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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 000-22501
SpectruMedix Corporation
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(Name of Small Business Issuer in Its Charter)
Delaware 25-1686354
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2124 Old Gatesburg Road,
State College, Pennsylvania 16803
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(Address of principal executive offices) (ZIP Code)
(814) 867-8600
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(Issuer's Telephone Number, Including Area Code)
SECURITIES REGISTERED UNDER TO SECTION 12 (b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER TO SECTION 12 (g) OF THE EXCHANGE ACT:
Common Stock, $0.00115 par value
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(Title of Class)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there 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 amendment to
this Form 10-KSB. [ ]
State issuer's revenue for its most recent fiscal year. $341,813
The aggregate market value of the voting and non-voting Common Stock held by
non-affiliates of the registrant, computed by reference to the closing sales
price of the Common Stock on the OTC Bulletin Board on June 15, 1998 was
$20,590,389.*
The number of shares of the Registrant's Common Stock outstanding was
3,515,214 as of June 15, 1998.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement filed with the Commission
pursuant to Regulation 14A in connection with the Company's 1998 Annual Meeting
are incorporated herein by reference into Part III of this Report.
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*Excludes 1,227,393 shares of the Registrant's Common Stock held by
executive officers, directors and affiliated parties at June 15, 1998. Exclusion
of such shares should not be construed to indicate that any such person
possesses the power, direct or indirect, to direct or cause the direction of the
management or policies of the Registrant or that such person is controlled by or
under common control with the Registrant.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
In addition to historical information, this report contains predictions,
estimates and other forward-looking statements that involve a number of risks
and uncertainties that are described more fully in "Item 1 Risk Factors." While
this outlook represents our current judgment on the future direction of the
business, these risks and uncertainties are only some of the factors that may
ultimately affect the success of SpectruMedix Corporation. Actual results may
differ materially from any future performance suggested in this report.
THE COMPANY
SpectruMedix is a U.S. company with a strong focus on medical and
scientific technologies and associated instrumentation. It manufactures nearly
the entire range of magnetic sector mass spectrometers, as well as other
analytical instruments and software packages. SpectruMedix's existing
instruments are characterized by their capacity to accurately detect minute
traces of elements and compounds and to perform the compositional measurements
for specific medical, biological, industrial, chemical, geological and
scientific applications. Using its expertise in analytical instrumentation, the
Company is engaged in three research and development programs to expand its
product base. The first program, developed in part from research efforts
conducted at the United States Department of Energy -- Ames Laboratories'
Institute for Physical Research and Technology/Iowa State University ("Ames
Laboratory/Iowa State University"), involves the development of a high-speed
DNA/gene sequencing instrumentation (the "DNA Sequencer") for the acquisition,
analysis and management of complex genetic information. The second program, a
result of initial research conducted at the University of California, Berkeley,
involves the development of analytical instruments which utilize a process
referred to as diagnostic kinetics to diagnose, monitor and assist in the
treatment of serious diseases. The third program, a result of research conducted
at the University of Pennsylvania Medical Center (the "University of
Pennsylvania"), involves the development of a mass spectrometer for the rapid
measurement of pulmonary function.
DNA Sequencing. DNA sequencing has significant implications for medical,
genetic and forensic science applications. In May 1995, the Company entered into
an agreement with Ames Laboratory/Iowa State University pursuant to which the
Company received an option to acquire an exclusive worldwide license to
technology developed at Ames Laboratory/Iowa State University targeting the
commercial development of the DNA Sequencer, which is capable of substantially
increasing the rate of sequencing over the other commercially available
sequencing instruments on the market today. In June 1997, the Company entered
into an exclusive, worldwide licensing agreement regarding such technology. In
addition to its sequencing speed, the Company believes that this technology may
also offer significant reductions in the costs of operation of the sequencer and
allow for recovery of samples. The Company has developed a laboratory prototype
of this product and expects to complete its commercial development in 1998. In
July 1997, R & D Magazine selected this technology to receive the R&D 100 Award
recognizing it as one of the top 100 technical innovations of 1997.
Diagnostic Kinetics. The Company has acquired an option to acquire an
exclusive worldwide license to technology developed at the University of
California, Berkeley that allows for highly sensitive detection and analysis of
biological samples to determine the near real-time progression of disease and
the effects of medical treatment on the synthesis, replication, inhibition and
destruction of viruses, cancer cells and other molecules, cells and tissues
contributing to disease. The Company is currently completing the construction of
a high performance mass spectrometry-based instrument to be used in initial
clinical testing of this technology. Initial disease targets for this technology
include AIDS, cancer, cardiovascular disease and osteoporosis.
Pulmonary Diagnostics. The Company, in collaboration with researchers at
the University of Pennsylvania, is developing technology that is designed to
enable the accurate and rapid assessment of pulmonary functioning. This method,
known as the Micropore Membrane Inlet Mass Spectrometry ("MMIMS") method, is
designed to detect impaired gas exchange associated with pulmonary disorders
such as acute respiratory distress syndrome, pneumonia, asthma and emphysema.
The new technique under development is expected to improve the
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existing testing method known as the Multiple Inert Gas Elimination Technique
("MIGET") by increasing the speed, accuracy and sensitivity required to assist
physicians to make diagnosis and treatment decisions for pulmonary disease
patients.
Mass Spectrometers. The Company is one of a very small number of
manufacturers worldwide to produce a broad line of magnetic sector mass
spectrometers and believes it is the only U.S. manufacturer to have a nearly
full line of magnetic sector mass spectrometers. In its core business, the
Company serves a number of large commercial manufacturers, major oil companies
(e.g., Shell International Exploration and Production B.V. Research and
Technology Services), the Gemological Institute of America, Lockheed Idaho
Technologies Company, various government agencies (e.g., the Smithsonian
Institution and the Department of Fisheries and Oceans Institute of Ocean
Sciences), major laboratories (e.g., Battelle Pacific North West) and numerous
universities (e.g., University of Chicago, CNR Universita La Sapienza-University
of Rome, Johns Hopkins University, Texas A&M University and Yale University).
These core applications include existing products and products in research or
development in each of the following areas:
Process Control Applications. The Company's process control
applications determine (i) the composition of hydrocarbons and petrochemicals in
refinery runs, (ii) the composition of metals in steel mills and non-ferrous
smelters and (iii) the composition of intermediates and final products in the
chemical processing, pharmaceutical and other industries.
Materials Science. The Company's high temperature mass
spectrometer targets materials science, e.g., the study of ceramics and other
high-temperature substances in order to determine the properties of such
materials and substances and how these behave in high temperature environments.
Environmental Applications. The Company's environmental
instrumentation determines and analyzes the pollutant levels in emissions and
wastes (air, water and soils), assays water quality both in industrial effluent
situations and in potable water reservoirs, wells and rivers, and performs a
range of soil analyses (e.g., pesticides, fertilizers and seepage of various
effluents).
Services. The Company provides a range of services,
including systems maintenance, remanufacturing and equipment refurbishing,
for a variety of mass spectrometers.
Luminoscope. The Company's luminoscope, a fine scale instrument, performs
analyses on a variety of solid samples such as CVD diamond, synthetic and
natural diamonds, gemstones, glass, ceramics, petroleum-bearing rock formations
and particles in oils and lubricants.
The new technologies being developed by the Company are in the research
and development stage, and to date the level of sales achieved by the Company's
existing products has been limited by factors which include limited
capitalization and little or no active sales and marketing efforts. Although the
Company intends to expand its sales in these areas, its principal effort will be
to complete the development of and commercialize its new technologies. There can
be no assurance that the Company will develop meaningful levels of sales or
profitability in the foreseeable future.
BUSINESS STRATEGY
Development of New Products and Technologies. Many of the Company's
product candidates are the result of research by academic institutions into new
applications of and methodologies involving the Company's fundamental products.
The Company's acquisition of the DNA Sequencer and the diagnostic kinetics and
pulmonary diagnostics technologies are the result of academic institutions
having previous knowledge with SpectruMedix and its high performance
instrumentation. The Company intends to continue to leverage the expansion of
its product line through the development of innovative technologies which build
upon its core product line.
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Research Affiliations. SpectruMedix is dependent upon its relationships
with research universities and laboratories including Ames Laboratory/Iowa State
University, the University of California, Berkeley and the University of
Pennsylvania for the expansion of its product line. The Company intends to
maintain sponsored research arrangements at such institutions and at other
research institutions to support the Company's own research and development
efforts.
Service Commitment. The Company prides itself in providing high levels of
service and maintenance and very rapid service turnaround time. Management
intends to continue and expand the scope and dimension of its service credo to
ensure such coverage for all of its instrument lines in the future.
History of Quality. SpectruMedix has built upon a long-standing reputation
in the academic, scientific and commercial marketplaces. Its objective is to
take instruments that are well known for their reliability, speed and accuracy
and move them into the 21st century through the addition of proprietary
software, electronics and mechanical innovation and the licensing of proprietary
new add-on technologies.
Redesign Efforts. The Company is taking advantage of a growing demand for
its products in the fields of medical diagnosis, oil exploration, new materials
analysis, quality control, process control and pollution monitoring. The Company
has invested the better part of three years to completely redesign the core
instrument line from the ground up, including all electronic and most mechanical
components.
PRODUCTS AND TECHNOLOGIES UNDER RESEARCH AND DEVELOPMENT
SpectruMedix has optioned or licensed several new technologies which are
complementary to its core instrumentation business and which the Company expects
will support its future growth. These include:
DNA Sequencing. DNA sequencing has significant implications for medical,
genetic and forensic applications. In May 1995, SpectruMedix entered into an
agreement with Ames Laboratory/Iowa State University pursuant to which the
Company received an option to acquire a worldwide license to a fully automated
DNA Sequencer. The Company completed an exclusive license agreement with respect
to this technology in June 1997. The Company has developed a laboratory
prototype of this product and expects to complete the commercial development of
this product in 1998.
DNA is the chemical material in living organisms that is responsible for
everything within the organism concerning the reproduction, maintenance, repair
and (some argue) the general behavior of a given individual. It is the genetic
code that defines the physical characteristics of every plant, animal, fungus,
bacteria and virus species presently known. At the molecular level, DNA appears
as a ladder-like structure. Two ribbons of sugar molecules, positioned
side-by-side, are cross-linked at regular intervals along their length. The
rungs of the ladder represent the actual genetic code and the outer sugar
molecules are believed to be merely physical supports to keep the cross-linked
ladder rungs in order. Each rung of the DNA ladder is composed of two molecules
called base pairs. Only four specific molecular bases are used to make the DNA
cross-links: Adenine, Thymine, Cytosine and Guanine, abbreviated A, T, C and G.
The molecules themselves are described in chemical terms as bases (i.e., the
opposite of acids), and the term "base," or "base pair," is used to describe the
DNA molecules without specifying A, T, C or G.
The search for the genetic sequence of living organisms has been an active
sphere of research since 1953, when the scientists James Watson and Francis
Crick published the discovery that DNA was in fact two cross-linked molecular
strands in the shape of a helical ladder. The complete DNA sequence for an
organism is called the Genome. While the search continues for identifying the
genetic sequence of many commercially significant plants and animals, the search
for the sequence to the Human Genome is arguably the greatest topic in
biological research today. The greatest problem facing these scientists is the
sheer scope of the task; the Human Genome can be described as a single string of
molecular computer code that is three billion characters long.
Since the inception of the Human Genome Project, there have been
substantial increases in speed and great reductions in the cost of dealing with
the large amount of information that constitutes the Human Genome. Over the past
five years, significant progress has been made to map the Genome, i.e., to
provide a guide to the various pieces
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of DNA comprising the Human Genome. There is therefore added urgency to start
large scale sequencing to further decipher and to make use of these physical
maps.
DNA Sample Preparation. The native DNA ladder scheme is first separated
along the long axis of the molecule (see Figure 1), yielding a "single strand
"sequence of DNA bases tethered along a single sugar backbone. The single strand
is chemically modified to obtain the fragment series as illustrated in Figure 1.
The resulting DNA pieces include a small tag molecule at one end of the strand.
This tag will fluoresce (emit light) when it is irradiated with a laser. The
color of the laser light is different from the tag fluorescence light, so it is
possible to tell them apart. In order to discern between the four possible
bases, each base type reacts exclusively with one of four possible tags in the
solution. The different tags fluoresce different colors, acting as a color-code,
and the four types of bases can thus be identified. The fragments correspond to
a series of DNA pieces that increase in length by one molecule character (C, T,
A or G). Only the last base on the tail end of the strand is tagged. This is
important because it means that the signal detected by the instrument is
specific to the last base on the strand, and the rest of the strand is invisible
to the detector. The significance of keeping the strand length will be
illustrated below. The sample preparation, from the bulk raw material to the
fluorescent-tagged DNA series, is performed by laboratory personnel, and is the
precursor to using the Company's DNA Sequencer. The task at hand for the
instrument is to identify, in order, the individual bases that appear along the
DNA strand.
[DIAGRAM OF THE DNA STRUCTURE, PREPARED FRAGMENT SAMPLES, AND RESULTING
DATA FORMAT]
FIGURE 1. Illustration of the DNA structure, prepared fragment samples,
and resulting data format.
Currently Commercially Available DNA Sequencer Instrumentation: Gel
Electrophoresis. The general separation method employed by the SpectruMedix
instrument, as well as most of the other instruments available from competitors,
is electrophoresis (the movement, under the influence of an electrical field, of
electrically charged particles suspended in a fluid). The older of the two most
common instrumental applications employing electrophoresis is by using a plate
of conductive, solid-like gelatin material as the sample solution. At one end of
the plate, the sample is injected into the gel. When an electric field is
applied across the gel, the molecules migrate across the gel. The smallest
fragments migrate the greatest distance for a given time and voltage. If all of
the charged molecules have the same polarity, it is possible to place the
initial samples at one end of the plate, and use the entire plate for the
separation. The technique works very well, and has been employed for a wide
range of analytical samples. To obtain the final data, the voltage is applied
across the gel for a given period of time, and then removed. The separated DNA
fragments are separated across the plate according to their size, and the entire
plate is scanned with the laser. The fluorescent tags, corresponding to each of
the four possible bases, are observed by a secondary light detector.
This instrumental design poses several fundamental problems: (i) the
technique is mechanically cumbersome; (ii) the gel material is short-lived,
requiring the slabs to be made immediately prior to their use; (iii) the gel
material is prepared from a monomer compound that is a highly dangerous
neurotoxin which requires specialized handling and disposal methods; (iv) due to
the dense solid-like nature of the gel material, the migration times of the DNA
fragments are very long, and thus the process is very slow; (v) slab gels can
only maintain comparatively low (e.g., 5,000 Volts) voltage loads as greater
voltage causes overheating and destroys the gel integrity (the greater the
voltage an electrophoretic instrument can safely handle, the faster the analysis
rate); (vi) the technique is not well-suited for automation or integration with
existing robotic-based preparation techniques commonly found in biological
laboratories, due to the incongruity of the hardware associated with each
system, e.g., gel electrophoresis instrumentation does not utilize the
microtiter wells universally associated with DNA preparation; and (vii) the
limit to the available space on the slab means that the slab is capable of only
a limited number of "side-by-side" runs. Because of these fundamental problems
with the slab gel technique as an analytical method, a maximum sequencing rate
of approximately 500 bases per hour is achieved.
The SpectruMedix DNA Instrument: the ESY9600 Multiplexed Capillary
Electrophoresis DNA Sequencer. The method employed by the Company's DNA
Sequencer is in principle the same as that described for the slab gel technique.
Instead of using slabs of gel, however, the material is placed into a tube. The
tube, or capillary, is
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composed of a non-conductive glass, roughly three feet in length(See Figures 2
and 3). Furthermore, the tube is very thin in size, with an outer diameter of
0.006 inches (150 microns) and an inner diameter of roughly 0.003 inches (75
microns). A reasonable analogy would be a three-foot long hollow tube the
thickness of sewing thread. The tube is filled with SpectruMedix's proprietary
(patented) gel material, and a very small volume of the DNA sample solution is
introduced at one end of the capillary (see Figure 2). In order to apply a
voltage across the capillary (the gel material is conductive), each end of the
capillary is immersed in a container of salt solution, along with the power
supply electrodes. In response to the voltage, the charged fragments migrate
through the gel matrix, from one end of the capillary to the other. The
fragments separate according to their size while traveling through the
capillary.
[DIAGRAM OF CAPILLARY ELECTROPHORESIS SETUP, SINGLE LANE SHOWN]
FIGURE 2. Capillary electrophoresis setup, single lane shown.
A significant difference between slab gel electrophoresis ("SGE") and
capillary gel electrophoresis ("CGE") is the method of detection. In the SGE
case, the sample is injected onto the gel plate, the voltage is applied for a
given amount of time, and then the voltage is removed and the entire gel plate
is scanned with the laser for analysis. Using SpectruMedix's CGE technique,
because the sample is now in a thin tube, the analysis is performed "on the fly"
with a light detector or camera. As the separated fragments pass through the
capillary, they pass through a region that is irradiated with laser light, and
the subsequent fluorescence is measured by the light detector. The data is
presented in a plot of light color versus the migration time of the fragments.
Because each fragment length exists in the sample solution, the bases are
identified in order, as a function of how long it takes for them to reach the
laser/detector region (see Figure 2). Several advantages exist with such a
setup, as compared to the slab gel technique: (a) less gel material, sample
volumes and reagents are used for each analysis and (b) the issue of resistive
heating is greatly reduced, since the cross-sectional area of the 0.006 inch
diameter capillary is considerably less than a 10 x 0.25 inch gel plate. Because
less heat is generated, an added advantage is the ability to apply a much
greater voltage to the system. Greater voltages result in shorter analysis
times. The ESY9600 system can apply 15,000 to 30,000 Volts across the capillary
tube. This in effect reduces run times from hours in the SGE case to minutes in
the SpectruMedix CGE instrument. Samples may be continuously run, and the entire
analytical procedure is computer controlled.
[DIAGRAM OF THE SPECTRUMEDIX ESY9600 MULTIPLEXED 96-CAPILLARY
ELECTROPHORESIS DNA SEQUENCER]
FIGURE 3. The SpectruMedix ESY9600 Multiplexed 96-Capillary
Electrophoresis DNA Sequencer.
The SpectruMedix sequencer surpasses current technology by, among other
things, increasing the number of capillaries that are used simultaneously and by
simplifying the construction of the instrument through keeping both the laser
light source and the detector stationary. The SpectruMedix ESY9600 couples the
latest technology in simultaneous fluorescence and detection of 96 discreet
capillary lanes with proven CGE base calling accuracy (see Figure 3). A
straightforward capillary array configuration allows the introduction and
analysis of 96 individual DNA samples, with multiple runs possible via two
computer controlled eight-tray carrousels. These are multiple-tray holders which
allow for pre-loading the DNA samples and buffers necessary for each of several
runs and then having the instrument's computer control all instrument functions
automatically without further operator intervention. For increased compatibility
with many preparative processes already present in the lab, the samples are
handled by the ESY9600 in standard, commercially available 96-well microtiter
plates. Samples may therefore be prepared and analyzed in the same container,
reducing the possibility of cross contamination and sample loss. The Company is
also introducing a fluid gel matrix capable of increased DNA fragment
resolution, at increased sample migration speeds. The less viscous nature of the
gel matrix compared to currently available instruments also allows the
capability of flushing out consumed matrix for fresh gel as part of the
automated instrument sequence, and complete capillary column reconditioning
between each sample series run. This means multiple runs with no capillary
memory effect or degradation in resolution, i.e., 96 lanes for simultaneous
analysis. In July 1997, R & D Magazine selected the ESY9600 Multiplexed
Capillary Electrophoreses DNA Sequencer to receive the R&D 100 Award recognizing
it as one of the top 100 technical innovations of 1997.
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Diagnostic Kinetics. Sophisticated detection of compounds allows for a
variety of biomedical applications associated with diagnosis of specific
diseases and medical conditions, including an application being developed by
SpectruMedix that may accurately and almost instantaneously measure the
biological process of a disease and the therapeutic efficacy of a drug in an
individual patient. Measuring in real time the basic biochemical transformations
responsible for a disease (e.g., the rate of cancer cell proliferation) or the
effect of a medical treatment on such biochemical processes (e.g., the effect of
anti-retroviral therapy on the rate of T lymphocyte destruction by the human
immunodeficiency virus ("HIV")) is referred to as diagnostic kinetics. The
fundamental difference between diagnostic kinetics and almost all other current
diagnostic modalities is the addition of the dimension of time. Current
laboratory tests are static: concentrations or amounts are measured at an
instance in time. For example, a clinician measures the number of t-cells or HIV
virions in the blood, the amount of calcium in bone or the concentration of
cholesterol in plasma. Kinetics allows scientists to measure dynamical processes
and thus true biochemical rates over a period of time. Examples of kinetic
measurements include the rates of t-cell destruction, viral replication and bone
breakdown.
In December 1994 the Company began discussions and in March 1995 informal
collaborations with scientists at the University of California, Berkeley to
develop an ultra-high performance mass spectrometer instrument designed to
perform diagnostic kinetics and to bring patents and inventions involving
diagnostic kinetics to market.
A number of instrumental advances have occurred in the field of mass
spectrometry over the past five years which now make possible the level of
accuracy and precision (reproducibility) required to make diagnostic kinetics
measurements. The current generation of mass spectrometers was not designed for
quantitative analysis of this type, however, because most previous applications
did not demand quantitative accuracy of isotope ratios. In contrast, diagnostic
kinetics applications require not only precision (reproducibility) but also
quantitative accuracy. Dynamic testing has therefore been restricted to a few
research laboratories.
For the purpose of rapidly initiating the clinical trials, SpectruMedix is
presently completing an advanced magnetic sector mass spectrometer having the
stringent specifications required to effectively perform the analyses inherent
in the successful implementation of diagnostic kinetics. SpectruMedix recognizes
that the vast clinical market would be better served by instrumentation that is
both less expensive to acquire and operate as well as less complex in operation,
more "user-friendly" as it were. For this purpose a two-pronged approach is
planned: first the simplification, miniaturization and streamlining of the
existing magnetic sector instrumentation and, alternatively and in parallel, the
application and hybridization of other analytical techniques to achieve
equivalent quality and quantity of data acquisition and analysis, but at a far
lower cost and in a simplified and routine fashion.
Full development of this technology still entails certain technical
challenges, particularly in the area of working with such minute quantities of
cellular material and drug substance. To be functional, the equipment requires
high levels of sensitivity and the ability to measure isotope ratios accurately.
The objective of this technology and the Company's collaboration with the
University of California, Berkeley is to alter the diagnosis and management of
and therapeutic approach to a number of common diseases, including AIDS, cancer,
heart disease, osteoporosis and others, by providing the physician with the
capability to measure directly the biological process of a disease in real time
(e.g., is bone being deposited or broken down in the osteoporosis patient, is a
tumor cell or the AIDS virus replicating at the present time in the cancer or
AIDS patient). By having a window into the underlying dynamics of these diseases
the physician and researcher may be able to rapidly assess the progress of the
disease and, most importantly, the effectiveness of treatment in an individual
patient without having to wait for an indirect and often distant end-point to
occur (e.g., bone fracture, immunodeficiency, cancer cell spread, death). One
example of the use of such an instrument and approach is in the field of AIDS
treatment. Currently, the degree of immune damage in AIDS is typically measured
through CD4 t-cell counts and the activity of viral replication is assessed by
the number of virus particles in the blood (the viral load). The former has been
likened to how far the disease has traveled and the latter to how fast it is
moving. But the measure of true interest is the rate at which CD4 t-cells are
being destroyed by the virus and the rate at which progenitor t-cell reserves
are being depleted. These dynamic processes are responsible for deletion of key
clones in the CD4 defense repertoire and for the ultimate failure of reserves
that leads to immune collapse. Unfortunately,
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these dynamic processes are not reliably reflected by static measurements. For
applications in the field of AIDS, the approach of the Company and the
University of California, Berkeley is to focus on the actual proliferation and
destruction rates of t-cells and the actual replication rate of HIV virons. This
ability to quantify the actual rate of t-cell proliferation and destruction of
HIV replication could transform the way that HIV is treated -- when drug
treatment is started, when it needs to be modified, what doses are necessary and
sufficient and when new modalities need to be considered.
In the field of cancer treatment, oncologists similarly desire to select
the chemotherapeutic drug that best addresses the tumor in question on a
patient-by-patient basis. A long-standing goal of oncologists has been to be
able to individualize cancer treatment in the same way that antibiotic
sensitivity testing is used in infectious diseases. But growth of a patient's
cancer cells outside of the body to establish its drug sensitivities has been
unsuccessful for a number of reasons (e.g., the environment in a test tube does
not reflect the key local factors influencing the tumor's behavior in the body).
The diagnostic kinetic approach, if successfully developed by the Company, would
allow oncologists to measure cancer cell replication activity (disease
activity)and its sensitivity to various chemotherapeutic agents (disease
response) over the course of a few days' trial. Oncologists could then tailor
treatments to individual patients' responses.
The technology may also have applications in cancer risk assessment. Here,
the instrument would identify individuals at high risk for cancer by virtue of
high "proliferative stress" (i.e., the rate at which cells in tissues such as
breast, lung or colon proliferate), which is perhaps the greatest risk factor
for development of cancer. Most cancer prevention strategies focus on reducing
proliferative stress by intervening with, among other things, hormones and
modified diet. However, because existing technology does not enable clinicians
to measure the level of proliferative stress in affected tissues, these
prevention strategies have in essence had to "fly blind." Direct kinetic
measurements would allow for individuals at risk to be identified, for the most
effective prevention(s) to be applied and even for more efficient preclinical
and clinical testing of new pharmaceutical agents.
The Company has entered into a Sponsored Research Agreement and an
exclusive Option Agreement with the University of California, Berkeley pursuant
to which the Company is funding ongoing development of this technology and has
the option to obtain an exclusive worldwide license to certain patents and
inventions relating thereto.
Pulmonary Diagnostics. The Company, in collaboration with researchers at
the University of Pennsylvania, is developing technology that is designed to
enable the accurate and rapid assessment of pulmonary functioning. The method,
known as MMIMS, improves upon the measurement of information using the MIGET
testing technique, developed in 1974. MIGET detects impaired gas exchange
associated with pulmonary disorders such as acute respiratory distress syndrome,
pneumonia, asthma, and emphysema. Because the previous method of making the
MIGET measurements was tedious and time-consuming, however, the technique was
used only in a few laboratory research settings. The MMIMS instrumentation under
development is expected to allow the measurement to be made more accurately,
more rapidly and with greater sensitivity.
The previous method of making the MIGET measurements required 20 to 40
milliliters of blood and completed measurements in approximately four hours.
MMIMS, on the other hand, is expected to require approximately two milliliters
of blood and complete the measurements in less than 10 minutes. MMIMS is based
on the diffusion of blood gases through a polymer membrane to directly measure
the partial pressure of the gases in the blood.
The MIGET method measures the retention and excretion of a series of
infused inert gases covering a wide range of blood solubilities. The technique
is expected to allow for the determination of the distribution of pulmonary
ventilation/perfusion ("V/Q") ratios of a patient. With this knowledge, MIGET
provides detailed information about the mechanisms of a patient's impaired lung
oxygen and carbon dioxide exchange. The ability to measure lung function
routinely is expected to allow a physician to provide a pulmonary disease
patient with a more accurate diagnosis, to select the optimal treatment, and to
quickly determine the efficacy of the prescribed medical therapy.
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EXISTING PRODUCTS AND SERVICES AND EXPANSIONS THEREOF
SpectruMedix's current revenue originates from five areas: magnetic sector
mass spectrometer products, Luminoscopes, electronic components, data
acquisition and analysis software, and various services including retrofitting,
remanufacturing and maintenance.
In its core business, the Company serves a number of large commercial
manufacturers, major oil companies (e.g., Shell International Exploration and
Production B.V. Research and Technology Services), the Gemological Institute of
America, Lockheed Idaho Technologies Company, various government agencies (e.g.,
the Smithsonian Institution and the Department of Fisheries and Oceans Institute
of Ocean Sciences), major laboratories (e.g., Battelle Pacific North West) and
numerous universities (e.g., University of Chicago, CNR Universita La
Sapienza-University of Rome, Johns Hopkins University, Texas A&M University and
Yale University).
Mass Spectrometers. Mass spectrometers are scientific instruments capable
of determining the composition of matter with great precision, whether it be a
solid, liquid, gas or plasma. Mass spectrometers identify a sample by analyzing
its component atoms and molecules, on the basis of atomic weights or "masses."
The required sample size is infinitesimally small and the analysis therefore
qualifies as "nondestructive." For example, a one microgram (10-6 gram) sample
is considered a large sample and femtograms (10-15 gram) are frequently
measured.
Magnetic sector mass spectroscopy technology was developed in the early
1900s. It employs electron and ion beam optics, magnetic fields, a high vacuum
environment, advanced electronics and advanced software to accurately describe
the composition of a sample.
Analysis using a magnetic sector mass spectrometer begins by converting
the sample to be analyzed into a gas. A portion of the sample is "ionized" in a
source region by one of several processes (electron bombardment, chemical
ionization, laser desorption, etc.) depending on the information required. The
ions formed are separated into component species on the basis of mass/charge
ratio by the analyzer and either brought successively to a single detector for
measurement (spectrometer) or, for more stringent measurement needs, detected
simultaneously at different locations with multiple detectors.
Eighty-three naturally occurring elements and over 24 man-made elements
exist on the Earth. Including isotopes, however, there are 283 naturally
occurring nuclides. In addition, at present, there are over 1,800 synthetic
short-lived radioactive nuclides. Nuclides are atoms that have a particular
number of protons and neutrons in their nucleus. For example, all atoms with 20
protons are known as the element calcium. The nuclides with 20, 22, 24 and 28
neutrons each are different isotopes of calcium known as calcium 40, 42, 44 and
48, respectively, The isotope number is arrived at by adding the number of
protons (always 20 for calcium) to the varying number of neutrons. Isobars are
isotopes of different elements which have the same integer mass by adding or
subtracting numbers of neutrons. For example, calcium-40 has 20 protons and 20
neutrons while potassium-40 has 19 protons and 21 neutrons. However, their
atomic weights are slightly different: 39.9773 for calcium-40 and 39.9753 for
potassium-40. Mass spectrometers measure these small differences to determine
the elements present in a sample.
Since mass spectrometers separate ionized particles of matter on the basis
of mass, they can also separate molecules and free radicals (particles composed
of more than one atom). The state of matter of these compounds or elements is
irrelevant so long as the sample can be vaporized and introduced into a high
vacuum chamber. The ions formed are separated into component species by the
analyzer on the basis of their mass-to-charge ratio and either brought to a
detector for measurement (spectrometer), or detected with a photographic plate
(spectrograph) or a solid state detector array. The detected components can be
amplified for display on a computer monitor or a strip chart recorder.
Magnetic sector mass spectrometers are used in such applications as
monitoring of pollutants and pollution levels, petrochemical analysis,
environmental fingerprinting, biomedical monitoring, analysis of soils, plants,
fertilizers and foods, analysis and characterization of semiconductors, nuclear
reactor monitoring, nuclear fuel accountability, geological age determinations,
and determination of purity levels in medicine, pharmaceuticals and metallurgy.
Major customers for the Company's mass spectrometers include Battelle Pacific
North West, the
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University of Chicago, CNR Universita La Sapienza -- University of Rome, the
Department of Fisheries and Oceans Institute of Ocean Sciences, Johns Hopkins
University, Lockheed Idaho Technologies Corporation, NASA Lewis Research Center,
Texas A&M University and Yale University.
Key applications for mass spectrometers include: (i) environmental testing
and monitoring, including monitoring of air pollution levels, water purity,
recirculated atmospheres (such as in submarines, spacecraft and mines), air
quality in private residences and offices, and pesticides in the soil, rivers
and well water; (ii) geologists routinely use mass spectrometers for such tasks
as determining the age of rocks and meteorites, computing the temperatures in
ancient oceans, and studying the composition of gases in rock formations; (iii)
the metallurgical industry has the need for an instrument that can perform
several analyses simultaneously, such as testing a sample for the presence of
hydrogen, carbon, nitrogen and oxygen, and for the concentration profiles of
these elements; (iv) SpectruMedix's mass spectrometers have many applications in
materials science, ranging from the analysis of semiconductor substrates to
corrosion analysis of structural materials to the analysis and eventual
synthesis of new-high-temperature materials, etc.
Luminoscope. The Luminoscope is a fine-scale analytical device used to
determine, in a nondestructive manner, the composition and structure of solid
samples. The Luminoscope consists primarily of a small vacuum chamber fitted
with an electron "gun" that is capable of producing a beam of energetic
electrons of up to 30KV. When this beam bombards a sample in the vacuum chamber,
luminescence and/or X-rays are produced. The output is studied either visually
with a microscope or with various photon and X-ray sensors. The image defines
the composition and structure of the material.
In its traditional field of application, petrology, the Luminoscope has
proven valuable in studies of compositional zoning, secondary crystallization,
exsolution, intergrowths, fracture filling, radiation halos, organic remains,
delineation of cementation stages and cementation of sand stones and shales.
Another application for the Luminoscope is gemstone determination, where the
analysis technique must be truly nondestructive. To determine whether a diamond
is genuine or whether it has been artificially altered by one of several recent
processes which removes the value-reducing defects, or perhaps is a synthetic
diamond grown in a laboratory, a Luminoscope is, the Company believes, the best
available method. The Luminoscope easily identifies the telltale signs of the
synthetic growing process.
Similarly, substantive research at a European research facility has
demonstrated that the Luminoscope is an effective and practical instrument in
analyzing CVD diamond. This is a form of synthetic diamond that the Company
believes will be the principal semiconductor material in the future, as well as
a linchpin of the next generation of machine tools, natural resource (e.g., oil
and natural gas) drilling equipment etc. The Luminoscope performs better than
other more expensive instruments (i.e., scanning electron microscopes). The
Company believes that in many manufacturing processes, a Luminoscope can be used
for quality control, to assess the purity and thus commercial viability of
nonmetallic substances such as glass, ceramics and present-day semiconductors.
SpectruMedix has developed three computer-based Luminoscope add-ons: (i) a
Spectrophotometer System to provide a spectral analysis of the
cathodo-luminescent emission, which is useful for process and quality control of
CVD diamond manufacturing operations, the ceramics manufacturing process, the
glass manufacturing process and the analysis of gemstones to determine whether
they are natural or synthetic; (ii) an Energy Dispersive Spectrometry ("EDS")
X-Ray Analysis System which allows the Luminoscope to perform elemental analyses
of unknown solids, e.g., the analysis of particles detected in the hydraulic
fluids of automotive systems; and (iii) a Digital Image Storage System which
provides an efficient means of storing and retrieving cathodo-luminescent images
along with operating conditions and personal notes.
Electronic Components. The Company regularly enhances the electronic
components of its instruments and makes these upgrades available to customers.
The upgrade process consists of replacing plug compatible modules and is usually
done by the customer.
Services. Services offered by the Company include retrofitting,
refurbishing, instrument repair and adjustment. Such services are a source of
cash flow and provide name recognition in the marketplace.
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RESEARCH AND DEVELOPMENT
The Company's research and development efforts currently are focused on
the completion of the prototype for the Company's DNA Sequencer, the development
of its diagnostic kinetics technologies and the development of a mass
spectrometer for its pulmonary diagnostic technology. As of March 31, 1998, the
Company had 12 full-time employees engaged in research and development.
Expenditures for research and development, net of grants received, in the fiscal
years ended March 31, 1997 and 1998 were $550,620, and $1,279,959, respectively.
The Company believes that its continued success will depend in part upon its
ability to enhance its existing products and to develop and introduce new
products and features to incorporate new technologies and meet changing customer
requirements and emerging industry standards on a timely and cost-effective
basis. Accordingly, the Company currently intends to continue to devote a
portion of its resources to research and development activities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SALES AND MARKETING
All of the Company's sales and marketing to date has been conducted on a
part-time basis by one or two SpectruMedix employees. Although the Company has
engaged in limited field sales calls and no direct marketing, the Company has
achieved sales of over $3 million since its inception in April 1992. The Company
believes that it could increase its sales significantly with a full time sales
and marketing force. In particular, over approximately the next 24 months, the
Company's sales and marketing objectives include: (i) establishing a
professional sales force with a record of performance, led by a proven,
established and highly competent national sales manager; (ii) seeking strategic
alliances with one or more large producers/ distributors of analytic
instrumentation as a means to market and service its instruments; (iii) making
prominent appearances at a number of trade and industry shows, including the
Pittsburgh Conference on Analytical Chemistry and Applied Spectroscopy
("PittCon"), conferences of the Geological Society of America and the American
Society of Mass Spectrometry, and any other appropriate trade and industry
shows; (iv) dedicating resources to the government bidding process due to
government policy which gives preference to U.S. firms; (v) completing and
maintaining a demonstration laboratory where prospective customers can bring
samples and evaluate the Company's instruments; and (vi) vigorously advertising
the Company's products and capabilities in a selected array of media venues as
well as engaging in carefully crafted public relations campaigns to optimize
beneficial exposure both nationally and internationally.
COMPETITION
DNA Sequencers. Competition in the market for DNA sequencing technology is
rapidly evolving and is characterized by major universities and research
centers, large organizations with significantly more financing than the Company,
and a large number of smaller instrument, software and genomics companies that
are developing complete, or components of, DNA sequencing equipment. Although
the Company believes that its technology will compete favorably with the
approaches being taken by such third parties, there can be no assurance that the
superior funding or experience levels of such competitors will not materially
and adversely affect the Company's own development and commercialization
efforts.
Current Technology. The primary commercially-available,
semi-automated DNA sequencer, the ABI377, is manufactured by the Applied
Biosystems Division of Perkin-Elmer ("ABI"). This slab gel-based technology is
capable of running 96 lanes of DNA samples of 400-450 bases in four hours. While
this device is billed as an automated system, the Company believes that the
ABI377 is labor-intensive for gel and sample preparation and requires highly
skilled operators. In addition, the ABI377 allows only a single run of 96 lanes,
after which the instrument must be reset. Other companies involved in this area
include Beckman Instruments, Fisons Scientific Equipment and Pharmacia Biotech.
Other Electrophoresis-based Research and Development. Other
instrument configurations are currently being investigated as alternatives to
both the ABI377 and the ESY9600. One such multi-capillary device being developed
by Molecular Dynamics, Inc. (the "MD device") employs a single scanning detector
that "looks" at each single capillary in the array in sequence. The system has
been in the later stages of development for at least the last two to three
years, and commercial release has been postponed within that time. The Company
believes that the
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ESY9600 is superior to the MD device because (i) the single detector of the MD
device can accurately scan a relatively low maximum number of capillaries before
the detector must return to its starting position to monitor the first capillary
and (ii) the capillary/detector system of the MD device is considerably more
complex than that of the ESY9600, with moving parts and timing issues not
observed in the ESY9600. The release date for the commercial version of the MD
device is unknown.
In May 1998, ABI announced the anticipated commercial release in early
1999 of a new 96-capillary DNA sequencer (model number 3700) that is expected to
significantly outperform its model ABI377 slab gel systems. Since the date of
the initial release by ABI, no additional information has been provided by ABI,
and no details associated with instrument design, function or performance are
available from public sources. It is not possible, therefore, to supply any
reasonable comparison between the SpectruMedix DNA Sequencer and ABI's expected
new product.
In the last two to three years, other capillary electrophoresis-based
technology companies (e.g., Seurat Technologies) have been reported to be in
initial stages of development. However, no progress reports, either released
from the companies themselves or in trade publications, have been forthcoming
and the status of these devices is currently unknown.
Technology Under Development. Various technologies have been under
development to sequence DNA. These include: (i) single-molecule sequencing,
where the bases are clipped off one at a time and read with respect to their
color labels, a technology which depends on several separate revolutionary
breakthroughs in enzymology, detection, labeling chemistry and
micromanipulation; (ii) mass-spectrometry by Matrix-Assisted Laser Desorption
Ionization, where the set of DNA fragments from the Sanger reaction is read by
mass-spectrometry without separation -- so far large intact DNA fragment ions
have been difficult to generate due to their innate instability; (iii)
sequencing by hybridization, where hybridization to short synthetic DNA
fragments on a microchip is detected and the sequence is deduced by pattern
matching -- the fundamental problem of variable numbers of tandem repeats in a
DNA strand remains to be solved; and (iv) capillary array electrophoresis (the
SpectruMedix technology), which adapts standard commercial DNA sequencing
protocols to a capillary format -- this technology is mature and is ready for
commercialization. Ultimately the competition will focus on real time data
analysis and the speed with which commercial and research laboratories can
effectively sequence the samples they produce
Diagnostic Kinetics. The Company does not believe that there are any
present competitors in the field of diagnostic kinetics. This is a new area of
science for which the Company, together with its scientific collaborators, is
pioneering the initial equipment and the markets therefor. As the Company's
experience in this field matures, it may experience competition from other
technologies or from other companies who may or may not be constrained through
patents licensed by the Company but who may also discover and develop new
applications for this technology or who may attempt to design around such
licensed patents.
Pulmonary Diagnostics. The Company does not believe that there are
presently any competitors to the Company's pulmonary diagnostics technology in
the clinical setting. The original MIGET technology upon which the new Pulmonary
Diagnostics technology is based is complex, difficult and slow for the clinical
setting. The large volume of blood needed for repeated analysis (approximately
20 to 40 milliliters, or one to three tablespoons, per analysis), as well as the
amount of time required for each process (approximately four hours) is
prohibitive for the clinical setting. For these reasons, MIGET analysis has
previously been available only in the world's most advanced research
laboratories. The pulmonary diagnostics technology is a new methodology which
could potentially replace current clinical practice, which depends on chemical
analysis of blood samples and observing a patient's breathing abilities to
evaluate lung function.
The Company, together with scientific collaborators at the University of
Pennsylvania, is developing the use of mass spectrometers and other
instrumentation for this application. As the Company's experience in this field
matures, it may experience competition from other technologies or from other
companies that may or may not be constrained by patents licensed by the Company
or who may discover and develop new applications and methodologies for this
technology or who may attempt to design around such licensed patents.
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Mass Spectrometers. SpectruMedix is the sole domestic manufacturer of a
full line of magnetic sector mass spectrometers. Its principal competitors are
Finnegan MAT, headquartered in Germany, Micromass, Inc. (the successor company
to VG Instruments) and Europa Scientific, each headquartered in Great Britain,
and JEOL, Inc., headquartered in Japan. The Company has competed against these
firms on a purely price basis as well as on the basis of product quality and
reliability with some success.
Competing technologies for compositional analysis also exist. Major
competing systems are gas, liquid and gas-liquid chromatography, various optical
spectroscopies and quadrupole mass spectrometry. Gas, liquid and gas-liquid
chromatography is a cost effective solution for applications where speed,
sensitivity and accuracy are not of paramount importance. Currently, the best
chromatography equipment requires a sample size of at least 10-11 grams while a
magnetic sector mass spectrometer can analyze a 10-15 gram sample. In addition,
the information produced with chromatography is often not definitive enough for
the analysis required. Accordingly, chromatography in combination with mass
spectrometry is commonly used.
Various optical spectrometric methods such as visible, ultraviolet and
infrared use light sources in conjunction with a spectroscope to determine the
composition of a sample.
Quadrupole mass spectrometers are somewhat less costly devices for
obtaining analyses than magnetic sector mass spectrometers. However, quadrupole
mass spectrometers generally provide much less precise measurements and rely
heavily on software to adjust the raw data. For most of the high-end
applications being addressed by the Company, especially the biomedical
applications, quadrupole mass spectrometers cannot be used. In addition
quadrupole mass spectrometers are subject to a high degree of instrument drift
and require constant recalibration. Consequently, results are much more subject
to measurement errors and repeatability is inferior.
Luminoscopes. SpectruMedix's primary competitor for luminoscopes is
Cambridge International Technology Ltd. ("CITL"), a British firm. The Company
believes its luminoscope to be superior to that of CITL in several aspects.
Prices for the Company's luminoscopes range from $15,000 to $100,000 depending
on the accessory systems purchased. The price is 15% more than a comparable CITL
model. The Company believes, however, that the design features of its
luminoscope are superior to CITL's. When coupled with an EDS system, the
Company's luminoscope can compete against the scanning electron microscope for
elemental analysis. Many applications do not require the level of detail
provided by a scanning electron microscope's high magnification and
sophisticated electron optics. For these applications, a luminoscope/EDS
instrument can be used for a fraction of the cost of an scanning electron
microscope.
Services. In the retrofit and upgrade market, SpectruMedix's chief
competition comes from individuals who are most often former field service
personnel of other manufacturers.
MARKETS
DNA Sequencers. The market for DNA sequencing instruments is rapidly
evolving and is characterized both by large well-financed organizations such as
ABI, Beckman Instruments, Fisons Scientific Equipment, Pharmacia Biotech and
Molecular Dynamics, Inc., as well as a large number of smaller companies, such
as Genomyx and Visible Genetics, and software and genomics companies that are
developing complete, or components of DNA sequencing equipment. In addition, the
potential applications for lower-cost and higher throughput equipment are
rapidly expanding. Consequently, it is difficult to predict with accuracy the
current market for sequencers capable of producing data at the speed being
targeted by the Company. The Company's capillary-array electrophoresis approach
is but one of a number of approaches being developed to improve the throughput
speed of currently available DNA sequencing equipment. In addition, research is
separately being conducted at a number of major universities and research
centers to refine DNA sequencing technologies. Although the Company believes
that its technology will compete favorably with the approaches being taken by
such third parties, there can be no assurance that the superior funding or
experience levels of at least some such competitors will not materially and
adversely affect the Company's own development and commercialization efforts.
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Diagnostic Kinetics. The field of diagnostic kinetics is an entirely new
approach to the diagnosis and treatment of serious disease. Potential
applications for this technology are varied and may ultimately be useful to a
large proportion of clinical indications requiring a real-time analysis of
whether or not the therapeutic is having its desired effect. The initial market
is likely to be major medical centers and universities who will utilize this
technology for research purposes in analyzing the progression of disease. Later,
as applications are developed and refined, the market should expand to cover
broader patient diagnosis and treatment monitoring. Although the Company
believes that the market potential for this technology is expansive, it is too
early to predict how and where physicians will aggressively intervene in
treatment protocols as this equipment is being further developed. Neither the
Company nor the inventor at the University of California, Berkeley have, as yet,
prioritized the commercial development of this technology with respect to the
numerous indications for which it has merit. As the Company further develops
this technology, competition is likely to arise from third parties, who may or
may not be constrained through patents licensed by the Company but who may also
discover and develop new applications for this technology.
Pulmonary Diagnostics. The field of pulmonary diagnostics is an entirely
new approach to the diagnosis and treatment of pulmonary disease in the clinical
setting. Potential applications for this technology are varied and may
ultimately be useful to a large proportion of clinical indications involving
pulmonary diseases requiring a real-time analysis of whether or not the
therapeutic is having its desired effect. The initial market is likely to be
major medical centers and universities who will utilize this technology for
research purposes. Later, as applications are developed and refined, the market
should expand to cover broader patient diagnosis and treatment monitoring.
Although the Company believes that the market potential for this technology is
large, it is too early to predict how and where physicians will aggressively
intervene in treatment protocols as this equipment is being further developed.
As the Company further develops this technology, competition is likely to arise
from third parties, who may or may not be constrained through patents licensed
by the Company but who may also discover and develop new applications for this
technology.
COLLABORATIVE AGREEMENTS
The Company's strategy for the development, manufacture and
commercialization of certain of its products includes maintaining and entering
into various collaborations with corporate partners, licensors, licensees and
others. There can be no assurance that the Company will be able to maintain
existing collaborative agreements, negotiate collaborative arrangements in the
future on acceptable terms, if at all, or that any such collaborative
arrangements will be successful. To date the Company has entered into the
following collaborative agreements:
Iowa State University Research Foundation. In May 1995, the Company and
Ames Laboratory/Iowa State University entered into an agreement pursuant to
which the Company acquired an option to license from Ames Laboratory/Iowa State
University high-speed DNA/gene sequencing instrumentation for the acquisition,
analysis and management of complex genetic information (the "Ames Technology").
In June 1997, the Company entered into an exclusive worldwide license agreement
with respect thereto with Ames Laboratory/Iowa State University (the "Ames
License Agreement"). Under the terms of the Ames License Agreement, Ames
Laboratory/Iowa State University granted the Company a worldwide license to use
and exploit the Ames Technology and any improvements thereof. Such license is
exclusive until all covered patents expire. In return for the rights granted to
the Company, the Company agreed to pay Ames Laboratory/Iowa State University
certain license fees and royalty payments.
University of California Berkeley. In December 1996, the Company and the
University of California, Berkeley, through its Office of Technology Licensing,
entered into an agreement (the "Berkeley Option Agreement") pursuant to which
the Company acquired from the University of California, Berkeley an option (the
"Berkeley Option") to negotiate an exclusive license agreement to make, have
made, use and sell in the United States and certain foreign countries technology
that allows for highly sensitive detection and analysis of biological samples to
determine the real-time progression of disease and the effects of medical
treatment on the replication, inhibition and destruction of viruses, cancer
cells and other diseased tissues. In exchange for the rights granted to the
Company under the Option Agreement, the Company paid to the University of
California, Berkeley an option fee. The term of the Option is for 15 months from
the effective date of the Option Agreement and is renewable for
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one additional year if the Company elects to renew the Option Agreement and pays
the University of California, Berkeley a renewal fee. The Option Agreement was
renewed for an additional one-year period in January 1998.
In connection with the Option Agreement, the Company also entered into a
Sponsored Research Agreement with the University of California, Berkeley, which
was amended in March 1998, pursuant to which the Company agreed to fund the
ongoing development of this technology through February 28, 1999.
The University of Pennsylvania. In March 1998, the Company and The
Trustees of the University of Pennsylvania (the "University of Pennsylvania")
entered into a License Agreement (the "UPenn License Agreement") pursuant to
which the Company acquired an exclusive world-wide license (the "UPenn License")
to make, have made, use, import, sell and offer for sale certain technologies
relating to mass spectroscopic means of measuring pulmonary function. In
exchange for the UPenn License, the Company paid a license fee and agreed to pay
certain royalties on net sales of the licensed technologies. The UPenn License
Agreement has a minimum term of 20 years, subject to earlier termination upon
certain events.
In connection with the UPenn License Agreement, the Company and the
University of Pennsylvania entered into a one-year Sponsored Research Agreement
(the "UPenn Research Agreement") pursuant to which the Company agreed to fund
certain research and development at the University of Pennsylvania School of
Medicine relating to the measurement of pulmonary function. In connection with
the UPenn Research Agreement, the University of Pennsylvania granted to
SpectruMedix an exclusive option (the "UPenn Option") to negotiate to obtain a
world-wide license to make, have made, use, import, sell and offer for sale
certain pulmonary diagnostic technologies developed under the UPenn Research
Agreement. Under the terms of the UPenn Research Agreement, the Company has a
certain period of time from the date of disclosure of a technology to exercise
its option to negotiate a license thereto. The UPenn Research Agreement has a
term of one year, subject to renewal upon the consent of both parties.
PATENTS AND PROPRIETARY TECHNOLOGY
Proprietary protection for the Company's products, processes and know-how
is important to the Company's business. The Company's policy is to file patent
applications to protect technology, inventions and improvements that are
considered commercially important to the development of its business. The
Company also relies upon trade secrets, know-how and continuing technological
innovation to develop and maintain its competitive position. The Company plans
to aggressively prosecute and defend its patents, when issued, and proprietary
technology.
The Company has acquired an exclusive worldwide license to certain
technology owned by Ames Laboratory/Iowa State University, including three
issued patents and two pending divisional applications, each of which relate to
the Company's DNA Sequencer. In addition, the Company has an option to license
from the University of California, Berkeley certain technology relating to
diagnostic kinetics, including one issued patent and one pending patent
application.
The Company presently has pending two U.S. patent applications, and a
provisional application, directed to certain components of the Company's DNA
Sequencer. There can be no assurance that the Company's pending patent
applications will result in patents being issued or that, if issued, such
patents will afford protection against competitors with similar technology; nor
can there be any assurance that others will not obtain patents that the Company
would need to license or circumvent. See "Risk Factors -- Uncertainty of
Protection of Patents and Proprietary Rights."
The Company's success depends on its ability to obtain patents, protect
its trade secrets and operate without infringing upon the proprietary rights of
others. A substantial number of patents have been applied for by the Company's
existing and potential competitors. There can be no assurance, however, that any
future patent applications will be approved, that the Company will develop
additional proprietary products that are patentable, or that any patents issued
to the Company will provide the Company with any significant protection or will
not be successfully challenged by third parties. Furthermore, there can be no
assurance that others will not design around
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the patented products developed by the Company. There can be no assurance that
the Company's products will not be found to infringe upon the patents of others.
If the Company's products are found to infringe upon the patents, or otherwise
impermissibly utilize the intellectual property, of others, the Company's
development, manufacture, and sale of such products could be severely restricted
or prohibited. The Company may be required to obtain licenses from such third
parties or otherwise obtain licenses to utilize patents or proprietary rights of
others. No assurance can be given that any licenses required under any such
patents or proprietary rights could be obtained on terms acceptable to the
Company, or at all. If the Company does not obtain such licenses, the
development, manufacture, or sale of products requiring such licenses could be
materially adversely affected. In addition, the Company could incur substantial
costs in defending itself against challenges to its patents or infringement
claims made by third parties or in enforcing its own patents.
The Company's competitive position is also dependent upon unpatented trade
secrets. The Company takes measures to protect its trade secrets, however, trade
secrets are difficult to protect. There can be no assurance that others will not
independently develop substantially equivalent proprietary information or
techniques or otherwise gain access to the Company's trade secrets. The Company
pursues a policy of having its employees, consultants and advisors execute
confidentiality agreements to maintain the proprietary nature of its technology.
There can be no assurance, however, that these agreements will provide
meaningful protection for the Company's trade secrets or other proprietary
information in the event of unauthorized use or disclosure of such information.
The Company may be required to obtain licenses to patents or proprietary
rights of others. No assurance can be given that any licenses required under any
such patents or proprietary rights would be made available on terms acceptable
to the Company. If the Company does not obtain such licenses, it could encounter
delays in product introductions while it attempts to design around such patents,
or could find that the development, manufacture or sale of such products could
be foreclosed. Litigation may be necessary to defend against or assert claims of
infringement, to enforce the Company's or its licensors' patents, to protect
trade secrets or know-how owned by the Company, or to determine the scope and
validity of the proprietary rights of others, and could result in substantial
cost to and diversion of effort by, and may have a material adverse impact on,
the Company.
GOVERNMENT REGULATION
Some of the Company's research and development activities and the future
manufacturing and marketing of products by the Company are subject to regulation
for safety and efficacy by numerous governmental authorities in the United
States and other countries. In the United States, the Company's diagnostic
kinetics equipment may be the subject of rigorous FDA regulation in its use for
the diagnosis and treatment of diseases. In addition to FDA regulations, the
Company is also subject to other federal and state regulations such as the
Occupational Safety and Health Act, the Environmental Protection Act, the
Resource Conservation and Recovery Act, the Clean Air Act, the Atomic Energy Act
and import, export and customs regulations. Product development and approval
within this regulatory framework takes a number of years and involves the
expenditure of substantial resources. In addition, there can be no assurance
that this regulatory framework will not change or that additional regulation
will not arise at any stage of the Company's product development that may affect
approval or delay an application or require additional expenditures by the
Company.
Federal, State and local regulations impose various environmental controls
on the storage, handling, discharge and disposal of chemicals and gases used in
the Company's manufacturing process. The Company believes that its activities
conform to present environmental regulations. Although the Company has not
experienced any materially adverse effects on its operations from environmental
regulations, there can be no assurance that changes in such regulations will not
impose the need for additional capital equipment or other requirements or
restrict the Company's ability to expand its operations. Any failure by the
Company to adequately restrict the discharge of hazardous substances could
subject the Company to future liabilities or could cause its manufacturing
operations to be suspended.
In addition, certain instruments in the Company's mass spectrometer line
are subject to export control regulations, including restrictions on export into
certain countries. While the Company believes it has obtained all permits
necessary to conduct its business, the failure to comply with present and future
regulations could result in
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fines being imposed on the Company or suspension or cessation of operations, and
thus result in a material adverse effect to the Company's business, results of
operations and financial condition.
EMPLOYEES
As of March 31, 1998, the Company had 26 employees. Of the total, one was
engaged part-time in sales and marketing, twelve in research and development,
and nine in electronics and mechanics. None of the Company's employees is
represented by a labor union. The Company has not experienced any work stoppages
and considers its relations with its employees to be good.
See "Risk Factors -- Dependence Upon Key Personnel."
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RISK FACTORS
This Form 10-KSB contains, in addition to historical information,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The Company's actual
results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and elsewhere in
this Form 10-KSB.
History of Losses; Uncertainty of Future Profitability; Ability To
Continue as a Going Concern. The Company has incurred operating losses since its
inception in 1992. At March 31, 1998, the Company had an accumulated deficit of
$8,570,152. The Company's current revenues from operations are limited and are
not sufficient to fund its operating expenses. The Company will need to either
substantially expand the sales of its existing products and services or
successfully develop and commercialize its new products to reach profitability.
No assurance can be given that the Company will be able to accomplish either
such objective. The Company will be required to conduct significant research,
development, testing and regulatory compliance activities which, together with
projected general and administrative expenses, are expected to result in
operating losses for at least the next several years. The Company may not
achieve significant revenues or profitable operations. To date the Company's
operations have been characterized by chronic underfunding and limited ability
to maintain inventories of key components, parts and supplies. The Company is
dependent upon the proceeds of its initial public offering (the "Public
Offering") to continue its operations. In addition, the proceeds of the Public
Offering may not be sufficient to allow the Company to materially alter its
reliance on "just-in-time" manufacturing and the inherent dependence upon
sources of components, parts and supplies. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
As a result of the Company's current financial condition, the Company's
independent accountants have included an emphasis of matter disclosure in their
report on the Company's financial statements for the period ended March 31,
1998. The independent accountants report on the Company's financial statements
includes an explanatory paragraph stating that the net losses and accumulated
deficit raise substantial doubt about the Company's ability to continue as a
going concern.
Early Stage of Development. Since the Company's incorporation in April
1992, the Company has been engaged in organizational activities, acquisition of
assets, hiring of personnel and financing activities. Since operations began in
July 1992, the Company has engaged in the following activities: manufacturing,
research and development, limited sales and marketing, capital raising,
exploration of strategic relationships and collaborations, and other general
corporate activities. The Company has generated limited revenues to date. While
the Company is able to finance certain of its current operations from revenues,
it requires substantial additional financing to continue to increase its
marketing capabilities and increase its research and development activities to
expand the applications of its core technology, to acquire additional
technologies, and to develop new products. As the Company is in the development
stage, its operations are subject to all of the risks inherent in the
establishment of a new business enterprise and the commercialization of new
products. The likelihood of the success of the Company must be considered in
light of the problems, expenses, difficulties, complications and delays
frequently encountered in connection with a new business, and, accordingly, is
highly speculative.
Uncertainty Regarding Completion of Licenses to Key Technologies. The
Company's technologies under development in the area of diagnostic kinetics are
the subject of an option held by the Company from the University of California,
Berkeley. Such option specifies maximum royalty rates and milestone payments,
which the Company deems reasonable. Although the option agreement entitles the
Company to exercise its option and acquire an exclusive license to the
underlying patents and technologies, no assurance can be given that the Company
will be successful in securing such license or that the terms thereof will
ultimately be deemed attractive for the commercialization of such equipment. The
Company does not expect to exercise its option with the University of
California, Berkeley until the second half of 1998, at the earliest.
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Uncertainty of Protection of Patents and Proprietary Rights. The Company's
success depends on its ability to obtain patents, protect its trade secrets and
operate without infringing upon the proprietary rights of others. The Company's
existing and potential competitors have applied for a substantial number of
patents. There can be no assurance that any of the Company's future patent
applications will be approved, that the Company will develop additional
proprietary products that are patentable, or that any patents issued to the
Company will provide the Company with any significant protection or will not be
successfully challenged by third parties. Furthermore, there can be no assurance
that others will not design around the patented products developed by the
Company. There can be no assurance that the Company's products will not be found
to infringe upon the patents of others. The area of gene sequencing, in
particular, is subject to intense competition and active filing of patent
applications. Any of such patent applications filed by one or more third parties
may conflict with the Company's products under development. If the Company's
products are found to infringe upon the patents or otherwise impermissibly
utilize the intellectual property of others, the Company's development,
manufacture and sale of such products could be severely restricted or
prohibited. Any such infringement could have a material adverse effect on the
Company's prospects, business, results of operations or financial condition. The
Company may be required to obtain licenses from such third parties or otherwise
obtain licenses to utilize patents or proprietary rights of others. No assurance
can be given that any licenses required under any such patents or proprietary
rights could be obtained on terms acceptable to the Company, or at all. If the
Company does not obtain such licenses, the development, manufacture or sale of
products requiring such licenses could be materially adversely affected. If the
Company does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around such patents, or could find
that the development, manufacture or sale of such products could be foreclosed.
Litigation may be necessary to defend against or assert claims of infringement,
to enforce the Company's or its licensors' patents, to protect trade secrets or
know-how owned by the Company, or to determine the scope and validity of the
proprietary rights of others, and could result in substantial cost to and
diversion of effort by, and may have a material adverse impact on, the Company.
The Company's competitive position is also dependent upon unpatented trade
secrets. Although the Company takes measures to protect its trade secrets, trade
secrets are difficult to protect. There can be no assurance that others will not
independently develop substantially equivalent proprietary information or
techniques or otherwise gain access to the Company's trade secrets. The Company
pursues a policy of having its employees, consultants and advisors execute
confidentiality agreements to maintain the proprietary nature of its technology.
There can be no assurance, however, that these agreements will provide
meaningful protection for the Company's trade secrets or other proprietary
information in the event of unauthorized use or disclosure of such information.
Technological Uncertainty; Uncertainty of Product Development and
Commercialization; Early Stage of Product Development. The science and
technology of the Company's products, particularly the Company's DNA Sequencer,
is rapidly evolving. Many of the Company's products and proposed products will
require significant further research, development, testing and possibly
regulatory clearances and are subject to the risks of failure inherent in the
development of products based on innovative technologies. The Company's
development efforts in the areas of diagnostic kinetics and pulmonary
diagnostics involve new areas of medicine which necessarily involves
unforeseeable risks and uncertainties. These risks include the possibility that
any or all of the products or proposed products are found to be ineffective or
unsafe, or otherwise fail to receive necessary regulatory clearances, if any,
that the proposed products, although effective, are uneconomical to market, that
such products will not satisfy cost and performance criteria, that third parties
hold proprietary rights that preclude the Company from marketing such products,
or that third parties market a superior or equivalent product. Accordingly, the
Company is unable to predict whether its research and development activities
will result in any commercially viable products other than the Company's mass
spectrometers. Further, the Company cannot predict with certainty when or if the
Company will be able to commercialize certain of its proposed products or that
such products will satisfactorily perform all of the functions for which they
have been designed or prove to be sufficiently reliable in long-term
applications.
New Concept and Emerging Markets; Uncertainty of Market Acceptance. The
production of the DNA Sequencer, diagnostic kinetics instruments, pulmonary
diagnostics technology and other proposed products of the Company represents new
manufacturing processes which are untested on a commercial scale. Although the
Company believes that its technologies and products will, if ultimately
commercialized, represent significant
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technological advances, demand for the Company's proposed products, all of which
are based upon new designs, concepts and manufacturing processes, is subject to
a high degree of uncertainty. Many potential customers of the Company, including
original equipment manufacturers ("OEM") and commercial end users, may be
reluctant to utilize or sell the Company's proposed products until a sufficient
number of other OEMs and commercial end users have already committed to do so.
The Company currently has limited marketing experience and limited financial,
personnel and other resources to undertake the extensive marketing activities
that will be necessary to market its proposed products. The Company's ability to
generate revenues from the sale of its proposed products will be dependent upon,
among other things, its ability to build an effective sales organization. In its
limited marketing efforts to date, the Company has relied solely upon the
efforts of its executive officers. If the Company is unable to market and
distribute its products directly, the Company may have to enter into
arrangements with others, such as joint ventures, licensing or similar
arrangements or distribution agreements. Any such contractual arrangements may
result in a lack of control by the Company over any or all of the marketing and
distribution of such products and may increase its marginal costs. There can be
no assurance that the Company will be able to formalize any marketing
arrangements or that its marketing efforts will be successful.
Limited Manufacturing Experience and Capabilities; Risks Associated with
Expansion of Manufacturing Operations; Possible Dependence on Third-Party
Manufacturers. The Company maintains limited manufacturing facilities and will
need to expand such facilities to effectively manufacture its products on a
profitable basis. Although certain members of the Company's management have
manufacturing experience, the expansion of the Company's manufacturing
facilities and capabilities will subject the Company to numerous risks,
including unanticipated technological problems or delays. Such expansion will
also require additional sources of capital, which may not be available on
commercially reasonable terms, if at all. In the event that the Company is
unable to expand its manufacturing facilities and capabilities, the Company
maybe required to enter into arrangements with others for the manufacture and
packaging of its proposed products. There can be no assurance that the Company
will be able to enter into any such arrangements on commercially reasonable
terms, or at all, or that the Company will ever be able to establish the
capability to manufacture its products on a commercial basis, in which case the
Company's business, results of operations and financial condition would be
materially adversely affected.
Assets Encumbered; Potential Litigation. The Company's assets are
encumbered by liens and security interests granted in favor of certain of the
Company's creditors. A majority of the obligations that gave rise to such liens
and security interests have been repaid with the proceeds of the Public Offering
and the liens and security interests resulting therefrom are in the process of
being released. Two parties have filed security interests, which are still
outstanding, for obligations aggregating $130,000. In the event that any party
holding a security interest should execute such security interest, the Company's
assets could be subject to seizure. In such event, the Company would be
materially adversely affected. In the event the Company should become party to
any litigation relating to these obligations, the costs of defending against
such claims could be substantial, and the Company could be materially adversely
affected.
Dependence on Third-Party Suppliers of Raw Materials and Components;
Relationships with Suppliers, Creditors and Customers. The Company's existing
and proposed products require high quality raw materials and components which
the Company currently purchases and will continue to purchase from third-party
suppliers. The Company believes that adequate sources of supply exist for all of
the raw materials and components that it will need and that such items are
available on commercially reasonable terms. Certain raw materials or components
may, however, from time to time, be difficult to obtain and may cause production
delays or require the Company to find alternate means of production. Thus, the
Company's ability to manufacture its products will depend on its ability to
establish and maintain commercial relationships with at least certain of such
suppliers. The Company does not currently maintain supply agreements with any of
its suppliers.
The Company's production will also be dependent upon its suppliers
satisfying the Company's performance and quality specifications and dedicating
sufficient production capacity to meet the Company's scheduled delivery times.
There can be no assurance that the Company will be able to establish any
commercial relationships with suppliers or, if it is able to do so, that such
suppliers will be able to satisfy the Company's scheduled delivery or
performance requirements or have sufficient production capacity to satisfy such
requirements during any period of sustained demand. Failure or delay by the
Company's suppliers in supplying the Company
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with needed raw materials and components would materially adversely affect the
Company's operating margins and the Company's ability to manufacture and deliver
products on a timely and competitive basis, which could, in turn, have a
material adverse effect on the Company.
Effect of Chronic Inadequate Capitalization on Relationships with
Suppliers, Creditors and Customers. Since inception, the Company has been
characterized by chronic inadequate capitalization. Accordingly, the Company's
lack of working capital has at times prevented the Company from making timely
payments to suppliers and creditors or from repairing relationships with such
entities. Such financial difficulties have also prevented the Company from
providing parts and service to certain of its customers in a timely manner. As a
result, the Company's relationships with its customers have also been damaged.
The deterioration of these relationships may make the Company's strategy for
expansion more difficult and may adversely affect the development of the
Company's business. There can be no assurance that the Company will be able to
reestablish relationships with its suppliers, creditors and customers or that
the Company will successfully implement its expansion plan.
Customer Concentration. Approximately 63% and 48% of the Company's net
sales for the years ended March 31, 1998 and 1997, respectively, were derived
from sales to the Company's top five customers. During the fiscal year ended
March 31, 1998 the Company's product sales amounted to approximately 15%, 14%,
13% and 12% to four separate customers. During the fiscal year ended March 31,
1997, product sales consisted of approximately 13% to one customer and 11% to
another customer. The loss of, or significant adverse change in, the
relationship between the Company and these customers could have a material
adverse effect on the Company's business, financial condition and results of
operations. The loss of or reduction in orders from any significant customer,
losses arising from customer disputes regarding shipments, fees, merchandise
condition or related matters, or the Company's inability to collect accounts
receivable from any major customer could have a material adverse impact on the
Company's business, financial condition and results of operations.
Competition and Technological Changes. The Company's success depends upon
establishing and maintaining a competitive position in the research, development
and commercialization of products and technologies in its areas of focus. The
medical and industrial instrumentation industry is highly competitive and
requires substantial capital. The Company competes with, and will compete with,
numerous international, national and regional companies, many of which have
significantly larger operations and greater financial, marketing, human and
other resources than the Company. Accordingly, such competitors may have
substantial competitive advantages over the Company, including the ability to
negotiate favorable supply and distribution agreements and the ability to
negotiate more favorable terms with developers of technology, including
universities. In addition, the Company plans to develop additional products and
acquire additional technologies in order to expand the Company's product and
technology portfolio. No assurance can be given that the Company will
successfully compete in any market in which it conducts or may conduct
operations or that developments by such competitors will not render the
Company's current or future products or technologies uncompetitive or obsolete.
The industry in which the Company competes is characterized by rapid
technological change. Although the basic technology of mass spectrometry has not
changed significantly in many years, its applications and enhancements, as well
as competing measurement and analysis technologies, are constantly developing.
There can be no assurance that the Company's products will not be rendered
obsolete as a result of technological developments. The Company is actively
engaged in research and development to improve its products through the
introduction of enhancements and various additional applications, which by its
nature is uncertain. Accordingly, there can be no assurance that the Company
will be able to develop such new products or improvements.
Need for Additional Financing. Based on the Company's operating plan, the
Company believes that the net proceeds of the Public Offering, together with
future operating revenues and possible future collaborative agreements and/or
government grants, will be sufficient to satisfy its capital requirements and
finance its plans through 1998. Such belief is based on certain assumptions, and
there can be no assurance that such assumptions are correct. After such time,
the Company anticipates that it will require additional financing in order to
meet its current plans for expansion. Such financing may take the form of the
issuance of common or preferred equity securities or debt securities, or may
involve bank financing. The Company may also be forced to enter into third-party
licensing, manufacturing or distribution agreements to support its capital
needs. There can be no assurance that the Company
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will be able to obtain such additional capital on a timely basis, on favorable
terms, or at all. In any of such events, the Company may be unable to implement
its product development and commercialization strategy and its operations would
be severely and adversely affected.
Dependence Upon Key Employees and Consultants; Recruitment of Additional
Personnel. The Company is dependent upon the efforts and abilities of Dr. Joseph
K. Adlerstein, its Chairman of the Board of Directors, Chief Executive Officer
and President, and Bernard Sonnenschein, its Secretary and Treasurer, and on
other members of its scientific and management staff. Dr. Adlerstein and Mr.
Sonnenschein are the only executive officers of the Company. In addition, the
Company is dependent on collaborators at research institutions and on the
Company's scientific advisors and consultants. Recruiting and retaining
qualified personnel, collaborators, advisors and consultants will be critical to
the Company's success. To date, the Company has been able to attract and retain
the personnel necessary for its operations. However, there can be no assurance
that the Company will be able to do so in the future, particularly in light of
the Company's expansion plans. If the Company is unable to attract and retain
personnel with necessary skills when needed, its business and expansion plans
could be materially adversely affected.
Dr. Adlerstein and Mr. Sonnenschein are substantial stockholders of the
Company, holding approximately 19% and 17%, respectively, of the outstanding
shares. The Company has entered into an employment agreement with Dr.
Adlerstein. The loss or unavailability of the services of either Dr.
Adlerstein or Mr. Sonnenschein for any significant period of time could have
a material adverse effect on the Company's business prospects. The Company
has obtained, and is the sole beneficiary of, key-person life insurance in
the amount of $1,000,000 on the life of Dr. Adlerstein.
Product Warranties. The Company generally warranties parts and services
for each of its products for one year from the date of purchase. Although there
have been few requests for extensive servicing and repairs for products that
have already been sold by the Company during the warranty period, a large number
of requests for such servicing could have a material adverse effect on the
Company by requiring additional expenditures for parts as well as the repair
efforts of the Company's personnel.
Environmental and Other Governmental Regulations. A portion of the
Company's future products may be regulated by the United States Food and Drug
Administration (the "FDA"). Such regulations extend to manufacturing practices,
the conduct of clinical investigations, pre-market approval, record keeping and
reporting requirements and labeling, among other matters. To date the Company
has not yet obtained clearance from the FDA for commercial marketing of its
primary products. In addition, other products that the Company might develop may
also be subject to FDA regulation. There can be no assurance that the Company
will be able to obtain FDA clearance for commercial marketing of its products.
Even if FDA clearance is received, government regulation may have an adverse
impact on the timing and cost of new product introductions, may interfere with
the marketing of existing products and may require the recall of products from
customer locations.
The Company is subject to a variety of United States and foreign
government regulations related to the discharge or disposal of toxic, volatile
or otherwise hazardous chemicals used in its manufacturing process. The failure
by the Company to comply with present or future environmental regulations could
result in fines, suspension of production or cessation of operations. Such
regulations could also require the Company to acquire equipment or to incur
other substantial expenses to comply with environmental regulations. If
substantial additional expenses were incurred by the Company, product costs
could significantly increase, thus materially and adversely affecting the
Company's results of operations. Additionally, the Company is subject to a
variety of government regulations relating to its operations, such as
environmental, labor and export control regulations. While the Company believes
it has obtained all permits necessary to conduct its business, the failure to
comply with present and future regulations could result in fines being imposed
on the Company or suspension or cessation of operations. Any failure by the
Company to control the use of, or adequately restrict the discharge of,
hazardous substances could subject the Company to future liabilities, and could
have a material adverse effect on the Company's business and results of
operations.
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Product Recalls and Liability. Products such as those sold by the Company
may be subject to recall for unforeseen reasons. In addition, certain projected
applications of the Company's products entail the risk of product liability
claims. The Company performs extensive testing of its products at each stage of
their design to minimize the risk of recall or product liability claims. A
recall or product liability claim could materially adversely affect the
Company's operation and reputation. The Company does not maintain any insurance
related to recalls or product liability and, accordingly, a product recall of
the Company's principal products or successful product liability claims against
the Company would have a material adverse effect on the Company.
Control by Management and Current Stockholders; No Independent Directors.
The Company's current management owns approximately 36% of the outstanding
shares of Common Stock. Management may, therefore, have the ability to elect a
majority of the directors of the Company and to control the outcome of all
issues submitted to a vote of the stockholders of the Company. The Company
currently has only two directors, Dr. Adlerstein and Mr. Sonnenschein, both of
whom are insiders and principal stockholders. Accordingly, such individuals are
in a position to control the actions and decisions of the Board of Directors
Year 2000 Compliance. The Company is in the process of assessing the
impact of year 2000 on its operations and systems, including those of its
suppliers and collaborators and other third parties. Management is in the
process of formalizing its assessment procedures and developing a plan to
address identified issues, if any. To date, the Company has evaluated its
financial and accounting systems and believes that these systems are not and
will not be materially affected by the year 2000. The Company does not yet know
the extent, if any, of the impact of the year 2000 on its other systems and
equipment or those of third parties with which the Company does business. There
can be no assurance that third parties, such as suppliers, clinical research
organizations and collaborative parties, are using systems that are year 2000
compliant or will address any year 2000 issues in a timely fashion, or at all.
Any year 2000 compliance problems of either the Company, its suppliers, its
clinical research organizations, or its collaborative partners could have a
material adverse effect on the Company's business, operating results and
financial conditions.
Possible Volatility of Stock Price. There can be no assurance that an
active trading market for the Common Stock or Redeemable Warrants will be
sustained in the future. The market price of the shares of Common Stock and the
Redeemable Warrants, like that of many other small cap and emerging technology
companies, is likely to be highly volatile.
Absence of Dividends. The Company has not paid any cash dividends on the
Common Stock since inception and does not intend to pay any dividends to its
stockholders in the foreseeable future. The Company currently intends to
reinvest earnings, if any, in the development and expansion of its business.
Shares Eligible for Future Sale May Adversely Affect the Market. 2,173,100
shares of the Company's outstanding shares of Common Stock are "restricted
securities." All of such restricted securities are available for sale pursuant
to Rule 144 as described below commencing December 15, 1997, 100,438, 560,015
and 1,512,647 of which are subject to a 13-month, 12-month and 24-month,
respectively, restriction against transfer, each commencing September 16, 1997.
The officers and directors of the Company, who own an aggregate of 1,227,393 of
the 2,173,100 above-referenced shares have agreed not to sell, assign or
transfer any securities of the Company owned by them until September 16, 1999
without the prior consent of Patterson Travis, Inc., the underwriter of the
Public Offering (the "Underwriter"). Rule 144 provides, in essence, that a
person holding "restricted securities" for a period of one year may sell only an
amount every three months equal to the greater of (a) one percent of the
Company's issued and outstanding shares or (b) the average weekly volume of
sales during the four calendar weeks preceding the sale. The amount of
"restricted securities" which a person who is not an affiliate of the Company
may sell is not so limited, since non-affiliates may sell without volume
limitation their shares held for two years if there is adequate current public
information available concerning the Company. In such an event, "restricted
securities" would be eligible for sale to the public at an earlier date. The
sale in the public market of such shares of Common Stock may adversely affect
prevailing market prices of the Common Stock.
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Effect of Outstanding Options and Warrants. At March 31, 1998, there were
outstanding stock options to purchase an aggregate of 127,827 shares of Common
Stock at an exercise price of $0.00115 per share, warrants to purchase an
aggregate of 100,000 shares of Common Stock at an exercise price of $1.00 per
share, stock options and warrants to purchase an aggregate of 247,829 shares of
Common Stock at an exercise price of $2.88 per share, stock options to purchase
an aggregate of 207,836 shares of Common Stock at an exercise price of $4.60 per
share, stock options to purchase an aggregate of 25,000 shares of Common Stock
at an exercise price of $6.00 per share, warrants to purchase 322,000 Units at
an exercise price of $5.75 per Unit and warrants to purchase 104,400 Units at an
exercise price of $9.49 per Unit. Of the foregoing, warrants and options to
purchase 534,578 shares of Common Stock are subject to a 24-month lock-up
restriction, the warrants to purchase 322,000 Units are subject to a 12-month
lock-up restriction, and up 174,000 shares issued or to be issued to one
stockholder are subject to a 13-month lock-up restriction. Each of the foregoing
lock-up restriction periods commenced on September 16, 1997. The exercise of
such outstanding options and warrants will dilute the percentage ownership of
the Company's stockholders, and any sales in the public market of shares of
Common Stock underlying such securities may adversely affect prevailing market
prices for the Common Stock. Moreover, the terms upon which the Company will be
able to obtain additional equity capital may be adversely affected since the
holders of such outstanding securities can be expected to exercise their
respective rights therein at a time when the Company would, in all likelihood,
be able to obtain any needed capital on terms more favorable to the Company than
those provided in such securities.
Current Prospectus and State Blue Sky Registration Required to Exercise
Redeemable Warrants. The Company will be able to issue shares of its Common
Stock upon exercise of the Redeemable Warrants only if there is then a current
prospectus relating to such Common Stock and only if such Common Stock is
qualified for sale or exempt from qualification underapplicable state securities
laws of the jurisdictions in which the various holders of the Redeemable
Warrants reside. The Company has undertaken and intends to file and keep current
a prospectus which will permit the purchase and sale of the Common Stock
underlying the Redeemable Warrants, but there can be no assurance that the
Company will be able to do so. Although the Company intends to seek to qualify
for sale the shares of Common Stock underlying the Redeemable Warrants in those
states in which the securities are to be offered, no assurance can be given that
such qualification will occur. The Redeemable Warrants may be deprived of any
value and the market for the Redeemable Warrants may be limited if a current
prospectus covering the Common Stock issuable upon the exercise of the
Redeemable Warrants is not kept effective or if such Common Stock is not
qualified or exempt from qualification in the jurisdictions in which the holders
of the Redeemable Warrants then reside.
Potential Adverse Effect of Redemption of Redeemable Warrants. The
Redeemable Warrants may be redeemed by the Company at a redemption price of $.01
per Redeemable Warrant upon 30 days written notice given at any time after
September 16, 1998 in the event that the market price of the Common Stock equals
or exceeds $10.00 per share. "Market price" shall mean: (i) the average closing
sale price of the Common Stock, for any 10 consecutive trading days within a
period of 30 consecutive trading days ending within five days of the date of
notice of redemption, as reported on the National Association of Securities
Dealers, Inc. ("NASD") Automated Quotation System or the NASD Electronic
Bulletin Board or (ii) the average of the last reported sales price of the
Common Stock for the 10 consecutive business days ending within five days of the
date of notice of redemption, on the primary exchange on which the Common Stock
is traded, if traded on a national securities exchange. Notice of redemption of
the Redeemable Warrants could force the holders to exercise the Redeemable
Warrants and pay the exercise price at a time when it may be disadvantageous for
them to do so, to sell the Redeemable Warrants at the current market price when
they might otherwise wish to hold the Redeemable Warrants, or to accept the
redemption price which would be substantially less than the market value of the
Redeemable Warrants at the time of redemption.
Preferred Stock; Possible Anti-Takeover Effects. The Company's Certificate
of Incorporation, as amended, authorizes the Board of Directors to issue up to
2,000,000 shares of preferred stock, par value $0.00115 per share. The preferred
stock may be issued in one or more series, the terms of which maybe determined
at the time of issuance by the Board of Directors, without further action by
stockholders, and may include voting rights (including the right to vote as a
series on particular matters), preferences as to dividends and liquidation,
conversion and redemption rights, and sinking fund provisions. No preferred
stock is currently outstanding, and the Company has
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no present plans for the issuance of any preferred stock. The Company has agreed
not to issue any shares of preferred stock without the Underwriter's consent
until September 16, 1999. However, the issuance of any such preferred stock
could materially adversely affect the rights of holders of Common Stock and,
therefore, could reduce the value of the Common Stock. In addition, specific
rights granted to future holders of preferred stock could be used to restrict
the Company's ability to merge with, or sell its assets to, a third party. The
ability of the Board of Directors to issue preferred stock could discourage,
delay, or prevent a takeover of the Company, thereby preserving control of the
Company by the current stockholders.
No Assurance of Public Trading Market. Prior to the Public Offering, there
was no established trading market for the Units, Common Stock and Redeemable
Warrants and there is no assurance that a regular trading market for such
securities on The Nasdaq Stock Market, or any other exchange, will be sustained
in the future. Although the Company's securities are included on the OTC
Bulletin Board, there can be no assurance that a regular trading market for the
securities will be sustained in the future. The OTC Bulletin Board is an
unorganized, inter-dealer, over-the-counter market which provides significantly
less liquidity than The Nasdaq Stock Market, and quotes for stocks included on
the OTC Bulletin Board are not listed in the financial sections of newspapers as
are those for The Nasdaq Stock Market. Therefore, prices for securities traded
solely on the OTC Bulletin Board may be difficult to obtain and purchasers of
the Units may be unable to resell the securities offered hereby at or near their
original offering price or at any price. In the event the securities are not
included on the OTC Bulletin Board, quotes for the securities may be included in
the "pink sheets" for the over-the-counter market. See "--'Penny Stock'
Regulations May Impose Certain Restrictions on Marketability of Securities."
"Penny Stock" Regulations May Impose Certain Restrictions On Marketability
Of Securities. The Securities and Exchange Commission (the "Commission") has
adopted regulations which generally define "penny stock" to be any equity
security that is not traded on a national securities exchange or Nasdaq and that
has a market price of less than $5.00 per share or an exercise price of less
than $5.00 per share, subject to certain exceptions. If the Company's securities
that are currently included on the OTC Bulletin Board are trading at less than
$5.00 per security at any time, the Company's securities may become subject to
rules that impose additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and accredited
investors(generally, such investors have assets in excess of $1,000,000 or an
individual annual income exceeding $200,000, or, together with the investor's
spouse, a joint income of $300,000). For transactions covered by these rules,
the broker-dealer must make a special suitability determination for the purchase
of such securities and have received the purchaser's written consent to the
transaction prior to the purchase. Additionally, for any transaction involving a
penny stock, unless exempt, the rules require, among other things, the delivery,
prior to the transaction, of a risk disclosure document mandated by the
Commission relating to the penny stock market and the risks associated
therewith. The broker-dealer must also disclose the commission payable to both
the broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the penny stock rules may restrict
the ability of broker-dealers to sell the Company's securities and may affect
the ability of stockholders to sell the Company's securities in the secondary
market. See "-- No Assurance of Public Trading Market."
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases approximately 18,500 square feet of
laboratory and office space in State College, Pennsylvania. The Company leases
this space under an operating lease that expired on June 30, 1997. The lease
provides that it will continue for successive one-year periods until terminated
by giving written notice not less than three months prior to the end of the
then-current term. As of March 31, 1998, no such notice had been given. The
Company has the right to use this space for laboratory research and development,
storage and distribution, offices, marketing and other related uses. Although
the Company believes that its existing facilities are adequate to meet its
requirements for the near term, additional space may be necessary in the future.
There can be no assurance that sufficient additional space will be available in
the area upon acceptable terms, or at all.
24
<PAGE> 26
ITEM 3. LEGAL PROCEEDINGS
Jack J. Grynberg v. SpectruMedix Corporation (formerly Premier American
Technologies Corporation) and Steve Guzofsky. In March 1996, a complaint was
filed in the District Court for the City and County of Denver, Colorado alleging
common law fraud and violation of the Colorado Securities Act in connection with
the plaintiff's purchase of Common Stock of the Company in 1992. Specifically,
the plaintiff alleges that the co-defendant placement agent induced the
plaintiff's purchase of a unit in a private placement by misrepresenting that
the plaintiff was being offered the sole remaining unit in such private
placement and that the Company would undertake a public offering within six
months of completing such private placement. The plaintiff sought rescissionary
damages in the sum of $45,000, punitive damages in like amount, interest, costs
and attorneys' fees. The court by order dated March 6, 1997 struck the punitive
damages claim, and later ruled that the plaintiff could seek either rescission
or restitution. In February 1998, judgment was entered against the plaintiff and
in favor of the Company with regard to the plaintiff's claim for damages. The
time for the plaintiff to file an appeal of the judgment has not yet expired.
Should an appeal be filed, the Company believes, based in part on its
discussions with its litigation counsel, that it has meritorious defenses to
these claims and it intends to defend the litigation vigorously. While
management believes that the resolution of this matter will not have a material
adverse effect on the Company's business, financial condition and results of
operations, the results of these proceedings are uncertain and there can be no
assurance to that effect.
Robert M. Rubin v. SpectruMedix Corporation et. al. On April 21, 1997, a
complaint was filed in the Supreme Court of the State of New York alleging
breach of contract. Specifically, the plaintiff alleges that the Company
defaulted under a promissory note issued to plaintiff on May 16, 1996 in the
amount of $175,000 (the "Rubin Note") while such Note was outstanding and
therefore that the Company is liable and indebted to plaintiff in the principal
amount of $175,000, together with interest and expenses. The Company, on May
2,1997, paid the principal and interest due under the Rubin Note. The main
remaining issue asserted by the plaintiff is whether, pursuant to an alleged
related agreement, the plaintiff is entitled to 152,174 shares (adjusted to
reflect stock splits) of Common Stock or, alternatively, $875,000. Plaintiff
alleges that the Company undertook to enter into a securities purchase agreement
pursuant to which he should have received the aforementioned shares of Common
Stock. The Company contends that such securities purchase agreement was never
discussed and therefore that no agreement was reached with respect to the terms
thereof. Such securities purchase agreement was not signed by either of the
parties to the Rubin Note. The Company believes that it has meritorious defenses
to the above-described claims and it intends to defend the litigation
vigorously. However, due to the nature of litigation and because the lawsuit is
in the initial stages, the Company cannot determine the total expense or
possible loss, if any, that may ultimately be incurred either in the context of
a trial or as a result of a negotiated settlement. While management believes
that the resolution of this matter will not have a material adverse effect on
the Company's business financial condition and results of operations, the
results of these proceedings are uncertain and there can be no assurance to that
effect. Regardless of the ultimate outcome of the litigation, it could result in
significant diversion of time by the Company's personnel.
Other Obligations. In addition, as a result of the historical lack of
working capital of the Company, the Company's assets are encumbered by liens and
security interests granted in favor of certain of the Company's creditors. A
majority of the obligations that gave rise to such liens and security interests
have been repaid with the proceeds of the Public Offering and the liens and
security interests resulting therefrom are in the process of being released. Two
parties have filed security interests, which are still outstanding, for
obligations aggregating $130,000. In the event that any party holding a security
interest should execute on such security interest, the Company's assets could be
subject to seizure. In such event, the Company would be materially adversely
affected. In the event the Company should become party to any litigation
relating to these obligations, the costs of defending against such claims could
be substantial, and the Company could be materially adversely affected.
Other than the foregoing, and except as to the security interests with
respect to outstanding liabilities, the Company is not a party to any other
material legal proceedings.
25
<PAGE> 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of securities holders during the
fourth quarter of the fiscal year ended March 31, 1998.
26
<PAGE> 28
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Units, Common Stock and Warrants trade on the Nasdaq OTC
Bulletin Board under the symbols SMDXU, SMDX AND SMDXW, respectively. The
Company's Units began trading on September 16, 1997. The Company's Common Stock
and Warrants became separable and began trading on December 17, 1997.
Set forth below is the range of high and low bid prices for the Company's
Common Stock for each quarter commencing on or after December 17, 1997, as
regularly quoted on the Nasdaq OTC Bulletin Board. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions.
<TABLE>
<CAPTION>
High Low
---- -----
<S> <C> <C>
Q3 FY 98 (commencing December 17, 1997) 5 1/2 5 1/2
Q4 FY 98 7 3/8 5 1/2
Q1 FY 99 (through June 15, 1998) 9 1/8 6
</TABLE>
As of June 15, 1998, there were approximately 56 holders of record of the
Company's Common Stock. No dividends have been paid on the Common Stock since
the Company's inception, and the Company does not anticipate paying any
dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED
SECURITIES
Recent Sales of Unregistered Securities
In March 1998, the Company issued 22,000 shares of Common Stock as a gift
to a certain charitable organization.
In February 1998, the Company issued to a consultant 7,000 shares of
Common Stock as compensation in connection with a consulting services agreement
between such consultant and the Company.
In October 1997, the holder of a $300,000 promissory note converted such
note into 104,348 shares of Common Stock.
In September 1997, the Company issued 8,166 shares of Common Stock in lieu
of interest payments on a note payable.
Use of Proceeds From Registered Securities.
The effective date of the Registration Statement (File No. 333-6650) for
which this statement is made is September 16, 1997. The Company has been
assigned a CUSIP number of 84763K. The offering to which this statement relates
(the "Public Offering") commenced on September 17, 1997, did not terminate
before any securities were sold and, as of the date hereof, has not terminated.
The managing underwriter of the Public Offering was Patterson Travis, Inc.
Pursuant to the Public Offering, the Company registered (i) Common Stock,
classified as an "equity" security, (ii) Units, classified as "other" securities
and (iii) Redeemable Warrants, also classified as "other" securities. Each Unit
consists of one share of Common Stock and one Redeemable Warrant to purchase one
additional share of Common Stock. The Redeemable Warrants are exercisable at a
price per share of $7.50 for a period of four years commencing September 16,
1998 and are subject to redemption by the Company at a
27
<PAGE> 29
redemption price of $0.01 per Redeemable Warrant upon 30 days' written notice
given at any time after September 16, 1998 in the event that the market price of
the Common Stock equals or exceeds $10.00 per share.
The Company registered and sold 1,200,600 Units for an aggregate price of
$6,903,450. In connection with the Public Offering, the issuer allowed
underwriting discounts and commissions of $690,345 and incurred aggregate
expenses of $1,015,100, broken down as follows: a non-accountable expense
allowance of $207,104, a consulting fee in the amount of $100,000 and offering
expenses of $707,996. Net offering proceeds to the Company after deducting
expenses were $5,198,055. Of the net proceeds, approximately $250,000 has been
used to pay professional fees, approximately $1,620,000 has been used to repay
indebtedness, including approximately $75,000 of indebtedness to officers and
directors of the Company, and approximately $620,000 has been used towards
repayment of accounts payable. The remaining proceeds are to be allocated as set
forth in the prospectus (the "Prospectus") included in the Registration
Statement (File No. 333-31843) relating to the Public Offering. This use of
proceeds does not represent a material change in the use of proceeds described
in the Prospectus.
28
<PAGE> 30
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Annual Report on Form 10-KSB. Except for the historical
information contained herein, the discussion in this Report contains certain
forward-looking statements, within the meaning of Section 27A of the Securities
Act and Section 27E of the Exchange Act, that involve risks and uncertainties,
such as statements of the Company's plans, objectives, expectations and
intentions. Forward-looking statements are based on management's current
expectations and are subject to a number of risks and uncertainties that could
cause actual results to differ materially from expected results. The cautionary
statements made in this Annual Report should be read as being applicable to all
related forward-looking statements wherever they appear in this Annual Report.
Factors that could cause or contribute to such differences include those
discussed in "Risk Factors," as well as those discussed elsewhere herein.
OVERVIEW
During the period from April 1992 (inception) through June 1992, the
Company was engaged in organizational activities, including negotiating
agreements with the Bankruptcy Court in Harrisburg, Pennsylvania to lease, on a
temporary basis, the assets and facilities of Nuclide Corporation ("Nuclide")
and Measurement and Analysis Systems, Inc. ("MAAS"). In December 1992, via court
order, the Company acquired the assets of Nuclide and MAAS. In April 1993, the
Company acquired all the assets of Lab Data Corporation, subsequently known as
Laboratory Software Associates ("LabData"), including an inventory of computer
hardware and a complete line of data acquisition and instrument control
software. Since June 1992, the Company has devoted substantially all of its
resources to upgrade and improve the Company's existing line of instrumentation
(Mass Spectrometers, Luminoscopes, etc.), electronic components and software and
to initiate the Company's strategy of carving out new and commercially promising
areas of application for its instrumentation and its scientific expertise and
capabilities, as well as finding new technologies that lie within its technical
purview for licensing and commercialization. The result of these efforts is the
present availability for sale of a fully upgraded line of magnetic sector mass
spectrometers, new and improved Luminoscope add-ons, and high-performance
software for a variety of applications in the petrochemical, environmental and
geochemical areas, among others. In addition, the Company has acquired (i) a
license for a DNA Sequencer that is in the process of being brought to the
commercial marketplace, (ii) an option for an instrument-intensive diagnostic
technique that the Company believes will have significant consequences for the
prevention and therapy of many diseases and (iii) a license to certain
technology relating to the development of a mass spectrometer that will be used
to measure pulmonary function. As most of the Company's products are still under
development, limited revenues have been derived from the sale of these products
and the Company does not expect to receive substantial revenues from the sale of
its products until at least 1999, at the earliest.
The Company has financed its operations primarily through the private sale
and issuance of equity securities and proceeds from an initial public offering
(the "Public Offering") of equity securities during September 1997. The Company
expects to enter into collaborative agreements for the financing of its research
and development efforts and for the commercialization of its products. The
Company was awarded a grant from the United States Department of Energy during
September 1997 which paid the Company $75,000 over a period of six months,
subject to certain terms and conditions, and through March 31, 1998, grant
proceeds of $75,000 have been received. In addition, the Company has been
selected for a Phase II award by the Department of Energy's Small Business
Innovations Research Program. The amount of the award has not yet been
determined. No assurance can be given that the Company will obtain significant
revenues from such grant.
The Company has not been profitable since inception and had an accumulated
deficit of $8,570,152 at March 31, 1998. Successful future operations depend
upon the Company's ability to develop and commercialize its products. The
Company will require additional funds to complete the development of its
products and to fund operating losses that are expected to be incurred in the
next several years.
29
<PAGE> 31
RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
The Company had total revenue of $341,813 and $562,310 for the fiscal
years ended March 31, 1998 and 1997, respectively. Revenue for both periods
reflect sales from old product lines. To date, the Company has received limited
revenues from the sales of products, and it does not expect to receive
significant product revenue for several years, if at all. The decreases in
revenue of $220,497, or approximately 39%, during fiscal year 1998 and $90,139,
or approximately 14%, during fiscal year 1997, were due primarily to the
increased focus of the Company on its various research and development,
commercialization and fundraising efforts, which resulted in the shifting of key
personnel from sales and marketing into such activities, and secondarily to the
historical lack of any full time sales and marketing staff.
Of the total revenue discussed above, revenue derived from the sale of the
Company's services totaled $71,938 and $62,953 for the fiscal years ended March
31, 1998 and 1997, respectively. The increase in service revenue of $8,985, or
approximately 14%, during fiscal year 1998 and $19,013, or approximately 43%,
during fiscal year 1997 were due to increased service activities, which are
dependent primarily on cash availability.
Research and development expenses increased 132% in 1998 and 79% in 1997
to $1,279,959 and $550,620, respectively, due primarily to increased
expenditures for the Company's new licensed technologies. The proceeds of the
public offering in September 1997 and the Bridge Financing during the second
half of the fiscal year ended March 31, 1997, enabled the Company to increase
its research and development activities, which are dependent primarily on cash
availability. The Company anticipates that research and development expenses
will increase for fiscal year 1999 as a result of expenses relating to its
option and research and development agreements with the University of
California, Berkeley, its license agreements with Ames Laboratory/Iowa State
University and its license and research and development agreements with the
University of Pennsylvania, and the ability to fund such activities from the
proceeds of the Public Offering.
General and administrative expenses were $1,282,002 and $691,995 during
the fiscal years ended March 31, 1998 and 1997, respectively, an increase of
$590,007, or approximately 85% in fiscal 1998 and an increase of $45,506, or
approximately 7%, in fiscal 1997 from the respective preceding fiscal years.
Approximately $355,125 and $269,002 of general and administrative expenses for
the fiscal years ended March 31, 1998 and 1997, respectively, were attributable
to payroll, payroll taxes and employee benefits. This represents an increase of
$86,123 during fiscal 1998 as compared to the preceding fiscal year. During
fiscal 1998, legal, accounting and consulting fees increased by $341,316 to
$462,161, and the Company donated shares of its Common Stock to a charitable
organization resulting in an increase of $140,250. The Company expects its
general and administrative expenses to increase in the future as a result of
further Company expansion.
Interest expense of $133,372 and $257,211 for the fiscal years ended March
31, 1998 and 1997, respectively, resulted from borrowings. Interest expense
decreased during fiscal 1998 primarily because the obligations which caused such
interest expense were repaid during September 1997 and October 1997. Interest
expense increased by $131,373 during fiscal 1997 primarily as a result of
additional borrowings.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
the sale of equity securities, and loans received under notes payable
aggregating approximately $2,650,000.
In September 1997, the Company completed the Public Offering. The net
proceeds from the Public Offering were $5,198,055 (gross proceeds of $6,903,450
less related costs of $1,705,395). The Company believes that the proceeds
received from the Public Offering, together with future revenue and possible
future collaborative agreements and/or government grants, will be sufficient to
meet the Company's operating expenses and capital requirements through the end
of 1998. The Company will attempt to raise any required additional funds through
equity or debt financings, collaborative arrangements with corporate partners or
from other sources if and when available. There can be no assurance that any
such additional funding will be available on favorable terms from any of these
sources, if at all.
30
<PAGE> 32
In August 1994, the Company issued to Gross Foundation, Inc. ("Gross") a
convertible promissory note in the principal amount of $300,000 (the "Note").
The Note accrued interest at the rate of 10% per annum and was due and payable
on August 4, 1997. During October 1997, the Note was converted into 104,348
shares of the Company's Common Stock.
From July 1996 through February 1997, the Company sold in a private
placement offering 16.1 units, each unit consisting of $100,000 of 10%
promissory notes and 34,783 shares of Common Stock for an aggregate purchase
price of $1,610,000. The shares have been valued at approximately $4.60 per
share and an original issue discount on the notes of $2,576,000 had been
recorded (resulting in an annualized effective interest rate of 170%).
In July 1997, the Company renegotiated the terms of the Bridge Financing
with its noteholders. Under the revised terms, one-half the face amount of the
promissory notes ($805,000) was converted into warrants (the "Warrants") to
purchase Units (each Unit consisting of Common Stock and one Redeemable
Warrant). The Warrants to purchase 322,000 Units (16.1 Units multiplied by
20,000) are exercisable for four years commencing September 16, 1998 at an
exercise price of $5.75 per Unit (the Public Offering price). The outstanding
principal and interest due under the promissory notes was paid in September
1997. Additional obligations of approximately $252,000 were also written off or
otherwise settled during the year ended March 31, 1998. A portion of the
proceeds of the Bridge Financing was used to expedite the commercialization
effort on the DNA Sequencer and to complete the manufacture of the
instrumentation prototypes for the diagnostic kinetics project. In addition to
the purchase of materials for these projects, the Company has hired additional
scientists and lab technicians. In addition to the sales of the Company's new
products, the sales of the Company's current product lines are expected to
continue and increase due to the fact that the new product lines are expected to
stimulate the sales of core product instrumentation.
The Company expects its cash requirements to increase in future periods.
The Company will require additional funds to conduct research and development,
pay various required license and milestone fees, establish third-party
collaborations and market its products. The Company's capital requirements
depend on many factors, including the status of the development of its products,
obtaining manufacturing capabilities to produce its products in volume,
prosecuting and enforcing its intellectual property rights, competing
technological and market developments, and the ability of the Company to develop
new collaborative and licensing arrangements.
YEAR 2000 COMPLIANCE
The Company is in the process of assessing the impact of year 2000 on its
operations and systems, including those of its suppliers and collaborators and
other third parties. Management is in the process of formalizing its assessment
procedures and developing a plan to address identified issues, if any. To date,
the Company has evaluated its financial and accounting systems and believes that
these systems are not and will not be materially affected by the year 2000. The
Company does not yet know the extent, if any, of the impact of the year 2000 on
its other systems and equipment or those of third parties with which the Company
does business. There can be no assurance that third parties, such as suppliers,
clinical research organizations and collaborative parties, are using systems
that are year 2000 compliant or will address any year 2000 issues in a timely
fashion, or at all. Any year 2000 compliance problems of either the Company, its
suppliers, its clinical research organizations, or its collaborative partners
could have a material adverse effect on the Company's business, operating
results and financial conditions.
FUTURE OUTLOOK
In addition to historical information, this report contains predictions,
estimates and other forward-looking statements that involve a number of risks
and uncertainties. These risks and uncertainties include the fact that
SpectruMedix is still a relatively young company and has not yet completed a
full cycle of development, regulatory approval and commercialization for any of
its products. The regulatory processes through which some of the Company's
products must proceed are complex, uncertain and costly, and no assurance can be
given regarding the timing of regulatory progress or that the Company will be
successful in commercializing any of its product candidates. These development
processes require substantial amounts of funding, and the Company is dependent
on
31
<PAGE> 33
corporate partners and the equity markets to finance such efforts. Where access
to funding is difficult, the Company's stockholders may face significant
dilution, and the ability of the Company to proceed with its programs and plans
may be significantly and adversely affected. Actions and advances by competitors
may also significantly affect the Company's prospects, as may the existence of
patents held by such competitors or potential competitors.
32
<PAGE> 34
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
SpectruMedix Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of SpectruMedix Corporation at March
31, 1998, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
which raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PRICE WATERHOUSE LLP
New York, New York
June 10, 1998
33
<PAGE> 35
REPORT OF LAZAR LEVINE & FELIX LLP,
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders
SpectruMedix Corporation
State College, Pennsylvania
We have audited the accompanying statements of operations, shareholders'
equity (deficit) and cash flows of SpectruMedix Corporation for the year ended
March 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of
SpectruMedix Corporation for the year ended March 31, 1997, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in the notes to the
financial statements, the Company has incurred substantial losses since its
inception, and had a substantial working capital deficiency at March 31, 1997.
In addition, the Company is in arrears or in default on a number of obligations
to third parties. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plan to raise funds through
an initial public offering is described in the Notes. In the event the initial
public offering is successful, continuation of the business thereafter is
dependent on the Company's ability to generate sufficient cash flow to meet its
operating needs. The accompanying financial statements do not include any
adjustments to the recorded asset amounts and to the recorded liability amounts
that might be necessary should the Company be unable to continue as a going
concern.
LAZAR LEVINE & FELIX LLP
New York, New York
May 16, 1997
34
<PAGE> 36
SPECTRUMEDIX CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
March 31,
1998
------------
<S> <C>
Assets
Current assets
Cash and cash equivalents $ 1,680,643
Accounts receivable 12,806
Inventories 381,393
Prepaid expenses 49,426
------------
Total current assets 2,124,268
Property and equipment, net 279,717
Patent fees 216,947
License and license options, net of accumulated
amortization of $25,669 159,346
Security deposit 8,479
------------
Total assets $ 2,788,757
============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 1,132,580
Current portion of long-term debt 5,041
Customer deposits 5,960
------------
Total current liabilities 1,143,581
------------
Long-term debt, net of current portion 29,217
------------
Commitments and contingencies (Notes 6, 13 and 16)
Stockholders' equity
Preferred stock, $.00115 par value, 2,000,000 shares
authorized, none issued or outstanding --
Common stock, $.00115 par value, 23,000,000 shares
authorized, 3,515,214 shares issued and outstanding 4,042
Additional paid-in-capital 10,623,823
Accumulated deficit (8,570,152)
------------
2,057,713
Less: deferred compensation (441,754)
------------
Total stockholders' equity 1,615,959
------------
Total liabilities and stockholders' equity $ 2,788,757
============
</TABLE>
The accompanying notes are an integral part of these financial statements
35
<PAGE> 37
SPECTRUMEDIX CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
MARCH 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Products $ 269,875 $ 499,357
Services 71,938 62,953
------------ ------------
TOTAL REVENUE 341,813 562,310
------------ ------------
Cost of revenues:
Products 292,311 336,479
Services 28,775 25,088
------------ ------------
TOTAL COST OF REVENUES 321,086 361,567
------------ ------------
Gross profit 20,727 200,743
------------ ------------
Operating expenses:
Research and development, net 1,279,959 550,620
General and administrative 1,282,002 691,995
------------ ------------
TOTAL OPERATING EXPENSES 2,561,961 1,242,615
------------ ------------
Loss from operations (2,541,234) (1,041,872)
------------ ------------
Other income (expense):
Interest income 47,695 --
Amortization of original issue discount and
deferred bridge financing costs (1,674,705) (1,359,319)
Interest expense (133,372) (257,211)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (1,760,382) (1,616,530)
------------ ------------
Loss from operations before extraordinary items (4,301,616) (2,658,402)
Extraordinary item:
Gain on forgiveness of debt 252,396 --
------------ ------------
NET LOSS $ (4,049,220) $ (2,658,402)
------------ ------------
BASIC AND DILUTED LOSS PER SHARE:
Loss from operations before extraordinary item $ (1.51) $ (1.51)
Extraordinary item 0.09 --
------------ ------------
Basic and diluted loss per share $ (1.42) $ (1.51)
------------ ------------
Weighted average common shares outstanding
used for basic and diluted loss per share 2,846,749 1,761,540
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE> 38
SPECTRUMEDIX CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------------ PAID-IN ACCUMULATED DEFERRED EQUITY
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION (DEFICIT)
--------- ----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1996 1,571,343 $ 1,807 $ 349,553 $(1,862,530) -- $(1,511,170)
Issuance of common shares
in lieu of interest payments 41,742 48 191,952 -- -- 192,000
Issuance of common shares in
connection with a private placement
bridge financing, net of offering costs
of $103,808 560,015 644 2,471,548 -- -- 2,472,192
Net loss -- -- -- (2,658,402) -- (2,658,402)
--------- ----------- ----------- ----------- --------- -----------
Balance at March 31, 1997 2,173,100 2,499 3,013,053 (4,520,932) -- (1,505,380)
Issuance of common shares and
warrants in connection with initial
public offering, net of offering costs
of $1,705,395 1,200,600 1,381 5,196,674 -- -- 5,198,055
Issuance of warrants in connection
with bridge financing restructuring -- -- 869,007 -- -- 869,007
Issuance of common shares
in lieu of interest payments 8,166 9 37,557 -- -- 37,566
Issuance of common shares
upon conversion of note payable 104,348 120 299,880 -- -- 300,000
Issuance of common shares
to consultant 7,000 8 43,742 -- -- 43,750
Issuance of common shares
as charitable contribution 22,000 25 140,225 -- -- 140,250
Compensatory stock options issued
to non-employees -- -- 629,285 -- $(441,754) 187,531
Issuance of common stock warrants
in connection with note payable -- -- 394,400 -- -- 394,400
Net loss -- -- -- (4,049,220) -- (4,049,220)
--------- ----------- ----------- ----------- --------- -----------
Balance at March 31, 1998 3,515,214 $ 4,042 $10,623,823 $(8,570,152) $(441,754) $ 1,615,959
========= =========== =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE> 39
SPECTRUMEDIX CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
MARCH 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,049,220) $ (2,658,402)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of original issue discount and deferred
bridge financing costs 1,674,705 1,359,319
Extraordinary gain on forgiveness of debt (252,396) --
Depreciation and amortization 64,128 22,527
Bad debt expense -- 488
Non-cash compensation expense 192,446 --
Non-cash charitable contribution 140,250 --
Non-cash interest expense 37,566 192,000
Changes in assets and liabilities:
Accounts receivable 68,147 (80,505)
Inventory (271,943) (43,810)
Prepaid expenses (10,591) --
Other assets (345,487) (59,939)
Accounts payable and accrued expenses 32,971 529,517
Customer deposits 5,960 (150,589)
------------ ------------
NET CASH USED BY OPERATING ACTIVITIES (2,713,464) (889,394)
------------ ------------
Cash flows from investing activities:
Capital expenditures (212,216) (37,135)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (212,216) (37,135)
------------ ------------
Cash flows from financing activities:
Decrease in bank overdraft -- (19,316)
(Repayments of) proceeds from bridge financing (805,000) 1,610,000
Proceeds from notes payable - others 495,000 178,637
Repayment of notes payable - others (885,728) --
Principal payments on long term-debt (2,356) --
Proceeds from initial public offering, net 5,198,055 --
Deferred initial public offering costs 328,228 (328,228)
Bridge financing costs -- (167,432)
Proceeds from officers' notes -- 45,158
Repayment of officers' notes (74,166) (40,000)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,254,033 1,278,819
------------ ------------
Net (decrease) increase in cash and cash equivalents 1,328,353 352,290
Cash and cash equivalents, at beginning of period 352,290 --
------------ ------------
Cash and cash equivalents, at end of period $ 1,680,643 $ 352,290
------------ ------------
Supplemental disclosures of cash flows information
Cash paid during the year for
Interest $ 95,806 $ 8,800
Taxes -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE> 40
SPECTRUMEDIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. COMPANY
SpectruMedix Corporation (the "Company") was incorporated in the State of
Delaware on April 16, 1992. The Company develops, manufactures, and markets
high technology measuring instruments and software packages with a strong
focus on medical and scientific technologies and associated instrumentation.
The Company also provides systems maintenance for the measuring instruments
it manufactures.
2. BASIS OF PRESENTATION
These financial statements have been prepared assuming the Company will
continue as a going concern. The Company has incurred substantial losses
since its inception in 1992, and expects to incur additional losses to
complete the commercialization of its technologies. These conditions raise
substantial doubt about the Company's ability to continue as a going
concern. The Company's ability to continue as a going concern is dependent
upon its ability to generate sufficient cash flow to meet its obligations as
they come due. Management is actively pursuing various options which include
securing additional equity financing and believes that sufficient funding
will be available to meet its planned business objectives. These financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
To prepare financial statements in accordance with generally accepted
accounting principles, management makes certain estimates and assumptions,
where applicable, that affect the reported amounts of assets and liabilities
at the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. While actual results
could differ from those estimates, management does not expect such
variances, if any, to have a material effect on the financial statements.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The
Company invests its excess cash in certificates of deposit and money market
funds of major financial institutions which are subject to minimal credit
and market risk.
SUPPLEMENTAL CASH FLOW INFORMATION
In September 1997, the Company issued 8,166 shares of its common stock
valued at approximately $4.60 per share in lieu of interest payments on a
note.
In October 1997, the Company financed the purchase of transportation
equipment through the issuance of long-term debt in the amount of $36,614.
During the year ended March 31, 1998, the holder of a $300,000 promissory
note elected to convert the principal into 104,348 shares of the Company's
common stock.
In February 1998, the Company issued 7,000 shares of its common stock valued
at approximately $6.25 per share in exchange for services to be provided by
a consultant.
In March 1998, the Company donated 22,000 shares of its common stock valued
at approximately $6.38 per share to a charitable organization.
39
<PAGE> 41
Between August 1996 and February 1997, the Company issued 560,015 shares of
common stock valued at approximately $4.60 per share as part of a bridge
financing transaction.
During the year ended March 31, 1997, the Company issued 41,742 common
shares valued at approximately $4.60 per share in lieu of interest payments
on a note.
REVENUE RECOGNITION
Revenue is recognized at the time goods are shipped. Revenue from
maintenance and service agreements are recognized over the term of the
agreement. Related costs are charged to expense in the period incurred.
RESEARCH AND DEVELOPMENT
Research and development costs, other than software development costs, are
charged to expense as incurred and are reported net of grants received from
U.S. federal agencies which amounted to $75,000 for the year ended March 31,
1998. Software development costs incurred to establish technological
feasibility of the Company's products are charged to expense when incurred.
Costs incurred subsequent to the establishment of technological feasibility
are capitalized. As of March 31, 1998, no software development costs have
been capitalized. Capitalization of computer software costs is discontinued
when the product is available to be sold or leased.
Costs of maintenance and customer support are expensed when the related
revenue is recognized or when the costs are incurred, whichever occurs
first.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided on a straight-line basis over the estimated useful lives of the
assets, as follows:
<TABLE>
<S> <C>
Equipment 5 years
Furniture and fixtures 7 years
Transportation equipment 5 years
Property improvements Shorter of lease term or
estimated useful life
</TABLE>
Expenditures for maintenance and repairs are charged to expense when
incurred.
LICENSE FEES
License fees include costs of obtaining licensed technology and are
amortized over the shorter of their estimated useful lives or the agreement
terms.
PATENT FEES
The Company has incurred patent application and related legal fees of
$216,947 as of March 31, 1998. If patents are granted, the patent fees will
be amortized over the expected useful lives of the patents, or otherwise
expensed.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of accounts receivable, accounts payable, and accrued
expenses approximates their fair values due to the relatively short maturity
of these instruments.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred income taxes are recorded for temporary differences between
financial statement carrying amounts and the tax basis of assets and
liabilities. Deferred tax assets and liabilities reflect the tax rates
expected to be in effect for the years in which the
40
<PAGE> 42
differences are expected to reverse. A valuation allowance is provided if it
is more likely than not that some or all of the deferred tax asset will not
be realized.
LOSS PER SHARE
Effective March 31, 1998, the Company adopted Financial Accounting Standards
No. 128, "Earnings per Share" ("FAS 128") which requires presentation of
basic earnings per share ("Basic EPS") and diluted earnings per share
("Diluted EPS") by all entities that have publicly traded common stock or
potential common stock (options, warrants, convertible securities or
contingent stock arrangements). Basic EPS is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period. The
computation of Diluted EPS does not assume conversion, exercise or
contingent exercise of securities that would have an antidilutive effect on
earnings.
Effective February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 98 ("SAB 98") which eliminated the requirement to
treat as outstanding for EPS purposes for all periods presented, all shares
issued within the one-year period prior to filing an initial public
offering.
All prior periods presented have been restated for the adoption of FAS 128
and SAB 98, resulting in an increase in the net loss per share of $.29 for
the year ended March 31, 1997.
At March 31, 1997, outstanding options and warrants to purchase 282,610
shares of common stock, with exercise prices ranging from $.00115 to $2.88
per share have been excluded from the computation of diluted loss per share
as they were antidilutive. Also at March 31, 1997, 104,348 common shares
issuable upon the conversion of a convertible note payable were excluded
from the computation of diluted loss per share as they were also
antidilutive. At March 31, 1998, outstanding options and warrants to
purchase 2,761,892 shares of common stock with exercise prices ranging from
$.00115 to $12.38 per share were antidilutive and excluded from the
computation of diluted loss per share.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130"), which requires the
presentation of the components of comprehensive income in a company's
financial statements for reporting periods beginning subsequent to December
15, 1997. Comprehensive income is defined as the change in a company's
equity during a financial reporting period from transactions and other
circumstances from nonowner sources (including cumulative translation
adjustments, minimum pension liabilities and unrealized gains/losses on
available-for-sale securities). The adoption of FAS 130 is not expected to
have a material impact on the Company's financial statements.
In June 1997, the FASB issued Financial Accounting Standards No. 131,
"Disclosure About Segments of an Enterprise and Related Information" ("FAS
131"), which requires that public business enterprises report certain
information about operating segments. It also requires that public business
enterprises report certain information about their products and services,
geographic areas in which they operate and major customers. FAS 131 is
effective for fiscal years beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years must be
restated. The adoption of the provisions of FAS 131 is not expected to have
a material impact on the Company's existing disclosures.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with their
current year presentation.
EXTRAORDINARY ITEM
In connection with reaching settlements with certain vendors and other third
parties, the Company recognized debt forgiveness income of $252,936 during
the year ended March 31, 1998. This amount represents the excess of
obligations previously recorded over the amount of settlement with the
respective creditors.
41
<PAGE> 43
4. INVENTORIES
The components of inventory as of March 31, 1998 are as follows:
<TABLE>
<S> <C>
Raw materials $238,710
Work-in-progress 142,683
--------
$381,393
========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of March 31, 1998:
<TABLE>
<S> <C>
Equipment $ 343,190
Furniture and fixtures 1,006
Transportation equipment 38,339
Property improvements 2,589
---------
385,124
Less - accumulated depreciation and amortization (105,407)
---------
$ 279,717
=========
</TABLE>
6. LICENSE, LICENSE OPTIONS AND SPONSORED RESEARCH AGREEMENTS
In March 1998, the Company entered into a license agreement with the
research department of a major university. Under the terms of the agreement,
the Company has been granted an exclusive world-wide license to make, have
made, use, and sell products derived from the licensed technologies. In
consideration of the license grant, the Company is obligated to pay
royalties equal to a specified percentage of net sales of products
incorporating the licensed technologies, subject to annual minimums
beginning in 2002, and annual license maintenance fees until minimum
royalties are due. In the event the Company sublicenses any technologies
covered by this agreement, the university is entitled to receive a
significant percentage of the sublicense revenue. The Company has also
agreed to sponsor further research by the university for the development of
the licensed technologies for a period of one year from the date of the
agreement in exchange for a cash payment and the use of certain services,
equipment and related support.
In May 1995, the Company entered into an option agreement at a cost of
$15,000 with the research department of a major university which, upon
exercise of the option, would grant the Company an exclusive license to
manufacture, use, and sell DNA sequencers. The option was exercised in
December 1996. In June 1997, the Company entered into a license agreement
with the university which expires upon termination of the last patented item
to be acquired under the agreement. In consideration of the license grant,
the Company is obligated to pay royalties equal to a specified percentage of
net sales of products incorporating the licensed technologies, subject to
annual minimums. In the event the Company sublicenses any technologies
covered by this agreement, the university is entitled to receive a
significant percentage of the sublicense revenue. The Company has also paid
a license issue fee of $150,000 and has agreed to pay additional license
maintenance fees during the year ended March 31, 1999.
In December 1996, the Company entered into an option agreement with the
research department of another major university which, upon exercise of the
option, would grant the Company an exclusive license for certain technology
relating to diagnostic kinetics, which the university has either patented or
intends to file patent applications. The option has been extended to
February 1999.
42
<PAGE> 44
The Company is obligated under its license agreements to pay, in the
aggregate, sponsored research and development, minimum royalties and license
maintenance fees of $387,500, $300,000, and $325,000 for the years ended
March 31, 1999, 2000, and 2001, respectively, and $350,000, thereafter.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are comprised of the following at
March 31, 1998:
<TABLE>
<S> <C>
Trade accounts payable $ 714,075
Accrued payroll tax interest and
penalties 128,191
Accrued legal 66,128
Accrued sponsored research fees 110,829
Other accrued liabilities 113,357
----------
$1,132,580
==========
</TABLE>
8. NOTES PAYABLE
In July, August and September 1997 the Company issued an aggregate of
$495,000 in promissory notes to one investor. In connection therewith, the
Company issued the investor warrants to purchase 100,000 shares of the
Company's common stock at an exercise price $1.00 per share. The Company has
valued the warrants at $394,400 which was recorded as a debt discount and
amortized over the life of the notes. The notes were repaid in September
1997 upon the closing of the Company's initial public offering ("IPO")(see
Note 11).
In August 1994, the Company borrowed $300,000 pursuant to a convertible note
agreement. The note provided for 10% interest per annum, and was payable on
August 4, 1997. Pursuant to the note agreement, the Company had the option
to issue the noteholder shares of the Company's common stock in lieu of cash
interest payments. The Company has issued the noteholder 8,166 and 41,742
shares of common stock valued at approximately $4.60 per share and has
recorded interest expense of $37,566 and $192,000, in the year ended March
31, 1998 and 1997, respectively. During the year ended March 31, 1998, the
note was converted into 104,348 shares of the Company's common stock.
9. BRIDGE FINANCING
From July 1996 through February 1997, the Company sold in a private
placement offering 16.1 units, each unit consisting of $100,000 of 10%
promissory notes and 34,783 shares of common stock for an aggregate purchase
price of $1,610,000. The shares were valued at approximately $4.60 per share
and an original issue discount on the notes of $2,576,000 was recorded
(resulting in an annualized effective interest rate of 170%). In connection
with the offering, the Company also incurred $167,432 of other financing
costs related to the bridge financing transaction, of which $103,808 and
$63,624 have been allocated to equity and debt, respectively. The original
issue discount and deferred financing costs were amortized on a
straight-line basis through the original maturity date of June 30, 1997.
In July 1997, effective upon the consummation of the Company's IPO (see Note
11), the Company renegotiated the terms of the Bridge Financing with its
noteholders. Under the revised terms, one-half of the face amount of the
promissory notes ($805,000) and accrued but unpaid interest thereon of
approximately $64,000 were converted into 322,000 warrants ("the Warrants")
to purchase units at an exercise price of $5.75 per unit (each unit
consisting of one share of common stock and one redeemable warrant to
purchase one additional share of common stock at an exercise price of $7.50
per share). The Warrants are exercisable for a period of four years
commencing one year from the effective date of the IPO. The balance of the
promissory notes, including accrued but unpaid interest of approximately
$64,000, were repaid from the proceeds of the IPO.
43
<PAGE> 45
10. LONG-TERM DEBT
In October 1997, the Company entered into a loan agreement for the purchase
of an automobile in the principal amount of $36,614. The loan bears interest
at 9% per annum and is due in 72 equal monthly installments of $660 through
October 2003. Future minimum annual principal payments due under the loan
are as follows at March 31, 1998:
<TABLE>
<CAPTION>
YEAR
<S> <C>
1999 $ 5,041
2000 5,514
2001 6,032
2002 6,597
2003 7,216
Thereafter 3,858
--------
34,258
Less: current portion 5,041
--------
$ 29,217
========
</TABLE>
11. CAPITAL STOCK
On June 30, 1997, the Company's Board of Directors declared an approximate
eight-for-nine (or .8695652:1) reverse stock split of the Company's common
stock. In addition, the Company reduced the authorized shares of preferred
stock from 5,000,000 to 2,000,000 and of common stock from 100,000,000 to
23,000,000. All shares of common stock, common stock options and warrants
included in these financial statements have been restated to give
retroactive effect to the reverse stock split for all periods presented.
In September 1997, the Company completed an IPO of 1,200,600 units (the
"Units"), each unit consisting of one share of the Company's common stock
and one redeemable Common Stock purchase warrant (the "Redeemable
Warrants"), each Redeemable Warrant entitling the holder to purchase one
share of Common Stock at an exercise price of $7.50 per share. The
Redeemable Warrants are exercisable for a period of four years commencing in
September 1998 and are subject to redemption by the Company at $.01 per
Redeemable Warrant upon thirty days written notice at any time after
September 1998, provided the market price (as defined) of the Company's
common stock equals or exceeds $10.00 per share. The Company realized gross
proceeds of $6,903,450 and net proceeds, after deducting underwriting
discounts and commissions, and other offering expenses payable by the
Company of $5,198,055.
In February 1998, the Company granted a consultant 7,000 shares of its
common stock in exchange for services to be provided by the consultant. The
Company has recorded $43,750 in consulting expense based upon the fair value
of the shares on the date of grant.
In March 1998, the Company donated 22,000 shares of its common stock to a
charitable organization. The Company has recorded $140,250 in expense based
upon the fair value of the shares on the date of grant.
12. STOCK OPTIONS AND WARRANTS
In April 1992, the Company issued its Chairman options to purchase 127,827
shares if its common stock at an exercise price of $.00115 per share, which
was the market value of the Company's common stock on the date of grant. The
options vested on the issuance date and expire in April 2012. As of March
31, 1998, none of the options have been exercised.
During the years ended March 31, 1995 and 1996, the Company issued warrants
to purchase an aggregate of 73,914 shares of the Company's common stock at
an exercise price of $2.88 per share in connection with the issuance of
notes payable. The warrants expire in May 1999.
44
<PAGE> 46
During the year ended March 31, 1996, the Company issued warrants to
purchase 18,261 shares of the Company's common stock at an exercise price of
$2.88 per share in connection with the issuance of notes payable. The
warrants expired in July 1997.
In September 1997, and in connection with the Company's IPO (see Note 9),
the Company granted the underwriters options to purchase 104,400 units (the
"Underwriter's Unit Purchase Options"). Each of the Underwriter's Unit
Purchase Options are exercisable to purchase one unit at $9.49, each unit
consisting of share of the Company's common stock and one Class B Redeemable
Warrant which is identical to the Redeemable Warrants (see Note 9) except
that the Class B Redeemable Warrants have an exercise price of $12.38 per
share and are subject to redemption in the event the market price of the
Company's common stock equals or exceeds $16.50 per share. The Underwriters
Unit Purchase Options are exercisable for a period of four years commencing
in September 1998.
In March 1997, the Company implemented its Stock Incentive Plan (the "Plan")
which is divided into three separate equity programs: (i) the Discretionary
Option Grant Program; (ii) the Stock Issuance Program and (iii) the
Automatic Option Grant Program. The programs provide for the grant of
incentive and nonqualified stock options for the purchase of up to an
aggregate of 500,000 shares of the Company's common stock to employees,
members of the Board of Directors and independent consultants to the
Company. However, no participant may receive option grants or direct stock
issuances of more than 100,000 shares in the aggregate per calendar year.
The exercise and vesting periods and the exercise price for options granted
under the Plan are determined by a Committee of the Board of Directors. The
Plan stipulates that no option may be (i) exercisable after ten years from
the date of grant, (ii) granted with an exercise price less than the fair
market value of Common Stock on the option grant date. Option vesting
provisions are determined for each grant by the Company's Board of
Directors.
In June 1997, the Company granted options to purchase 217,403 shares of its
common stock to employees under the Plan at an exercise price of $4.60 per
share, which was the estimated fair value of the common stock on the date of
grant. The options vest in annual installments over a four year period
commencing in June 1998 and are exercisable for a period of ten years from
the date of grant.
Transactions under the Plan are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
<S> <C> <C>
Options outstanding, March 31, 1997 -- --
Options granted 217,403 $4.60
Options forfeited (9,567) 4.60
-------- -----
Options outstanding at March 31, 1998 207,836 4.60
======== =====
Options available for future grant 292,164
========
Weighted average fair value of options granted during
the year ended March 31, 1998 $ 2.63
========
</TABLE>
45
<PAGE> 47
In April and June 1997, the Company granted non-plan options to purchase
173,915 shares of its common stock to consultants. The options have an
exercise price of $2.88 per share and expire in April 2007. The estimated
fair value of the Company's common stock at the date of grant was $4.60 per
share. 17,392 of such options were immediately vested and the remaining
options vest over a three year period. During the year ended March 31, 1998,
the Company recorded $543,485 in deferred compensation expense related to
these options which is being amortized over the vesting period.
In December 1997, the Company granted non-plan options to purchase 25,000
shares of its common stock to a consultant. The options have an exercise
price of $6.00 per share, which was the estimated fair value of the common
stock on the date of grant, and expire in December 2007. The options vest in
equal annual installments over a five year period beginning in December
1998. During the year ended March 31, 1998, the Company recorded $85,800 in
deferred compensation expense related to these options which is being
amortized over the vesting period.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting
for its Plan and other stock-based compensation issued to employees and
directors. Had compensation cost for options grants to employees been
determined based upon the fair value at the date of grant for awards under
the Plan consistent with the methodology prescribed under Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation,"
("FAS 123"), the Company's net loss and loss per share for the year ended
March 31, 1998 would have increased by approximately $173,000 or $.06,
respectively.
The fair values of options granted to employees and consultants during the
year ended March 31, 1998 has been determined on the date of the respective
grant using the Black-Scholes option pricing model based on the following
assumptions:
<TABLE>
<S> <C>
Dividend yield None
Weighted average risk free interest rate
on date of grant 6.00%
Volatility 60%
Forfeitures None
Expected life 5 years
</TABLE>
13. COMMITMENTS
In July 1996, the Company entered into an agreement to lease office and
factory space in State College, Pennsylvania for one year at an annual rent
of $101,750. The Company has an option in perpetuity to renew the lease for
additional one year periods which must be exercised within three months of
the end of the lease term for the respective year. During the fiscal year
ended March 31, 1998, the Company exercised its option to renew the lease
through June 30, 1999.
In March 1997, the Company entered into a three-year employment agreement
with its Chairman of the Board of Directors, President and Chief Executive
Officer. The agreement provides for an annual compensation of $96,000 and
the payment of an annual bonus of up to 25% of base salary plus $24,000,
through the term of the agreement, in consideration for past services
rendered.
During the year ended March 31, 1998, the Company entered into several
consulting agreements which expire in 2002. Under the terms of the
agreements, the Company is obligated to pay aggregate annual consulting fees
of $120,000.
46
<PAGE> 48
14. INCOME TAXES
The Company has incurred losses since inception which have generated net
operating loss carryforwards of approximately $7,200,000 at March 31, 1998,
for federal and state income tax purposes. These carryforwards are available
to offset future taxable income and expire at various dates through 2013 for
federal income tax purposes. These losses are subject to limitation on
future years' utilization should certain ownership changes occur
The net operating loss carryforwards and temporary differences between
carrying amounts of assets and liabilities for financial reporting and
income tax purposes result in a net deferred tax benefit of approximately
$3,160,000 at March 31, 1998. In consideration of the Company's accumulated
losses and uncertainty about its ability to utilize this deferred tax
benefit in the future, the Company has recorded a valuation allowance of an
equal amount on such dates to fully offset the deferred tax benefit amount.
For the years ended March 31, 1998 and 1997, the Company's effective tax
rates differ from the federal statutory rate principally due to net
operating losses for which no benefit has been recorded, state taxes and
other permanent differences.
15. ECONOMIC DEPENDENCY
To date, the Company's revenues have been materially dependent on a limited
number of customers. The nature of the Company's business (see Note 1) is
such that during any individual accounting period it may sell its products
to a limited number of significant customers. During the fiscal year ended
March 31, 1998 the Company's product sales consisted of approximately 15%,
14%, 13% and 12% to four separate customers. During the fiscal year ended
March 31, 1997, the Company's product sales consisted of approximately 13%
to one customer and 11% to another customer. The Company's existing and
proposed products require high quality raw materials and components that the
Company purchases from third party suppliers. The Company believes adequate
sources of supply exist for all raw materials and components it will need,
and that such items are available on commercially reasonable terms.
16. LEGAL PROCEEDINGS
GRYNBERG MATTER
In March 1996, a complaint was filed in the District Court for the City and
County of Denver, Colorado alleging common law fraud and violation of the
Colorado Securities Act in connection with the plaintiff's purchase of
Common Stock of the Company in 1992. Specifically, the plaintiff alleges
that the co-defendant placement agent induced the plaintiff's purchase of a
unit in a private placement by misrepresenting that the plaintiff was being
offered the sole remaining unit in such private placement and that the
Company would undertake a public offering within six months of completing
such private placement. The plaintiff sought rescissionary damages in the
sum of $45,000, punitive damages in like amount, interest, costs and
attorneys' fees. The court by order dated March 6, 1997 struck the punitive
damages claim, and later ruled that the plaintiff could seek either
rescission or restitution. In February 1998, judgment was entered against
the plaintiff and in favor of the Company with regard to the plaintiff's
claim for damages. The time for the plaintiff to file an appeal of the
judgment has not yet expired. Should an appeal be filed, the Company
believes, based in part on its discussions with its litigation counsel, that
it has meritorious defenses to these claims and it intends to defend the
litigation vigorously. While management believes that the resolution of this
matter will not have a material adverse effect on the Company's business,
financial condition and results of operations, the results of these
proceedings are uncertain and there can be no assurance to that effect.
RUBIN MATTER
On April 21, 1997, a complaint was filed in the Supreme Court of the State
of New York alleging breach of contract. Specifically, the plaintiff alleges
that the Company defaulted under a promissory note issued to plaintiff on
May 16, 1996 in the amount of $175,000 (the "Rubin Note") while such Note
was outstanding and therefore that the Company is liable and indebted to
plaintiff in the principal amount of $175,000, together with interest and
expenses. The Company, on May 2,1997, paid the principal and interest due
under the Rubin Note.
47
<PAGE> 49
The main remaining issue asserted by the plaintiff is whether, pursuant to
an alleged related agreement, the plaintiff is entitled to 152,174 shares
(adjusted to reflect stock splits) of Common Stock or, alternatively,
$875,000. Plaintiff alleges that the Company undertook to enter into a
securities purchase agreement pursuant to which he should have received the
aforementioned shares of Common Stock. The Company contends that such
securities purchase agreement was never discussed and therefore that no
agreement was reached with respect to the terms thereof. Such securities
purchase agreement was not signed by either of the parties to the Rubin
Note. The Company believes that it has meritorious defenses to the
above-described claims and it intends to defend the litigation vigorously.
However, due to the nature of litigation and because the lawsuit is in the
initial stages, the Company cannot determine the total expense or possible
loss, if any, that may ultimately be incurred either in the context of a
trial or as a result of a negotiated settlement. While management believes
that the resolution of this matter will not have a material adverse effect
on the Company's business financial condition and results of operations, the
results of these proceedings are uncertain and there can be no assurance to
that effect. Regardless of the ultimate outcome of the litigation, it could
result in significant diversion of time by the Company's personnel.
17. SUBSEQUENT EVENTS
In May and June 1998, the Company entered into consulting agreements with
several scientific advisors. Under the terms of the agreements, the
consultants were issued options to purchase shares of the Company's common
stock. The options will vest in equal annual installments over a three-year
period.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 15, 1997, the Board of Directors approved the engagement of
Price Waterhouse LLP as the independent accountants for SpectruMedix
Corporation(the "Registrant"). The Board of Directors also accepted the
resignation of Lazar, Levine & Company LLP as such independent accountants,
dated December 8,1997.
During the two fiscal years ended March 31, 1997 and the subsequent
interim period through December 8, 1997, (i) there were no disagreements with
Lazar, Levine & Company LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements, if not resolved to its satisfaction, would have caused it to make
reference in connection with its report to the subject matter of the
disagreement, and (ii) Lazar, Levine & Company LLP has not advised the
Registrant of any reportable events, as defined in paragraphs (A) through (D) of
Item 304 (a)(1)(iv) of Regulation S-B.
The accountants' report of Lazar, Levine & Company LLP on the
consolidated financial statements of SpectruMedix Corporation for the years
ended March 31, 1997 and March 31, 1996 did not contain any adverse opinion or
disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope, or accounting principles.
48
<PAGE> 50
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE OFFICERS
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The information required by this Item 9 concerning the directors,
executive officers, promoters and control persons of the Company is incorporated
by reference from the information under the captions "Proposal One - Election of
Directors - Information With Respect to Nominees" and "Executive Compensation
and Other Information - Directors, Executive Officers, Promoters and Control
Persons" in the Company's Definitive Proxy Statement to be filed with the
Commission pursuant to Regulation 14A in connection with the Company's 1998
Annual Meeting of Stockholders (the "Proxy Statement").
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The information required by this Item 9 as to compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated by reference from
the information under the caption "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item 10 is incorporated by reference
from the information under the caption "Executive Compensation and Other
Information" in the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 11 is incorporated by reference
from the information under the caption "Security Ownership of Management and
Certain Beneficial Owners" in the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 12 is incorporated by reference from the
information under the caption "Executive Compensation and Other Information -
Certain Relationships and Related Transactions" in the Proxy Statement.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1(1) Restated Certificate of Incorporation of the Registrant,
as filed with the Delaware Secretary of State on
March 5, 1993.
3.2(1) Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant, as filed with the
Delaware Secretary of State on March 11, 1997.
3.3(1) Second Amended and Restated Certificate of Incorporation
of the Registrant, as filed with the Delaware Secretary
of State on September 16, 1997.
3.4(1) Amended and Restated Bylaws of the Registrant.
4.1(1) Form of Stock Certificate.
4.2(1) Form of Registration Rights Agreement by and between the
Registrant and certain stockholders.
4.3(1)(5) 1997 Stock Incentive Plan of the Registrant and related
documents.
</TABLE>
49
<PAGE> 51
<TABLE>
<S> <C>
4.4(1) Form of SpectruMedix Corporation Unit Purchase Option.
4.5(1) Form of Warrant Agreement by and between the Registrant
and ChaseMellon Shareholder Services, L.L.C.
4.6(1)(5) Notice of Grant and Stock Option Agreement for option to
purchase shares of Common Stock granted to Joseph K.
Adlerstein.
4.7(1) Form of Unit.
4.8(1) Form of Redeemable Warrant.
4.9(1) Form of Warrant issued in the Bridge Financing.
10.1(1) Form of Indemnification Agreement.
10.2(1) Asset Purchase Agreement dated April 5, 1993 by and
between Lab Software Associates, Inc and the Registrant.
10.3(1) Reserved.
10.4(1) Form of Warrant Agreement by and between the Company and
the Gross Foundation, Inc.
10.5(1)(3) Option Agreement dated May 1, 1995 by between the
Registrant and Iowa State University Research Foundation.
10.6(1) Commercial Lease Agreement dated July 9, 1996 by and
between FMF Partnership and the Registrant.
10.7(1)(3) Option and Bailment Agreement for an Exclusive License
between the Registrant and the Regents of the University
of California dated December 1, 1996.
10.8(1)(3) Research Agreement No. M2498 dated December 1, 1996 by
and between the Regents of the University of California,
Berkeley and the Registrant.
10.9(1)(5) Employment Agreement dated March 31, 1997 by and between
the Registrant and Joseph K. Adlerstein.
10.10(1)(5) Employment Agreement dated March 31, 1997 by and between
the Registrant and Bernard Sonnenschein.
10.11(1)(3) Scientific Advisory Board and Consulting Agreement by
and between the Registrant and Dr. Edward Yeung.
10.12(1)(3) Scientific Advisory Board and Consulting Agreement by
and between the Registrant and Dr. Marc Hellerstein.
10.13(1)(3) License Agreement dated June 24, 1997 by and between the
Registrant and Iowa State University Research
Foundation, Inc.
10.14(1)(5) Amendment No. 1 to Employment Agreement by and between
the Registrant and Joseph K. Adlerstein.
10.15(1)(5) Letter Agreement by and between the Registrant and
Bernard Sonnenschein.
10.16(6)* Amendment No. 1 to Option and Bailment Agreement for an
Exclusive License between the Registrant and the Regents
of the University of California, effective as of January
15, 1998.
10.17(7)* Amendment No. 1 to Research Agreement No. M2498 by and
between the Regents of the University of California,
Berkeley and the Registrant.
10.18(4)* Sponsored Research Agreement, effective as of March 15,
1998, by and between The Trustees of the University of
Pennsylvania and the Registrant.
10.19(4)* License Agreement, effective as of March 15, 1998, by
and between The Trustees of the University of
Pennsylvania and the Registrant.
16.1(2) Letter on Change in Certifying Accountant.
23.1* Consent of Independent Accountants.
23.2* Consent of Independent Certified Public Accountants.
23.3* Consent of Independent Certified Public Accountants.
24.1* Power of Attorney (see page II-5).
27* Financial Data Schedule
</TABLE>
- ----------
* Filed herewith.
(1) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form SB-2, File No. 333-31843, which
was declared effective September 16, 1997.
50
<PAGE> 52
(2) Incorporated by reference to exhibits filed with Registrant's
Current Report on Form 8- K, filed with the Commission on
December 15, 1997.
(3) Confidential treatment has been granted with respect to certain
portions of this Exhibit.
(4) Confidential treatment has been requested with respect to certain
portions of this Exhibit. Such information has been omitted and
filed separately with the Commission.
(5) Management contract or compensation plan.
(6) Amendment to Exhibit 10.7, for which confidential treatment was
granted.
(7) Amendment to Exhibit 10.8, for which confidential treatment was
granted.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed in the last quarter of the
fiscal year ended March 31, 1998.
51
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: June 26, 1998
SPECTRUMEDIX CORPORATION
By: /s/ Joseph K. Adlerstein, Ph.D.
--------------------------------------
Joseph K. Adlerstein, Ph.D.
President and, Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person who signature appears
below constitutes and appoints jointly and severally, Joseph K. Adlerstein,
Ph.D. and Bernard Sonnenschein, or either of them as his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Report on Form
10-KSB, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Joseph K. Adlerstein, Ph.D. President, Chief Executive Officer June 26, 1998
- --------------------------------- and Chairman of the Board
Joseph K. Adlerstein, Ph.D. (principal executive officer)
/s/ Bernard Sonnenschein Treasurer, Secretary and Director June 26, 1998
- --------------------------------- (principal financial and accounting
Bernard Sonnenschein officer)
</TABLE>
<PAGE> 54
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1(1) Restated Certificate of Incorporation of the Registrant,
as filed with the Delaware Secretary of State on
March 5, 1993.
3.2(1) Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant, as filed with the
Delaware Secretary of State on March 11, 1997.
3.3(1) Second Amended and Restated Certificate of Incorporation
of the Registrant, as filed with the Delaware Secretary
of State on September 16, 1997.
3.4(1) Amended and Restated Bylaws of the Registrant.
4.1(1) Form of Stock Certificate.
4.2(1) Form of Registration Rights Agreement by and between the
Registrant and certain stockholders.
4.3(1)(5) 1997 Stock Incentive Plan of the Registrant and related
documents.
</TABLE>
<PAGE> 55
<TABLE>
<S> <C>
4.4(1) Form of SpectruMedix Corporation Unit Purchase Option.
4.5(1) Form of Warrant Agreement by and between the Registrant
and ChaseMellon Shareholder Services, L.L.C.
4.6(1)(5) Notice of Grant and Stock Option Agreement for option to
purchase shares of Common Stock granted to Joseph K.
Adlerstein.
4.7(1) Form of Unit.
4.8(1) Form of Redeemable Warrant.
4.9(1) Form of Warrant issued in the Bridge Financing.
10.1(1) Form of Indemnification Agreement.
10.2(1) Asset Purchase Agreement dated April 5, 1993 by and
between Lab Software Associates, Inc and the Registrant.
10.3(1) Reserved.
10.4(1) Form of Warrant Agreement by and between the Company and
the Gross Foundation, Inc.
10.5(1)(3) Option Agreement dated May 1, 1995 by between the
Registrant and Iowa State University Research Foundation.
10.6(1) Commercial Lease Agreement dated July 9, 1996 by and
between FMF Partnership and the Registrant.
10.7(1)(3) Option and Bailment Agreement for an Exclusive License
between the Registrant and the Regents of the University
of California dated December 1, 1996.
10.8(1)(3) Research Agreement No. M2498 dated December 1, 1996 by
and between the Regents of the University of California,
Berkeley and the Registrant.
10.9(1)(5) Employment Agreement dated March 31, 1997 by and between
the Registrant and Joseph K. Adlerstein.
10.10(1)(5) Employment Agreement dated March 31, 1997 by and between
the Registrant and Bernard Sonnenschein.
10.11(1)(3) Scientific Advisory Board and Consulting Agreement by
and between the Registrant and Dr. Edward Yeung.
10.12(1)(3) Scientific Advisory Board and Consulting Agreement by
and between the Registrant and Dr. Marc Hellerstein.
10.13(1)(3) License Agreement dated June 24, 1997 by and between the
Registrant and Iowa State University Research
Foundation, Inc.
10.14(1)(5) Amendment No. 1 to Employment Agreement by and between
the Registrant and Joseph K. Adlerstein.
10.15(1)(5) Letter Agreement by and between the Registrant and
Bernard Sonnenschein.
10.16(6)* Amendment No. 1 to Option and Bailment Agreement for an
Exclusive License between the Registrant and the Regents
of the University of California, effective as of January
15, 1998.
10.17(7)* Amendment No. 1 to Research Agreement No. M2498 by and
between the Regents of the University of California,
Berkeley and the Registrant.
10.18(4)* Sponsored Research Agreement, effective as of March 15,
1998, by and between The Trustees of the University of
Pennsylvania and the Registrant.
10.19(4)* License Agreement, effective as of March 15, 1998, by
and between The Trustees of the University of
Pennsylvania and the Registrant.
16.1(2) Letter on Change in Certifying Accountant.
23.1* Consent of Independent Accountants.
23.2* Consent of Independent Certified Public Accountants.
23.3* Consent of Independent Certified Public Accountants.
24.1* Power of Attorney (see page II-5).
27* Financial Data Schedule
</TABLE>
- ----------
* Filed herewith.
(1) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form SB-2, File No. 333-31843, which
was declared effective September 16, 1997.
<PAGE> 56
(2) Incorporated by reference to exhibits filed with Registrant's
Current Report on Form 8- K, filed with the Commission on
December 15, 1997.
(3) Confidential treatment has been granted with respect to certain
portions of this Exhibit.
(4) Confidential treatment has been requested with respect to certain
portions of this Exhibit. Such information has been omitted and
filed separately with the Commission.
(5) Management contract or compensation plan.
(6) Amendment to Exhibit 10.7, for which confidential treatment was
granted.
(7) Amendment to Exhibit 10.8, for which confidential treatment was
granted.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed in the last quarter of the
fiscal year ended March 31, 1998.
<PAGE> 1
EXHIBIT 10.16
[LETTERHEAD OF UNIVERSITY OF CALIFORNIA, BERKELEY,
OFFICE OF TECHNOLOGY TRANSFER]
- --------------------------------------------------------------------------------
AMENDMENT #1 TO:
OPTION AND BAILMENT AGREEMENT FOR AN EXCLUSIVE LICENSE
BETWEEN PREMIER AMERICAN TECHNOLOGIES, INC.
AND THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
FOR METHODS FOR MEASURING REPLICATION AND DESTRUCTION RATES OF
INFECTIOUS AGENTS IN A HOST ORGANISM
* * *
================================================================================
Effective January 15, 1998 ("EFFECTIVE DATE"), THE REGENTS of the University of
California, a California corporation, whose legal address is 300 Lakeside Drive,
Oakland, California 94612-3550, acting through its Office of Technology
Licensing, at the University of California, Berkeley, 2150 Shattuck Avenue,
Suite 510, Berkeley, CA 94720-1620, ("THE REGENTS") and SpectruMedix Corp.
(f.k.a. Premier American Technologies Corporation) having a principal place of
business at 2124 Old Gatesburg Road, State College, PA 16803 ("OPTIONEE"), agree
as follows:
APPENDIX A: Replace with:
SAMPLE LETTER FOR USE PRIOR TO TRANSMISSION OF BIOLOGICAL
MATERIALS TO INVESTIGATORS AT UNIVERSITIES OR
NON-PROFIT RESEARCH INSTITUTIONS
(date)
IN DUPLICATE
[Adr]
Dear [Name]:
Re: Agreement for Use of Certain Biological Materials
This Letter Agreement governs an arrangement whereby THE REGENTS OF THE
UNIVERSITY OF CALIFORNIA ("REGENTS") make available to [Name] ("INDIVIDUAL")
of [Institution] ("INSTITUTION") the Biological Material described in Article 1
below.
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been separately filed
with the Securities and Exchange Commission pursuant to Rule 24b-2.
<PAGE> 2
Accepted and Agreed to: (INDIVIDUAL)
- ------------------------------------------------
Printed Name
- ------------------------------------------------
Signature
- ------------------------------------------------
Date
Accepted and Agreed to: (INSTITUTION)
By: ______________________________
Printed Name: ______________________________
Title: ______________________________
Address: ______________________________
______________________________
______________________________
All other terms of the Option to negotiate an Exclusive License remain in full
force and effect.
The parties to this Agreement have executed this Agreement in duplicate
originals by their duly authorized officers or representatives.
<TABLE>
<S> <C>
THE REGENTS SPECTRUMEDIX CORP.
OF THE UNIVERSITY OF CALIFORNIA
By: /s/ William A. Hoskins By: /s/ Joseph K. Adlerstein
William A. Hoskins
Director, Office of Technology Licensing Printed Name: Joseph K. Adlerstein
2150 Shattuck Ave., Suite 510
Berkeley, CA 94720-1620 Title: C.E.O.
-----------------------------------
Date: April 3, 1998 Date: April 2, 1998
---------------------------------------- ------------------------------------
</TABLE>
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been separately filed
with the Securities and Exchange Commission pursuant to Rule 24b-2.
<PAGE> 3
This Letter Agreement, if approved by INSTITUTION, will state the understandings
under which the Biological Material will be made available to INDIVIDUAL.
INSTITUTION will hold the Biological Material in trust solely for the purposes
set forth in this Letter Agreement. Upon signing of this Letter Agreement, the
Biological Material will be forwarded to:
Name: ____________________________________
Title: ____________________________________
Address: ____________________________________
____________________________________
1. The Biological Material to be furnished consists of the following:
Description of Material Laboratory Designation UCB Case No.
* * *
The Biological Material resulted from research by * * * at the University of
California, Berkeley, under private sponsorship.
2. This Letter Agreement does not restrict REGENTS' right to distribute
the Biological Material and all derivatives resulting therefrom to other
noncommercial or commercial entities.
3. INSTITUTION acknowledges that REGENTS have informed INSTITUTION that
it has filed a patent application covering inventions relating to the Biological
Material.
4. INSTITUTION may use the Biological Material or all unmodified
derivatives only for scientific research. Nothing in this Letter Agreement
grants INSTITUTION any rights under patents, nor any rights to use any products
or processes which contain some portion of the Biological Material, for
profit-making or commercial purposes. INSTITUTION agrees to negotiate, in good
faith, a license with REGENTS prior to making any profit-making or commercial
use of any product or process derived from Biological Material. REGENTS shall
have no obligation to grant such a license to INSTITUTION, and may grant
exclusive or non-exclusive licenses to others who may be investigating uses of
the Biological Material.
5. INSTITUTION may create modified substances from the Biological
Material ("Modifications"). INSTITUTION retains the right to distribute
Modifications to academic scientists for non-commercial research purposes only.
However, INSTITUTION further grants an exclusive
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been separately filed
with the Securities and Exchange Commission pursuant to Rule 24b-2.
<PAGE> 4
option to a world-wide license to REGENTS' exclusive optionee or licensee of the
Biological Material to any Modifications created by INSTITUTION. Such option
shall extend for a period of * (*) days from the date REGENTS receives written
notification of such Modifications from INSTITUTION. If REGENTS' exclusive
optionee or licensee does not exercise such option, INSTITUTION shall be free to
license such Modifications to other third parties. Modifications do not include
progeny or unmodified derivatives.
6. Either party has the right to terminate this Letter Agreement at any
time, in which case INSTITUTION will discontinue, within * (*) days, its use of
the above-mentioned Biological Material and any derivatives resulting therefrom,
for research or other purposes, including sale of commercial products as
indicated in Article 4 above, until such time as a new agreement between the
parties is established.
7. INSTITUTION UNDERSTANDS THAT THE BIOLOGICAL MATERIAL DELIVERED
HEREBY IS EXPERIMENTAL IN NATURE, AND REGENTS MAKE NO REPRESENTATION AND EXTEND
NO WARRANTIES OF ANY KIND, EITHER EXPRESSED OR IMPLIED. THERE ARE NO EXPRESSED
OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR
THAT THE USE OF THE BIOLOGICAL MATERIAL WILL NOT INFRINGE ANY PATENT, COPYRIGHT,
TRADEMARK OR OTHER RIGHTS.
8. In no event shall REGENTS be liable for any use of such Biological
Material or any derivatives resulting therefrom, and INSTITUTION hereby agrees
to defend, indemnify, and hold REGENTS harmless from any loss, claim, damage, or
liability of whatsoever kind or nature, which may arise from or in connection
with this Agreement or the use of such Biological Material hereunder.
9. INSTITUTION shall not transfer the Biological Material (including
any derivative or part thereof) to any other INSTITUTION or non-INSTITUTION
person outside the above-mentioned laboratory without the prior written consent
from REGENTS.
Sincerely,
* * *
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been separately filed
with the Securities and Exchange Commission pursuant to Rule 24b-2.
<PAGE> 1
EXHIBIT 10.17
AMENDMENT NO. 1
TO
RESEARCH AGREEMENT NO. M2498
BETWEEN
THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
AND
SPECTRUMEDIX CORP
(FORMERLY PREMIER AMERICAN TECHNOLOGIES CORPORATION)
THIS AGREEMENT by and between THE REGENTS OF THE UNIVERSITY OF CALIFORNIA,
BERKELEY ("California") and SPECTRUMEDIX CORP. ("SpectruMedix") is hereby
amended as follows:
ARTICLE I. STATEMENT OF THE WORK
California shall perform additional work as more fully described in
Exhibit B, attached hereto.
I) ARTICLE II. PERIOD OF PERFORMANCE
The period of performance of this agreement is extended for one year, and
now shall be from December 1, 1996, through February 28, 1999, unless
sooner terminated or extended as elsewhere provided herein.
II) ARTICLE III. COST AND PAYMENT
The amount of this agreement is increased by ** to **. Payment of this
additional ** will be made to California within 30 days of receipt of
California's monthly invoices for cost incurred. Payment should be sent to
Financial Services, 481 University Hall, Berkeley, CA 94720-1103.
III) ARTICLE X. NOTICES
When any notice to SpectruMedix is to be given hereunder, it shall be in
writing and sent to the following addresses:
SpectruMedix Corporation
2124 Old Gatesburg Road
State College, PA 16803
Attention: Dr. Joseph Alderstein or Mr. Bernard Sonnenschein
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been separately filed
with the Securities and Exchange Commission pursuant to Rule 24b-2.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
by their duly authorized representatives.
SPECTRUMEDIX CORPORATION THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
("SPECTRUMEDIX") ("CALIFORNIA")
By: /s/ Joseph K. Adlerstein By:/s/ Marion B. Lentz
Name: Joseph K. Adlerstein Name: Marion B. Lentz
Title: C.E.O. Title: Manager,
University/Industry Research
Date: April 2, 1998 Date: March 1, 1998
------------- -------------
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been separately filed
with the Securities and Exchange Commission pursuant to Rule 24b-2.
<PAGE> 3
1998 BUDGET AND STATEMENT OF WORK (SPECTRUMEDIX SRC AWARD #M2498):
BIOMEDICAL APPLICATIONS OF IMPROVE ISOTOPE RATIO MEASUREMENTS WITH MAGNETIC
SECTOR MASS SPECTROMETERS
*** ENTIRE SCHEDULE REDACTED ***
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been separately filed
with the Securities and Exchange Commission pursuant to Rule 24b-2.
<PAGE> 4
Budget
I) PERSONNEL Salary + Fringe Benefits
** TABLE REDACTED **
II) SUPPLIES (to be covered by other mechanisms)
III) MISCELLANEOUS
A) Publications, graphics, etc. **
B) Clerical, telephone, etc. **
C) Travel **
--
Subtotal **
--
Subtotal **
Indirect costs:
** TABLE REDACTED **
GRAND TOTAL **
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been separately filed
with the Securities and Exchange Commission pursuant to Rule 24b-2.
<PAGE> 5
BUDGET JUSTIFICATION
IV) PERSONNEL
** PARAGRAPHS REDACTED **
V) SUPPLIES
** PARAGRAPHS REDACTED **
VI) MISCELLANEOUS
Self-explanatory
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been separately filed
with the Securities and Exchange Commission pursuant to Rule 24b-2.
<PAGE> 1
EXHIBIT 10.18
SPONSORED RESEARCH AGREEMENT
between
SPECTRUMEDIX
(SPONSOR)
and
THE TRUSTEES OF THE UNIVERSITY OF PENNSYLVANIA
(PENN)
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 2
SPONSORED RESEARCH AGREEMENT
This Sponsored Research Agreement ("AGREEMENT") is made by and between
The Trustees of the University of Pennsylvania, a Pennsylvania nonprofit
corporation ("PENN"), with offices located at Suite 300, 133 South 36th Street,
Philadelphia, PA 19104-3246, and SpectruMedix a corporation organized and
existing under the laws of Delaware ("SPONSOR"), having a place of business at
2124 Old Gatesburg Road, State College, PA 16803.
This AGREEMENT is effective as of March 15, 1998 ("EFFECTIVE DATE").
BACKGROUND
A. SPONSOR desires to fund the research of Drs. James Baumgardner
and Bryan Marshall relating to a means of measuring pulmonary function;
B. SPONSOR desires to support such research conducted by PENN under
the terms and conditions of this AGREEMENT;
C. The research program described in this AGREEMENT is of mutual
interest to SPONSOR and PENN and furthers the educational and research
objectives of PENN as a nonprofit, tax-exempt educational institution, and may
benefit both SPONSOR and PENN through the creation of new inventions;
NOW, THEREFORE, in consideration of the promises and covenants contained
in this AGREEMENT and intending to be legally bound, the parties agree as
follows:
1. DEFINITIONS
1.1 PENN INTELLECTUAL PROPERTY means and includes all technical
information, inventions, developments, discoveries, software, know-how, methods,
techniques, formulae, data, processes and other proprietary ideas, whether or
not patentable or copyrightable, that are first conceived, discovered, developed
or reduced to practice in the conduct of the SPONSORED RESEARCH during the term
of this AGREEMENT, provided that PENN INTELLECTUAL PROPERTY is either (i)
dominated by PENN PATENT PATENT RIGHTS as defined in the LICENSE AGREEMENT or
(ii) derived, developed from or used in conduction with equipment supplied by
SPONSOR to PENN pursuant to his AGREEMENT, and will include work performed by
collaborators of PENN working on the SPONSORED RESEARCH provided such
collaborators agree to assign their rights to PENN.
1.2 PRINCIPAL INVESTIGATOR is Dr. James Baumgardner and Dr. Bryan
Marshall, who are responsible for supervision and administration of the
SPONSORED RESEARCH.
1.3 SPONSORED RESEARCH which may include work performed by
collaborators, means the research program described in Attachment A to this
AGREEMENT.
1.4 LICENSE AGREEMENT means the agreement entered into between PENN
and SPONSOR with an effective date of March 15, 1998 attached as Attachment C.
2. SPONSORED RESEARCH
2.1 PENN agrees to begin the SPONSORED RESEARCH after the EFFECTIVE
DATE and upon payment by SPONSOR of any funds owed. PENN agrees to use
reasonable efforts to conduct the SPONSORED RESEARCH substantially in accordance
with the terms and conditions of this AGREEMENT. SPONSOR
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 3
acknowledges that PENN and the PRINCIPAL INVESTIGATOR shall have the freedom to
conduct and supervise the SPONSORED RESEARCH in a manner consistent with PENN's
educational and research missions.
2.2 If the services of the PRINCIPAL INVESTIGATOR become unavailable
to PENN for any reason, PENN is entitled to designate another member of its
faculty who is acceptable to both parties to serve as the PRINCIPAL INVESTIGATOR
of the SPONSORED RESEARCH. If a substitute PRINCIPAL INVESTIGATOR acceptable to
both parties has not been designated within sixty (60) days after the original
PRINCIPAL INVESTIGATOR ceases his or her services under this AGREEMENT, either
party may terminate this AGREEMENT upon written notice to the other party,
subject to the provisions of ARTICLE 9.
3. TERM OF AGREEMENT
3.1 The term of this AGREEMENT shall begin on the EFFECTIVE DATE of
this AGREEMENT and shall end one year after the EFFECTIVE DATE unless terminated
sooner pursuant to Sections 2.2, 9.1 or 9.2 hereof This AGREEMENT may be
extended or renewed only by mutual written agreement executed by duly authorized
representatives of the parties.
4. REIMBURSEMENT OF COSTS, PAYMENT
4.1 SPONSOR shall reimburse PENN (REIMBURSEMENTS) for direct and
indirect costs incurred in the conduct of the SPONSORED RESEARCH by (i) a cash
payment from SPONSOR not to exceed * * * (*) as set forth in Attachment A; (ii)
subject to Section 9.3, certain services, equipment and related support from
SPONSOR valued at * * * (*) such as set forth in Attachment A; and (iii) grants
of funds, equipment or other assets awarded to PENN from any third party for the
SPONSORED RESEARCH (including but not limited to research or development of PENN
LICENSED PRODUCTS as defined in the LICENSE AGREEMENT or any intellectual
property created under this AGREEMENT) where PENN agrees that such funds,
equipment or other assets would not have been awarded to PENN but for the
contributions or efforts of SPONSOR and such third party agrees to the terms of
this AGREEMENT in its entirety. PENN may also receive grants of funds, equipment
or other assets awarded to PENN from any third party which PENN may, in its sole
discretion, apply to the conduct of the SPONSORED RESEARCH but such support
shall not be included in REIMBURSEMENTS. PENN agrees that funds from * * * * * *
* * * shall be applied to the conduct of the SPONSORED RESEARCH and SPONSOR
agrees that such funds shall not be included in REIMBURSEMENTS. SPONSOR
acknowledges that these amounts are a good faith estimate only and not a
guarantee of the cost to conduct the SPONSORED RESEARCH If at any time PENN
determines that it will require additional funds for the SPONSORED RESEARCH it
shall notify SPONSOR and provide an estimate of the additional amount. SPONSOR
shall not be responsible for any costs in excess of the amount of * * as set
forth in Attachment A unless it has agreed in writing to provide additional
funds.
4.2 SPONSOR shall make payments in advance to PENN in accordance
with the payment schedule set forth in Attachment A. All payments are to be made
by check payable in United States dollars, to "The Trustees of the University of
Pennsylvania", and sent to the address in Section 11.4.
4.3 Title to any equipment, laboratory animals, or any other
materials made or acquired with funds provided under this AGREEMENT shall vest
in PENN, and such equipment, animals, or materials shall remain the property of
PENN following termination of this AGREEMENT. Equipment and material provided
under this AGREEMENT to PENN by SPONSOR shall vest in PENN subject to terms and
conditions of Section 9.3.
5. RECORDS AND REPORTS
5.1 PRINCIPAL INVESTIGATOR shall maintain records of the results of
the SPONSORED RESEARCH and shall provide SPONSOR with reports of the progress
and results of the SPONSORED RESEARCH in accordance with Attachment A. PENN
shall maintain records of the use of the fiends provided by SPONSOR and shall
make such records available to
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 4
SPONSOR upon reasonable notice during PENN's normal business hours, but not more
frequently than once each calendar year.
5.2 In order to preserve the patentability of PENN INTELLECTUAL
PROPERTY, SPONSOR shall maintain PENN INTELLECTUAL PROPERTY and information
provided pursuant to Section 6.1 (whether oral or written) as confidential and
shall use best efforts not disclose such information to any third party except
with PENN's prior written approval. The foregoing obligation shall not apply to:
5.2.1 information that is known to COMPANY or independently
developed by COMPANY prior to the time of disclosure, in each case, to the
extent evidenced by written records;
5.2.2 information disclosed to COMPANY by a third party that
has a right to make such disclosure;
5.2.3 information that becomes patented, published or
otherwise part of the public domain as a result of acts by PENN or a third
person obtaining such information as a matter of right; or
5.2.4 information that is required to be disclosed by order of
United States governmental authority or a court of competent jurisdiction;
provided that COMPANY must use best efforts to obtain confidential treatment of
such information by the agency or court.
6. INTELLECTUAL PROPERTY
6.1 PRINCIPAL INVESTIGATOR shall provide to PENN and SPONSOR a
complete written disclosure of any PENN INTELLECTUAL PROPERTY reasonably
considered patentable or reasonably considered to be of commercial utility.
SPONSOR shall advise PENN in writing, no later than thirty (30) days after
receipt of such disclosure, whether it requests PENN to file and prosecute
patent applications related to such PENN INTELLECTUAL PROPERTY. If SPONSOR does
not request PENN to file and prosecute such patent applications, then such PENN
INTELLECTUAL PROPERTY shall be excluded from SPONSOR's option under ARTICLE 7.
6.2 PENN shall control the preparation and prosecution of all patent
applications and the maintenance of all patents related to PENN INTELLECTUAL
PROPERTY. PENN shall endeavor to assign responsibility for such preparation,
prosecution and maintenance to a patent law firm mutually agreeable to PENN and
SPONSOR. PENN and SPONSOR hereby agree that the patent counsel of Pennie &
Edmonds is a mutually agreeable law firm for such preparation, prosecution and
maintenance. SPONSOR shall reimburse PENN upon receipt of invoice for all
documented expenses incurred in connection with the filing and prosecution of
the patent applications and maintenance of the patents that SPONSOR has
requested PENN to prosecute under Section 6. 1.
6.3 Patent counsel mutually agreeable to PENN and SPONSOR shall take
instructions only from PENN unless otherwise expressly authorized in writing by
PENN. PENN shall promptly provide SPONSOR with copies of all relevant
prosecution documentation so that SPONSOR may be currently and promptly informed
and apprised of the continuing prosecution. SPONSOR may comment upon such
documentation, provided that if SPONSOR has not commented upon such
documentation prior to the initial deadline for filing a response with relevant
government patent office, PENN shall be free to respond appropriately without
consideration of SPONSOR's comments. SPONSOR agrees to keep this documentation
confidential.
6.4 PENN shall use all reasonable efforts to prepare or amend any
U.S. or foreign patent application to include claims reasonably requested by
SPONSOR to protect PENN INTELLECTUAL PROPERTY included in SPONSOR's option under
ARTICLE 7.
6.5 The preparation, prosecution, and maintenance of copyright,
trademark and other intellectual property applications for the PENN INTELLECTUAL
PROPERTY shall be subject to the provisions of Section 6.1.
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 5
6.6 PENN shall retain all right, title and interest in and to the
PENN INTELLECTUAL PROPERTY and any patents, copyrights and other intellectual
property protections related thereto.
7. OPTION
7.1 In consideration of SPONSOR's funding of the SPONSORED RESEARCH
and payment for intellectual property expenses as provided for in Article 6,
PENN grants SPONSOR an exclusive option to negotiate to obtain a world-wide
right and license, with the right to grant sublicenses, to practice PENN
INTELLECTUAL PROPERTY to make, have made, use, import sell and offer for sale
products of SPONSOR under the terms and conditions as set forth hereunder
("OPTION").
7.1.1 The period during which the OPTION may be exercised by
SPONSOR shall commence from the date of written disclosure of PENN INTELLECTUAL
PROPERTY to SPONSOR under Section 6.1 and continue for a period of six (6)
months with an automatic renewal of an additional six (6) months unless SPONSOR
and PENN earlier terminate the OPTION with respect to such disclosed PENN
INTELLECTUAL PROPERTY by mutual written agreement ("OPTION PERIOD"). Thereafter
the OPTION may be renewed only as mutually agreed upon by PENN and SPONSOR in
writing.
7.1.2 During the OPTION PERIOD, PENN shall not have
discussions with, negotiate with, or enter into any agreement with a third party
with respect to PENN INTELLECTUAL PROPERTY as to which Section 6.1 applies. If
SPONSOR elects in writing not to exercise the OPTION for a particular disclosure
of PENN INTELLECTUAL PROPERTY, PENN shall be free to license such disclosed PENN
INTELLECTUAL PROPERTY to any party upon such terms as PENN deems appropriate,
without any further obligation to SPONSOR.
7.1.3 SPONSOR shall notify PENN in writing during the OPTION
PERIOD if it wishes to exercise the OPTION with respect to a particular
disclosure of PENN INTELLECTUAL PROPERTY under Section 6.1.
7.1.4 If SPONSOR exercises the OPTION with respect to a
particular disclosure of PENN INTELLECTUAL PROPERTY then PENN and SPONSOR shall
negotiate in good faith concerning commercially fair and reasonable terms and
conditions of a license to such disclosure. PENN and SPONSOR currently expect
that commercially fair and reasonable terms and conditions would be:
7.1.4.1 If such disclosed PENN INTELLECTUAL PROPERTY is
dominated by PENN PATENT RIGHTS as defined in the LICENSE AGREEMENT so that most
products incorporating such disclosed PENN INTELLECTUAL PROPERTY would infringe
at least one claim of PENN PATENT RIGHTS as defined in the LICENSE AGREEMENT,
then such disclosed PENN INTELLECTUAL PROPERTY would (a) be included within the
definitions of PENN PATENT RIGHTS or PENN TECHNICAL INFORMATION, as defined in
the LICENSE AGREEMENT as appropriate; and (b) be licensed to SPONSOR under the
terms and conditions of the LICENSE AGREEMENT.
7.1.4.2 If such disclosed PENN INTELLECTUAL PROPERTY (1)
is based upon or related to but not covered by at least one claim in a patent or
patent application under PENN PATENT RIGHTS as defined in the LICENSE AGREEMENT
or (2) uses a process or machine related to but not covered by a claim in a
patent or patent application under PENN PATENT RIGHTS as defined in the LICENSE
AGREEMENT or (3) uses, incorporates, is based upon, or is related to PENN
TECHNICAL INFORMATION as defined in the LICENSE AGREEMENT, but is not subject to
Paragraph 7.1.4.1 (all of the foregoing collectively referred to as "Related
PENN INTELLECTUAL PROPERTY"), such Related PENN INTELLECTUAL PROPERTY will be
included within the definitions of PENN PATENT RIGHTS or PENN TECHNICAL
INFORMATION, as defined in the LICENSE AGREEMENT as appropriate subject to
agreement upon modified terms and conditions set forth in Article 3 (Fees and
Royalties and Diligence) of the LICENSE AGREEMENT which PENN and SPONSOR shall
promptly and in good faith renegotiate.
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 6
7.1.4.3 If such disclosed PENN INTELLECTUAL PROPERTY is
not Paragraph 7.1.4.1 or 7.1.4.2 then the terms and conditions shall be
negotiated in good faith.
7.1.4.4 In the event that such a particular disclosure
would substitute for or supersede previously licensed technology, the parties
acknowledge that such a particular disclosure may require an appropriate
modification in the schedule of the DEVELOPMENT PLAN as defined in the LICENSE
AGREEMENT.
7.1.5 If despite the good faith negotiations on the part of
both parties, SPONSOR and PENN fail to execute a license agreement consistent
with the foregoing provisions within twelve (12) months after disclosure of such
PENN INTELLECTUAL PROPERTY to SPONSOR or if SPONSOR fails to make payment for
intellectual property expenses as provided for in Article 6 within thirty (30)
days of notification in writing that such expenses are past due, PENN shall be
free to license the PENN INTELLECTUAL PROPERTY to any party upon such terms as
PENN deems appropriate, without any further obligation to SPONSOR.
7.2 Any license granted to SPONSOR pursuant to Section 7.1 hereof
shall be subject, if applicable, to the rights of the United States government
reserved under Public Laws 96-517, 97-256 and 98-620, codified at 35 U.S.C.
200-212, and any regulations issued thereunder.
8. PUBLICATION, USE OF NAME
8.1 PENN shall be free to publish the results of the SPONSORED
RESEARCH; except that PENN agrees to submit a copy of the complete draft of such
proposed publication to SPONSOR at least forty five (45) days prior to
publication. N SPONSOR reasonably determines that patentable subject matter is
disclosed in such proposed publication, SPONSOR shall notify PENN in writing
within thirty (30) days of receiving such complete draft If SPONSOR so notifies
PENN such publication shall thereafter be delayed until (i) PENN files a patent
application covering such patentable subject matter, or (ii) SPONSOR reasonably
determines after further investigation that no patentable invention is
disclosed, whichever comes first In no event, however, shall such publication be
delayed for longer than ninety (90) days after a copy of the complete draft of
such publication is delivered to SPONSOR by PENN.
8.2 PENN shall not use SPONSOR's name without SPONSOR's prior
written consent except that PENN may acknowledge Sponsor's funding of the
SPONSORED RESEARCH in scientific publications and in listings of sponsored
research projects. SPONSOR shall not use PENN's name, or the name of any
trustee, officer, faculty member, student or employee thereof, except for use in
scientific publications, listings of sponsored research projects, as required by
law, or as consented to by PENN.
9. TERMINATION
9.1 In addition to the termination right set forth in Section 2.2
hereof, either party may terminate this AGREEMENT effective upon written notice
to the other party, if the other party breaches any of the terms or conditions
of this AGREEMENT and fails to cure such breach within thirty (30) days after
receiving written notice of the breach. In the event of an incurable breach, the
non-breaching party may terminate this AGREEMENT effective immediately upon
written notice to the breaching party.
9.2 In addition, either party may terminate this AGREEMENT for any
reason upon ninety (90) days prior written notice to the other party.
9.3 In the event of termination of this AGREEMENT prior to its
stated term, whether for breach or for any other reason whatsoever, PENN shall
be entitled to retain from the cash payments made by SPONSOR prior to
termination PENN's reasonable costs of concluding the work in progress.
Allowable costs include, without limitation, all costs or noncancellable
commitments incurred prior to the receipt or issuance, by PENN of the notice of
termination, and the full cost of each employee, student and faculty member
supported hereunder through the end of such commitments. In the event of
termination, PENN shall submit a final report of all costs incurred and all
funds received under this AGREEMENT within sixty (60) days after the effective
termination date. The
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 7
report shall be accompanied by a check in the amount of any excess cash payments
made by SPONSOR advanced over costs and allowable commitments incurred. In the
case of termination of this AGREEMENT by PENN under Paragraph 9.2 or by SPONSOR
for material breach by PENN, PENN shall, within ten (10) days of such
termination, return all equipment or other material delivered to PENN by SPONSOR
if such termination is made less than one year after receipt by PENN of such
equipment or other material.
9.4 Termination of this AGREEMENT shall not affect the rights and
obligations of the parties accrued prior to termination. The provisions of
ARTICLE 6, entitled INTELLECTUAL PROPERTY-, ARTICLE 7, entitled OPTION, ARTICLE
10, entitled DISCLAIMER OF WARRANTIES, INDEMNIFICATION; and ARTICLE 1.1,
entitled ADDITIONAL PROVISIONS, shall survive termination.
10. DISCLAIMER OF WARRANTS, INDEMNIFICATION
10.1 PENN MAKES NO WARRANTIES, EXPRESS OR IMPLIED, AS TO ANY MATTER
WHATSOEVER, INCLUDING, WITHOUT LIMITATION, WARRANTIES WITH RESPECT TO THE
CONDUCT, COMPLETION, SUCCESS OR PARTICULAR RESULTS OF THE SPONSORED RESEARCH OR
THE CONDITION, OWNERSHIP, MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE
OF THE SPONSORED RESEARCH OR ANY PENN INTELLECTUAL PROPERTY. PENN SHALL NOT BE
LIABLE FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, PUNITIVE OR OTHER DAMAGES
SUFFERED BY SPONSOR OR ANY OTHER PERSON RESULTING FROM THE SPONSORED RESEARCH OR
THE USE OF ANY PENN INTELLECTUAL PROPERTY PRODUCT.
10.2 SPONSOR shall defend, indemnify and hold harmless PENN, the
PRINCIPAL INVESTIGATOR and any of PENNs faculty, students, employees, trustees,
officers, affiliates and agents (hereinafter referred to collectively as the
"INDEMNIFIED PERSONS") from and against any and all liability, claims, lawsuits,
losses, damages, costs or expenses(including attorney fees), which the
INDEMNIFIED PERSONS may hereafter incur, or be required to pay as a result of
Sponsor's use of the results of SPONSORED RESEARCH or any PENN INTELLECTUAL
PROPERTY or as a result of any breach of this AGREEMENT or any act or emission
of SPONSOR, its employees, affiliates, contractors, licensees or agents. PENN
shall notify SPONSOR upon learning of the institution or threatened institution
of any such liability, claims, lawsuits, losses, damages, costs and expenses and
PENN shall cooperate with SPONSOR in every proper way in the defense or
settlement thereof at Sponsor's request and expense.
11. ADDITIONAL PROVISIONS.
11.1 No rights hereunder may be assigned by SPONSOR, directly or by
merger or other operation of law, without the express written consent of PENN.
Any prohibited assignment of this AGREEMENT or the rights hereunder shall be
null and void. No assignment shall relieve SPONSOR of responsibility for the
performance of any accrued obligations which it has prior to such assignment.
11.2 A waiver by either party of a breach or violation of any
provision of this AGREEMENT will not constitute or be construed as a waiver of
any subsequent breach or violation of that provision or as a waiver of any
breach or violation of any other provision of this AGREEMENT.
11.3 Nothing herein shall be deemed to establish a relationship of
principal and agent between PENN and SPONSOR, nor any of their agents or
employees, nor shall this AGREEMENT be construed as creating any form of legal
association or arrangement which would impose liability upon one party for the
act or failure to act of the other party. Nothing in this AGREEMENT, express or
implied, is intended to confer on any person other than the parties hereto or
their permitted assigns, any benefits, rights or remedies.
11.4 Notices, payments, statements, reports and other communications
under this AGREEMENT shall be in writing and shall be deemed to have been
received as of the date dispatched if sent by -public overnight courier (e.g.,
Federal Express) and addressed as follows:
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 8
If to PENN: with a copy to:
Office of Research Administration Office of the General Counsel
University of Pennsylvania University of Pennsylvania
133 South 36th Street, Suite 300 221 College Hall
Philadelphia, PA 19104-3246 Philadelphia, PA 19104-6303
Attn: Managing Director Attn: General Counsel
If to SPONSOR:
SpectruMedix Corporation J. Stephan Dolezalek
2124 Old Gatesburg Road Brobeck Phleger & Harrison LLP
State College, PA 16803 2200 Geng Road
Attn: Joseph Adlerstein Ph.D. Two Embarcadero Place
Bernard Sonnenschein Palo Alto, CA 94303
11.5 This AGREEMENT shall be construed and governed in accordance
with the laws of the Commonwealth of Pennsylvania, without giving effect to
conflict of law provisions. The parties hereby submit to the exclusive
jurisdiction of and venue in any state or federal courts located within the
Eastern District of Pennsylvania with respect to any and all disputes concerning
the subject of this AGREEMENT.
11.6 PENN and SPONSOR shall not discriminate against any employee or
applicant for employment because of race, color, sex, sexual preference, age,
religion, national origin, disability, or because he or she is a disabled
veteran or veteran of the Vietnam Era.
11.7 Neither party shall be liable for any failure to perform as
required by this AGREEMENT to the extent such failure to perform is due to
circumstances reasonably beyond such party's control, including, without
limitation, labor disturbances or labor disputes of any kind, accidents, failure
of any governmental approval required for full performance, civil disorders or
commotion's, acts of aggression, acts of God, energy or other conservation
measures imposed by law or regulation, explosions, failure of utilities,
mechanical breakdowns, material shortages, disease, or other such occurrences.
11.8 SPONSOR shall comply with all laws, regulations and other legal
requirements applicable to SPONSOR in connection with this AGREEMENT, including
but not limited to any legal requirements applicable to Sponsor's use of the
results of the SPONSORED RESEARCH or any PENN INTELLECTUAL PROPERTY and laws
controlling the export of technical data, computer software, laboratory
prototypes, and all other export controlled commodities.
11.9 If any provision of this AGREEMENT is held to be illegal or
unenforceable, that provision shall be limited or eliminated to the minimum
extent necessary so that this AGREEMENT shall otherwise remain in full force and
effect and enforceable.
11.10 This AGREEMENT and the LICENSE AGREEMENT (Attachment C hereto)
are being entered into simultaneously and each is related to the other in
setting forth the entire agreement of the parties relating to the subject matter
hereof and supersedes all prior understandings and agreements, whether written
or oral. Any modification of this AGREEMENT must be in writing and signed by an
authorized representative of each party.
(Signatures on next page)
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 9
IN WITNESS WHEREOF, the duly authorized representatives of the parties
hereby execute this AGREEMENT as of the date first written above.
THE TRUSTEES OF THE SPECTRUMEDIX
UNIVERSITY OF PENNSYLVANIA
By: /s/ Anthony Merritt By: /s/ Joseph K. Adlerstein
------------------------------ -------------------------------
Name: Anthony Merritt Name: Joseph K. Adlerstein
---------------------------- -----------------------------
Title: Executive Director,
Sponsored Programs Title: Chief Executive Officer
--------------------------- ----------------------------
Date: March 20, 1998 Date: March - 18 - 1998
---------------------------- -----------------------------
I have read and agreed to abide by the terms of this AGREEMENT and to the
responsibilities of the PRINCIPAL INVESTIGATOR:
By: /s/ James Baumgardner Date: 3/26/98
---------------------------- -----------------------------
James Baumgardner
By: /s/ Bryan Marshall Date: 3/26/98
---------------------------- -----------------------------
Bryan Marshall
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 10
Attachment A
SUMMARY OF SPONSORED RESEARCH
* * *
ATTACHMENT REDACTED
* * *
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 11
ATTACHMENT B
Sponsored Research Proposal
* * *
ATTACHMENT REDACTED
* * *
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 1
EXHIBIT 10.19
LICENSE AGREEMENT
BETWEEN
SPECTRUMEDIX
(COMPANY)
AND
THE TRUSTEES OF THE UNIVERSITY OF PENNSYLVANIA
(PENN)
MARCH 15, 1998
(EFFECTIVE DATE)
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 2
LICENSE AGREEMENT
This License Agreement ("AGREEMENT") is between The Trustees of the
University of Pennsylvania, a Pennsylvania nonprofit corporation, with offices
located at 3700 Market Street, Suite 300, Philadelphia, Pennsylvania 19104-3147
("PENN") and SpectruMedix, a corporation organized and existing under the laws
of Delaware ("COMPANY"), having a place of business at 2124 Old Gatesburg Road,
State College, PA 16803.
This AGREEMENT is effective as of March 15, 1998 ("EFFECTIVE DATE").
BACKGROUND
A. PENN owns certain intellectual property developed by Drs. James
Baumgardner, Gordon Neufeld and Bryan Marshall of PENN's School of Medicine
relating to mass spectroscopic means of measuring pulmonary function and,
B. PENN owns applications for United States letters patent listed
in Attachment 1 to this AGREEMENT and foreign counterparts relating to the
intellectual property developed by Drs. James Baumgardner, Gordon Neufeld and
Bryan Marshall as described above; and,
C. COMPANY intends to fund further research by Drs. James
Baumgardner, Gordon Neufeld and Bryan Marshall relating to a means of measuring
pulmonary function under a sponsored research agreement ("SPONSORED RESEARCH
AGREEMENT"; Attachment 2); and,
D. COMPANY desires to obtain the exclusive right and license to use
and exploit the intellectual property developed by Drs. James Baumgardner,
Gordon Neufeld and Bryan Marshall described in Attachment 1 in accordance with
the Development Plan ("DEVELOPMENT PLAN"; Attachment 3); and,
E. PENN has determined that the exploitation of the intellectual
property developed by Drs. James Baumgardner, Gordon Neufeld and Bryan Marshall
is in the best interest of PENN and is consistent with its educational and
research missions and goals.
NOW, THEREFORE, in consideration of the promises and covenants contained
in this AGREEMENT and intending to be legally bound, the parties agree as
follows:
1. DEFINITIONS
1.1 CALENDAR QUARTER means each three-month period, or any portion
thereof, beginning on January 1, April 1, July 1 and October 1.
1.2 COMPANY means COMPANY and its AFFILIATES. AFFILIATE means, any
legal entity directly or indirectly controlling, controlled by or under common
control with COMPANY. For purposes of this AGREEMENT, "control" means the direct
or indirect ownership of more than fifty percent (50%) of the outstanding voting
securities of a legal entity, or the right to receive more than fifty percent
(50%) of the profits or earnings of a legal entity, or the right to control the
policy decisions of a legal entity.
1.3 DEVELOPMENT PLAN means a plan for the development and/or
marketing of the PENN PATENT RIGHTS and PENN TECHNICAL INFORMATION that
demonstrates COMPANY's capability to bring the PENN PATENT RIGHTS and PENN
TECHNICAL INFORMATION to practical application and is more fully described in
Attachment 3.
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 3
1.4 FAIR MARKET VALUE means the cash consideration which COMPANY or
its sublicensee would realize from an unaffiliated, unrelated buyer in an arm's
length sale of an identical item sold in the same quantity and at the same time
and place of the transaction.
1.5 FIELD OF USE means instruments to measure pulmonary function
using PENN PATENT RIGHTS.
1.6 NET SALES means the consideration or FAIR VALUE attributable to
the SALE of any PENN LICENSED PRODUCT(S), less qualifying costs directly
attributable to such SALE and actually identified on the invoice and borne by
COMPANY or its sublicensee.
1.6.1 Such qualifying costs shall be limited to the following:
1.6.1.1 Discounts in amounts customary in the trade for
quantity purchases prompt payments and for wholesalers and distribution.
1.6.1.2 Credits or refunds, not exceeding the original
invoice amount, for claims or returns.
1.6.1.3 Prepaid transportation expenses and
transportation insurance premiums.
1.6.1.4 Sales and use taxes and other fees imposed by a
governmental agency.
1.7 PENN LICENSED PRODUCT(S) means products which are made, made
for, used or sold by COMPANY and any sublicensees and which: (1) in the absence
of this AGREEMENT would infringe at least one claim of PENN PATENT RIGHTS or (2)
use a process or machine covered by a claim of PENN PATENT RIGHTS or (3) use, at
least in part, PENN TECHNICAL INFORMATION.
1.8 PENN PATENT RIGHTS means all patents issuing from those United
States patent applications listed in Attachment 1, and their foreign
counterparts and extensions, including continuation, divisional and reissue
applications and continuation-in-part applications.
1.9 PENN TECHNICAL INFORMATION means all the information contained
in the patents and the patent applications listed in Attachment 1.
1.10 SALE means any bona fide transaction for which consideration is
received or expected for the sale, use, lease, transfer or other disposition of
PENN LICENSED PRODUCT(S). A SALE of PENN LICENSED PRODUCT(S) shall be deemed
completed at the time COMPANY or its sublicensee invoices, ships, or receives
payment for such PENN LICENSED PRODUCT(S), whichever occurs first.
2. LICENSE GRANT
2.1 PENN grants to COMPANY for the term of this AGREEMENT an
exclusive, world-wide right and license, with the right to grant sublicenses, to
make, have made, use, import, sell and offer for sale PENN LICENSED PRODUCT(S)
in the FIELD OF USE. No other rights or licenses arc granted. Intellectual
property created under the SPONSORED RESEARCH AGREEMENT is governed by the
SPONSORED RESEARCH AGREEMENT.
2.2 This license grant is exclusive except that PENN may use and
permit other nonprofit organizations to use the PENN PATENT RIGHTS and the PENN
TECHNICAL INFORMATION for educational and research purposes.
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 4
2.3 COMPANY acknowledges that pursuant to Public Laws 96-517, 97-256
and 99-620, codified at 35 U.S.C. 200-212, the United States government retains
certain rights in intellectual property funded in whole or part under any
contract, grant or similar agreement with a Federal agency. Pursuant to these
laws, the government may impose certain requirements regarding such intellectual
property, including but not limited to the requirement that products resulting
from such intellectual property sold in die United States must be substantially
man in the United States. This license grant is expressly subject to all
applicable United States government rights as provided in the above-mentioned
laws and any regulations issued under those laws, as those laws or regulations
may be amended from time to time.
2.4 The right to sublicense granted to COMPANY under this AGREEMENT
is subject to the following conditions:
2.4.1 Subject to Paragraph 2.4.4, COMPANY shall require that
any sublicensee is subject to the terms and conditions of the license granted to
COMPANY under this AGREEMENT.
2.4.2 Within thirty (30) days after COMPANY enters into any
sublicense, COMPANY must send to PENN a complete copy of the sublicense written
in the English language. PENN's of the sublicense shall not constitute an
approval of the sublicense or a waiver of any of PENN's rights or COMPANY's
obligations under this AGREEMENT.
2.4.3 If COMPANY enters bankruptcy proceedings, voluntarily or
involuntarily, all payments then or thereafter due to COMPANY from its
sublicensees shall upon notice from PENN to any such sublicensee become owed
directly to PENN for the account of COMPANY; provided however, that PENN shall
remit to COMPANY the amount by which such payments exceed the amounts owed by
COMPANY to PENN.
2.4.4 To the extent that COMPANY remains liable for the
obligations under Section 3.3 (Minimum Royalties), Paragraph 3.1.1 (License
Initiation Fee), Section 3.2 (Diligence and Maintenance Fees), or Article 6
(Patent Maintenance and Reimbursement), any individual sublicensee shall not be
required to assume the obligations due PENN under Section 3.3 (Minimum
Royalties), Paragraph 3.1.1 (License Initiation Fee), Section 3.2 (Diligence and
Maintenance Fees), or Article 6 (Patent Maintenance and Reimbursement),
respectively.
2.4.5 Even if COMPANY enters into sublicenses, COMPANY remains
primarily liable to PENN for all of COMPANY'S duties and obligations contained
in this AGREEMENT, and any act or omission of a sublicensee which would be a
breach of this AGREEMENT if performed by COMPANY shall be deemed to be a breach
by COMPANY of this AGREEMENT.
3. FEES AND ROYALTIES AND DILIGENCE
3.1 LICENSE INITIATION FEE AND ROYALTIES
3.1.1 In partial consideration of the exclusive license
granted to COMPANY, COMPANY must pay to PENN on the EFFECTIVE DATE of this
AGREEMENT, a non-refundable license initiation fee of * * ( * ). In Paragraph
6.1, and subject to the conditions of Paragraph 6.1, COMPANY agrees to pay all
past and future documented attorneys fees, expenses, official fees and other
charges incident to the preparation, prosecution and maintenance of PENN PATENT
RIGHTS.
3.1.2 In further consideration of the exclusive license
granted to COMPANY, COMPANY must pay to PENN a royalty of:
3.1.2.1 * * (*) of the first * (*) of NET SALES in any
one year of PENN LICENSED PRODUCTS by COMPANY and any sublicensees; and
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 5
3.1.2.2 * * (*) of the next * (*) of NET SALES in any
one year of PENN LICENSED PRODUCTS by COMPANY and any sublicensees; and
3.1.2.3 * * (*) of all further NET SALES in any one year
of PENN LICENSED PRODUCTS by COMPANY and any sublicensees.
3.1.3 COMPANY shall pay to PENN a fraction of the difference
between (i) any cash and non-cash consideration (valued at its FAIR MARKET VALUE
as of the date of receipt by COMPANY from such sublicensees) received from a
sublicensee (other than royalty payments on SALES which are subject to the
payments described in Paragraph 3.1.2), and (ii) an amount paid by such
sublicensee that is reasonably calculated to reimburse COMPANY for its
expenditures under this AGREEMENT. Such fraction shall be determined using the
following schedule:
3.1.3.1 * * (*) for any such sublicense whose effective
date falls within the * * after the EFFECTIVE DATE;
3.1.3.2 * * (*) for any such sublicense whose effective
date falls within the * * after the EFFECTIVE DATE;
3.1.3.3 * * (*) for any such sublicense whose effective
date falls within the * * after the EFFECTIVE DATE;
3.1.3.4 * * (*) for any such sublicense whose Effective
Date falls after * * from the EFFECTIVE DATE.
3.1.4 NET SALES of any PENN LICENSED PRODUCT shall not be
subject to more than one assessment of the scheduled royalty; such assessment
shall be the highest applicable royalty.
3.2 DILIGENCE AND MAINTENANCE FEES
3.2.1 COMPANY must use diligent commercial efforts to develop
for commercial use and to market PENN LICENSED PRODUCTS as soon as practical,
consistent with the DEVELOP PLAN. COMPANY shall be entitled to exercise prudent
and reasonable business judgement in meeting all of its diligence obligations
hereunder.
3.2.2 COMPANY must provide PENN on the EFFECTIVE DATE and on
each anniversary thereafter, written progress reports, setting forth in such
detail as PENN may reasonably request, the progress of the development,
evaluation, testing and commercialization of each PENN LICENSED PRODUCT. COMPANY
shall also notify PENN within thirty (30) days of the first commercial sale of
each PENN LICENSED PRODUCT.
3.2.3 COMPANY shall use diligent commercial efforts to
initiate clinical studies suitable for submission to the FDA for device approval
of a PENN LICENSED PRODUCT not later than * (*) months after completion of
testing of the modified prototype as described in the DEVELOPMENT PLAN. Failure
of the FDA to grant the required approvals for such clinical studies despite
diligent commercial efforts by COMPANY shall not be a breach of this Paragraph
3.2.3 so long as COMPANY has filed the regulatory application to initiate
clinical studies with the FDA within * (*) months of such completion of testing
of the modified prototype. In any event, if COMPANY does not initiate such
clinical studies after such * (*) months plus a period reasonably agreed between
the parties as required to overcome such failure by FDA but not more than *
months (the "Failure Date") then a non-refundable royalty payment of * * * (*)
shall be due and payable by COMPANY to PENN as of the Failure Date and every *
(*) months thereafter until the initiation of clinical studies or termination of
this Agreement for any reason, which amounts shall be fully creditable against
royalties due under section 3.1.2 but shall not be creditable against minimum
royalties due under section 3.3. 1, such minimum royalties being separately
creditable against royalties due under section 3.1.2. Provided that COMPANY uses
diligent commercial efforts to initiate clinical studies suitable for submission
to the FDA for device approval of a PENN LICENSED PRODUCT, the parties agree
that this Paragraph 3.2.3 shall be the sole remedy for delay in initiating
clinical studies
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 6
3.2.4 COMPANY shall use diligent commercial efforts to obtain
approval from the FDA for a PENN LICENSED PRODUCT before * months after
initiation of clinical studies or, if the FDA deems that such PENN LICENSED
PRODUCT shall be regulated as a drug, before * months after initiation of
clinical studies. Failure of FDA to approve a PENN LICENSED PRODUCT despite
diligent commercial efforts by COMPANY shall not be a breach of this Paragraph
3.2.4, and PENN shall grant COMPANY the right and option to three one year
extensions, the terms of which shall be negotiated in good faith. If COMPANY
exercises such option, COMPANY shall so notify PENN in writing at least sixty
(60) days prior to the end of each of such initial period or extended period or
periods. In no event shall the extension fee for any extension exceed * * * *
(*) for each * * extension. If an extension period of more than * * is required
for any extension, PENN and COMPANY will negotiate in good faith an appropriate
adjustment in terms. If COMPANY does not obtain such FDA approval after such
extensions then a non-refundable royalty payment of * * * (*) shall be due and
payable by COMPANY to PENN at that time and every * (*) months thereafter until
COMPANY obtains such FDA approval or termination of this Agreement for any
reason, which amounts shall be fully creditable against royalties due under
section 3.1.2 but shall not be creditable against minimum royalties due under
section 3.3.1, such minimum royalties being separately creditable against
royalties due under section 3.1.2. Provided that COMPANY uses diligent
commercial efforts to obtain approval from the FDA for a PENN LICENSED PRODUCT,
the parties agree that this Paragraph 3.2.4 shall be the sole remedy for delay
in obtaining FDA approval.
3.2.5 COMPANY must pay to PENN annual license maintenance fees
of * * * (*) due and payable on each anniversary of the EFFECTIVE DATE until
minimum royalties are due. If COMPANY sponsors research under the SPONSORED
RESEARCH AGREEMENT during that year, up to * * * (*) of REIMBURSEMENT as defined
in Section 4.1 of the SPONSORED RESEARCH AGREEMENT in any given year may be
applied as a credit against these license maintenance fees due that year. If
PENN terminates the SPONSORED RESEARCH AGREEMENT under Paragraph 9.2 of the
SPONSORED RESEARCH AGREEMENT then this annual license maintenance fee shall be
reduced to * * * (*).
3.2.6 COMPANY must pay to PENN one year after the EFFECTIVE
DATE * * * (*).
3.2.7 COMPANY must pay to PENN two years after the EFFECTIVE
DATE ** * (*).
3.2.8 COMPANY must pay to PENN three years after the EFFECTIVE
DATE * * * (*).
3.2.9 COMPANY must pay to PENN upon the first SALE * * * (*)
which amount shall be fully creditable against future royalties due under
Paragraph 3.1.2. COMPANY must pay to PENN upon each of the next * SALES * * *
(*) which amount shall be fully creditable against future royalties due under
Paragraph 3.1.2.
3.3 MINIMUM ROYALTIES
3.3.1 COMPANY must pay to PENN a nonrefundable minimum royalty
for each PENN LICENSED PRODUCT for the following periods in the corresponding
amounts:
* * *
TABLE REDACTED
* * *
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 7
3.3.2 A minimum royalty payment paid under Section 3.3.1 shall
serve as an advance payment against royalties due under Section 3.1 during the
period for which such minimum royalty payment was paid.
3.4 REPORTS AND RECORDS
3.4.1 COMPANY must deliver to PENN within forty-five (45) days
after the end of each CALENDAR QUARTER a report, certified by the chief
financial officer of COMPANY, setting forth the calculation of the royalties due
to PENN for such CALENDAR QUARTER, including, without limitation:
3.4.1.1 Number of PENN LICENSED PRODUCTS involved in
SALES.
3.4.1.2 Gross consideration for SALES of PENN LICENSED
PRODUCTS, including all amounts invoiced, billed, or received.
3.4.1.3 Qualifying costs, as defined in Section 1.5,
listed by category of cost.
3.4.1.4 NET SALES of PENN LICENSED PRODUCTS.
3.4.1.5 Royalties owed to PENN, listed by category,
including without limitation earned, sublicensee-derived, and minimum royalty
categories.
3.4.1.6 Earned royalty amounts credited against minimum
royalty payments.
3.4.2 COMPANY must pay the royalties due under Section 3.1.2
within forty-five (45) days following the last day of the CALENDAR QUARTER in
which the royalties accrue. COMPANY must send with the royalties the report
described in Section 3.4. 1.
3.4.3 COMPANY must maintain and cause its sublicensees to
maintain, complete and accurate books and records which enable the royalties
payable under this AGREEMENT to be verified. The records for each CALENDAR
QUARTER must be maintained for three years after the submission of each report
under Article 3. Upon reasonable prior notice to COMPANY, COMPANY must provide
PENN with access to all books and records relating to the SALES of PENN LICENSED
PRODUCTS by COMPANY and its sublicensees to conduct a review or audit of those
books and records. Access to COMPANY's books and records must be available at
least once each CALENDAR YEAR, during normal business hours, and for each of
three years after the expiration or termination of this AGREEMENT. If PENN
determines that COMPANY has underpaid royalties by * * (*) or more, COMPANY must
pay the costs and expenses of PENN and its accountants in connection with their
review or audit.
3.5 CURRENCY, PLACE OF PAYMENT, INTEREST
3.5.1 All dollar amounts referred to in this AGREEMENT are
expressed in United States dollars. All payments to PENN under this AGREEMENT
must be made in United States dollars by check payable to "The Trustees of the
University of Pennsylvania." If COMPANY receives revenues from SALES of PENN
LICENSED PRODUCTS in currency other than United States dollars, revenues shall
be converted into United States dollars at the conversion rate for the foreign
currency as published in the eastern edition of The Wall Street Journal as of
the last business day of the applicable CALENDAR QUARTER.
3.5.2 Amounts that are not paid when due shall accrue interest
from the due date until paid, at a rate equal to one and one-half percent (1.5%)
per month (or the maximum allowed by law, if less).
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 8
4. CONFIDENTIALITY.
4.1 CONFIDENTIAL INFORMATION means and includes all technical
information, inventions. developments, discoveries, software, know-how. methods,
techniques, formulae, data, processes and other proprietary ideas, whether or
not patentable or copyrightable, that PENN identifies in writing as confidential
or proprietary at the time it is delivered or communicated to COMPANY.
4.2 COMPANY agrees to maintain in confidence and not to disclose to
any third party any CONFIDENTIAL INFORMATION of PENN COMPANY agrees to ensure
that its employees have access to CONFIDENTIAL INFORMATION only on a
need-to-know basis and are obligated in writing to abide by COMPANY's
obligations under this AGREEMENT. The foregoing obligation shall not apply to:
4.2.1 information that is known to COMPANY or independently
developed by COMPANY prior to the time of disclosure, in each case, to the
extent evidenced by written records;
4.2.2 information disclosed to COMPANY by a third party that
has a right to make such disclosure;
4.2.3 information that becomes patented, published or
otherwise part of the public domain as a result of acts by PENN or a third
person obtaining such information as a matter of right; or
4.2.4 information that is required to be disclosed by order of
United States governmental authority or a court of competent jurisdiction;
provided that COMPANY must use best efforts to obtain confidential treatment of
such information by the agency or court
4.3 PENN shall not be obligated to accept any confidential
information from COMPANY except for the reports required in Sections 3.2.2 and
3.4. PENN shall use best efforts not to disclose those reports to any third
party (subject to the exceptions of Section 4.2). PENN bears no institutional
responsibility for maintaining the confidentiality of any other information of
COMPANY. If COMPANY desires to furnish any confidential information to PRINCIPAL
INVESTIGATOR as defined under the SPONSORED RESEARCH AGREEMENT or any PENN
employee, COMPANY may request that such individual sign a confidentiality
agreement acceptable to PENN, COMPANY and individual.
5. TERM AND TERMINATION
5.1 This AGREEMENT, unless sooner terminated as provided in this
AGREEMENT, terminates upon the later of (a) expiration of the last to expire or
become abandoned of the PENN PATENT RIGHTS; or (b) twenty (20) years after the
EFFECTIVE DATE, whichever is later.
5.2 COMPANY may, upon sixty (60) days written notice to PENN,
terminate this AGREEMENT by doing all of the following:
5.2.1 ceasing to make, have made, use, import sell and offer
for sale all PENN LICENSED PRODUCTS; and
5.2.2 terminating all sublicenses, and causing all
sublicensees to cease making, having made, using, importing selling and offering
for sale all PENN LICENSED PRODUCTS; and
5.2.3 paying all monies owed to PENN that, prior to the date
of termination , accrue under this AGREEMENT and the SPONSORED RESEARCH
AGREEMENT.
5.3 PENN may terminate this AGREEMENT if any of the following occur:
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 9
5.3.1 COMPANY is more than ninety (90) days late in paying to
PENN royalties, expenses, or any other monies due under this AGREEMENT and
COMPANY does not, within dm business days, pay PENN in full upon demand in
writing; or
5.3.2 COMPANY enters bankruptcy proceedings, voluntarily or
involuntarily, or
5.3.3 COMPANY breaches this AGREEMENT and does not cure the
breach within ninety (90) days after written notice of the breach; or
5.3.4 COMPANY has not met milestones specified in Section
3.2.3 or 3.2.4 subject to any extensions provided for therein.
5.4 if COMPANY enters bankruptcy proceedings, voluntarily or
involuntarily, all duties of PENN and all rights (but not duties) of COMPANY
under this AGREEMENT immediately terminate without the necessity of any action
being taken either by PENN or by COMPANY.
5.5 Upon termination of this AGREEMENT, COMPANY must, at PENN's
request, return to PENN all CONFIDENTIAL INFORMATION fixed in any tangible
medium of expression as well as any data generated by COMPANY during the term of
this AGREEMENT that relates to PENN TECHNICAL INFORMATION and will facilitate
the development of the technology licensed under this AGREEMENT.
5.6 COMPANY's obligation to pay all monies owed to PENN that, prior
to the date of termination accrue under this AGREEMENT, shall survive
termination of this AGREEMENT. In addition, the provisions of Articles 4 -
Confidentiality, Article 5 - Term and Termination, Article 8 - Disclaimer of
Warranties; Indemnification, Article 9 - Use of PENN's Name and Article 10 -
Additional Provisions shall survive such termination.
6. PATENT MAINTENANCE AND REIMBURSEMENT
6.1 PENN controls the prosecution and maintenance of PENN PATENT
RIGHTS. COMPANY shall reimburse PENN for all documented attorneys fees,
expenses, official fees and other charges incident to the preparation,
prosecution and maintenance of PENN PATENT RIGHTS, including all such fees,
expenses and charges which PENN has incurred prior to the EFFECTIVE DATE, within
thirty (30) days after COMPANY'S receipt of invoices for such fees, expenses and
charges. However, in no event shall payment by COMPANY for such fees, expenses
and charges which PENN has incurred prior to the EFFECTIVE DATE exceed * * *
(*).
6.2 At COMPANY's request, PENN shall transfer responsibility of
prosecution and maintenance of PENN PATENT RIGHTS to a patent law firm mutually
agreeable to PENN and COMPANY. PENN and COMPANY hereby agree that the patent
counsel of * * * is a mutually agreeable law firm for such prosecution and
maintenance.
6.3 Patent counsel mutually agreeable to PENN and COMPANY shall take
instructions only from PENN unless otherwise expressly authorized in writing by
PENN. PENN shall promptly provide COMPANY with copies of all relevant
prosecution documentation so that COMPANY may be currently and promptly informed
and apprised of the continuing prosecution. COMPANY may comment upon such
documentation, provided that if COMPANY has not commented upon such
documentation prior to the initial deadline for filing a response with relevant
government patent office, PENN shall be free to respond appropriately without
consideration of COMPANY's comments. COMPANY agrees to keep this documentation
confidential in accordance with the provisions of Article 4 (Confidentiality).
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 10
6.4 PENN shall use all reasonable efforts to prepare or amend any
U.S. or foreign patent application to include claims reasonably requested by
COMPANY to protect PENN LICENSED PRODUCT(S) contemplated to be sold or
procedures to be practiced under this AGREEMENT.
7. INFRINGEMENT AND LITIGATION
7.1 PENN and COMPANY arc responsible for notifying each other
promptly of any infringement of PENN PATENT RIGHTS which may come to their
attention PENN and COMPANY shall consult one another in a timely manner
concerning any appropriate response to the infringement.
7.2 COMPANY may prosecute such infringement at its own expense.
COMPANY must not settle or compromise any such suit in a manner that imposes any
obligations or restrictions on PENN or grants any rights to the PENN TECHNICAL
INFORMATION or the PENN PATENT RIGHTS, without PENN's prior written permission.
Financial recoveries from any such litigation will first be applied to reimburse
COMPANY for its litigation expenditures with additional recoveries being paid to
COMPANY, subject to a royalty due PENN based on the provisions of Article 3.
7.3 COMPANY's rights under Section 7.2 are subject to the continuing
right of PENN to intervene at PENN's own expense and join COMPANY in any claim
or suit for infringement of the PENN PATENT RIGHTS. Any consideration received
by COMPANY in settlement of any claim or suit shall be shared between PENN and
COMPANY in proportion with their share of the litigation expenses in such
infringement action.
7.4 If COMPANY fails to prosecute any infringement, PENN may
prosecute such infringement at its own expense. In such event, financial
recoveries will be entirely retained by PENN.
7.5 In any action to enforce any of the PENN PATENT RIGHTS, either
party, at the request and expense of the other party shall cooperate to the
fullest extent reasonably possible. This provision shall not be construed to
require either party to undertake any activities, including legal discovery, at
the request of any third party except as may be required by lawful process of a
court of competent jurisdiction.
8. DISCLAIMER OF WARRANTIES; INDEMNIFICATION
8.1 THE PENN PATENT RIGHTS, PENN TECHNICAL INFORMATION, PENN
LICENSED PRODUCTS AND ALL OTHER TECHNOLOGY LICENSED UNDER THIS AGREEMENT ARE
PROVIDED ON AN "AS IS" BASIS AND PENN MAKES NO REPRESENTATIONS OR WARRANTIES,
EXPRESS OR IMPLIED, WITH RESPECT THERETO. BY WAY OF EXAMPLE BUT NOT OF
LIMITATION, PENN MAKES NO REPRESENTATIONS OR WARRANTIES (i) OF COMMERCIAL
UTILITY; (ii) OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE; OR (iii)
THAT THE USE OF THE PENN PATENT RIGHTS, PENN TECHNICAL INFORMATION, PENN
LICENSED PRODUCTS AND ALL TECHNOLOGY LICENSED UNDER THIS AGREEMENT WILL NOT
INFRINGE ANY PATENT, COPYRIGHT OR TRADEMARK OR OTHER PROPRIETARY RIGHTS OF
OTHERS. PENN SHALL NOT BE LIABLE TO COMPANY, COMPANY'S SUCCESSORS OR ASSIGNS OR
ANY THIRD PARTY WITH RESPECT TO: ANY CLAIM ARISING FROM COMPANY'S USE OF THE
PENN PATENT RIGHTS, PENN TECHNICAL INFORMATION, PENN LICENSED PRODUCTS AND ALL
TECHNOLOGY LICENSED UNDER THIS AGREEMENT OR FROM THE MANUFACTURE, USE OR SALE OF
PENN LICENSED PRODUCTS; OR ANY CLAIM FOR LOSS OF PROFITS, LOSS OR INTERRUPTION
OF BUSINESS, OR FOR INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES OF ANY KIND.
8.2 COMPANY must defend, indemnify and hold harmless PENN, its
trustees, officers, agents and employees (individually, an "Indemnified Party",
and collectively, the "Indemnified Parties"), from and against any and all
liability, loss, damage, action, claim or expense suffered or incurred by the
Indemnified Parties (including
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 11
attorney's fees) (individually, a "Liability", and collectively, the
"Liabilities") that results from or arises out of: (a) the development, use,
manufacture, promotion, sale or other disposition of any PENN TECHNICAL
INFORMATION, PENN PATENT RIGHTS, or PENN LICENSED PRODUCTS by COMPANY, its
assignees, sublicensees, vendors or other third parties, (b) any breach by
COMPANY of this AGREEMENT; and (c) the enforcement by an Indemnified Party of
this Section. Without limiting the foregoing, COMPANY must defend, indemnify and
hold harmless the Indemnified Parties from and against any Liabilities resulting
from:
8.2.1 any product liability or other claim of any kind related
to the use by a third party of a PENN LICENSED PRODUCT that was manufactured,
sold or otherwise disposed by COMPANY, its assignees, sublicensees, vendors or
other third parties;
8.2.2 a claim by a third party that the PENN TECHNICAL
INFORMATION or PENN PATENT RIGHTS or the design, composition, manufacture, use,
sale or other disposition of any PENN LICENSED PRODUCT infringes or violates any
patent, copyright, trademark or other intellectual property rights of such third
party; and
8.2.3 clinical trials or studies conducted by or on behalf of
COMPANY relating to the PENN TECHNICAL INFORMATION, PENN PATENT RIGHTS or PENN
LICENSED PRODUCTS, including, without limitation, any claim by or on behalf of a
human subject of any such clinical trial or study.
8.3 COMPANY is not permitted to settle or compromise any claim or
action giving rise to Liabilities in a manner that imposes any restrictions or
obligations on PENN or grants any rights to the PENN TECHNICAL INFORMATION, PENN
PATENT RIGHTS or PENN LICENSED PRODUCTS without PENN's prior written consent If
COMPANY fails or declines to assume the defense of any such claim or action
within thirty (30) clays after notice thereof, PENN may assume the defense of
such claim or action for the account and at the risk of COMPANY, and any
Liabilities related thereto shall be conclusively deemed a liability of COMPANY.
The indemnification rights of PENN or other Indemnified Party contained herein
are in addition to all other rights which such Indemnified Party may have at law
or in equity or otherwise.
8.4 INSURANCE
8.4.1 COMPANY must procure and maintain a policy or policies
of comprehensive general liability insurance, including broad form and
contractual liability, in a minimum amount of $2,000,000 combined single limit
per occurrence and in the aggregate as personal injury, bodily injury and
property damage arising out of COMPANY's performance of this AGREEMENT.
8.4.2 COMPANY must, upon commencement of clinical trials
involving PENN LICENSED PRODUCTS, procure and maintain a policy or policies of
product liability insurance in a minimum amount of * * combined single limit per
occurrence and in the aggregate as respects bodily injury and property damage
arising out of COMPANY's performance of this AGREEMENT.
8.4.3 The policy or policies of insurance described in this
Section 8.4 must be issued by an insurance carrier with an A.M. Best rating of
"A" or better and must name PENN as an additional insured with respect to
COMPANY's performance of this AGREEMENT. COMPANY must provide PENN with
certificates evidencing the insurance coverage required herein and all
subsequent renewals thereof. Such certificates must provide that COMPANY's
insurance carrier(s) notify PENN in writing at least 30 days prior to
cancellation or material change in coverage.
8.4.4 PENN may periodically review the adequacy of the minimum
limits of liability insurance specified in this Section and PENN reserves the
right to require COMPANY to adjust the liability insurance coverages. The
specified minimum insurance amounts do not constitute a limitation on COMPANY's
obligation to indemnify PENN under this AGREEMENT.
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 12
9. USE OF PENN'S NAME
COMPANY and its employees and agents must not use and COMPANY must not
permit its sublicensees to use PENN's name or any adaptation thereof, or any
PENN seal, logotype, trademark or service mark, or the name, mark, or logotype
of any PENN representative or organization in any way without the prior written
consent of PENN.
10. ADDITIONAL PROVISIONS
10.1 Nothing in this AGREEMENT shall be deemed to establish a
relationship of principal and agent between PENN and COMPANY, nor any of their
agents or employees for any purpose whatsoever, nor shall this AGREEMENT be
construed as creating any other form of legal association or arrangement which
would impose liability upon one party for the act or failure to act of the other
party.
10.2 COMPANY is not permitted to assign this AGREEMENT or any part of
it, either directly or by merger or other operation of law, without the prior
written consent of PENN. Any prohibited assignment of this AGREEMENT or the
rights hereunder shall be null and void. No assignment relieves COMPANY of
responsibility for the performance of any accrued obligations which it has prior
to such assignment
10.3 A waiver by either party of a breach of any provision of this
AGREEMENT will not constitute a waiver of any subsequent breach of that
provision or a waiver of any breach of any other provision of this AGREEMENT.
10.4 Notices, payments, statements, reports and other
commununications under this AGREEMENT shall be in writing and shall be deemed to
have been received as of the date sent if sent by public courier (e.g. Federal
Express) or by Express Mail, receipt requested, and addressed as follows:
<TABLE>
<S> <C>
If for PENN: with a copy to:
University of Pennsylvania Office of General Counsel
Center for Technology Transfer University of Pennsylvania
3700 Market Street, Suite 300 221 College Hall
Philadelphia, PA 19104-3147 Philadelphia, PA 19104-6303
Attention: Managing Director Attention: General Counsel
If for COMPANY:
SpectruMedix Corporation J. Stephan Dolezalek
2124 Old Gatesburg Road Brobeck, Phleger & Harrison LLP
State College, PA 16803 2200 Geng Road
Attention: Joseph Adlerstein Ph.D. Two Embarcadero Place
Bernard Sonnenschein Palo Alto, CA 94303
</TABLE>
Either party may change its official address upon written notice to the other
party.
10.5 This AGREEMENT shall be construed and governed in accordance
with the laws of the Commonwealth of Pennsylvania, without giving effect to
conflict of law provisions. In the event that a party to this AGREEMENT
perceives the existence of a dispute with the other party concerning any right
or duty provided for herein, the parties will, as soon as practicable, confer in
an attempt to resolve the dispute. If the parties are unable to resolve such
dispute amicably, then the parties hereby submit to the exclusive jurisdiction
of and venue in
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 13
the courts located in the Eastern District of the Commonwealth of Pennsylvania
with respect to any and all disputes concerning the subject of this AGREEMENT.
10.6 PENN and COMPANY shall not discriminate against any employee or
applicant for employment because of race, color, sex, sexual or affectional
preference, age, religion, national or ethnic origin, handicap, or because he or
she is a disabled veteran or a veteran of the Vietnam Era.
10.7 COMPANY must comply with all prevailing laws, rules and
regulations that apply to its activities or obligations under this AGREEMENT.
Without limiting the foregoing, it is understood that this AGREEMENT may be
subject to United States laws and regulations controlling the export of
technical data, computer software, laboratory prototype and other commodities,
articles and information, including the Arms Export Control Act as amended in
the Export Administration Act of 1979, and that the parties' obligations are
contingent upon compliance with applicable United States export laws and
regulations. The transfer of certain technical data and commodities may require
a license from the cognizant agency of the United States Government and/or
written assurances by COMPANY that COMPANY shall not export data or commodities
to certain foreign countries without prior approval of such agency. PENN neither
represents that a license is not required nor that, if required, it will issue.
10.8 If any provision of this AGREEMENT is held to be illegal or
unenforceable, that provision shall be limited or eliminated to the minimum
extent necessary so that this AGREEMENT shall otherwise remain in full force and
effect and enforceable.
10.9 This AGREEMENT and the SPONSORED RESEARCH AGREEMENT (Attachment
2 hereto) are being entered into simultaneously and each is related to the other
in setting forth the entire agreement of the parties. Any modification of this
AGREEMENT must be in writing and signed by an authorized representative of each
party.
IN WITNESS WHEREOF, the parties, intending to be legally bound, have
caused this AGREEMENT to be executed by their duly authorized representatives.
THE TRUSTEES OF THE UNIVERSITY OF PENNSYLVANIA SPECTRUMEDIX
By /s/ Louis P. Berneman By /s/ Joseph K. Adlerstein
------------------------------------- -----------------------------------
Name: Louis P. Berneman Name: Joseph K. Adlerstein
Title: Managing Director Title: Chief Executive Officer
Center for Technology Transfer
Date: Date: March 18, 1998
-------------------------------- -----------------------------
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 14
ATTACHMENT 1 PATENTS AND PATENT APPLICATIONS
* * *
ATTACHMENT REDACTED
* * *
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 15
ATTACHMENT 2 SPONSORED RESEARCH AGREEMENT
* * *
ATTACHMENT REDACTED
* * *
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 16
ATTACHMENT 3 DEVELOPMENT PLAN
* * *
ATTACHMENT REDACTED
* * *
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (no. 333-42437) of SpectruMedix Corporation of our report
dated June 10, 1998 appearing on page 33 of this Annual Report on Form
10-KSB.
PRICE WATERHOUSE LLP
New York, New York
June 26, 1998
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use of our report dated May 16, 1997, on the
financial statements of SpectruMedix Corporation as of March 31, 1997, appearing
on page 34 of this Annual Report on Form 10-KSB for the fiscal year ended March
31, 1998.
NEW YORK, NEW YORK
JUNE 26, 1998 LAZAR LEVINE & FELIX LLP
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to incorporation by reference in the Registration
Statement on Form S-8 (no. 333-42437) of SpectruMedix Corporation of our report
dated May 16, 1997 appearing on page 34 of this Annual Report on Form 10-KSB for
the fiscal year ended March 31, 1998.
NEW YORK, NEW YORK
JUNE 26, 1998 LAZAR LEVINE & FELIX LLP
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,680,643
<SECURITIES> 0
<RECEIVABLES> 12,806
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<INVENTORY> 381,393
<CURRENT-ASSETS> 2,124,268
<PP&E> 385,124
<DEPRECIATION> (105,407)
<TOTAL-ASSETS> 2,788,757
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0
0
<COMMON> 4,042
<OTHER-SE> 1,611,917
<TOTAL-LIABILITY-AND-EQUITY> 2,788,757
<SALES> 269,875
<TOTAL-REVENUES> 341,813
<CGS> 292,311
<TOTAL-COSTS> 321,086
<OTHER-EXPENSES> 2,561,961
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<INTEREST-EXPENSE> (1,760,382)
<INCOME-PRETAX> (4,301,616)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,301,616)
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<EXTRAORDINARY> 252,396
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