit 9 9 Valuation allowance (43) (43) ------ ------ Income tax benefit - effective rate 0 % 0 % ====== ======
Note 15. Risks and Uncertainties The Company faces competitive risks for its Axenohl and pesticide products because the products displace traditional technologies sold by better capitalized and established companies. A significant part of the Company's revenues are from pharmaceutical water products. Note 16. Business Segment and Sales Concentrations In accordance with the provisions of SFAS No. 131, certain information is disclosed based on the way management organizes financial information for making operating decisions and assessing performance. In determining operating segments, the Company reviewed the current management structure reporting to the chief operating decision-maker ('CODM') and analyzed the reporting the CODM receives to allocate resources and measure performance. The Company's business activities are divided, managed and conducted in two basic business segments, the Water Treatment segment and the Bioscience segment. These two segments were determined by management based upon the inherent differences in the end use of the products, the inherent differences in the value added processes made by the Company, the differences in the regulatory requirements and the inherent differences in the strategies required to successfully market finished products. The Water Treatment segment includes Commercial Water and Residential Retail products and the Nutripure Water Dealer program. Bioscience includes Axenohl (Silver Ion Technology) and the Innovex line of pest control products. Segment information is presented in accordance with SFAS 131, Disclosures about Segments of an Enterprise and Related Information. This standard is based on a management approach, which requires segmentation based upon the Company's internal organization and disclosure of revenue and operating income based upon internal accounting methods. The Company's financial reporting systems present various data for management to run the business, including internal profit and loss statements prepared on a basis not consistent with U.S. generally accepted accounting principles. Reconciling amounts consist of unallocated general and administrative expenses.
Water Reconciling Treatment Biosciences Amounts Consolidated ----------- ------------ ------------ ------------- 2003 ------ Revenues Commercial Water Treatment Fillmaster Products $1,160,700 $ 1,160,700 ----------------------- Replacement Filters (Includes CSP 2000) 640,600 640,600 -------------------------------------- Residential Water Treatment 155,200 155,200 --------------------------- Water Dealer Program 517,300 517,300 -------------------- Silver Ionization - $ 54,500 54,700 ----------------- Pesticide - 61,200 61,200 --------- ---------- ---------- ------------- ------------ Total Revenues $2,473,800 $ 115,700 $ 0 $ 2,589,500 ------------------- ========== ========== ======= ========== Operating Income/(Loss) $ 379,900 $ (173,083) $(2,967,500) $ (3,174,300) ----------------------- ----------- ---------- ------------ ------------ Segment Assets $ 423,300 $2,436,100 -------------- ----------- ---------- 2002 ------ Revenues Commercial Water Treatment Fillmaster Products $1,161,800 $1,161,800 ----------------------- Replacement Filters (Includes CSP 2000) 524,000 524,000 ------------------------------------------ Residential Water Treatment 106,400 106,400 --------------------------- Water Dealer Program 396,700 396,700 -------------------- Silver Ionization - $ 683,100 683,100 ----------------- Pesticide - 334,400 334,400 --------- ----------- ------------ ------------ ----------- Total Revenues $ 2,188,900 $ 1,017,500 $ 0 $ 3,206,400 -------------- =========== ============ =========== =========== Operating Income/(Loss) $ 186,100 $ (717,300) $(1,691,300) $(2,222,500) ----------------------- ----------- ------------ ----------- ----------- Segment Assets $ 790,200 $ 2,450,100 -------------- ----------- -----------
Significant customers primarily consisted of domestic retail chain pharmacies. Sales concentrations to major chain stores were approximately $923,000 and export sales were $73,000 for the year ended July 31, 2003. Sales concentrations to major chain stores were approximately $1,107,200 and export sales were $584,600 for the year ended July 31, 2002 No customer accounted for more than 10% of consolidated sales. Note 17. Patent Acquisition On November 30, 2001, the Company acquired the patent for Axenohl, a silver ion based technology which is the basis for the Company's silver ion products. The Company previously licensed the use of this patent. The Company purchased the patent for 700,000 shares of its common stock plus certain expenses. The Company valued the patent at $1,540,600 based on the market price of the stock exchanged. In addition, the Company agreed to pay royalties in the amount of 5% of gross Axenohl sales until March 2018, the end of the life of the patent including minimum royalties (see Note 9). Note 18. Discontinued Operations In December 1999, the Company formed NUTRIPURE.COM as a wholly owned subsidiary to operate an e-commerce health website, composed primarily of Bergen Brunswig products. On January 15, 2002, Bergen Brunswig Corporation terminated the distribution license for these products. As a result, we closed our e-commerce division. The Nutripure subsidiary now is holding the website for resale, which is its only remaining asset. Assets of the subsidiary were zero at July 31, 2003 and zero at July 31, 2002. Revenues from discontinued operations were zero in 2003 and $1,000 in 2002. No income tax expense was allocated to discontinued operations because of the uncertainty of realizing net operating loss carryforwards. Note 19. Subsequent Events In August of 2003 the Company completed a financing arrangement which included the acquisition of a $2,000,000 Trust Deed receivable and $35,000 related accrued interest and issuing a $435,000 note payable resulting in a net increase of $1,600,000 in equity during the period. This note receivable is in exchange for the issuance of 2,000,000 shares of the Company's common stock to a party unrelated to the Company, and that is fully secured by specific assets other than the equity instruments granted. In October 2003 the Company conducted a $50,000 private placement in which the Company issued 100,000 shares of common stock to an accredited investor at a price of $0.50 per share. Also in October of 2003 the Company conducted a $420,000 private placement in which the Company issued 700,000 shares of common stock to an accredited investor at a price of $0.60 per share. Note 20. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141 "Business Combinations." The Statement is to be adopted for all business combinations initiated after June 30, 2001. The adoption of this statement did not impact the Company's financial position, results of operations, or cash flows. In June 2001, the FASB issued SFAS No. 142 "Accounting for Goodwill and Intangible Assets." In accordance with certain provisions of the Statement, goodwill acquired after June 30, 2001 is not amortized. All provisions of the Statement are required to be applied in the fiscal year beginning after December 15, 2001. The adoption of this statement did not impact the Company's financial position, results of operations, or cash flows. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. The Company adopted this statement for the year ending December 31, 2002. The adoption of this statement did not impact the Company's financial position, results of operations, or cash flows. In July 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets which is effective for fiscal years beginning after December 15, 2001. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and establishes a single accounting model, based on the framework established in SFAS 121, for long lived assets to be disposed of by sale. The adoption of this statement did not impact the Company's financial position, results of operations, or cash flows. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections". SFAS 145, which is effective for fiscal years beginning after May 15, 2002, provides guidance for income statement classification of gains and losses on extinguishments of debt and accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The adoption of this statement did not impact the Company's financial position, results of operations, or cash flows. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 nullifies the guidance of the Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. SFAS 146 also establishes that fair value is the objective for the initial measurement of the liability. The provisions of SFAS 146 are required for exit or disposal activities that are initiated after December 31, 2002. The adoption of this statement did not impact the Company's financial position, results of operations, or cash flows. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". SFAS 148 amends FASB Statement No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on the reported results. The provisions of SFAS 148 are effective for financial statements for fiscal years ending after December 15, 2002. The adoption of this statement did not impact the Company's financial position, results of operations, or cash flows. In November 2002, the FASB issued FIN 45, which expands previously issued accounting guidance and disclosure requirements for certain guarantees. Except as described in Note 8, the adoption of this statement did not impact the Company's financial position, results of operations, or cash flows. In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", which amends and clarifies the accounting guidance on certain derivative instruments and hedging activities. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003 and hedging relationships designated after June 30, 2003. The adoption of this statement did not impact the Company's financial position, results of operations, or cash flows. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 establishes standards for how an issuer of equity (including the equity shares of any entity whose financial statements are included in the consolidated financial statements) classifies and measures on its balance sheet certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and for existing financial instruments after July 1, 2003. The adoption of this statement did not impact the Company's financial position, results of operations, or cash flows. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III - -------- ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers and directors of PURE Bioscience and their ages are as follows:
Name Age Position Held Position Since - ------------------------- --------- ------------------------------------ ------------------- Michael L. Krall 51 President, CEO, Chairman, Director 1992 Gary Brownell, CPA 54 Treasurer CFO, Director 1996 Gene Auerbach 58 Chief Operating Officer 2002 Donna Singer 33 Executive Vice President, Director 1998 Dennis Atchley, Esq. 50 Secretary 1996 Greg Barnhill 49 Director 2001 Dennis Brovarone 47 Director 1996 Patrick Galuska 44 Director 1996 Eugene Peiser, PD 71 Director 1996
The Directors serve until their successors are elected by the shareholders. Vacancies on the Board of Directors may be filled by appointment of the majority of the continuing directors. The executive officers serve at the discretion of the Board of Directors except as subject to the employment agreement with Mr. Krall. Business Experience - ------------------- DENNIS B. ATCHLEY, ESQ. Mr. Atchley is the Secretary of PURE Bioscience and currently practices as a sole practitioner in Carlsbad, California handling corporate and business related litigation matters. A 1973 graduate of Loyola Marymount University in Los Angeles and a 1976 graduate of California Western School of Law in San Diego, California, Mr. Atchley is a member of the California Bar, the San Diego County Bar Association, and the Association of Business Trial Lawyers. GENE AUERBACH Mr. Auerbach is the Chief Operating Officer of PURE Bioscience. Prior to joining the Company in June 2002, Mr. Auerbach served as Senior Vice President, Global Supply Chain for Estee Lauder Companies (NYSE: EL) in New York City. Previously, he served as Senior Vice President for Development and International Development at AutoZone (NYSE: AZO) in Memphis, Tennessee. Prior to joining AutoZone, Mr. Auerbach gained significant international experience as Regional Director, Asia for Dairy Farm International (Jardines), where he played a key role in the executive management of 1400 retail stores in eight countries, including supermarkets, drug stores, convenience stores and restaurants. Before joining Dairy Farm International, Mr. Auerbach held the position of Senior Vice President at Costco (NasdaqNM: COST) and, prior thereto, Executive Vice President for Price Club. Before joining Price Club/Costco, Mr. Auerbach served 22 years in the US Navy where he was, and still is, the youngest officer ever selected for Captain (06) in the history of the Navy Supply Corps. Mr. Auerbach holds a BA degree in Business Administration from University of Washington and an MBA degree from Wharton School of Finance and Commerce. GREGORY H. BARNHILL Mr. Barnhill is Managing Director of North American Equity Sales at Deutsche Bank Securities, Inc., Baltimore, MD. He joined the firm in 1975, following his graduation from Brown University with an AB degree in economics. 30 DENNIS BROVARONE Mr. Brovarone has been practicing corporate and securities law since 1986 and as a sole practitioner since 1990. He was elected to the Company's Board of Directors in April 1996. From January 3002 to the present, Mr. Brovarone serves on the Board of Directors of Shannon International Resources, Inc., a publicly held Nevada corporation. From December 1997 to April 2001, Mr. Brovarone served as the President and Chairman of the Board of Directors of Ethika Corporation, a publicly held, Mississippi corporation investment holding company with its office in Littleton, Colorado. From January 1995 to March 1998, Mr. Brovarone served as President (Chairman) of the Board of Directors of The Community Involved Charter School, a four year old K-12 public school located in Lakewood, Colorado, operating under an independent charter and serving approximately 350 students in an individualized, experiential learning environment. Prior to 1990, Mr. Brovarone served as in-house counsel to R.B. Marich, Inc., a Denver, Colorado based brokerage firm. Mr. Brovarone lives and works in Littleton, Colorado. GARY W. BROWNELL Mr. Brownell is a Certified Public Accountant in a private partnership practice. He is the partner in charge of taxes and municipal audits for his firm. Mr. Brownell graduated from San Diego State University in 1973 with a Bachelor of Science degree in accounting. He received his Certified Public Accountant designation in 1983. Mr. Brownell has been a partner in Brownell and Duffy since 1985. PATRICK GALUSKA Mr. Galuska is a consulting petroleum engineer in Denver, Colorado. His practice focuses mainly on the acquisition and exploitation of underdeveloped oil and gas assets in the Rocky Mountain area. He is a Registered Professional Engineer and is a member of the Society of Petroleum Engineers. Mr. Galuska earned his BS degree in petroleum engineering from the University of Wyoming and received his MBA degree in Finance from the University of Denver. Mr. Galuska resides in Littleton, Colorado with his wife and two children. MICHAEL L. KRALL Mr. Krall is the President, CEO and Chairman of the Board of Directors of PURE Bioscience, a position he has held since 1993. He is responsible for the strategic planning, product development, and day-to-day operations of PURE Bioscience. Previously, Mr. Krall was the President and CEO of Bettis-Krall Construction, Inc. a successful building-development company of custom homes and commercial property in San Diego County, California. He has also held numerous positions in general management in the hospitality industry. Mr. Krall attended Pepperdine University (economics, statistics, mechanical engineering). He previously served 4 years in the United States Marine Corps and was elected, by general election, to a 4 year term on the Valle de Oro Planning Board. Mr. Krall lives in El Cajon, California with his wife, Connie, and two children. EUGENE S. PEISER, DOCTOR OF PHARMACY Dr. Peiser has been an independent consultant to FDA regulated industries since 1974 and a Member of the Board of PURE Bioscience since 1994. He graduated from the University of Tennessee College of Pharmacy with a Bachelor of Science in Pharmacy in 1951 and has received his Doctorate of Pharmacy. Dr. Peiser's consultancy advises on a wide variety of subjects, including compliance with the Prescription Drug Marketing Act and other government compliance matters, employee training and drug repackaging. Dr. Peiser furnishes expert witness services and has provided approved Pharmaceutical Continuing Education to several thousand attendees at his seminars. Dr. Peiser is a Founding Director of the Association of Drug Repackagers; is appointed as a Registered Arbitrator by the American Registry of Arbitrators; and is President of the Southwest Chapter of the Association of Military Surgeons. Dr. Peiser lives and works in Palm Harbor, FL. DONNA SINGER Ms. Singer is the Executive Vice President of PURE Bioscience. From 1996-1998, Ms. Singer served as Vice President of Operations for the Company. Ms. Singer is responsible for company operations, corporate communications, investor relations and marketing. Previously, Ms. Singer served as the investor relations executive at Western Garnet International, a Toronto Stock Exchange mining company. Ms. Singer graduated from Gonzaga University with a Bachelor of Arts degree and lives in El Cajon, California. Committees: Meetings of the Board We have a Compensation/Administration Committee and an Audit Committee. The Compensation/Administration Committee and the Audit Committee were formed in 1995. Messrs. Barnhill, Brovarone, Galuska and Peiser comprise the Compensation/Administration Committee and Messrs. Barnhill, Brownell, Galuska and Peiser are the Audit Committee. The Compensation/Administration Committee recommends to the Board the compensation of executive officers and will serve as the Administrative Committee for the Company's Stock Option Plans. The Audit Committee serves as a liaison between the Board and the Company's auditor. The Compensation/Administration Committee met once during the fiscal year ended July 31, 2003, and the Audit Committee met once during the fiscal year ended July 31, 2003. Our Board of Directors held six meetings during the fiscal year ended July 31, 2003, at which time all the then Directors were present or consented in writing to the action taken at such meetings. No incumbent Director attended fewer than 100% of said meetings. Compliance with Section 16(a) of Securities Exchange Act of 1934 To our knowledge, during the fiscal year ended July 31, 2003, our Directors and Officers complied with all applicable Section 16(a) filing requirements. This statement is based solely on a review of the copies of such reports furnished to us by our Directors and Officers and their written representations that such reports accurately reflect all reportable transactions. 31 Family Relationships There is no family relationship between any Director, executive or person nominated or chosen by PURE Bioscience to become a Director or executive officer. Code of Ethics We have not as yet adopted a Code of Ethics that applies to our principal executive officer and principal financial officer. The Company's recent focus has been codifying internal controls as required by the Sarbanes-Oxley Act. We intend to adopt a Code of Ethics during this fiscal year. Transactions with Management PURE Bioscience did not enter into any transactions with Management during the fiscal year ended July 31, 2002. ITEM 10. EXECUTIVE COMPENSATION Summary Compensation Table The following table shows for the fiscal year ending July 31, 2003, the compensation awarded or paid by the Company to its Chief Executive Officer and any of the executive officers of the Company whose total salary and bonus exceeded $100,000 during such year (The "Named Executive Officers"):
- -------------------------------------------------------------------------------------------------------- SUMMARY COMPENSATION TABLE | - -------------------------------------------------------------------------------------------------------- | Long Term Compensation | - -------------------------------------------------------------------------------------------------------- | Annual Compensation | Awards | Payouts | - --------------------------------------------------------------------------------------------------------- | | Salary | Other Annual | Securities | | Name and Principle Position | Year| (S) | Compensation | Underlying |All Other Compensation | | | | ($) | Options (#) | ($) | - --------------------------------------------------------------------------------------------------------- Michael L. Krall President/CEO| 2003| 168,000 | 0 | 50,000 Common| 0 | - --------------------------------------------------------------------------------------------------------- Michael L. Krall President/CEO| 2002| 144,000 | 0 |150,000 Common| 0 | - --------------------------------------------------------------------------------------------------------- Michael L. Krall President/CEO| 2001| 144,000 | 0 | 50,000 Common| 0 | - ---------------------------------------------------------------------------------------------------------
No other executive officer earned more than $100,000 during the current fiscal year. 32
- ----------------------------------------------------------------------------------------------------------------------- Option Grants in Last Fiscal Year - ----------------------------------------------------------------------------------------------------------------------- Individual Grants - ----------------------------------------------------------------------------------------------------------------------- Number of Common Shares Underlying Options Granted % of Total Options Granted to Exercise Price Expiration Name (#) Employees in Fiscal Year ($/Sh) Date - ----------------------------------------------------------------------------------------------------------------------- Michael L. Krall President/CEO 50,000 11 .50 1/10/08 - -----------------------------------------------------------------------------------------------------------------------
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option/Values The following table sets forth the number and value of the unexercised options held by each of the Named Executive Officers at July 31, 2003.
- ------------------------------------------------------------------------------------------------------------------------ Aggregate Option Exercises in Last Fiscal Year and FY-End Option Values - ------------------------------------------------------------------------------------------------------------------------ Shares Value Number of Securities Underlying Value of Unexercised In-the Money Acquired on Realized at Unexercised Options at FY-End (#) Options at FY-End ($) Name Exercise (#) FY-End ($) Exercisable/Unexercisable Exercisable/Unexercisable - ------------------------------------------------------------------------------------------------------------------------ Michael L. Krall 0 0 731,250 Common Shares/Exercisable 48,000/Exercisable (1) President/CEO - ------------------------------------------------------------------------------------------------------------------------
(1) Option value based on the difference between the exercise price of unexercised options and the average closing price of $0.74 for the 30 trading days ending July 31, 2003. Employment Agreements and Executive Compensation In April 1996, the Board of Directors approved a five-year employment agreement for Michael Krall, its President. Mr. Krall receives a salary of $168,000 per year plus an amount equal to 3% of PURE Bioscience's net income before taxes, if any, plus other benefits. The Board of Directors has extended Mr. Krall's employment agreement for an additional year. Compensation of Directors Directors are entitled to receive $300 plus reimbursement for all out-of-pocket expenses incurred for attendance at Board of Directors meetings. Other Arrangements 1996 Directors And Officers Stock Option Plan: On April 17, 1996, the Company's Board of Directors approved a Directors and Officers Stock Option Plan. The purpose of the Plan is to advance the business and development of the Company and its shareholders by affording to the Directors and Officers of the Company who are ineligible to participate in the above Incentive Stock Option Plan, the opportunity to acquire a propriety interest in the Company by the grant of Options to acquire shares of the Company's common stock. The Plan is administered by the entire Board of Directors. The Plan became effective on April 17, 1996 by the Board of Directors, was not subject to Shareholder approval and shall terminate on April 17, 2006. Subject to anti-dilution provisions, the Plan may issue Options to acquire up to 1,000,000 shares to Directors and Officers. The maximum number of shares subject to Options granted to any one Director or Officer shall not exceed 200,000 shares in any 12-month period. The exercise price for Options shall be set by the Board of Directors but shall not be for less than eighty-five (85%) of the fair market value per share on the date of grant. The period in which Options can be exercised shall be set by the Board of Directors not to exceed five years from the date of Grant. The Plan may be terminated, modified or amended by the Board of Directors. The PURE Bioscience 1998 Directors And Officers Stock Option Plan: On December 19, 1998, the Company's Shareholders approved the Amended PURE Bioscience 1998 Officers and Directors Stock Option Plan. The purpose of the Plan is to advance the business and development of the Company and its shareholders by affording to the Directors and Officers of the Company the opportunity to acquire a propriety interest in the Company by the grant of Options to acquire shares of the Company's common stock. The PURE Bioscience 2001 Directors And Officers Stock Option Plan: On January 8, 2001, the Company's Shareholders approved the PURE Bioscience 2001 Officers and Directors Stock Option Plan. The purpose of the Plan is to advance the business and development of the Company and its shareholders by affording to the Directors and Officers of the Company the opportunity to acquire a propriety interest in the Company by the grant of Options to acquire shares of the Company's common stock. 33 The PURE Bioscience 2002 Non-Qualified Stock Option Plan: On March 11, 2002, the Company's Shareholders approved the PURE Bioscience 2002- Non-Qualified Stock Option Plan. The purpose of the Plan is to advance the business and development of the Company and its shareholders by affording Eligible Plan Participants the opportunity to acquire a propriety interest in the Company by the grant of Options to acquire shares of the Company's common stock. Eligible Plan Participants include the Directors and Officers of the Company, consultants, advisors and other individuals deemed by the Compensation Committee to provide valuable services to the Company but who are not otherwise eligible to participate in the Employee Incentive Stock Option Plan. The Options granted are not "Incentive Stock Options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. The issuance of such non-qualified options pursuant to this Plan is not expected to be a taxable event for the recipient until such time that the recipient elects to exercise the option whereupon the recipient is expected to recognize income to the extent the market price of the shares exceeds the exercise price of the option on the date of exercise. The Plans are administered by an Administrative Committee whom shall serve a one year term. The Administrative Committee is composed of the Board's Compensation/Administration Committee. Subject to anti-dilution provisions, each Plan may issue Options to acquire up to 2,000,000 shares to Directors and Officers. The exercise price for Options shall be set by the Administrative Committee but shall not be for less than the fair market value of the shares on the date the Option is granted. Fair market value shall mean the average of the closing price for ten consecutive trading days at which the Stock is listed in the NASDAQ quotation system ending on the day prior to the date an Option is granted. The period in which Options can be exercised shall be set by the Administrative Committee not to exceed five years from the date of Grant. Options granted to new executive officers or directors shall vest one year from date of appointment or election. Shares issuable under options granted to continuing officers or directors are immediately exercisable and vest upon exercise. The maximum number of shares subject to Options granted to any one Director of Officer shall not exceed 200,000 shares in any 12-month period. The Executive Officers and Directors of the Company are eligible to participate in the Plans. The Administrative Committee first granted the Executive Officers and Directors an option to purchase 100,000 shares of common stock at $1.00 per share in 1998. The Administrative Committee shall grant to individuals newly appointed as Executive Officers or as Directors, an option to purchase 100,000 shares of common stock at fair market value. Upon each subsequent anniversary thereof, each such Officer and Director will receive an option to purchase 50,000 shares of common stock at fair market value. The Plans also give the Administrative Committee discretion to award additional options. The aggregate number and kind of shares within the Plans and the rights under outstanding Options granted hereunder, both as to the number of shares and Option price, will be adjusted accordingly in the event of a reverse split in the outstanding shares of the Common Stock of the Company. The Board may at any time terminate the Plans. The approval of the majority of shareholders is required to increase the total number of shares subject to the Plans, change the manner of determining the option price or to withdraw the administration of the Plans from the Administrative Committee. Termination of Employment and Change of Control Arrangement There is no compensatory plan or arrangement with respect to any individual named above which results or will result from the resignation, retirement or any other termination of employment with the Company, or from a change in the control of the Company. 34 ITEM 11. Security Ownership of Certain Beneficial Owners and of Management The following table sets forth the number of shares of the Company's Common Stock beneficially owned as of December 22, 2003 by individual directors and executive officers and by all directors and executive officers of the Company as a group. Based upon a review of the Company's shareholders list as of December 22, 2003, there are two other registered holders of five percent or more of the Company's Common Stock. As of December 22, 2003 there were 13,454,088 shares outstanding.
Name and Address of Common Stock Percentage of Shares Beneficial Owner Title Ownership Outstanding (%) - ----------------------- --------------------- --------------- ------------------------ Dennis Atchley Secretary 243,860 (1) 1.81 1725 Gillespie Way El Cajon, CA 92020 Gene Auerbach Chief Operating Officer 175,000 (2) 1.30 1725 Gillespie Way El Cajon, CA 92020 Gregory Barnhill Director 425,000 (3) 3.16 1725 Gillespie Way El Cajon, CA 92020 Dennis Brovarone Director 506,483 (4) 3.76 1725 Gillespie Way El Cajon, CA 92020 Gary Brownell Treasurer, CFO/Director 450,321 (5) 3.35 1725 Gillespie Way El Cajon, CA 92020 Patrick Galuska Director 420,690 (6) 3.13 1725 Gillespie Way El Cajon, CA 92020 Michael L. Krall President, CEO/Chairman 1,353,560 (7) 10.06 1725 Gillespie Way El Cajon, CA 92020 Eugene Peiser Director 476,136 (8) 3.54 1725 Gillespie Way El Cajon, CA 92020 Donna Singer Executive VP, Director 403,356 (9) 3.00 1725 Gillespie Way El Cajon, CA 92020 Directors and Officers as a Group (9 individuals) 4,454,406 (10) 33.11 Next9, LLC Shareholder 2,000,000 (11) 14.87 850 State Street San Diego, CA 92101 Jeffery P. Dauenhauer Shareholder 700,000 5.20 800 5th Ave., Suite 4100 Seattle WA, 98104
(1) Includes presently exercisable options to acquire up to 200,000 shares. (2) Includes presently exercisable options to acquire up to 150,000 shares. (3) Includes presently exercisable options to acquire up to 250,000 shares. (4) Includes presently exercisable options to acquire up to 435,000 shares. (5) Includes presently exercisable options to acquire up to 400,000 shares. (6) Includes presently exercisable options to acquire up to 350,000 shares. (7) Includes presently exercisable options to acquire up to 731,250 shares. (8) Includes presently exercisable options to acquire up to 400,000 shares. (9) Includes presently exercisable options to acquire up to 375,000 shares. (10) Includes presently exercisable options held by all of the above officers and directors to acquire up to 2,814,250 shares. (11) Lee Brukman is the control person of Next9, LLC. Securities Authorized for Issuance under Equity Compensation Plans
- ------------------------ ------------------------- -------------------------- ---------------------------- Number of securities remaining available for Number of securities to future issuance under be issued upon exercise Weighted-average equity compensation plans of outstanding options, exercise price of (excluding securities warrants and rights outstanding options, reflected in column (a)) (a) warrants and rights (c) Plan Category (b) - ------------------------ ------------------------- -------------------------- ---------------------------- Equity compensation plans approved by security holders 3,129,375 1.86 5,987,278 - ------------------------ ------------------------- -------------------------- ---------------------------- Equity compensation plans not approved by security holders 1,015,000 1.63 533,000 - ------------------------ ------------------------- -------------------------- ---------------------------- Total 4,144,375 1.83 6,520,278 - ------------------------ ------------------------- -------------------------- ----------------------------
The following equity compensation plans were not approved by security holders: 1. 2001 ETIH2O Stock Option Plan: Adopted by the Board in January 2001 with 1,000,000 shares authorized under this Plan. The options have a five-year term with vesting ratably over a five-year period. 2. 2001 Consultants and Advisors Stock Option Plan: Adopted by the Board in January 2001 with 500,000 shares authorized under this Plan. The maximum number of shares subject to options granted under this Plan to any one participant shall not exceed 50,000 shares in any 12-month period. The options have a five-year term with vesting ratably over a five-year period. 3. Executive Officers and Directors are not eligible participants under these plans. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. ITEM 13. EXHIBITS. The following Exhibits are filed as part of this registration statement pursuant to Item 601 of Regulation S-B: 3.1 (1) -- Articles of Incorporation, Articles of Amendment and Bylaws 3.1.1 (2) -- Articles of Amendment dated March 11, 2002 3.1.2 -- Articles of Amendment dated October 6, 2003 4.1 (1) -- Form of Class A Warrant 4.2 (1) -- Form of Class Z Warrant 4.3 (1) -- Form of Common Stock Certificate 4.4 (1) -- Warrant Agreement 4.5 (3) -- March 2000 Warrant 4.6 (4) -- January 2001 Warrant 4.7 (5) -- Convertible Debenture 4.8 (6) -- Convertible Debenture Purchase Agreement 4.9 (7) -- Convertible Debenture Warrant 10.1 (1) -- Employment Contract/Michael L. Krall 10.2 (8) -- Manufacturing, Licensing and Distribution Agreement dated March 26, 2001 10.3 (9) -- Axenohl License Agreement 10.4 (10) -- Weaver - Roach X Assignment 10.5 (10) -- Dodo Agreement [Confidential treatment requested for certain omitted information filed separately.] 10.6 (9) -- Promissory Note of Michael Krall 10.7 (9) -- Promissory Note of Gary Brownell 10.8 (10) -- Nutripure Dealer Agreement 10.9 (10) -- Sales Finance Agreement 10.10 (11) -- ETIH2O, Inc., Acquisition Agreement 10.11 (12) -- NVID Litigation Settlement Agreement 10.12 (13) -- Addendum #1 to NVID Settlement Agreement 10.13 -- Therapeutics, Inc. Agreement [Confidential treatment requested for certain omitted information filed seperately.] 21 (14) -- Subsidiaries of the Registrant 31.1 -- Sarbanes Oxley 302 Certification - CEO 31.2 -- Sarbanes Oxley 302 Certification - CFO 32.1 (14) -- Sarbanes Oxley 906 Certification - CEO 32.2 (14) -- Sarbanes Oxley 906 Certification - CFO (1) Incorporated by reference from Form SB-2 registration statement, SEC File # 333-00434 effective August 8, 1996 (2) Incorporated by reference from the Annual Report on Form 10KSB for the fiscal year ended July 31, 2002 filed on October 29, 2002. (3) Incorporated by reference from S-3 registration statement, SEC File #333-36248 effective on May 17, 2000 (4) Incorporated by reference from S-3 registration statement, SEC File #333-55758 effective on February 26, 2001 (5) Incorporated by reference from S-3 registration statement, SEC File #333-61664 filed on May 25, 2001 (6) Incorporated by reference from pre-effective amendment no. 1 to S-3 registration statement, SEC File #333-61664 filed on July 10, 2001 (7) Incorporated by reference from pre-effective amendment no. 2 to S-3 registration statement, SEC File #333-61664 filed on August 13, 2001 (8) Incorporated by reference from Current Report on Form 8-K filed on May 24, 2001 as amended on October 19, 2001 (9) Incorporated by reference from the Amended Annual Report on Form 10KSB for the fiscal year ended July 31, 2000 filed on October 19, 2001 (10) Incorporated by reference from Amended Form 10QSB for the nine month period ended April 30, 2001 filed on October 19, 2001 (11) Incorporated by reference from the Amended Annual Report on Form 10KSB for the fiscal year ended July 31, 2001 filed on November 13, 2001 (12) Incorporated by reference from Current Report on Form 8-K filed on December 6, 2001 (13) Incorporated by reference from Amended Current Report on Form 8-K filed on December 7, 2001 (14) Incorporated by reference from Annual Report on Form 10-KSB for the fiscal year ended July 31, 2003 filed on October 29, 2003 B. Reports on Form 8-K: No Reports on Form 8-K were filed during the fourth quarter of the fiscal year. 35 ITEM 14. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 13a-14(c). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation. ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES Miller & McCollom, Certified Public Accountants, are the Company's independent auditors to examine the financial statements of the Company for the fiscal year ending July 31, 2003. Miller & McCollom has performed the following services and has been paid the following fees for these fiscal years. Audit Fees Miller & McCollom was paid aggregate fees of $39,312 for the fiscal year ended July 31, 2002 and $70,457 for the fiscal year ended July 31, 2003 for professional services rendered for the audit of the Company's annual financial statements and for the reviews of the financial statements included in Company's quarterly reports on Form 10QSB during these fiscal years. Audit -Related Fees Miller & McCollom was not paid any additional fees for the fiscal year ended July 31, 2002 and July 31, 2003 for assurance and related services reasonably related to the performance of the audit or review of the Company's financial statements. Tax Fees Miller & McCollom was paid aggregate fees of $15,450 for the fiscal year ended July 31, 2002 and $10,900 for the fiscal year ended July 31, 2003 for professional services rendered for tax compliance, tax advice and tax planning. Other Fees Miller & McCollom was paid no other fees for professional services during the fiscal years ended July 31, 2002 and July 31, 2003. 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PURE BIOSCIENCE DATE /s/ MICHAEL L. KRALL December 22, 2003 - ---------------------------------------- ----------------------- Michael L. Krall, Chairman/President/CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE /s/ GREGORY BARNHILL Director December 22, 2003 - ------------------------------------------- ------------------------- Gregory Barnhill /s/ DENNIS BROVARONE Director December 22, 2003 - ------------------------------------------- ------------------------- Dennis Brovarone /s/ GARY BROWNELL Chief Financial Officer and Director December 22, 2003 - ------------------------------------------- ------------------------- Gary Brownell /s/ PATRICK GALUSKA Director December 22, 2003 - ------------------------------------------- ------------------------- Patrick Galuska /s/ MICHAEL L. KRALL President/CEO and Director December 22, 2003 - ------------------------------------------- ------------------------- Michael L. Krall /s/ EUGENE PEISER Director December 22, 2003 - ------------------------------------------- ------------------------- Eugene Peiser /s/ DONNA SINGER Executive Vice President and Director December 22, 2003 - ------------------------------------------- ------------------------- Donna Singer
37 EX-10.13 3 exhibit10_13markedconfagmt.txt THERAPEUTICS, INC. AGREEMENT EXHIBIT 10.13 DEVELOPMENT AND LICENSING AGREEMENT ----------------------------------- THIS WORLD-WIDE EXCLUSIVE DEVELOPMENT AND LICENSING AGREEMENT [the "Agreement"], is made, entered into and effective as of ___ September, 2003 ["Effective Date"], by and between Innovative Medical Services ["INNOVATIVE"], a California corporation, having its principal place of business at 1725 Gillespie Way, El Cajon, Ca 92020, and Therapeutics, Inc., a Delaware corporation, with its principal place of business at 4180 La Jolla Village Drive, Suite 255, La Jolla, California 92037 ["THERAPEUTICS"]. RECITALS WHEREAS, pursuant to a Core Settlement Agreement dated 15 November 2001, INNOVATIVE became the sole owner and/or assignee of certain patents and certain technology, known as SDC Core Technology, more fully described in Exhibit A hereto, which includes silver dihydrogen citrate and other related silver compounds; WHEREAS, INNOVATIVE has developed and commercialized various and multiple non-healthcare, non-personal care applications utilizing the SDC Core Technology; WHEREAS, THERAPEUTICS is primarily engaged in medical product development with an emphasis on dermatological products, blending clinical and regulatory strategies, manufacturing know-how, drug development expertise, and a thorough understanding of the competitive technologies and the marketplace; WHEREAS, INNOVATIVE and THERAPEUTICS are interested in exploring and investigating the feasibility of developing healthcare and personal care products utilizing the SDC Core Technology, which may require approval from an Agency, including the United States Food and Drug Administration ("FDA"); WHEREAS, the Parties have determined that THERAPEUTICS has the necessary knowledge, skill and expertise in the identification and development of proprietary drugs utilizing the SDC Core Technology and that such process can be more efficiently and effectively accomplished through the beneficial collaboration by the Parties; and WHEREAS, INNOVATIVE and THERAPEUTICS desire to enter into a collaborative development program for the product development and commercialization of personal care and healthcare products utilizing the SDC Core Technology and requiring FDA approval or review. W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 1 OF 43 AGREEMENT --------- NOW, THEREFORE, for and in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto expressly agree as follows: SECTION 1.0 DEFINITIONS 1.1 The term "Affiliate" means any entity that directly or indirectly owns, is owned by or is under common ownership with, a Party to this Agreement, where "own" or "ownership" means direct or indirect possession of at least fifty percent (50%) of the outstanding voting securities of a corporation or a comparable ownership in any other type of entity, provided, however, that if the law of the jurisdiction in which such entity operates does not allow fifty percent (50%) or greater ownership by a Party to this Agreement, such ownership interest shall be at least forty percent (40%). 1.2 The term "Agency" means any governmental regulatory authority, exclusive of the United States Environmental Protect Agency "EPA" (except as agreed to by the Parties), responsible for granting health or pricing approvals, registrations, import permits, and other approvals required before a SDC Product(s) may be tested or marketed in any country. The term Agency includes the United States Food and Drug Administration ("FDA") 1.3 The term "Agency Approval" means final authorization by an Agency to market and sell the SDC Product(s) in a country in the Territory. 1.4 The term "Best Efforts" means that the obligated Party is required to make a diligent and good faith effort to accomplish the applicable objective through the use of a sustained manner consistent with the exercise of prudent scientific and business judgment as applied to other research, development and commercialization efforts for products of similar scientific and commercial potential within the research programs and relevant product lines of such Party. 1.5 The term "Budget" means the annual budget approved by the EMC from time to time pursuant to Section 3.4. As of the Effective Date, the initial Budget agreed-upon by the Parties shall be included in the initial Development Plan and Technology Development Plan, which are attached as Exhibit B hereto. 1.6 The term "Development" means, as applied to a Product, that the Party has been granted the "product specific" license and performed material work with respect to such Product, such as (without limitation): partnering activities, formulation development, preclinical testing or submission of an IND. 1.7 The term "Development Costs" or "Development Expenses" means the costs incurred by THERAPEUTICS or INNOVATIVE for its account after the Effective Date which are consistent with the Development Plan and are specifically attributable to the research and development of SDC Product(s) pursuant to the Development Plan and Technology Development Plan. Such costs shall include the internal and external W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 2 OF 43 verifiable costs incurred either by THERAPEUTICS or INNOVATIVE to further the SDC Product(s) Development and Technology Development programs. Internal costs related to the Development Plan and licensing or sale of SDC Products shall include, but not be limited to, salaries, employee benefits, use of facilities and equipment, personnel, travel expenses and costs, product/licensing related legal fees, materials and supplies, which shall be absorbed into the Development Costs based on generally accepted accounting principles and methods mutually established and approved by the EMC, such approval not to be unreasonably withheld. For these Development Costs and Development Expenses to be eligible for reimbursement per the terms of this Agreement they must be approved by the EMC. 1.8 The "Development Plan" is defined as the overall two-stage (2) program for the development of SDC Product(s) approved by the EMC, from time to time, pursuant to Section 3.2. Within thirty (30) days from the Effective Date of this Agreement, the Parties will adopt an initial Development Plan, which will reflect the mutual objectives of the Parties with respect to the sequence of events leading up to the filing of regulatory submissions and will contain such description having sufficient detail to enable INNOVATIVE and THERAPEUTICS to fully understand the overall project goals and objectives. Said Development Plan will consist of the following two stages: (a) Stage One of the Development Plan will refer to all activities conducted by either Party during Months one (1) through twelve (12) from the Effective Date for the technology evaluation resulting in the identification and categorization of potential new SDC Products, which shall then be reviewed, approved and selected by the EMC, on a "product-by-product" basis, for Stage Two development. The Development Plan adopted by the Parties will outline Stage One activities and will include the Product Development Flow Chart attached hereto as Exhibit "B", a time and events schedule ("T/E") in critical path form prepared by THERAPEUTICS, utilizing "Microsoft Project(R)" software or equivalent and initial Budgets developed by the Parties for said initial phase. (b) Stage Two of the Development Plan will consist of all activities conducted by the Parties after a SDC Product(s) has been identified and approved for Stage Two development and a SDC Product(s) specific plan has been reviewed and adopted by the EMC for its continued development and commercialization. The SDC Product(s) specific plan will include a Product specific T/E schedule in critical path form prepared by THERAPEUTICS, utilizing "Microsoft Project(R)" software and will include a Budget, updated annually, which will project all anticipated costs pertaining to the T/E schedule. Concurrently, as necessary, a Product specific T/E schedule in critical path form for intellectual property development will be prepared by INNOVATIVE utilizing "Microsoft Project(R)" software, which will include a Budget, updated annually, projecting the anticipated costs pertaining to the intellectual property resulting from THERAPEUTICS's T/E schedule. 1.9 The term "Executive Management Committee" or "EMC" as used herein means that committee comprised initially of four (4) senior staff members, two (2) from each company, which shall be established pursuant to and have the responsibilities set W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 3 OF 43 forth in Section 3.2 hereof and elsewhere in this Agreement. Within sixty (60) days of the Effective Date of this Agreement, the Parties shall adopt rules and regulations for the EMC's governance, which shall supplement Section 3.2 hereof. 1.10 The term " cGMP" means current good manufacturing practices. 1.11 The term "IND" or "Investigational New Drug Application" means an application as defined in the United States Food, Drug and Cosmetic Act and applicable regulations promulgated thereunder to the FDA or the equivalent application to the equivalent agency in any other country or group of countries, the filing of which is necessary to commence clinical testing of products in humans. For purposes of this Agreement it shall also include IDE's (Investigational Device Exemptions). 1.12 The term "Improvements" means and includes any and all patentable or non-patentable additions, alterations, modifications, design changes, and other improvements to the SDC Core Technology and any derivative products, which are SDC Healthcare Product(s) and individually or jointly developed by INNOVATIVE, THERAPEUTICS, or any Third Party at any time during the term of this Agreement, regardless of whether or not INNOVATIVE owns or holds any proprietary rights therein or thereto. 1.13 The term "INNOVATIVE Patent Rights" means and includes all rights under United States Patent No. 6,197,814, issued 6 March 2001, United States Patent No. 6,583,176, issued 24 June 2003, as transferred to INNOVATIVE pursuant to that certain Core Settlement Agreement dated 15 November 2001, and all other patent rights, issued or pending, related in any way to Axenohl(R) or Axen(R) or any Improvements thereto that were acquired and/or developed prior to the Effective Date of this Agreement by INNOVATIVE, or any Affiliate of INNOVATIVE. The term "INNOVATIVE Patent Rights" further means and includes (a) all patent applications filed heretofore or hereafter during the term of this Agreement in any country by INNOVATIVE or any Affiliate of INNOVATIVE, together with any and all United States and foreign patents that have issued or in the future will issue therefrom, and (b) all divisionals, continuations, continuations-in-part, reexaminations, reissues, renewals, substitutions, confirmations, registrations, revalidations, extensions or additions to any such patents and patent applications and patents issuing thereon; all to the extent and only to the extent that INNOVATIVE or any Affiliate of INNOVATIVE now has or hereafter will have the right to grant licenses or other rights thereunder. INNOVATIVE Patent Rights as of the Effective Date are set forth as Exhibit A to this Agreement and such Exhibit shall be updated on an annual basis. 1.14 The term "INNOVATIVE Know-How" means all proprietary inventions, technology, trade secrets, clinical and pre-clinical results, data, materials, compounds, know-how, methods, documents, tests, confidential information and physical, chemical or biological material, or other information, excluding INNOVATIVE Patent Rights, owned or acquired with right to sublicense during the term of this Agreement by INNOVATIVE or any Affiliate of INNOVATIVE that are necessary or useful to the Parties W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 4 OF 43 in the development, formulation, manufacture, use or sale of SDC Product(s) contemplated herein. 1.15 The term "THERAPEUTICS Know-How" means all proprietary inventions, technology, trade secrets, clinical and pre-clinical results, materials, compounds, knowhow, methods, documents, tests, confidential information and physical, chemical or biological material and formulations thereof, procedures, techniques or other information developed, owned or acquired with right to sublicense during the term of this Agreement by THERAPEUTICS or any Affiliate of THERAPEUTICS that are necessary or useful to the Parties in the development, formulation, manufacture, use or sale of SDC Product(s) contemplated herein. 1.16 The term "NDA" or "New Drug Application" means an application as defined in the United States Food, Drug and Cosmetic Act and applicable regulations promulgated thereunder to the FDA or the equivalent application to the equivalent agency in any other country or group of countries, the filing of which is necessary to achieve approval upon which one may commence sales and distribution. For purposes of this Agreement, NDA shall include ANDA's (Abbreviated New Drug Applications), NADA's (New Animal Drug Applications), PMA's (Pre-Market Approvals), 510K's, supplements or other regulatory submissions or regulatory compliance to be marketed. 1.17 The term "Party" means INNOVATIVE or THERAPEUTICS and, when used in the plural, shall mean INNOVATIVE and THERAPEUTICS. 1.18 The term "Partnered Transaction(s)" means any agreement or transaction entered into with any Third Party either by (a) licensing an SDC Product(s) for its continued development, production, commercialization and/or marketing; or by (b) the sale of an SDC Product(s) developed pursuant to this Agreement. 1.19 The term "Partnered Transaction(s) Proceeds" means any cash or noncash proceeds derived from or obtained through any Partnered Transaction. 1.20 The term "Partnering Costs" means any EMC-approved cost or expense incurred by either Party in the negotiation and documentation of a Partnered Transaction. 1.21 The term "Phase I Clinical Trial" means the initial introduction, through clinical studies, of an investigational new drug into humans, designed to determine the metabolic and pharmacologic actions of the drug in humans, the side effects associated with increasing doses, and, if possible, to gain early evidence on effectiveness, which if successful will permit the design of a well-controlled, scientifically valid Phase II Clinical Trial. 1.21 The term "Phase II Clinical Trial" means early well-controlled, closely monitored clinical studies conducted to obtain some preliminary data on the effectiveness of the drug for a particular indication or indications in patients with the disease or condition, including common short-term side effects and risks associated W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 5 OF 43 with the use of the drug, which if successful will permit the design of a well-controlled, scientifically valid Phase III Clinical Trial. 1.22 The term "Phase III Clinical Trial" means any clinical studies or trials primarily designed to serve as a pivotal, well-controlled study upon which approval of an NDA will be based, including such a study referred to or denominated as a "Phase III Study" in the United States or the equivalent elsewhere. 1.23 The term "Proprietary Information" means, subject to the limitations set forth in Section 12.1 hereof, all information disclosed by a Party hereto to the other Party pursuant to this Agreement. In particular, Proprietary Information shall be deemed to include, but is not limited to, information relating to research and development programs and results, therapeutic candidates and products, clinical and pre-clinical data, trade secrets, business strategy, patent applications, licenses, suppliers, manufacturers, product and marketing strategy, customers, market data, personnel and consultants. 1.24 The term "Research and Development Program" or "research and development program" as used herein means any and all research and development activities deemed necessary and appropriate by the EMC from time to time for the development of SDC Product(s), and as more fully set forth in the Development Plan and Technology Development Plan, attached hereto as Exhibit B. 1.25 The term "SDC Core Technology" means all Axenohl(R) and Axen(R) product rights, the supporting ionic silver technology, which includes silver dihydrogen citrate ("SDC"), SDC + ETOH, other related silver compounds, and the entire related intellectual property portfolio, including INNOVATIVE Patent Rights and INNOVATIVE Know-How, and any and all Improvements made during the Term of this Agreement. 1.26 The term "SDC Healthcare Product(s)" means any product requiring a prescription or authorization by a licensed healthcare practitioner (including but not limited to a physician, dentist, or veterinarian), including but not limited to drugs, devices, sterilants (e.g., surgical scrub, instrument cleaning products exclusive of hard surface disinfectants) or diagnostics, utilizing the SDC Core Technology or Improvements, or future enhancements or additions to the technology, having application in the medical, pharmaceutical, or dental categories of human health and/or animal health and that is supported by an IND ("Investigational New Drug Application"), an NDA ("New Drug Application"), an ANDA ("Abbreviated New Drug Application"), a NADA ("New Animal Drug Application"), a PMA ("Pre-Market Approval"), an IDE ("Investigational Device Exemption"), a 510K, a supplement or other regulatory submission, or that requires regulatory compliance in order to be marketed. 1.27 The term "SDC Personal Care Product(s)" means any non-prescription consumer product utilized for health, beauty, dental, veterinary or other similar needs and utilizes the SDC Core Technology or Improvements, future enhancements or additions to the technology and that may require little or no product clinical testing to establish a claim. Also, included in this category are products for which no specific W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 6 OF 43 cosmetic or clinical claim may be pursued, which utilize low concentrations of SDC Core Technology for preservative or other "non-claim" usage, even though the SDC Core Technology may confer a beneficial effect. 1.28 The term "SDC Product(s)" or "Product(s)" means any SDC Healthcare Product(s) or any SDC Personal Care Product(s) developed through the collaborative efforts of the Parties pursuant to this Agreement. For the purposes of this Agreement, the definition of an individual Product shall also mean each indication for which a formulation is being Developed. 1.29 The term "SDC Product Categorization," "Product Categorization" or "Categorization" means the step-by-step process by which the EMC will evaluate each potential SDC Product identified and evaluated by THERAPEUTICS in order to determine its proper categorical designation, e.g., Category I, II or III, as defined in Section 3.1. The SDC Product Categorization process is set forth in a Product Category Decision Chart, which is attached hereto as Exhibit C. 1.30 The term "Technology Development Plan" means the plan by which INNOVATIVE will maintain and expand the SDC Core Technology and INNOVATIVE Patent Rights including all Improvements, as necessary and needed to perform the Parties' obligations under this Agreement and to support the Development of the EMC approved Products. The initial Technology Development Plan including the initial Budget reflecting the mutual objectives of the Parties with respect to the research to be carried out by INNOVATIVE to expand the SDC Core Technology shall contain sufficient detail to enable THERAPEUTICS to understand the overall goals and objectives and shall include time and event schedules for expansion of the SDC Core Technology, including evaluation of all appropriate organic acids, a patent filing plan, a plan to formally assess and evaluate the current SDC Core Technology Patent portfolio and the plans to expand the portfolio. 1.31 The term "Territory" as used herein shall mean the entire world. 1.32 The term "Third Party" as used herein shall mean any person or entity other than INNOVATIVE, THERAPEUTICS, an Affiliate of either Party, or any officer or director of either Party. SECTION 2.0 GRANT OF LICENSE RIGHTS 2.1 Grant of License. Subject to the terms of this Agreement and subject to payment of the "Initial Licensing Fee" in Section 5.1 herein, INNOVATIVE hereby grants to THERAPEUTICS an exclusive, worldwide license, without the right to sublicense, of INNOVATIVE Patent Rights and INNOVATIVE Know-How, limited solely for research and development purposes for the collaborative investigation and development of SDC Product(s), as contemplated herein. THERAPEUTICS agrees and warrants that, subject to Section 2.3 of this Agreement, INNOVATIVE Patent Rights and INNOVATIVE Know-How will not be used by THERAPEUTICS for any other purpose. W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 7 OF 43 2.2 Disclosure of INNOVATIVE Know-How. Within thirty (30) days of the Effective Date and subject to payment of the "Initial Licensing Fee" in Section 5.1 herein, and throug h the term of this Agreement, INNOVATIVE shall make available to THERAPEUTICS, subject to the terms of this Agreement, all INNOVATIVE Know-How. 2.3 Grant of Future Licenses and Sublicensing Rights. Upon (a) identification of a potential SDC Product(s), (b) SDC Product Categorization pursuant to Section 1.29, and (c) adoption of a Development Plan for such SDC Product(s), reviewed and approved by the EMC, on a product-by-product basis, INNOVATIVE shall grant, to THERAPEUTICS such "product specific" world-wide license, or licenses, necessary and required for the continued development, production, out-licensing, commercialization and marketing, or sale of any such SDC Product(s) developed pursuant to this Agreement, and the Parties shall enter into a "product specific" license agreement for such SDC Product(s) in the form attached hereto as Exhibit E. The "product specific" transfer of technology and license to THERAPEUTICS refers to a specific Product and includes rights to all (1) dosage forms, (2) concentrations, (3) related indications or uses and (4) all types of SDC Core Technology and Improvements predating or conceived during the Term of the Agreement. Pursuant to such "product specific" licensing, THERAPEUTICS shall have the right to sublicense the rights granted under the "product specific" license to Third Parties. If THERAPEUTICS grants a sublicense to a Third Party, all of the terms and conditions of the "product specific" license agreement of Exhibit E shall apply to the sublicensee to the same extent as they apply to THERAPEUTICS. 2.4 Termination And Reversion Of Non-Utilized Patent Rights. In the event THERAPEUTICS fails to meet the minimum performance standards set forth in Section 3.7 within two (2) years from the date of the payment of the Initial Licensing Fee as required under Section 5.1 of this Agreement, all licensing rights under Section 2.1 to INNOVATIVE Patent Rights and INNOVATIVE Know-How not utilized in the development of an SDC Product shall revert to INNOVATIVE and be automatically terminated. Termination and reversion, as set forth in this Section 2.4, shall not apply to any and all INNOVATIVE Patent Rights and INNOVATIVE Know-How being actively utilized in any SDC Product(s) under Development under this Agreement and approved by the EMC regarding its out-licensing or sale as a Product. SECTION 3.0 PRODUCTS, PRODUCT DEVELOPMENT AND REGULATORY AFFAIRS 3.1 Products, Product Categories And Product Categorization. Pursuant to the Development Plan, the Parties shall collaborate in the evaluation, identification, development and commercialization either through the sale and/or licensing of SDC Product(s) in the medical, dental and/or veterinary fields for human or animal health, exclusive of food, water or any product(s) requiring principally Environmental Protection Agency ("EPA") review and approval. Upon evaluation of a potential SDC Product(s), SDC Product Categorization, as described in Section 1.29, shall be carried out by the EMC. The SDC Product(s) Developed pursuant to the terms of this Agreement shall consist solely of the following categories of products: W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 8 OF 43 (a) Category I Products. All SDC Healthcare Products, primarily topical in nature, requiring (i) an Agency approval or compliance, and (ii) a medical, dental or veterinary healthcare provider's prescription, authorization , approval or action prior to their dispensation or utilization; that will be actively developed by THERAPEUTICS pursuant to the terms of this Agreement. b) Category II Products. All SDC Healthcare Products, requiring (i) an Agency approval or compliance, and (ii) a medical, dental or veterinary healthcare provider's prescription, authorization, approval or action prior to their dispensation or utilization; that will be "licensed or sublicensed" under the terms of this Agreement or sold directly to a Third Party for continued development and commercialization, with little or no prior research and development conducted by the Parties. (c) Category III Products. All SDC OTC (over the counter) and SDC Personal Care Products. 3.2 Executive Management Committee. (a) Executive Management Committee Membership and Governance. The Parties shall establish an Executive Management Committee ["EMC"] to provide strategic, technical and commercial guidance to their collaborative efforts and to provide overall coordination of the activities of the Parties with respect to each SDC Product(s) and implement the initial Development Plan and Technology Development Plan, all subsequent amendments and revisions thereto and the initial Budgets and all subsequent amendments and revisions thereto. As a foundational principle, all EMC decisions shall be oriented to maximizing the success of the Parties' overall collaborative efforts and their realization of the highest achievable value of any SDC Product(s) developed hereunder. As a second foundational principle, all EMC decisions shall be by unanimous consent of the committee members and if the committee is unable to reach unanimous consent on any given issue, then as to that issue the decision will be made on a Category-by-Category basis in favor of the Party set forth in Section 3.2(b) below. The EMC, in turn, may establish such working groups or other mechanisms as it desires to achieve this result. The EMC shall consist of an equal number of employee representatives of each Party, which shall be at least two (2). The size of the EMC may be changed by the mutual agreement of the Parties. Within ten (10) days after the Effective Date, each Party shall select its initial members of the EMC. Each Party may select additional employee representatives to replace the initial EMC members selected by such Party as necessary during the term of the Agreement, and may have other representatives attend meetings of the EMC in addition to the members of the committee. Any EMC members selected by one Party shall be subject to the reasonable approval of the other Party. The Chairperson of the EMC shall be a representative of THERAPEUTICS. The Chairperson of the EMC shall be responsible for providing an agenda for each meeting of the committee at least ten (10) days in advance of such meeting and shall prepare written minutes of all committee meetings in reasonable detail. The Chairperson shall distribute such minutes to all members of the EMC within twenty (20) days after the relevant meeting. The EMC shall have the authority to make changes to these governance procedures from time to time W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 9 OF 43 as it deems warranted provided that all members of the EMC concur. The EMC shall attempt to operate by unanimous approval. With the exception of issues outlined in Section 3.2(b) below, in the event that the EMC is unable to resolve any issues by unanimous consent, such issues shall be submitted for resolution pursuant to Section 11.0 below. (b) EMC Meetings And Responsibilities. The EMC shall meet at least once each quarter i.e. four (4) times per year during the term of this Agreement. Each Party may request additional meetings as reasonably required. The EMC shall be responsible for overseeing and monitoring the implementation of the Development Plan, the Technology Development Plan, intellectual property maintenance, intellectual property expansion plans, Budgets and all development, partnering, commercialization plans. The EMC shall determine the Categorization of all potential SDC Product(s), determine a suitable development program for each SDC Product and will review and approve all Budgets pursuant to Section 3.4. The EMC shall also monitor the allocation of research and development work between the Parties and shall recommend changes as necessary. The Parties shall report to the EMC on all significant clinical, regulatory and intellectual property issues relating to SDC Product(s), and the EMC shall make recommendations and provide strategic guidance with respect to such issues. In the event that any disputes arise in any way relating to the foregoing functions of the EMC related to Category I, II or III SDC Product(s), their performance criteria, Third Party sale or Third Party licensing terms and conditions or any other Product related issue before the EMC that can not be resolved by the EMC, the issue will be resolved on a Category-by-Category basis in favor of the Party designated below: Category I and II THERAPEUTICS Category III INNOVATIVE 3.3 Staging, Research/Clinical Development and Regulatory Filings. (a) Staging of Development Efforts. Prior to the commencement of any research and development program of any SDC Product(s), THERAPEUTICS, on a Best Efforts basis, shall evaluate the SDC Core Technology and explore various alternative uses in order to determine what it believes to be the potential commercially reasonable development of viable SDC Product(s). Upon identification of what it believes to be a potentially viable SDC Product(s) and completion of its Categorization by the EMC, the Party bearing the primary responsibility for the conduct and execution of the research and development activities for said SDC Product(s) shall commence the research and development activities reviewed and approved by the EMC. (b) Clinical Development. Utilizing commercially reasonable efforts, the collaborative research and clinical development program will follow the most efficient path to achieve registration of Categories I, II, IIIA and IIIB SDC Product(s) with THERAPEUTICS bearing the primary and significant role in the conduct and execution of the research and clinical development activities for Categories I, II, IIIA and IIIB SDC Product(s), while INNOVATIVE will bear similar responsibilities for all Categories IIIC and IIID SDC Product(s). The Parties further agree to fully cooperate as necessary to support the programs undertaken under this Agreement and freely acknowledge that the distribution of responsibility may be adjusted and changed from time to time by unanimous decision of the EMC. W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 10 OF 43 (c) Regulatory Filings. With regard to Category I and Category II SDC Product(s) and after review and approval by the EMC, THERAPEUTICS shall cause to prepare and file in its own name as "sponsor" any and all INDs and NDAs, including ANDAs, NADAs, PMAs, IDEs ("Investigational Device Exemptions"), 510Ks, and supplements or other regulatory submissions (collectively the "Regulatory Filings") for SDC Product(s) requiring Agency or regulatory compliance in the United States. The EMC has the right to review and approve all regulatory submissions, but is required to do so in a timely manner with approval not being unreasonably withheld. A single representative of INNOVATIVE has the right to attend any and all FDA meetings (as an observer only), subject to THERAPEUTICS approval and said approval will not be unreasonably withheld. (d) Diligence. In their respective capacities and in regard to the respective Category types, THERAPEUTICS and INNOVATIVE, on a Best Efforts basis, will each diligently carry out the research and development of SDC Product(s) as provided in this Section 3.3. Without limitation of the foregoing, such efforts shall include the assignment of appropriate personnel and the allocation of sufficient resources to carry out such Party's responsibilities under the Development Plan and the research and development program. (e) Adverse Reactions. THERAPEUTICS shall be responsible for reporting to the appropriate regulatory authorities any and all adverse events related to the use of any Category I and Category II SDC Product(s), while INNOVATIVE shall bear said responsibility for all Category III SDC Product(s). Adverse events related to the use of any SDC Product(s) shall be recorded in a single database, maintained by THERAPEUTICS and the Parties will coordinate their efforts to assure that all adverse events are properly reported INNOVATIVE will report all adverse events to THERAPEUTICS within 5 days of notification regardless of the Category of the Product. In the event of termination or breach, or for any other reason THERAPEUTICS transfers its ownership of any Regulatory Filings for any SDC Product(s) to INNOVATIVE, INNOVATIVE shall assume and become responsible for the reporting of adverse events for any Category I and Category II SDC Product(s). 3.4 Budgets. It is agreed between the Parties that, as of the Effective Date, both THERAPEUTICS and INNOVATIVE, as part of the Development Plan and Technology Development Plan will have submitted its initial proposed Budgets for its activities under this Agreement (a copy of which is attached hereto as Exhibit B). All future projected Budgets for the budgetary periods determined by the EMC relating to all future research and development activities of each and every SDC Product(s) developed under this Agreement, and work proscribed by the Technology Development Plan will be submitted to the EMC for its review and approval. Said Budgets shall W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 11 OF 43 include projected costs for THERAPEUTICS' internal and external research and development efforts as well as INNOVATIVE's proposed activities under the Development Plan and Technology Development Plan. In the event that either Party determines that its efforts and activities will result in a budget overrun in excess of ten (10.0%), such Party will immediately notify the EMC thereof. Budgets in excess of 10% must receive EMC approval to be eligible for reimbursement per Section 3.6. Budget overruns may include line items not previously included in an approved Budget. These new items must be approved by the EMC to be eligible for reimbursement. Approval cannot be withheld for new items requested by the Agency, directly or indirectly, for a Product. 3.5 Reports. To the degree applicable, THERAPEUTICS shall provide monthly reports to INNOVATIVE, as follows: (i) concerning its past and contemplated research and development efforts and activities relating to all SDC Product(s), including all technical, scientific and clinical progress; and (ii) concerning its past and contemplated efforts and activities in locating, identifying and pursuing potential Third Party purchasers or licensees with the requisite capital and funding capabilities for an FDA-mandated clinical testing phase and the maximization of the commercial potential of the identified SDC Product(s). In particular, such reports as warranted shall include specific budgets, timetables and time and events schedules for activities in the research and development of the SDC Product(s), the potential marketing and positioning of the SDC Product(s), competitive issues and THERAPEUTICS' primary sales and marketing objectives with respect to "partnering" of the SDC Product(s) on a worldwide basis with an emphasis on the United States. To the degree applicable, INNOVATIVE shall provide monthly reports to THERAPEUTICS, as follows: (i) concerning its past and contemplated research and development efforts and activities relating to all improvements and its progress with Category III Products, including all technical, scientific and clinical progress; and (ii) concerning its past and contemplated efforts and activities in locating, identifying and pursuing potential Third Party purchasers or licensees with the requisite capital and funding capabilities for any required testing and the maximization of the commercial potential of the identified Category III SDC Product(s) and (iv) a patent update regarding efforts to strengthen and broaden the SDC Core Technology and Improvements (Technology Development Plan) In particular, such reports as warranted shall include patent application updates and/or pending applications, specific budgets, timetables and time and events schedules for past and contemplated activities in the research and development of the SDC Product(s), the potential marketing and positioning of the SDC Product(s), competitive issues and INNOVATIVES' primary sales and marketing objectives with respect to "partnering" of the SDC Product(s) on a worldwide basis with an emphasis on the United States. 3.6 Development Costs And Reimbursement. (a) General. THERAPEUTICS shall pay, on a current basis, all research and development expenses, both internal and external, in carrying out its responsibilities as set forth in the Development Plan, for Category I, II and those W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 12 OF 43 Category III SDC Product(s) categorized by the FDA as OTC drug products (Exhibit B as 3A and 3B). INNOVATIVE shall pay, on a current basis, any and all research and development expenses for Category III SDC Product(s) both internal and external, exclusive of products categorized by the FDA as OTC drug products, as well as ongoing intellectual property maintenance expenses in carrying out its responsibilities as set forth in the Technology Development Plan, as modified from time to time by the EMC. The Parties will be reimbursed for all EMC approved expenses from funds derived from Partnered Transactions described below and further detailed in Exhibit D. (b) Reimbursement Of THERAPEUTICS Research/Development Costs And Expenses And Partnering Costs. Upon the sale or licensing to a Third Party of any Category I, II or III SDC Product(s) developed pursuant to this Agreement and, to the degree funds are available from the Partnered Transaction(s), THERAPEUTICS shall be entitled to reimbursement for all Development Costs and its time, expenses and legal fees directly related to partnering activities involved in the sale or license of each Product incurred pursuant to the Development Plan and as more fully set forth in the Reimbursement Schedule contained in Exhibit D attached hereto. Reimbursement for EMC approved expenses will be made from the proceeds of Partnered Transactions for the Product(s) for which the expenses were incurred. The Parties acknowledge that THERAPEUTICS will incur certain non-Product specific pre-clinical expenses that support multiple Products. The Parties agree that THERAPEUTICS shall be entitled to reimbursement of such non-Product specific preclinical expenses from the proceeds of the first three (3) Category I, II and those Category III SDC Product(s) categorized by the FDA as OTC drug products (Exhibit B as 3A and 3B) Partnered Transactions, with the total amount of such non-Product specific pre-clinical expenses allocated equally across the three Partnered Transactions. (c) Reimbursement Of INNOVATIVE's Acquisition Costs, Prior Research/Development Costs And Expenses, On-Going Maintenance Expenses And Partnering Costs. The Parties acknowledge that, prior to the Effective Date, INNOVATIVE has incurred costs and expenses in excess of $2,200,000.00. Upon the sale or licensing to a Third Party of Category I, II or III SDC Product(s) developed pursuant to this Agreement and, to the degree funds are available from the Partnered Transaction(s), INNOVATIVE shall be entitled to reimbursement in the mutually agreed-upon amount of $2,200,000.00 for costs and expenses incurred prior to the Effective Date. One fourth (i.e., $550,000) of the aforementioned $2,200,000.00 reimbursement due INNOVATIVE will be allocated to and recovered from the proceeds of each of the first four (4) SDC Product Partnering Transactions regardless of the Category of the SDC Product. INNOVATIVE shall be reimbursed for Development Costs, 50% of the costs directly related to maintenance and expansion of the SDC Core Technology and 100% of the ongoing intellectual property costs for new medical, dental or veterinary indications directly related to the SDC Products and incurred after the Effective Date W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 13 OF 43 pursuant to the Development Plan and as more fully set forth in the Reimbursement Schedule contained in Exhibit D attached hereto. Such reimbursement for EMC approved expenses will be made from the proceeds of Partnered Transactions for the Product(s) for which the expenses were incurred. 3.7 Minimum Development Performance Standard. If, regardless of whether THERAPEUTICS exercises its Best Efforts, within two (2) years from the date of payment of the Initial Licensing Fee as required by Section 5.1 of this Agreement at least five (5) SDC Products reviewed and approved by the EMC, in any combination of Category I or II products, with not less than two in either Category I or II, are not under Development under the terms of this Agreement, then the Parties agree that this Agreement shall be automatically terminated and the licensing rights granted by INNOVATIVE to THERAPEUTICS under Section 2.1 shall terminate and revert to INNOVATIVE; provided, however, that any SDC Product(s) under Development and all licenses and sublicenses related to the continued development of those SDC Product(s) shall remain unaffected by termination under this Section 3.7 and the terms of this Agreement shall remain in full force and effect for the continued Development of those SDC Product(s). Upon termination under this Section 3.7, INNOVATIVE shall be entitled to proceed with the development of any Product(s) in the medical, dental and/or veterinary fields for human or animal health, in any way it sees fit; provided however, that INNOVATIVE shall not engage in the development and/or production of any Product(s) that is competitive with the continued Development of an SDC Product(s) under the terms of this Agreement and those Products that are the subject of active Third Party substantive discussions regarding its licensing or sale. SECTION 4.0 DUTIES AND RESPONSIBILITIES 4.1 THERAPEUTICS' Duties and Responsibilities. With regard to Category I, II and III Products, on a Best Efforts basis, THERAPEUTICS shall provide: (a) Research and Development Program. Based upon its expertise and on a commercially reasonable basis exercising its Best Efforts, THERAPEUTICS will establish an integrated Development Plan for the implementation of research and development programs for each SDC Product(s) evaluated and identified under Section 3.3(a) that, in its exercise of sound business judgment, it deems worth pursuing. The Development Plan, with mutually agreed upon performance standards and criteria, including time and event scheduling, will identify potential SDC Healthcare Product candidates, under Categories I and II, as set forth in Section 3.0, for development by either THERAPEUTICS or a Third Party(s). THERAPEUTICS shall collaborate and assist INNOVATIVE in identifying Category III SDC Product candidates. Upon evaluation and identification and SDC Product Categorization and approval by the EMC, THERAPEUTICS will conduct all product development, as more fully set forth in Section 3.0 hereof and bear full responsibility for all technical, scientific and clinical studies associated with the research and development of all Category I and II SDC Product(s) and those Category III SDC Product(s) categorized by the FDA as OTC drug products (Exhibit B as 3A and 3B). W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 14 OF 43 (b) Identification and Solicitation of Third Party Purchasers for SDC Product(s). THERAPEUTICS shall use Best Efforts to identify and solicit potential Third Party purchasers for sale of any Category I or Category II SDC Product(s) and, will support, as appropriate INNOVATIVE'S efforts to arrange sale of a Category III SDC Product(s). THERAPEUTICS will negotiate deal terms for sale of Category I and II Product(s) to the Third Party(s) and present such term sheet(s) to EMC for review and approval prior to execution. In most cases, it is anticipated that such a transaction will occur on or before the completion of a Phase II Clinical Trial or the equivalent for a given Product. (c) Identification and Solicitation of Third Party Licensees for SDC Product(s). On a Best Efforts basis, THERAPEUTICS shall identify and solicit potential Third Party licensees for Partnered Transaction(s) for all Category I and II SDC Products. THERAPEUTICS will negotiate deal terms for licensing Category I and II Product(s) to Third Party(s) and present term sheet(s) to EMC for review and approval prior to execution. In most cases, it is anticipated that such a transaction will occur on or before the completion of a Phase II Clinical Trial or the equivalent for a given Product. 4.2 INNOVATIVE's Duties and Responsibilities. In addition to licensing its SDC Core Technology pursuant to the terms of this Agreement, as set forth in Section 2.1 hereof, and with regard to Categories I, II and III Products, INNOVATIVE shall provide the following: (a) Maintenance and Expansion of SDC Core Technology. On a Best Efforts basis, INNOVATIVE shall maintain its SDC Core Technology, all related patents and pending patents and continue to expand the SDC Core Technology and intellectual property opportunities related to Improvements as is deemed necessary, reasonable and appropriate in light of the SDC Product development activities outlined in this Agreement and approved by the EMC and described in the Technology Development Plan. (b) Research and Development Program. Utilizing its Best Efforts and with the assistance of THERAPEUTICS, INNOVATIVE will establish an integrated Development Plan for the implementation of research and development programs for all Category III SDC Product(s) evaluated and identified under Section 3.3(a) that, in its exercise of sound business judgment, it deems worth pursuing. The Development Plan, with mutually agreed-upon performance standards and criteria, including time and event scheduling, will identify potential SDC Personal Care candidates under Category III, as set forth in Section 3.0, for development and THERAPEUTICS shall collaborate and assist INNOVATIVE in identifying Category III SDC Product candidates. Upon evaluation, identification and approval by the EMC of such Category III SDC products, INNOVATIVE will conduct or have conducted all product development, as more fully set forth in Section 3.0 hereof and bear full responsibility for all studies associated with the research and development of all Category III SDC Product(s) exclusive of products categorized by the FDA as OTC drug products The product development of the aforementioned OTC products is the responsibility of THERAPEUTICS. W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 15 OF 43 (c) Identification and Solicitation of Third Party Purchasers for SDC Product(s). On a Best Efforts basis, INNOVATIVE shall identify and solicit potential Third Party purchasers for sale of Category III SDC Product(s). INNOVATIVE will negotiate terms for sale of Category III Products to Third Party(s) and present such term sheet to EMC for review and approval prior to execution. In most cases, it is anticipated that such a transaction will occur on or before the completion of a Phase II Clinical Trial or the equivalent for a given Product. (d) Identification and Solicitation of Third Party Licensees for SDC Products. On a Best Efforts basis, INNOVATIVE shall identify and solicit potential Third Party licensees of any Category III SDC Product(s) and, will support, as appropriate THERAPEUTICS' efforts to arrange sale of a Category I and II SDC Product(s). INNOVATIVE will negotiate terms for licensing Category III Products to Third Party(s) and present such term sheet to EMC for review and approval prior to execution. In most cases, it is anticipated that such a transaction will occur on or before the completion of a Phase II Clinical Trial or the equivalent for a given Product. (e) Pre-Commercial Manufacturing of Drug Substance. INNOVATIVE shall by January 1, 2004 produce and provide at no cost to THERAPEUTICS, cGMP-quality, active pharmaceutical ingredient (SDC drug substance) based upon SDC Core Technology or Improvements for incorporation into investigational SDC Healthcare Products, use in all of the formulation development activities, pre-clinical and clinical studies and trials for all Category I,II and III SDC Product(s) conducted by or under the direction of THERAPEUTICS or any Licensee of the SDC Products. INNOVATIVE will provide the SDC (Raw Material) drug substance in timely and sufficient manner to support forecasted development demands. In the event that INNOVATIVE is unable to provide the SDC drug substance in a timely and sufficient manner to support forecasted commercial demands, THERAPEUTICS shall have the right to manufacture or have manufactured any SDC drug substance or Improvements required for the Development of SDC Products that are in Development or necessary to meet the defined commercial needs and INNOVATIVE shall fully cooperate with the transfer of manufacturing capability to a Third Party specified by THERAPEUTICS in a timely manner. (f) Commercial Manufacturing of Drug Substance. INNOVATIVE shall be solely and exclusively responsible for the commercial manufacture of any SDC bulk drug substance either itself or through approved Third Parties and prior to commencement thereof, shall establish a fully compliant cGMP manufacturing facility to produce all SDC (Raw Material) drug substance meeting all Agency and/or FDA specifications for utilization in all SDC Healthcare and Personal Care Product(s). INNOVATIVE shall demonstrate its ability to meet these requirements not less than twelve (12) months prior to the first scheduled Category I, II or III Product "NDA" submission. but not sooner than January 1, 2004. INNOVATIVE will provide cGMPcompliant SDC drug substance material for incorporation into all Category I, II or III SDC Products subject to this Agreement at a cost not to exceed any competitive bid from a qualified Third Party manufacturer. In the event that INNOVATIVE is unable to provide the SDC drug substance in a timely and sufficient manner to support forecasted W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 16 OF 43 commercial demands, THERAPEUTICS shall have the right to manufacture or have manufactured any SDC drug substance or Improvements required for the Development of SDC Products that are in Development or necessary to meet the defined commercial needs and INNOVATIVE shall fully cooperate with the transfer of manufacturing capability to a Third Party specified by THERAPEUTICS in a timely manner. SECTION 5.0 LICENSING FEES, MILESTONE PAYMENTS AND THIRD PARTY SALES AND/OR LICENSING TRANSACTIONS 5.1 Initial Licensing Fee. As consideration for the rights conveyed by INNOVATIVE to THERAPEUTICS under this Agreement, THERAPEUTICS shall pay to INNOVATIVE a licensing fee of TWENTY-FIVE THOUSAND Dollars ($25,000.00) (the "Initial Licensing Fee") on or before October 15, 2003. 5.2 Milestone Payments. In addition to the Initial Licensing Fee, THERAPEUTICS shall also pay to INNOVATIVE the following nonrefundable and non-creditable amounts: Payment of [CONFIDENTIAL TREATMENT OF THIS ITEM IS REQUESTED] is payable within ten (10) days after achievement of milestone ("a") set forth below and Payment of [CONFIDENTIAL TREATMENT OF THIS ITEM IS REQUESTED] is payable upon receipt of a Third Party payment, if any, related to milestone ("b") set forth below for the FIRST Category I Product developed pursuant to this Agreement: (a) [CONFIDENTIAL TREATMENT OF Upon successful completion THIS SECTION IS REQUESTED] of the first human Proof-of-Concept ("POC") Study with results warranting Phase III testing for a Category I or II Product And (b) [CONFIDENTIAL TREATMENT OF Either upon sale of a THIS SECTION IS REQUESTED] Category I SDC Product(s) to a Third Party, or upon execution of definitive agreement with Third Party Licensee of a Category I SDC Product(s) 5.3 Sale Or Licensing To Third Party Of SDC Healthcare and Personal Care Product(s). Upon successful identification and negotiations with a potential Third Party purchaser or licensee(s) for any Category I, II or III SDC Product(s), INNOVATIVE or THERAPEUTICS, through the EMC, will enter into sale, licensing and sublicensing agreements as defined in Section 4.0. 5.4 Third Party Sale Proceeds, Licensing Fees And Royalty Payments. All Partnered Transaction Proceeds (including, Third Party sales proceeds, licensing fees, royalty payments and any and all forms of cash and non-cash consideration) shall be paid directly to INNOVATIVE and THERAPEUTICS, according to their respective pro rata share, as set forth below. W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 17 OF 43 (a) Category I Product(s) [CONFIDENTIAL TREATMENT OF THIS ITEM IS REQUESTED] to THERAPEUTICS [CONFIDENTIAL TREATMENT OF THIS ITEM IS REQUESTED to INNOVATIVE (b) Category II Product(s) [CONFIDENTIAL TREATMENT OF THIS ITEM IS REQUESTED to INNOVATIVE [CONFIDENTIAL TREATMENT OF THIS ITEM IS REQUESTED to THERAPEUTICS (c) Category III Product(s) [CONFIDENTIAL TREATMENT OF THIS ITEM IS REQUESTED to INNOVATIVE [CONFIDENTIAL TREATMENT OF THIS ITEM IS REQUESTED to THERAPEUTICS (the exact percentage to be determined by reference to Exhibit "C" -Product Category III Sub-Categorization) Upon the Parties receipt of their respective share of any "Partnered Transaction Proceeds" as referenced in this Section, the Parties will comply with the reimbursement procedures set forth in Exhibit "D" attached hereto . SECTION 6.0 RECORDS, REPORTS, AUDIT AND INSPECTION RIGHTS 6.1 Reports. On a quarterly basis, within thirty (30) days after the close of each fiscal quarter, THERAPEUTICS and INNOVATIVE will provide to the EMC and each other, if requested, regular written reports, fully documenting and specifically outlining all research and development and partnering costs incurred for the past quarter, pursuant to the Development Plan approved by the EMC. 6.2 Maintenance of Records. Both INNOVATIVE and THERAPEUTICS shall maintain or cause to be maintained, for a minimum of five (5) years, complete and proper records and books of account relating to its activities under this Agreement. Each Party will permit its books and records to be examined from time to time by the other Party with reasonable notice, as provided in Section 6.3 to the extent necessary to verify the reports provided for in Section 6.1, such examination to be made at the expense of the requesting Party. 6.3 Audit Procedures. Each Party will have the right, at its own expense and at any reasonable time or times, to cause a Third Party independent auditor not engaged on a contingency basis to inspect and audit the books and records of the other Party in order to verify the contents of the reports required by Section 6.1 above. Any such audit (i) shall be conducted after reasonable prior notice, during normal business hours and at the location(s) where such books and records are normally kept and (ii) may not be conducted more than once in any given twelve (12) month period. Notwithstanding the foregoing, in the event that any such audit results in a corrected report, on a material basis, the requesting Party shall have the right to conduct up to two (2) such audits in the subsequent year. Such audit and the results thereof shall be confidential and the non-requesting Party reserves the right to require the auditor to execute an appropriate non-disclosure agreement before permitting the inspection and audit to proceed. The auditor shall report directly to the requesting Party and shall provide a copy of such report to each of the Parties. W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 18 OF 43 SECTION 7.0 INTELLECTUAL PROPERTY 7.1 Warranty Of Title By INNOVATIVE. INNOVATIVE warrants that it has good and marketable title, and all rights to, the INNOVATIVE Patent Rights set forth in Exhibit A hereto, the INNOVATIVE Know-How, and the SDC Core Technology. 7.2 Improvements. (a) Improvements And Associated Technology Relating To INNOVATIVE's SDC Core Technology. THERAPEUTICS acknowledges that in consideration of the collaboration established hereby and the enabling nature of the work previously done by INNOVATIVE, Improvements to the SDC Core Technology may result that are not utili zed in the development of any SDC Product(s) under the terms and conditions of this Agreement. In addition, associated technology and data may be acquired and developed that may assist INNOVATIVE in the development of other uses and applications for the SDC Core Technology unrelated to the SDC Product Development Program outlined in this Agreement. Any such Improvements, together with the associated technology and data, shall remain the sole and separate property of INNOVATIVE, which shall have the right to independently use such associated technology and data provided that such use does not result in the improper disclosure or misuse of Proprietary Information. INNOVATIVE may seek to obtain, enforce and defend any and all intellectual property protection with regard to the associated technology and data in its own name, at its own expense and in its sole discretion. (b) Improvements And Associated Technology Not Related to or Dependent Upon SDC Core Technology. INNOVATIVE acknowledges that in consideration of the collaboration established hereby and the enabling nature of the work to be done pursuant to this Agreement, technology, materials, results, know-how, methods, data and documents may be developed by THERAPEUTICS that are not related to or dependent upon the SDC Core Technology. In addition, associated technology and data may be acquired and developed that may assist THERAPEUTICS in the development of other uses and applications not related to or dependent upon the SDC Core Technology or the SDC Product Development Program outlined in this Agreement. Any such technology, materials, results, know-how, methods, data and documents shall remain the sole and separate property of THERAPEUTICS, which shall have the right to independently use the same provided that such use does not result in the improper disclosure or misuse of SDC-related Proprietary Information. THERAPEUTICS may seek to obtain, enforce and defend any and all intellectual property protection with regard to such technology, materials, results, know-how, methods, data and documents in its own name, at its own expense and in its sole discretion. Any patents resulting from THERAPEUTICS efforts in the collaboration that are not related to or dependent upon the SDC Core Technology will belong to THERAPEUTICS. THERAPEUTICS will be responsible for filing, prosecution and maintenance of such patents and associated costs. Should INNOVATIVE wish to use such technology, materials, results, know-how, methods, data and documents solely in connection with SDC Product(s) and in a manner that is not competitive with W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 19 OF 43 THERAPEUTICS, THERAPEUTICS may grant a non-exclusive worldwide license on terms to be agreed upon by the Parties. 7.3 Prosecution Of Patents. (a) INNOVATIVE Patents Relating to SDC Product(s). It is anticipated that as part of this collaborative Development Program, patents may be filed by and issued to INNOVATIVE that may cover compositions of matter, including formulations of product(s), as well as biological uses or processes for the manufacture of various SDC Product(s). In order to promote and achieve the overall goals of this Agreement, INNOVATIVE, at its expense, shall hire and retain patent counsel with expertise in the biomedical field to assist INNOVATIVE and THERAPEUTICS in properly protecting and safeguarding the INNOVATIVE Patent Rights, including conducting the review of all existing patents and related materials contemplated by the Technology Development Plan, and preparation and prosecution of any patents hereunder. Said patent counsel shall be approved either by THERAPEUTICS or the EMC, and such approval shall not be unreasonably withheld. Such patent review shall be conducted, and patents shall be prosecuted (including the handling of interferences) and maintained, by INNOVATIVE at its expense. In recognition of the importance to both Parties of the INNOVATIVE Patent Rights, and the Parties' community of interest therein, INNOVATIVE will provide THERAPEUTICS access to the results of such patent review, and INNOVATIVE will consult with THERAPEUTICS and give due consideration to all THERAPEUTICS comments at each stage of the patent application process, including prior to the initial preparation of draft applications, finalization of applications for filing with the relevant patent authorities, and amendment of applications during prosecution. In this connection, INNOVATIVE shall furnish THERAPEUTICS with copies of draft submissions to the relevant patent authorities for THERAPEUTICS's review and comment prior to formal submittal. THERAPEUTICS shall maintain all information and documents relating to such patent review, and to preparation and prosecution of patent applications, in strictest confidence. INNOVATIVE shall always be entitled to proceed with any submission or other contemplated action, provided that INNOVATIVE makes reasonable efforts to inform THERAPEUTICS as early as practicable and to consider its comments where possible. In the event that INNOVATIVE elects not to file any patent applications requested in writing by THERAPEUTICS, or elects to abandon claims in pending patent applications, relating to SDC Product(s), INNOVATIVE shall give timely written notice to and consult with THERAPEUTICS. INNOVATIVE shall not allow any patent applications, or claims or potential claims of any patent application, relating to SDC Product(s) to become barred or abandoned, or fail to maintain any patents, without first offering assignment of such applications and patents to THERAPEUTICS, which if it accepts such assignment shall thereafter prepare and/or prosecute such applications, and maintain such patents, at its sole expense and in its sole discretion. In the event such applications and patents are assigned to THERAPEUTICS, INNOVATIVE shall retain a non-exclusive license for uses not competitive to Therapeutics or it's licenses and forego any and all consideration related to Products developed based upon said patents. 7.4 Infringement Of Patents By Third Parties. W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 20 OF 43 (a) Notification. Each Party shall promptly notify the other, in writing, of any alleged or threatened Third Party infringement of INNOVATIVE Patent Rights, of which it becomes aware. (b) INNOVATIVE Patents Covering SDC Product(s). INNOVATIVE shall have the right, but not the obligation, to bring, at INNOVATIVE's expense and in its sole control, an appropriate action against any person or entity infringing upon a INNOVATIVE Patent Right directly or contributorily. If INNOVATIVE does not bring such action within ninety (90) days [forty-five (45) days in the case of an action brought under the Hatch-Waxman Act] of notification thereof to or by INNOVATIVE, THERAPEUTICS shall have the right, but not the obligation, to bring at its expense and in its sole control, such appropriate action. The Party not bringing an action under this paragraph (b) shall be entitled to separate representation in such matter by counsel of its own choice and at its own expense, but such Party shall cooperate fully with the Party bringing such action. (c) Costs And Awards. The Party which is not in control of any action brought pursuant to Section 7.4(b) may elect to contribute fifty percent (50%) of the costs of litigation against such Third Party infringer, by providing written notice to the controlling Party within ninety (90) days after such action is first brought. If the non-controlling Party elects to bear fifty percent (50%) of such litigation costs, it shall receive fifty percent (50%) of any damage award or settlement resulting from such action. If the non-controlling Party does not elect to share such litigation costs, it shall not participate in any damage award or settlement resulting from such action. (d) Settlement; Allocation Of Proceeds. Neither Party shall settle a claim brought under this Section 7.4 without the consent of the other Party. In the event of any recovery of monetary damages from the Third Party, whether such damages result from the infringement of a INNOVATIVE Patent(s), such recovery shall be allocated first to the reimbursement of any expenses incurred by the Parties in the litigation under this Section 7.4 (including, for this purpose, a reasonable allocation of internal counsel and other expenses). If the amount recovered from the Third Party is less than the aggregate expenses of the Parties incurred in connection with such litigation, the recovery shall be shared pro rata between THERAPEUTICS and INNOVATIVE in proportion to their respective expenses. 7.5 Infringement Of Third Party Rights. In the event that any SDC Product(s) developed under this Agreement becomes the subject of a Third Party claim or there is the potential for a claim for patent infringement anywhere in the world, and irrespective of whether THERAPEUTICS or INNOVATIVE is charged with said infringement, the Parties shall promptly meet to consider the claim and the appropriate course of action. Unless the Parties otherwise agree, the Party against which such Third Party infringement claim is brought shall defend against such claim at its sole expense and the other Party shall have the right, but not the obligation, to participate in any such suit, at its sole option and at its own expense. Such other Party shall reasonably cooperate with the Party conducting the defense of the claim, including if required to conduct such defense, furnishing a power of attorney. Neither Party shall W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 21 OF 43 enter into any settlement that affects the other Party's rights or interests without such other Party's written consent, which consent shall not be unreasonably withheld. If in the opinion of INNOVATIVE's counsel, a license with respect to such Third Party patents is necessary to avoid substantial risks which could prevent INNOVATIVE, THERAPEUTICS or a sublicensee from making, using, marketing, offering for sale or selling an SDC Product(s), then INNOVATIVE shall notify THERAPEUTICS of such conclusion and the basis for it and give THERAPEUTICS a reasonable opportunity to discuss INNOVATIVE's opinion. If THERAPEUTICS concurs in INNOVATIVE's opinion, INNOVATIVE shall have the right, but not the obligation, to negotiate directly with such Third Party for a license. If THERAPEUTICS does not concur with INNOVATIVE's opinion, the matter shall be submitted to an independent counsel, selected by mutual consent and paid equally by INNOVATIVE and THERAPEUTICS, to determine whether there is a substantial risk of infringement of such Third Party rights. If such independent counsel determines that a substantial risk exists, then INNOVATIVE may, but shall not be required or obligated, to negotiate directly with such Third Party on behalf of the Parties. If such independent counsel determines that a substantial risk does not exist, then INNOVATIVE may still negotiate for a license from such Third Party if it elects to do so, but shall not be obligated to do so. Anything herein to the contrary notwithstanding, if a court of competent jurisdiction rules that practice of the rights granted to THERAPEUTICS or a sublicensee in Section 2.1 infringes a Third Party patent, INNOVATIVE at its own expense will obtain all enabling licenses necessary to restore the rights granted to THERAPEUTICS in Section 2.1. If the infringement results from the utilization of INNOVATIVE Patent Rights or INNOVATIVE Know-How in existence or acquired prior to the Effective Date of this Agreement, then INNOVATIVE shall not be entitled to reimbursement of any of such expense under Section 3.6(c) of this Agreement or otherwise. If the infringement results from utilization of INNOVATIVE Patent Rights or INNOVATIVE Know-How developed or acquired after the Effective Date pf this Agreement, INNOVATIVE shall be entitled to reimbursement of 50% for SDC Core Technology and 100% of specific medical patents related to SDC Healthcare or Personal Care Products of such expense under Section 3.6(c). 7.6 Patent Marking. SDC Products subsequently marketed and/or sold by the Parties hereunder shall be marked with appropriate patent numbers or indicia at INNOVATIVE's request, reflecting INNOVATIVE's ownership of the SDC Core Technology, subject to THERAPEUTICS' consent and that of any pertinent Third Party that may license the SDC Product. 7.7 Retention of Right To Sell Or License SDC Core Technology. Irrespective of the terms of this Agreement, INNOVATIVE shall retain any and all rights as to its SDC Core Technology, including but not limited to the right to sell, transfer, assign or license the SDC Core Technology (in a manner not inconsistent with this Agreement), provided that and upon condition that INNOVATIVE shall retain all rights for all applications relative to the SDC Healthcare and Personal Care Product(s), as defined in this Agreement and contemplated herein. W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 22 OF 43 SECTION 8.0 REPRESENTATIONS AND WARRANTIES 8.1 Mutual Representations. Each Party represents and warrants that (i) it is a corporation in good standing under the laws of the state of its incorporation; that (ii) it has the authority to enter into this Agreement; that (iii) it has obtained all corporate approvals necessary to enter into this Agreement; that (iv) this Agreement is valid and binding and enforceable in accordance with its terms; and that (v) its execution, delivery, and performance of this Agreement will not infringe upon the rights of any Third Party or violate the provisions of any agreement to which it is a party. 8.2 INNOVATIVE Representations And Warranties. INNOVATIVE warrants and represents that: (a) No Litigation. To the best of its knowledge, INNOVATIVE has no pending legal actions or obligations or financial obligations that would or could infringe or impede its ability to carry out its obligations under the terms of this Agreement. (b) Performance of Obligations. To the best of its knowledge, INNOVATIVE warrants that it will perform its obligations under the terms of this Agreement on a Best Efforts basis and further warrants that it will allocate sufficient resources in its active pursuit of viable SDC Product(s), as contemplated by the Parties under the terms of this Agreement. (c) Safety Data. To the best of its knowledge, INNOVATIVE has informed THERAPEUTICS about all significant information in its possession or control concerning Axenohl(R), Axen(R), any potential side effects, injury, toxicity or sensitivity reaction and incidents or severity thereof with respect to any SDC Product(s) tests conducted by INNOVATIVE or its predecessors. INNOVATIVE acknowledges that such tests have been entirely pre-clinical and may not be indicative of results that may be obtained in humans. (d) Patent Matters. As of the Effective Date and other than as outlined herein, INNOVATIVE has no knowledge of the existence of any patent owned or controlled by a Third Party which covers SDC Core Technology and would prevent INNOVATIVE from making, using or selling such SDC Core Technology. To the best of INNOVATIVE's knowledge and belief, as of the Effective Date, the INNOVATIVE Patent Rights set forth in Exhibit A and the INNOVATIVE Know-How at the Effective Date are owned by INNOVATIVE, and INNOVATIVE is not in possession of information that would, in its opinion, render any of its patent claims invalid and/or unenforceable. INNOVATIVE further warrants that NVID (a party to the Core Settlement Agreement referenced in the Recitals of this Agreement) holds no rights to import, make, use, offer for sale or sell the SDC Core Technology, nor, under any circumstances, unless granted by INNOVATIVE, can NVID recover more than patent ownership, but in such case INNOVATIVE would retain the rights to import, make, use, offer for sale and sell the SDC Core Technology. W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 23 OF 43 8.3 THERAPEUTICS' Representations And Warranties. THERAPEUTICS warrants and represents that: (a) No Litigation. To the best of its knowledge, THERAPEUTICS has no pending legal actions or obligations or financial obligations that would or could infringe or impede its ability to carry out its obligations under the terms of this Agreement. Performance of Obligations. To the best of its knowledge, THERAPEUTICS warrants that it will perform its obligations under the terms of this Agreement on a Best Efforts basis and further warrants that it will allocate sufficient resources in its active pursuit of viable SDC Product(s), as contemplated by the Parties under the terms of this Agreement. 8.4 No Other Representations. THE EXPRESS REPRESENTATIONS AND WARRANTIES STATED IN THIS AGREEMENT, INCLUDING THIS SECTION 8.0 ARE IN LIEU OF ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITA TION, THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. SECTION 9.0 TERM AND TERMINATION 9.1 Term. Unless earlier terminated as hereinafter provided, this Agreement shall commence upon the Effective Date and, unless sooner terminated as provided in this Section 9.0, extend until the latter of the payment of the last royalty payable by a Third Party licensee or any payments due from any Third Party purchaser under Section 5.0 or the expiration date of the last SDC patent relevant to this Agreement. 9.2 Termination Without Cause. Upon one hundred twenty days (120) days written notice, THERAPEUTICS shall have the right to terminate this Agreement, without cause, on condition that and provided that, all licenses granted to THERAPEUTICS under this Agreement under Section 2.1 hereof shall terminate and all rights to all SDC Product(s) shall be promptly and efficiently transferred by THERAPEUTICS to INNOVATIVE. In addition, upon such termination, THERAPEUTICS hereby grants to INNOVATIVE the exclusive, royalty-free license to use any and all of the SDC-related Proprietary Information obtained from THERAPEUTICS under the terms of this Agreement in any manner which is necessary or useful for the continued research, development, manufacture, future use or sale of any SDC Product(s) that INNOVATIVE continues after THERAPEUTICS' termination. Furthermore, in the event that any SDC Product(s) have been either licensed or sold to a Third Party, as outlined in Section 5.0 hereof and any sales proceeds, licensing fees, or royalty payments remain due and payable from any Third Party, said termination shall not in any way affect THERAPEUTICS' right to receive its share of the payments due and payable to THERAPEUTICS pursuant to Section 5.4 hereof. 9.3 Termination For Breach. Each Party shall have the right to terminate this Agreement and its obligations hereunder for material breach by the other Party, which breach remains uncured for thirty (30) business days after written notice is W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 24 OF 43 provided to the defaulting Party, unless there exists a bona fide dispute as to whether or not a breach has occurred. Notwithstanding any termination under this Section 9.3, any obligation by a Party to make any monetary payment, which had accrued or has become payable as of the date of termination shall survive termination of this Agreement. 9.4 Termination For THERAPEUTICS' Breach. In the event INNOVATIVE terminates this Agreement as a result of THERAPEUTICS' breach, pursuant to Section 9.3 above, the licenses granted to THERAPEUTICS under Section 2.1 hereof of this Agreement shall terminate and any and all rights in any SDC Product(s) under Development as outlined herein shall be automatically terminated. In addition thereto, THERAPEUTICS shall cooperate with INNOVATIVE in all respects to effect the prompt and efficient transfer to INNOVATIVE of all SDC Product(s) research and development information and data. In the event of such termination, in regard to any Category I or II SDC Product(s), THERAPEUTICS hereby assigns to INNOVATIVE all right, title and interest in and to all Regulatory Filings and approvals with any Agency, including the FDA, pertaining to any SDC Product(s) and THERAPEUTCIS agrees to resign as Sponsor from any Regulatory Filings with any Agency, including the FDA, and assist INNOVATIV E and its agents, to assume all duties as Sponsor for all SDC Product(s) being processed with any Agency, including the FDA. INNOVATIVE will assume full responsibility for all Category I and II SCD Product related expenses incurred after the date of the Termination for Breach by THERAPEUTICS. In the event that any SDC Product(s) have either been licensed or sold to a Third Party, as outlined in Section 5.0 hereof, prior to termination under this Section 9.4, termination of this Agreement shall not in any way affect THERAPEUTICS' right to receive its share of any remaining payments due and payable to THERAPEUTICS from a Third Party purchaser or licensee pursuant to Section 5.4 hereof and THERAPEUTICS shall be entitled to receive all sales proceeds, licensing fees, or royalty payments that remain due and payable from any Third Party. In addition, upon termination under this Section 9.4 THERAPEUTICS hereby grants to INNOVATIVE the exclusive, royalty-free license to use any and all of the SDC-related Proprietary Information obtained from THERAPEUTICS under the terms of this Agreement in any manner which is necessary or useful for the continued development, manufacture, sale or licensing of the SDC Product(s) as such product(s) exist as of the date of termination. Furthermore, INNOVATIVE shall retain all of its rights to bring an action against THERAPEUTICS under Section 11.0 [Dispute Resolution], including all of its rights for recovery of damages. In the case of Termination or Breach as defined in Section 9.0, prior to the transfer of any Regulatory Filings to INNOVATIVE, THERAPEUTICS shall provide INNOVATIVE, copies of all material correspondence with any Agency, including the FDA, and, subject to EMC approval, INNOVATIVE shall have the right to be present at all meetings with any Agency, including the FDA, related to the SDC Product(s). In the event of any transfer of ownership in the Regulatory Filings occurs, pursuant to Section 9.0, or any other Section hereof, beginning prior to the time of transfer of ownership of the Regulatory Filings to INNOVATIVE by THERAPEUTICS, THERAPEUTICS shall provide INNOVATIVE with letters of access to, any drug master files or other regulatory W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 25 OF 43 dossiers containing information necessary or useful to INNOVATIVE in connection with the impending transfer. Upon THERAPEUTICS' resignation as Sponsor, INNOVATIVE, by and through its agents, and with THERAPEUTICS' reasonable assistance (at no expense to THERAPEUTICS) shall assume all duties of the Sponsor and become primarily responsible for all regulatory affairs related to the SDC Product(s) 9.5 Termination For INNOVATIVE's Breach. In the event that THERAPEUTICS terminates this Agreement as a result of INNOVATIVE's' breach, pursuant to Section 9.3, all licenses granted to THERAPEUTICS under this Agreement shall survive to the degree commercially reasonable and necessary for any proper purpose of this Agreement. Further, in the event that INNOVATIVE is unable to manufacture the SDC (Raw Material) active ingredient drug substance, either itself or through INNOVATIVE'S Third Party manufacturer in timely and sufficient manner to support THERAPEUTICS forecasted development demands, INNOVATIVE will grant THERAPEUTICS a world-wide royalty-based license to manufacture SDC Core Technology based drug substance. In any case, INNOVATIVE will continue to provide SDC drug substance as described in Section 4.2 at least until THERAPEUTICS can establish an alternate source of supply. THERAPEUTICS shall retain all of its rights to bring an action against INNOVATIVE under Section 11.0 [Dispute Resolution], including all of its rights for recovery of damages. 9.6 Partial Termination For Failure To Achieve Minimum Development Performance Standard. In the event that THERAPEUTICS is unable to meet the Minimum Development Performance Standards set forth in Section 3.7, this Agreement will automatically terminate and the licensing rights granted by INNOVATIVE to THERAPEUTICS under Section 2.1 shall terminate and revert to INNOVATIVE provided, however, that any SDC Product(s) under Development at the time of such termination and all licenses and sublicenses related to the continued Development of those SDC Product(s) shall remain unaffected by termination under this Section 9.6 and the terms of this Agreement shall remain in full force and effect for the continued development of those SDC Product(s). Upon termination under this Section 9.6, INNOVATIVE shall be entitled to proceed with the development of any Product(s) in the medical, dental and/or veterinary fields for human or animal health, in any way it sees fit provided however that INNOVATIVE shall not engage in the development and/or production of any Product(s) that is competitive with any SDC Product(s) under Development according to the terms of this Agreement. In any case, subsequent to a Partial Termination described herein, if an SDC Product is developed and commercialized by INNOVATIVE or a Third Party and such SDC Product uses or references information developed by THERAPEUTICS, For Category I, II and III A and III B Products, THERAPEUTICS shall receive the lesser of 5% of all proceeds received by INNOVATIVE in connection with such Third Party transaction or for five (5) years from the date of Product launch a royalty of 1.5% of Net Sales derived from such Product. For Category III C and III D Products, THERAPEUTICS shall receive the lesser of 2.5% of all proceeds received by INNOVATIVE in connection with such Third Party transaction or for five (5) years from the date of Product launch a royalty of 0.75% of Net Sales derived from such Product In the event that any SDC Product(s) have either been licensed or sold to a Third Party, as outlined in Section 5.0 hereof, prior to W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 26 OF 43 termination under this Section 9.6, termination shall not in any way affect THERAPEUTICS' right to receive its share of any remaining payments due and payable to THERAPEUTICS from a Third Party purchaser or licensee pursuant to Section 5.4 hereof and THERAPEUTICS shall be entitled to receive all sales proceeds, licensing fees, or royalty payments that remain due and payable from any Third Party. 9.7 Notice. In the event of default or failure by either Party to perform any of the terms, covenants or provisions of this Agreement, the defaulting Party shall have thirty (30) days after the giving of written notice of such default by the non-defaulting Party to correct such default. If such default is not corrected within the said thirty (30) day period, non-defaulting Party shall have the right, at its option, to cancel and terminate this Agreement. 9.8 No Waiver. No termination of this Agreement shall constitute a termination or a waiver of any rights of either Party against the other Party accruing at or prior to the time of such termination. SECTION 10.0 GOVERNMENTAL COMPLIANCE During the term of this Agreement, INNOVATIVE and THERAPEUTICS shall, at all times, comply with all laws and regulations that may control the development, production, commercialization, manufacture, use, sale, marketing, distribution and other commercial exploitation of the any SDC Product(s) undertaken pursuant to this Agreement. SECTION 11.0 DISPUTE RESOLUTION, VENUE AND GOVERNING LAW 11.1 Disputes. The Parties recognize that disputes as to certain matters may from time to time arise during the term of this Agreement which relate to either Party's rights and/or obligations hereunder or thereunder. It is the objective of the Parties to establish procedures to facilitate the resolution of disputes arising under this agreement in an expedient manner by mutual cooperation and without resort to litigation. To accomplish this objective, the Parties agree to follow the procedures set forth in this Section 11.0 if and when a dispute arises under this Agreement. In the event of disputes between the Parties, including disputes among the members of the EMC which such committee is unable to resolve, a Party seeking to resolve such dispute will, by written notice to the other, have such dispute referred to their respective executive officers designated below or their successors, for attempted resolution by good faith negotiations within fourteen (14) days after such notice is received. Said designated officers are as follows: INNOVATIVE Chief Executive Officer THERAPEUTICS Chief Executive Officer W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 27 OF 43 In the event the designated executive officers are not able to resolve such dispute, either Party may at any time after the fourteen business (14) day period invoke the provisions of Section 11.2 hereinafter. 11.2 Alternative Dispute Resolution. Following settlement efforts pursuant to Section 11.1, any dispute, controversy or claim arising out of or relating to the validity, construction, enforceability or performance of this Agreement, including disputes relating to alleged breach or to termination of this Agreement under Section 9.3, other than disputes described in Section 11.2 (c) which are expressly prohibited herein from being resolved by this mechanism, shall be settled by binding Alternative Dispute Resolution ("ADR") in the manner described below: (a) ADR Request. If a Party intends to begin an ADR to resolve a dispute, such Party shall provide written notice (the "ADR Request") to counsel for the other Party informing such other Party of such intention and the issues to be resolved. From the date of the ADR Request and until such time as any matter has been finally settled by ADR, the running of the time periods contained in Section 9.3 as to which a Party must cure a breach of this Agreement shall be suspended as to the subject matter of the dispute. (b) Additional Issues. Within ten (10) business days after the receipt of the ADR Request, the other Party may, by written notice to the counsel for the Party initiating ADR, add additional issues to be resolved. (c) No ADR Of Patent Issues. Disputes regarding the scope, validity and enforceability of patents shall not be subject to this Section 11.2, and shall be submitted to a court of competent jurisdiction. 11.3 Arbitration Procedures. The ADR shall be conducted pursuant to the Rules of the American Arbitration Association (San Diego) then in effect, except that notwithstanding those rules, the following provisions shall apply to the ADR hereunder. (a) Arbitrator. The arbitration shall be conducted by a panel of three arbitrators (the "Panel"). The Panel shall be selected from a pool of retired judges to be presented to the Parties by American Arbitration Association ("AAA"). (b) Proceedings. The time periods set forth in the AAA rules shall be followed, unless a Party can demonstrate to the Panel that the complexity of the issues or other reasons warrant the extension of one or more of the time tables. In such case, the Panel may extend such time tables, but in no event shall the time tables being extended so that the ADR proceeding extends more than twelve (12) months from its beginning to the Award. In regard to such time tables, the Parties (i) acknowledge that the issues that may arise in any dispute involving this Agreement may involve a number of complex matters and (ii) confirm their intention that each Party will have the opportunity to conduct any discovery reasonably necessary with respect to all material issues involved in a dispute within the framework provided above. Within such time frames, each Party shall have the right to conduct discovery in accordance with W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 28 OF 43 California Code of Civil Procedure. The Panel shall not award punitive damages to either Party and the Parties shall be deemed to have waived any right to such damages. The Panel shall, in rendering its decision, apply the substantive law of the State of California, without regard to its conflict of laws provisions. The Panel shall apply California's Rules of Evidence to the hearing. The proceeding shall take place in the City of San Diego. The fees of the Panels and AAA shall be paid by the losing Party which shall be designated by the Panel. If the Panel is unable to designate a losing Party, it shall so state and the fees shall be split equally between the Parties. (c) Award. The Panel is empowered to award any remedy allowed by law, including money damages, multiple damages, prejudgment interest and attorneys' fee, and to grant final, complete, interim, or interlocutory relief, including injunctive relief but excluding punitive damages. (d) Costs. Except as set forth in Section 11.3(b), above, each Party shall bear its own legal fees. The Panel shall assess its costs, fees and expenses, including reasonable attorneys' fees and costs, against the Party losing the ADR unless it believes that neither Party is the clear loser, in which case the Panel shall divide such fees, costs and expenses according to the Panel's sole discretion. (e) Confidentiality. The ADR proceeding shall be confidential and the Panel shall issue appropriate protective orders to safeguard each Party's Proprietary Information. Except as required by law, no Party shall make (or instruct the Panel to make) any public announcement with respect to the proceedings or decision of the Panel without prior written consent of each other Party. The existence of any dispute submitted to ADR, and the award, shall be kept in confidence by the Parties and the Panel, except as required in connection with the enforcement of such award or as otherwise required by applicable law. 11.4 Judicial Enforcement. The Parties agree that judgment on any arbitral award issued pursuant to this Article 11 shall be entered in the Superior Court of the State of California, in the County of San Diego. 11.5 Governing Law. This Agreement is made in accordance with and shall be governed and construed under the laws of the State of California, as such laws are applied to contract entered into and to be performed within such state. SECTION 12.0 CONFIDENTIALITY 12.1 Proprietary Information; Exceptions. Each Party will maintain all Proprietary Information received or generated by it under this Agreement in trust and confidence and will not disclose any such Proprietary Information to any Third Party or use any such Proprietary Information for any purposes other than those necessary or permitted for performance under this Agreement. Neither THERAPEUTICS or INNOVATIVE shall use any of the other Party's Know-How for any purpose other than those expressly described herein. Each Party may use the other's Proprietary Information only to the extent required to accomplish the purposes of this Agreement. W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 29 OF 43 Proprietary Information shall not be used for any purpose or in any manner that would constitute a violation of any laws or regulations, including without limitation the export control laws of the United States. Proprietary Information shall not be reproduced in any form except as required to accomplish the intent of this Agreement. No Proprietary Information shall be disclosed to any employee, agent, consultant, Affiliate, or sublicensee who does not have a need for such information. To the extent that disclosure is authorized by this Agreement, the disclosing Party will prospectively notify the other Party of such intended disclosure and obtain prior agreement from its employees, agents, consultants, Affiliates, sublicensees or clinical investigators to whom disclosure is to be made to hold in confidence and not make use of such information for any purpose other than those permitted by this Agreement. Each Party will use at least the same standard of care as it uses to protect its own Proprietary Information of a similar nature to ensure that such employees, agents, consultants and clinical investigators do not disclose or make any unauthorized use of such Proprietary Information, but no less than reasonable care. Each Party will promptly notify the other upon discovery of any unauthorized use or disclosure of the Proprietary Information. Proprietary Information shall not include any information which: (a) is now, or hereafter becomes, through no act or failure to act on the part of the receiving Party in breach hereof, generally known or available; (b) is known by the receiving Party at the time of receiving such information, as evidenced by its written records; (c) is hereafter furnished to the receiving Party by a Third Party, as a matter of right and without restriction on disclosure; (d) is independently developed by the receiving Party without any breach of this Agreement; or (e) is the subject of a written permission to disclose provided by the disclosing Party. 12.2 Authorized Disclosure. Upon signing this Agreement the Parties shall issue a mutually approved joint press release that does not include the financial terms of the Agreement. The Parties agree that the material financial terms of the Agreement, other than the initial payment provided in Section 5.1 and the milestone payments provided for 5.2, will be considered Proprietary Information of both Parties. Notwithstanding the foregoing, either Party may make disclosures required by law or regulation, provided prior notice is given to the other Party whenever possible, and may disclose the material financial terms of the Agreement to bona fide potential corporate partners, to the extent required or contemplated by this Agreement, and to financial underwriters, prospective investors and other parties with a need to know such information. Any such disclosures, and any disclosure of the development and marketing or Products or other developments under this Agreement, including but not limited to press releases, will be reviewed and consented to by each Party prior to such W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 30 OF 43 disclosure. Such consent shall not be untimely or unreasonably withheld by either Party. All such disclosures shall be made only to parties under an obligation of confidentiality. Notwithstanding any other provision of this Agreement, each Party may disclose Proprietary Information if such disclosure: (a) is in response to a valid order of a court or other governmental body of the United States or a foreign country, or any political subdivision thereof; provided, however, that the responding Party shall first have given notice to the other Party hereto and shall have made a reasonable effort to obtain a protective order requiring that the Proprietary Information so disclosed be used only for the purposes for which the order was issued; (b) is otherwise required by law or regulation, including SEC related documents; or (c) is otherwise necessary to file or prosecute patent applications, prosecute or defend litigation or comply with applicable governmental regulations or otherwise establish rights or enforce obligations under this Agreement, but only to the extent that any such disclosure is necessary. 12.3 Return Of Proprietary Information. In the event THERAPEUTICS loses its license to INNOVATIVE Patents and INNOVATIVE Know-How which was granted to it under this Agreement, THERAPEUTICS shall use diligent efforts (including without limitation a diligent search of files and computer storage devices) to return all Proprietary Information received by it from INNOVATIVE, provided, however, that THERAPEUTICS may keep one copy of such Proprietary Information for legal archival purposes. Access to the copy so retained by THERAPEUTICS' legal department shall be restricted to counsel and such Proprietary Information shall not be used except in the resolution of any claims or disputes arising out of this Agreement. 12.4 Publications. Except as required by law, neither Party shall publish or present, or cause to be published or presented, the results of studies carried out with respect to any SDC Product(s) without the opportunity for prior review by the other Party. Each Party shall provide to the other the opportunity to review any proposed abstracts, manuscripts or presentations which relate to any SDC Product(s) at least thirty (30) days prior to their intended submission for publication and such submitting Party agrees, upon written request from the other Party, not to submit such abstract or manuscript for publication or to make such presentation until the other Party is given a reasonable period of time to seek patent protection for any material in such publication or presentation that it believes is patentable. 12.5 Mutual Confidentiality Agreement. This Agreement shall supersede the Mutual Confidentiality Agreement ["MCA"] executed between the Parties on or about 21 March 2003 and the MCA shall be terminated upon the Effective Date of this Agreement. However, each Party's obligations of confidentiality and non-use of W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 31 OF 43 information under the MCA shall continue with respect to all Proprietary Information disclosed prior to its termination. 12.6 Right To Injunctive Relief. Each Party shall be entitled, in addition to any other right or remedy it may have, at law or equity, to an injunction, without the posting of any bond or other security, enjoining or restraining any other Party from any violation or threatened violation of this Section 12.0. SECTION 13.0 INDEMNIFICATION. 13.1 Indemnification By INNOVATIVE. INNOVATIVE hereby agrees to indemnify, hold harmless and defend THERAPEUTICS against any and all expenses, costs of defense (including without limitation attorneys' fees, witness fees, damages, judgments, fines and amounts paid in settlement) and any amounts THERAPEUTICS becomes legally obligated to pay because of any claim or claims against it by NVID or others to the extent that such claim or claims (i) arise out of the breach or alleged breach of any representation or warranty by INNOVATIVE hereunder, or (ii) are due to the negligence or misconduct of INNOVATIVE; provided that (a) THERAPEUTICS provides INNOVATIVE with prompt notice of any such claim and the exclusive ability to defend (with the reasonable cooperation of THERAPEUTICS) and settle any such claim and (b) such indemnities shall not apply to the extent such claims are covered by THERAPEUTICS' indemnity set forth in Section 13.2 below. 13.2 Indemnification By THERAPEUTICS. THERAPEUTICS hereby agrees to indemnify, hold harmless and defend INNOVATIVE against any and all expenses, costs of defense (including without limitation attorneys' fees, witness fees, damages, judgments, fines and amounts paid in settlement) and any amounts INNOVATIVE becomes legally obligated to pay because of any claim or claims against it to the extent that such claim or claims (i) result from THERAPEUTICS' activities under this Agreement, (ii) arise out of the breach or alleged breach of any representation or warranty by THERAPEUTICS hereunder, (iii) are due to the negligence or misconduct of THERAPEUTICS, or (iv) arise out of the possession, manufacture, use, sale or administration of an SDC Product by THERAPEUTICS or THERAPEUTICS' Affiliates or sublicensees provided that (a) INNOVATIVE provides THERAPEUTICS with prompt notice of any such claim and the exclusive ability to defend (with the reasonable cooperation of INNOVATIVE) or settle any such claim and (b) such indemnities shall not apply to the extent such claims are covered by INNOVATIVE's indemnity set forth in Section 13.1 above. 13.3 Mechanics. In the event that the Parties cannot agree as to the application of Sections 13.1 and 13.2 above to any particular loss or claim, the Parties may conduct separate defenses of such claim. Each Party further reserves the right to claim indemnity from the other in accordance with Sections 13.1 and 13.2 above upon resolution of the underlying claim, notwithstanding the provisions of Sections 13.1 and 13.2 above requiring the indemnified Party to tender to the indemnifying Party the exclusive ability to defend such claim or suit. W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 32 OF 43 13.4 Insurance Coverage. Each Party represents and warrants that it is covered and will continue to maintain the following insurance coverage covering all of each Party's activities and obligations hereunder. Furthermore, both Parties agree to give due notice to the other Party during the period stated of any such material change that may affect the continuation of such coverage. (a) Worker's Compensation and Occupational Disease Disability insurance as required by the laws of the State of California; (b) Comprehensive Automobile Liability insurance for vehicles furnished by such Party or used by such Party in the performance of this Agreement with bodily injury and property damage limits of $1,000,000 each occurrence, combined single limit; and (c) Commercial General Liability insurance with bodily injury and property damage limits of $1,000,000 each occurrence, aggregate combined single limit. Furthermore, each Party shall provide the other Party with written notice at least fifteen (15) days prior to any cancellation or material change in such insurance program. Each Party shall maintain such insurance program, or other program with comparable coverage, beyond the expiration or termination of this Agreement during (i) the period that any SDC Product is being commercially distributed or sold other than for the purpose of obtaining regulatory approvals by THERAPEUTICS, Affiliate or agent of THERAPEUTICS and (ii) a commercially reasonable period thereafter. SECTION 14.0 GENERAL TERMS AND CONDITIONS. 14.1 Entire Agreement. Other than the Mutual Confidentiality Agreement and its effective terms, as outlined in Section 12.5, this Agreement memorializes and constitutes the final expression and the complete and exclusive statement of agreement and understanding among the Parties with regard to the subject matter hereof. All negotiations, agreements, proposed agreements, covenants, representations and warranties, express and implied, oral and written, of the Parties with regard to the subject matter hereof are contained herein. No other agreements, covenants, representations or warranties, express or implied, oral or written, have been made by either Party to the other with respect to the subject matter of this Agreement. All prior and contemporaneous conversations, negotiations, possible and alleged agreements and representations, covenants, and warranties with respect to the subject matter, including the undated Silver Bullet Agreement previously prepared by the Parties are hereby waived, merged herein and superseded by this Agreement. This is an integrated agreement. 14.2 No Agency Or Legal Representative Status. The Parties are and, at all times, shall be and remain independent contractors as to each other. No joint venture or other relationship which would impose liability upon either Party for any act or failure to act of the other Party shall be created or implied hereby or herefrom. This Agreement W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 33 OF 43 does not and is not intended to constitute THERAPEUTICS as the agent or legal representative of INNOVATIVE. Except as provided herein, neither Party is granted any express or implied right or authority by the other Party to assume or create any obligation or responsibility on behalf of or in the name of the other Party, or to bind the other Party in any manner or thing whatsoever. Nothing in this relationship shall be construed to create a relationship of joint venture, partnership, fiduciary or other similar relationship between the Parties. 14.3 Exhibits. The following exhibits are attached to the Agreement and incorporated by reference: Exhibit A - INNOVATIVE Patent Rights Exhibit B - Product Development Flow Chart Exhibit C -Product Category Decision Chart Exhibit D - Approved Reimbursement Costs and Reimbursement Schedule Exhibit E - Form of "Product Specific" License Agreement 14.4 Attorneys' Fees And Court Costs. In the event that it becomes necessary to initiate legal proceedings by either Party to enforce any of the terms or provisions of this Agreement, to recover damages, or to obtain any relief, at law or in equity, the prevailing Party shall be entitled to recover, in addition to any relief afforded or obtained in such proceeding, reasonable attorneys' fees and costs as well as any court costs incurred by such Party in connection with any such action(s). 14.5 No Waiver. The failure of either Party to enforce any provision of this Agreement shall not be deemed a waiver of that provision or of the right of the Party to thereafter enforce that or any other provision. 14.6 Legal Representation/No Operative Presumption. This document is the result of negotiations between Parties, each of whom was represented or had the opportunity to be represented in the transaction, and has had the opportunity to have had the transactional documents reviewed by counsel of their own choice. There shall be no operative presumption against any Party on the ground that such Party was responsible for the preparation of this Agreement or any part thereof. 14.7 Assignment. Except as otherwise provided herein, neither this Agreement nor any interest hereunder will be assignable in part or in whole by any Party without the prior written consent of the other which cannot be unreasonably withheld; provided, however, that either Party may assign or otherwise transfer this Agreement to any of its Affiliates or to any successor by merger or sale of all or substantially all of its business assets to which this Agreement relates in a manner such that the assignor will remain liable and responsible for the performance and observance of all its duties and obligations hereunder. This Agreement will be binding upon the successors and permitted assigns of the Parties, and the name of a Party herein will be deemed to include the names of such Party's successors and permitted assigns to the extent necessary to carry out the intent of this Agreement. Any assignment which is not in accordance with this Section 14.7 will be void. W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 34 OF 43 14.8 Affiliates. The Parties hereto acknowledge that they may carry out some of the activities required or permitted pursuant to this Agreement through its Affiliates. The Parties hereby mutually represent and warrant that this Agreement shall be binding on its Affiliates and further guarantees the performance of its Affiliates in accordance with this Agreement as if such Affiliates were parties to this Agreement. 14.9 Survival Of Representations And Warranties. The representations and warranties contained in Section 4.0 survive and continue in full force and effect notwithstanding early termination of this Agreement. In addition, Sections 1.0, 2.0, 5.0, 7.0, 9.0, 11.0, 12.0 and 14.0 of this Agreement shall survive the termination of this Agreement (subject to any subsequent dates of termination referred to in such individual Sections). 14.10 Additional Documents And Acts. Each of the Parties hereto agrees to execute and deliver such additional documents and instruments and to perform such additional acts as may be necessary or appropriate to effectuate, carry out and perform all of the terms, provisions, and conditions of this Agreement and the transactions contemplated hereby. 14.11 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which when taken together shall constitute one and the same instrument. 14.12 Governing Law And Jurisdiction. This Agreement shall be construed in accordance with and governed by the laws of the State of California. This Agreement is performable in part in the County of San Diego, California, and the Parties mutually agree that personal jurisdiction and venue shall be proper in the state and federal courts situated in San Diego County, California. Other than as expressly modified by Section 11.0 hereof, the Parties agree that any litigated dispute will be conducted solely in such courts. Each Party further agrees that personal jurisdiction over it may be effected by service of process by registered or certified mail addressed to them at the address listed hereinabove and that when so made shall be as if served upon its registered agent for service of process within its respective state. 14.13 Severability. In the event that any covenant, condition or other provision herein contained is held to be invalid, void or illegal by any court of competent jurisdiction the same shall be deemed severable from the remainder of this Agreement and. shall in no way affect, impair or invalidate any other covenant, condition or other provision herein contained. If such condition, covenant or other provision shall be deemed invalid due to its scope or breadth, such covenant, condition or other provision shall be deemed valid to the extent of the scope or breadth permitted by law. 14.14 Notices. All notices, as well as any reports or statements, required hereunder shall be deemed to be duly given on the date same is mailed or sent and/or acknowledged via hand delivery, facsimile or reliable overnight delivery to the Party concerned at the following addresses: W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 35 OF 43 INNOVATIVE 1725 Gillespie Way El Cajon, California 92020 ATTN: Mr. Michael L. Krall Telephone: 619.596.8600 Facsimile : 619.596.8700 [Confirmation By Registered Mail, If Requested] THERAPEUTICS 4180 La Jolla Village Drive, Suite 255 La Jolla, California 92037 ATTN: Charles E. Holland, Ph.D. Daniel Piacquadio. M.D. Telephone: 858.642.9100 Facsimile : 858.642.9108 [Confirmation By Registered Mail, If Requested] 14.15 Reformation. All Parties hereby agree that neither Party intends to violate any public policy, statutory or common law, rule, regulation, treaty or decision of any government agency or executive body thereof of any country or community or association of countries; that if any word, sentence, paragraph or clause or combination thereof of this Agreement is found, by a court or executive body with judicial powers having jurisdiction over this Agreement or any of its Parties hereto, in a final unappealed order to be in violation of any such provision in any country or community or association of countries, such words, sentences, paragraphs or clauses or combination shall be inoperative in such country or community or association of countries, and the remainder of this Agreement shall remain binding upon the Parties hereto. 14.16 Cumulative Rights. The rights, powers and remedies hereunder shall be in addition to, and not in limitation of, all rights, powers and remedies provided at law or in equity, or under any other agreement between the Parties. All of such rights, powers and remedies shall be cumulative, and may be exercised successively or cumulatively. 14.17 Force Majeure. No liability hereunder shall result to a Party by reason of delay in performance caused by force majeure, that is, circumstances beyond the reasonable control of the Party, including, without limitation, acts of God, fire, flood, war, civil unrest, labor unrest, terrorist acts, shortage of or inability to obtain material as equipment. W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 36 OF 43 14.18 Section Headings. The section headings used in this Agreement are intended for convenience only and shall not be deemed to supersede or modify any provisions. IN WITNESS WHEREOF, the Parties hereto have executed and delivered this Agreement in multiple originals by their duly authorized officers and representatives on the respective dates shown below, but the terms hereof are effective as of the Effective Date. INNOVATIVE MEDICAL SERVICES Dated: September 5, 2003 By: /s/ Michael L. Krall ----------------------------------- Michael L. Krall President / CEO THERAPEUTICS, INC. Dated: September 5, 2003 By: /s/ Dan Piacquadio --------------------- Dan Piacquadio, M.D Title: President Dated: September 5, 2003 By: /s/ Charles E. Holland -------------------------- Charles E. Holland, Ph.D W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 37 OF 43 Exhibit A U. S. PATENTS 98-0114 Disinfectant and Method of Making -------------------------------------------------------- Case No. USSN 09/169,229 filed 10-09-98 Status: U.S. Patent 6,197,814 B1 issued 03-06-01 00-0128 Disinfectant and Method of Making (Divisional Application) -------------------------------------------------------- Case No.: USSN 09/798,763 filed 03-02-01 Status: U.S. Patent 6,583,176 issued 06-24-03 U. S. PATENT APPLICATIONS [CONFIDENTIAL TREATMENT OF THIS SECTION IS REQUESTED] FOREIGN PATENTS --------------- 00-0043 Disinfectant and Method of Making - OAPI Region Case No. Serial Number 1200000094 Status: Patent Number 11368 issued 10-17-00 00-0044 Disinfectant and Method of Making -Russia Case No. 200000396 Status: Patent No. 002646 issued 08-29-2002 00-0024 Disinfectant and Method of Making -Australia Case No. 11880/99 Status: Patent No. 753,470 issued 08-29-2002 00-0031 Disinfectant and Method of Making -New Zealand Case No. 503582 Status: Patent 503582 issued PENDING FOREIGN PATENT APPLICATIONS - ----------------------------------- [CONFIDENTIAL TREATMENT OF THIS SECTION IS REQUESTED] W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 38 OF 43 Exhibit B Development Plan Flow Chart (full size chart to be included) PURE Bioscience Therapeutics Inc. Term Sheet Definitive Agreement JV Formation Complete STAGE ONE - Months 1 thru 12 from execution of Contract Axenohl Technology Transfer - Exploration of Technologies Pre-Clinical Evaluation Period of SDC and SDC + ETOH Technology Best Efforts to Determine Viable FDA Products TI Determined Non-Viable FDA Products Rejected Return to IMS (Typical) Product Category Determination (Product Category Evaluation Flow Chart, Exhibit C) Product Development Product Pool TI Developed Category 1 First Three Products Identified for TI Development STAGE 2 - Months 1-24 Projected Sequenced Product Regulatory Starts from execution of Contract Pre-Clinical Phase 1 Clinical Phase 2 Clinical Pharma or 3rd Party Out-Licensing License to Development and Sub-License Agreements (Product Specific) Pre-Clinical Phase 1 Clinical Phase 2 Clinical Pharma or 3rd Party Out-Licensing License to Development and Sub-License Agreements (Product Specific) Pre-Clinical Phase 1 Clinical Phase 2 Clinical Pharma or 3rd Party Out-Licensing License to Development and Sub-License Agreements (Product Specific) 3rd Party Developed Category 2 First Two Products Identified for Out-Licensed Development Pre-Clinical Evaluation Period Phase 1 Clinical Phase 2 Clinical Phase 3 Clinical License to Development and Sub-License Agreements (Product Specific) Pre-Clinical Evaluation Period Phase 1 Clinical Phase 2 Clinical Phase 3 Clinical License to Development and Sub-License Agreements (Product Specific) IMS, TI or Out-Sourced developed Cat 3 Development and Sub-Licensing Agreements on a case by case basis as required W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 39 OF 43 Exhibit C Product Category Evaluation Flow Chart (full size chart to be included) 1. Will the Product be used in the Medical, Dental or Veterinary Fields? a. If (1) is Yes then - Is the Product to be used in other than food or water? (Goto 2) b. If (1) No then - Not In Contract (NIC) - Remains Innovative Medical Services Property 2. Is the Product to be used in other than food or water? a. If (2) is Yes then - Does the Product require a Healthcare Provider RX, Authorization or Action to be utilized? b. If (2) is No then - Not In Contract (NIC) - Remains Innovative Medical Services Property 3. Does the Product require a Healthcare Provider RX, Authorization or Action to be utilized? a. If (3) is Yes then - Will Product be developed by Therapeutics? b. If (3) is No then - Product becomes Category 3 per contract (Goto 5) 4. Will Product be developed by Therapeutics? a. If (4) is Yes then - Product becomes Category 1 Product [Confidentiality Requested for this item] b. If (4) is No then - Product becomes Category 2 Product [Confidentiality Requested for this item] 5. Was this Product previously Category 1 or 2? a. If (5) is Yes then - Category 3A OTC Product [Confidentiality Requested for this item] b. If (5) is No then - Does the Product require FDA Approval? (Goto 6) 6. Does the Product require FDA Approval? a. If (6) is Yes then - Was the Product developed directly as an OTC NDA? (Goto 7) b. If (6) is No then - Does the Product require the disclosure or utilization of Therapeutics Data? (Goto8) 7. Was the Product developed directly as an OTC NDA? a. If (7) is Yes then - Product becomes Category 3B Product [Confidentiality Requested for this item] b. If (7) is No then - Was the Product developed under a Monograph for OTC? (Goto 9) 8. Does the Product require the disclosure or utilization of Therapeutics Data? a. If (8) is Yes then - Was the Product developed under a Monograph for OTC? (Goto 9) b. If (8) is No then - Not In Contract (NIC) - Remains Innovative Medical Services Property 9. Was the Product developed under a Monograph for OTC? a. If (9) is Yes then - Product becomes Category 3A Product [Confidentiality Requested for this item] b. If (9) is No then - Does the Product require the disclosure or utilization of Therapeutics Data? (Goto 10) 10. Does the Product require the disclosure or utilization of Therapeutics Data? a. If (10) is Yes then - Does the Product Make a FDA Claim? (Goto 11) b. If (10) is No then - Not In Contract (NIC) - Remains Innovative Medical Services Property 11. Does the Product Make a FDA Claim? a. If (11) is Yes then - Product becomes Category 3C Product [Confidentiality Requested for this item] b. If (11) is No then - Product becomes Category 3D Product [Confidentiality Requested for this item] W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 40 OF 43 Exhibit D Reimbursement of Costs Cost of Therapeutics, Inc. Services Determination For reimbursement purposes related to in-house THERAPEUTICS services rendered in support of the Products, the cost will be billed according to the then current THERAPEUTICS rate schedule less 10%. The then current schedule of THERAPEUTICS services and costs shall be included with any Budget submitted by THERAPEUTICS to the EMC. Reimbursement Methodology It is anticipated that the Partnered Transaction Proceeds will be received by the Parties directly from the Third Party in proportion to its allocable percentage set forth in Section 5.4. Within 30 days of receipt of each direct Third Party payment representing their allocated share of Partnered Transaction Proceeds from a Category I - III Product, the Parties will submit to the EMC a detailed list of costs incurred in development, partnering and intellectual property activities relative to the Product for which the payment was received. For reimbursement calculations, [CONFIDENTIAL TREATMENT OF THIS ITEM IS REQUESTED] under this Agreement to acquire the SDC Core Technology and associated intellectual property from NVID and others will be allocated to each of the first four deals regardless of the Category of the Product upon which the deal is based. Likewise, one third of THERAPEUTICS' costs incurred for pre-clinical investigations that support multiple Products will be allocated to each of the first three Category I and II deals and Category IIIA and IIIB deals (categorized by the FDA as OTC drug products). If either Party subsequently incurs costs that qualify for the above described allocation across multiple Products (and the same is included in an approved Budget), a detailed list of those costs shall be submitted monthly to the EMC for approval. Reimbursement of all reimbursable costs shall take place according to the "50/50 -0/100" scheme described below. The Parties will "even-up" based upon the costs submitted to and approved by the EMC and the respective payments received by the Parties from the Third Parties. For reimbursement purposes, the gross "Partnered Transaction Proceeds" will be split 50/50 until the one Party is fully reimbursed and then 0/100 until the second Party is fully reimbursed. W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 41 OF 43 Cost Control and Approval The EMC will review and approve all costs submitted for reimbursement and determine the net effect of "evening-up". Within 10 business days of the EMC approval of the submitted costs and the "evening-up amount" determination the "owing" Party will pay the other Party the "evening-up amount". W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 42 OF 43 EXHIBIT E FORM OF "PRODUCT SPECIFIC" LICENSE AGREEMENT Within fifteen (15) days of the effective date of this agreement the Parties will provide and agree to the form of the "Product Specific" license and it will be attached hereto as Exhibit "E". W02-W97-oc:LGA\41332973.5 FINAL DEVELOPMENT AND LICENSING AGREEMENT CONFIDENTIAL DATED SEPTEMBER 5, 2003 BY AND BETWEEN INNOVATIVE MEDICAL SERVICES AND THERAPEUTICS, INC. Page 43 OF 43 EX-31.1 4 exhibit31_1.txt SECTION 302 CERTIFICATION Exhibit 31.1 CERTIFICATIONS I, Michael L. Krall, certify that: 1. I have reviewed this annual report on Form 10-KSB/A of Pure Bioscience; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of the end of the period (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: December 22, 2003 /s/ Michael L. Krall - -------------------- Michael L. Krall President/CEO EX-31.2 5 exhibit31_2.txt SECTION 302 CERTIFICATION Exhibit 31.2 CERTIFICATIONS I, Gary Brownell, certify that: 1. I have reviewed this annual report on Form 10-KSB/A of Pure Bioscience; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of the end of the period (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: December 22, 2003 /s/ Gary Brownell - ----------------- Gary Brownell Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----