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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, 2000
[_] 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 Identification No.)
Incorporation or Organization)
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
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No ___
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [_]
State issuer's revenue for its most recent fiscal year. $1,193,405
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 July 10, 2000 was
$4,528,987.*
The number of shares of the Registrant's Common Stock outstanding was
4,242,289 as of June 15, 2000.
Transitional Small Business Disclosure Format (check one): Yes ____ No X
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DOCUMENTS INCORPORATED BY REFERENCE
The applicable portions of the Registrant's Proxy Statement for the 2000
Annual Meeting of Stockholders are incorporated by reference herein into Part
III of this Annual Report on Form 10-KSB.
_______________
*Excludes 1,455,220 shares of the Registrant's Common Stock held by the
chief executive officer and directors and affiliated parties at July 10, 2000.
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
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All statements contained herein that are not historical facts,
including, but not limited to, statements regarding SpectruMedix Corporation and
our current business strategy, projected sources and uses of cash, and plans for
future development and operation, are based on our current expectations. The
statements are forward-looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially. The risks and uncertainties
are described more fully under the heading "Risk Factors," and include, but are
not limited to, our ability to commercialize and market our DNA sequencing
instrumentation and high throughput screening instrumentation. We caution you
not to place undue reliance on any such forward-looking statements, which
statements are made pursuant to the Private Litigation Reform Act of 1995 and,
as such, speak only as of the date made.
The Company
Introduction
We devote substantially all of our resources and efforts to the
commercialization, marketing and sale of our two principal products, our high-
speed DNA sequencing instrumentation that facilitates the acquisition, analysis
and management of complex genetic information, and our high throughput
screening, massive parallel capillary electrophoresis system (the "HTS-MPCE
system"), a high throughput system based on the technologies developed for our
DNA sequencer, used in the pharmaceutical industry for drug discovery. Our DNA
sequencer was developed in part from research efforts conducted at the United
States Department of Energy's Ames Laboratory, which is operated by Iowa State
University's Institute for Physical Research and Technology. We believe DNA
sequencing has significant implications for medical, genetic and forensic
science applications.
In May 1995, we entered into an agreement with Iowa State University
Research Foundation ("ISURF"), an affiliate of Ames Laboratories. Under that
agreement we received an option to acquire an exclusive worldwide license to
technology for the commercial development of the DNA sequencer developed at
ISURF. We believe our DNA sequencer is capable of substantially increasing the
rate of sequencing over the other commercially available sequencing instruments
on the market today and providing reliable results at a lower cost. We have
completed development of our DNA sequencer and have models available for the
commercial market.
In June 1997, we exercised our option for the ISURF technology and
entered into an exclusive, worldwide licensing agreement. Due to our financial
condition during our 1999 fiscal year and through the end of July 1999, however,
we were not able to make certain required payments under the licensing
agreement. On July 30, 1999, we amended the license agreement to require us to
pay $500,000 to ISURF, in exchange for which ISURF waived any defaults for our
past failure to make required payments. The amended agreement also provided for
a revised schedule of minimum royalties. In addition, ISURF allowed us to grant
a sublicense to The Perkin-Elmer Corporation, now known as PE Biosystems, in
exchange for a portion of the royalties we received from PE Biosystems and a
phantom stock award equal to 150,000 shares of our common stock.
Concurrently with the restructuring of our license agreement, we
granted PE Biosystems an exclusive sublicense to use certain patents for DNA
sequencing machines, with the sublicense limited to machines using 30 or fewer
capillaries and side entry illumination. We also granted PE Biosystems a right
of first refusal to sublicense this technology to develop DNA sequencing
machines using more than 30 capillaries. On July 30, 1999, PE Biosystems paid us
a non-refundable sublicense issue fee of $1,000,000, and agreed to pay us
certain minimum annual royalties commencing with the twelve-month period
beginning August 1, 2000. The minimum royalties are non-refundable, but are
credited against the earned royalties payable pursuant to the sublicense
agreement.
In connection with the sublicense agreement, PE Corporation, the
parent company of PE Biosystems, purchased 2,000 shares of our series A
preferred stock for $1,000 per share. We will pay dividends on our series A
preferred stock only if we pay dividends on our common stock. Our series A
preferred stock may be converted into shares of our common stock at a conversion
price of $2.50 per share, subject to adjustment in the event we
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consolidate, merge, reorganize or sale of substantially all of our assets. In
addition, we entered into a multi-year consulting agreement with PE Biosystems
pursuant to which we will provide consulting services to PE Biosystems. Upon
execution of the consulting agreement, we received a lump sum consulting fee of
$2,000,000.
Company History
Since our formation in 1992, we have devoted all of our resources to
developing, upgrading and improving our existing line of scientific
instrumentation, which initially consisted of mass spectrometers and
Luminoscopes, electronic components and software. Despite the technological
achievements of our products, we have not been able to achieve significant sales
of our scientific instrumentation, partly as a result of our earlier significant
liquidity concerns and management turnover.
Until December 1998, we financed our operations primarily through the
sale of equity securities and loans, most of which loans were repaid with the
proceeds from our initial public offering. As sales from our then existing
product lines were limited, we shifted our focus to the development of our DNA
sequencer and our HTS-MPCE system and, to a substantially lesser degree, certain
other research products.
We expended substantially all of our funds on the development and
commercialization of our products, including our DNA sequencer and HTS-MPCE
system. From January 1999 through July 1999, we were dependent on funds advanced
to us by our chief executive officer to meet payroll and expenses. Due to our
financial condition at that time, we were unable to make required payments under
our license agreements and were unable to maintain an option for the right to
use a patent critical to another technology we were developing. Our financial
position improved markedly in July 1999 with the restructuring of our license
agreement with ISURF and the sublicense to, and related agreements with, PE
Biosystems, as discussed above.
In the Fall of 1999, we completed the development and
commercialization of our DNA sequencer and began a directed marketing effort,
and we developed and commercialized the HTS-MPCE system. On March 31, 2000,
Procter & Gamble Pharmaceuticals purchased an HTS-MPCE system for use in
pharmaceutical screening. This sale was the first, and to date, the only sale of
our principal products.
DNA Sequencer
DNA is the chemical material in living organisms that defines the
physical characteristics of each organism and is responsible for everything
within the organism concerning the reproduction, maintenance, repair and (some
scientists believe) the general behavior of a given individual or organism. 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 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 two cross-linked molecular
strands in the shape of a helical ladder. The complete DNA sequence for an
organism is called the genome. Coordinated by the U.S. Department of Energy and
the National Institute of Health, many research centers and laboratories, as
well as many private companies, are engaged in a project to map the human genome
(the Human Genome Project). Among the goals of the Human Genome Project are to
identify all the estimated 80,000 to 100,000 genes in human DNA and to determine
the sequences of the three billion chemical bases that make up human DNA.
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 genetic information that constitutes the human genome.
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Recently, a working draft of the Human Genome was unveiled. 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 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. 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 our DNA sequencer. Our DNA sequencer is
then used to identify, in order, the individual bases that appear along the DNA
strand.
[GRAPHIC SHOWING DNA SAMPLE PREPARATION]
Figure 1. Illustration of the DNA structure, prepared fragment samples, and
resulting data format.
Currently Commercially Available DNA Sequencer Instrumentation. The
general separation method employed by our DNA sequencer, 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 uses 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. To obtain the final data, the voltage is
applied across the gel for a given period of time, and then removed. The 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.
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This instrument design has certain inherent limitations: (i) the
technique is mechanically cumbersome; (ii) the gel material must be made
immediately prior to its use; (iii) the gel material is prepared from a monomer
compound that is a highly dangerous neurotoxin that 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 because 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 use with existing robotic-based preparation techniques
commonly found in biological laboratories due to the incompatibility 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. As a result
of such limitations, the slab gel technique cannot exceed a sequencing rate of
approximately 500 bases per hour.
The SpectruMedix SCE9610 Multiplexed Capillary Electrophoresis DNA
Sequencer. Unlike gel slab-based systems, our DNA sequencer utilizes narrow
glass tubes, a process known as capillary gel electrophoresis. The tube, or
capillary, is composed of a non-conductive glass, roughly three feet in length
(See Figures 2 and 3), and 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).
The capillaries may be compared to a three-foot long hollow tube the thickness
of sewing thread. The tube is filled with our 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.
[GRAPHIC SHOWING DNA SEQUENCING]
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. With an SGE
based system, 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 our CGE technique, the
analysis is performed "on the fly" with a light detector or charged-couple
device ("CCD") 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
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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). The Company believes that CGE provides
several advantages over the slab gel technique: (i) less gel material, sample
volumes and reagents are used for each analysis and (ii) the issue of resistive
heating is greatly reduced, because the cross-sectional area of the 0.006 inch
diameter capillary is considerably smaller than a 10 x 0.25 inch gel plate.
In addition, because less heat is generated, greater voltage can be
applied to the system, resulting in shorter analysis times. The SCE9610 system
can apply 15,000 to 30,000 volts across the capillary tube, reducing run times
from hours in the case of SGE based instrumentation to minutes in our CGE
instrument. Samples may be continuously run, and the entire analytical procedure
may be computer controlled. In addition, the on-column sample analysis provided
by the SCE9610 provides continuous discrete isolation of concurrent samples
during the analysis and reduces the risk of chemical cross contamination from
neighboring lanes.
[GRAPHIC SHOWING CCD CAMERA]
Figure 3. The SpectruMedix SCE9610 Multiplexed 96-Capillary Electrophoresis DNA
sequencer.
We believe that our DNA sequencer provides advantages over 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.
Our SCE9610 Multiplexed Capillary Electrophoresis DNA Sequencer
combines simultaneous fluorescence and detection of 96 discreet capillary lanes
with CGE (see Figure 3). Our 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 carrousels are
multiple-tray holders that allow for pre-loading the DNA samples and buffers
necessary for each of several runs and then having the instrument's computer
control the instrument functions automatically without further operator
intervention. The samples are handled by the SCE9610 in standard, commercially
available 96-well microtiter plates and, we believe, should be compatible with
the preparation processes commonly used in laboratories. Samples may therefore
be prepared and analyzed in the same container, reducing the possibility of
cross contamination and sample loss.
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We have also developed a fluid gel matrix capable of increased DNA
fragment resolution at increased sample migration speeds. The less viscous
nature of our gel matrix, compared to some other currently available materials,
also allows the capability of flushing out consumed gel matrix with fresh gel
matrix as part of the automated instrument sequence, and complete capillary
column reconditioning between each sample series run.
Recently, we introduced a new gel sieving mixture. We believe this
gel, which we plan to market under the name HTgel, has a novel composition in
that it contains no urea, the key chemical necessary for DNA separation in
conventional gels. Instead of relying on urea for DNA separation, samples using
the new gel are run at higher temperatures, 80 to 90 degrees Celsius. As a
result of running at higher temperatures, our new gel routinely generates 650
base pairs of data per capillary lane. In addition, urea has been demonstrated
to contribute to the degradation of the capillary inner wall, and is linked to
capillary failure after prolonged use. High heat achieves DNA separation without
capillary degradation, thereby increasing the useful life of a capillary, and
high heat also increases the data uniformity of the capillary array.
In addition, the SCE9610 utilizes direct sample injection from the
tray in which the samples were prepared, which help assure the integrity prior
to its analysis. Some of our competitor's capillary systems employ a robotic arm
that transfers the samples from the well tray to a secondary loading station.
This raises concerns with cross-contamination because neither the pipe tip nor
the loading tray are replaced after each use.
High Throughput Screening, Massive Parallel Capillary Electrophoresis System
Drug discovery at modern pharmaceutical companies requires screening
an ever increasing number of compounds against a large library of compounds.
Advances in genomics, combinatorial chemistry and laboratory automation have
significantly increased the number of targets for drug screening. Drug companies
employ hundreds of chemists who create, maintain, analyze and assay hundreds of
thousands, if not millions, of drug candidates. It is the job of these chemists
to ensure the purity and consistency of massive compound collections, and to
define the chemical composition, active ingredients and impurities of complex
mixtures. As part of the drug screening process, active components must be
separated from the samples in a combinatorial library. Otherwise, it may not be
possible to detect its activity in a compound that may contain many inactive
substances. In addition, high throughput analytical technology must also provide
detailed information that reflects whether other factors have altered the
chemical composition, the molecular structure, conformation or activity of the
target substance.
Capillary Electrophoresis. Capillary electrophoresis is a powerful
separation tool that enables simultaneous separation and analysis of substances.
Multiplexed capillary electrophoresis can be applied to library screening,
impurity identification, enzyme kinetic studies, multiple source analysis and
environmental and clinical assays.
The SpectruMedix HTS9610 - High Throughput Screening - Massive
Parallel Capillary Electrophoresis System. The HTS-MPCE system, our model number
HTS9610, has been developed to perform 96 parallel analytical separations
simultaneously in individual capillaries. Each capillary is the equivalent of a
single-column instrument. The combination of massive multiplexing, high
separation efficiency, fast analysis time, full automation, sensitive detection,
and spectrometric capability makes the HTS9610 a highly suitable analytical
platform for high-throughput pharmaceutical applications.
During each analysis, the instrument introduces 96 samples
simultaneously from a standard 96-well microtiter tray. The instrument
automatically processes up to six sample trays without operator intervention.
Additionally, the instrument may run any of the 96-well trays repeatedly at pre-
determined intervals to provide time-resolved measurements for kinetic studies.
We believe that this high degree of automation and operational flexibility
significantly reduces labor cost, while enhancing productivity.
The system is based on technology developed for the DNA sequencer and
employs on-column laser excitation and a charged-coupled device (CCD) detector
to simultaneously record fluorescence signal from all capillaries. The efficient
optical design produces a robust detection system. Multi-wavelength detection is
implemented with a miniaturized spectrometer. The instrument is capable of
performing size separation for mutation screening and protein analysis by
filling capillaries with a replaceable polymer solution. With a minor upgrade,
the
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instrument is also capable of capillary zone electrophoresis for protein/peptide
and other small molecule separations.
The HTS-MPCE system incorporates all the design advantages of our
SCE9610, but uses an alternative type of separation process known as capillary
zone electrophoresis. In capillary zone electrophoresis, the capillaries are
filled with salt water, a conductive medium that facilitates the separation of
charged analyte molecules across an electric field, rather than a gel. The
system is capable of simultaneously separating and analyzing, in less than 10
minutes, the components in 96 individual drug screening assay samples such as
proteins, including enzymes and antibodies, peptides and drug candidates. In a
24 hour cycle, the HTS-MPCE system is capable of automatically analyzing over
12,000 samples.
Alternative Technologies. High pressure liquid chromatography
("HPLC"), an alternative to capillary electrophoresis, is the primary analytical
technique used for drug screening and to monitor the integrity and purity of
compounds. HPLC is not a high throughput technique, however, and represents a
significant bottleneck in drug screening, even when using multiple instruments.
Other Products
We also manufacture and sell mass spectrometers and Luminoscopes.
Historically, we have not been able to generate significant sales of these
products. As a result, we have shifted our focus to the commercialization of
the DNA sequencer. However, we may continue to make limited sales of our mass
spectrometers and Luminoscopes.
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." 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) routine geology tasks such as determining the age of rocks
and meteorites, computing the temperatures in ancient oceans, and studying the
composition of gases in rock formations; (iii) metallurgical uses involving
several simultaneous analyses, such as testing a sample for the presence of
hydrogen, carbon, nitrogen and oxygen, and for the concentration profiles of
these elements; and (iv) 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.
A Luminoscope is a micro-scale analytical device used to determine in
a nondestructive manner the composition and structure of solid samples.
Luminoscopes consist 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.
Other Technologies under Development
Laser Diagnostics. In support of our work on our DNA sequencer, we
acquired certain assets of Laser Diagnostics. Laser Diagnostics developed a
technology known as Laser-Induced Breakdown Spectroscopy ("LIBS") in
collaboration with the Los Alamos National Laboratory, Sandia National
Laboratory in Livermore, CA, and the Diagnostic and Analysis Instrumentation
Laboratory at Mississippi State University. The LIBS technique involves focusing
a high peak-power pulsed laser to create a small spark from which optical
emission is used to perform elemental analysis. This technology can be used to
continuously monitor the off-gases from incinerators and other thermal treatment
facilities for heavy metals released into the atmosphere. The U.S. Department of
Energy granted a Small Business Technology Transfer ("STTR") grant to Laser
Diagnostics in support of this work. Laser Diagnostics also developed a novel
near-infrared diode laser system to monitor water vapor and carbon dioxide in
the atmosphere. The National Science Foundation, Atmospheric Sciences Division
issued an STTR grant in support of this work. We are continuing the development
of both these technologies with the STTR grants.
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Pulmonary Diagnostics. In collaboration with researchers at the
University of Pennsylvania, we are 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 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. The MMIMS
instrumentation under development is expected to allow the measurement to be
made more accurately, more rapidly and with greater sensitivity.
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.
Research and Development
Our research and development efforts currently are focused on the
commercialization and improvement of the DNA sequencer and the HTS-MPCE system,
and, to a lesser extent, the development of LIBS and pulmonary diagnostic
technology. As of March 31, 2000, we 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, 2000 and 1999 were $499,159
and $1,050,933, respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
We believe that our success will depend upon our ability to enhance
our existing products, to meet changing customer requirements and emerging
industry standards on a timely and cost-effective basis, and to develop and
introduce new products. Accordingly, we currently intend to continue to devote a
substantial portion of our resources and efforts to research and development
activities.
Sales and Marketing
In April 2000, we hired a national sales director to develop a full-
time sales and marketing force and undertake a concerted marketing effort to
market our DNA sequencer and HTS-MPCE system. We expect to expand our sales and
marketing efforts for our principal products during the next fiscal year. Prior
to that time, all of our sales and marketing was conducted by our chief
executive officer on a part-time basis and by one or two of our employees.
Competition
DNA sequencers. Competition in the market for DNA sequencing
technology is rapidly evolving. Our competitors include certain major
universities and research centers, large corporations with significantly more
financing, and a large number of smaller instrument, software and genomics
companies that are developing complete, or components of, DNA sequencing
equipment. Although we believe 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 our own development and commercialization
efforts.
Current Technology. The primary commercially-available, semi-automated
DNA sequencer, the ABI377, is manufactured by PE Biosystems. This slab gel-based
technology is capable of running 96 lanes of DNA samples of 400-450 bases in
four hours. Based on discussions with scientists who use the ABI377, the Company
believes that the ABI377 is labor-intensive for gel and sample preparation and
requires highly skilled operators. In addition, the
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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.
In early 1999, PE Biosystems released a new 96-capillary DNA sequencer, the
ABI Prism(R) 3700 DNA Analyzer, and PE Biosystems has reported significant
sales for this product. We believe that the technology employed in the SCE9610
should allow the SCE9610 to compete favorably with the ABI Prism(R) 3700 DNA
Analyzer. PE Biosystems has sublicensed certain aspects of our technology and
may incorporate such technology into its future DNA sequencing instrumentation,
but only for machines with 30 or fewer capillaries and employing an optics
system that we are not currently considering for commercialization.
Other Electrophoresis-based Instrumentation. Other manufacturers of DNA
sequencing machines are developing alternatives to both the ABI3700 and the
SCE9610. One such multi-capillary device being commercialized by Molecular
Dynamics, Inc., the MEGABACE 1000, employs a single scanning detector that
"looks" at each single capillary in the array in sequence. We believe that the
SCE9610 should compete favorably with the MEGABACE 1000 because (i) the single
detector of the MEGABACE 1000 can accurately scan a relatively low maximum
number of capillaries before the detector must return to its starting position
to monitor the first capillary, (ii) the capillary/detector system of the
MEGABACE 1000 is considerably more complex than that of the SCE9610, and (iii)
the MEGABACE lacks multi-tray automation.
In addition to the capillary array electrophoresis technology we use, other
various technologies are being developed 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, which determines DNA sequences based upon the molecular
mass of the DNA and its fragments; and (iii) sequencing by hybridization, which
involves binding the sample DNA fragments to complimentary, known sequence
targets anchored to a substrate.
HTS-MPCE System. Pharmaceutical and academic research groups currently
employ a wide variety of instruments for the purpose of targeting and
interrogating candidate drug molecules. Current technology employed by
pharmaceutical companies include high pressure liquid chromatography systems,
single capillary electrophoresis systems and gel filtration columns. In each
case, single samples are processed. Other instrumentation to increase
throughput includes running multiple instruments in parallel, and using sample
handling robotics, autosamplers and other forms of automation. Suppliers of
such technology include the major analytical equipment manufacturers, including
Waters Corporation, PE Biosystems, Hewlett-Packard and Beckman Instruments. We
believe that the HTS-MPCE system is the first high throughput screening
instrument capable of 96 simultaneous separations.
Markets
The market for DNA sequencing instruments is rapidly evolving and includes
large well-financed corporations such as PE Biosystems, Beckman Instruments,
Pharmacia Biotech and Molecular Dynamics, as well as a large number of smaller
companies, such as Genomyx and Visible Genetics. 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 we are targeting.
Our 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 we believe that our 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 our own development and
commercialization efforts.
Pharmaceutical companies and academic centers focused on drug discovery
represent the major market for our HTS-MPCE system. Recent advances in genomics
combinatorial chemistry have substantially increased the number of targets to be
screened, and, management believes that the HTS-MPCE system is compatible with
most high throughput screening systems and compares favorably against other
separation and screening technologies. It
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is difficult to determine the size of the potential market. In addition, we may
face many more competitors in the future, and many of those competitors may have
greater resources and name recognition than we have.
Patents and Proprietary to Technology
Proprietary protection for our products, processes and know-how is
important to our business. Our policy is to file patent applications to protect
technology, inventions and improvements that are considered commercially
important to the development of our business. We also rely upon trade secrets,
know-how and continuing technological innovation to develop and maintain our
competitive position. We plan to aggressively prosecute and defend our patents,
when issued, and proprietary technology.
We have acquired an exclusive worldwide license to certain technology owned
by ISURF, including three issued patents and two pending divisional
applications, each of which relate to our DNA sequencer.
Presently we have been issued four U.S. patents and have twelve U.S. patent
applications pending. In addition, foreign filings have been submitted on eight
of the patents.
Laser Diagnostics was issued a U.S. patent, entitled "Method for
Determining the Concentration of Atomic Species in Gases and Solids" (No.
5715053), in connection with its LIBS technology. The patent was included in the
assets we purchased and has been assigned to us.
Government Regulation
Some of our research and development activities and the future
manufacturing and marketing of products by us are subject to regulation for
safety and efficacy by numerous governmental authorities in the United States
and other countries. In the United States, our 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, we are 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.
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.
In addition, certain instruments in our mass spectrometer line are subject
to export control regulations, including restrictions on export into certain
countries. We believe we have obtained all permits necessary to conduct our
business.
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Risk Factors
All statements contained herein that are not historical facts, including,
but not limited to, statements regarding SpectruMedix Corporation and our
current business strategy, projected sources and uses of cash, and plans for
future development and operation, are based on our current expectations. The
statements are forward-looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially. The risks and
uncertainties are described more fully under the heading "Risk Factors," and
include, but are not limited to, our ability to commercialize and market our DNA
sequencing instrumentation and high throughput screening instrumentation. We
caution you not to place undue reliance on any such forward-looking statements,
which statements are made pursuant to the Private Litigation Reform Act of 1995
and, as such, speak only as of the date made.
Although we have completed the commercialization of our principal products,
we have only sold one system. Our principal products, the SCE9610 and HTS9610,
have been commercially available since late 1999. To date, we sold one HTS9610
to Procter & Gamble Pharmaceuticals in March 2000. While our products have
generated a certain amount of interest, they have not yet gained market
acceptance and our marketing program is still in development.
If we do not generate significant sales, we may need to raise additional
cash to fund our operations in 2001. Funds raised from the sale of preferred
stock to PE Biosystems in 1999, combined with the consulting and sublicense fees
paid by PE Biosystems, will provide sufficient capital to fund our operations,
including our expanding marketing effort and updating and refining our products,
for the fiscal year ending March 31, 2001. If we are unable to generate sales
revenue, we may be required to seek additional financing, either equity or debt.
There can be no assurance that we will be able to obtain any financing on terms
acceptable to us.
We do not yet have a sufficient marketing staff to properly promote and
market our products. In April 2000, we hired a national sales director who is
establishing a marketing program. In order to support our marketing program we
need to hire several additional sales professionals with technical backgrounds,
and, if we can find sufficient qualified candidates, we expect to incur
significant expenses to hire and retain these professionals. There can be no
assurance that we will be able to attract and retain a sufficient sales and
marketing team to promote and support our products. If we fail to staff a
professional marketing team, we may not be able to generate sufficient sales of
our products. If we are unable to market and distribute our products directly,
we may have to enter into arrangements with others, such as joint ventures,
licensing or similar arrangements or distribution agreements. Any such
contractual arrangements could cause us to lose control over part or all of the
marketing and distribution of such products and may increase our marginal costs.
We cannot assure you that we will be able to formalize any marketing
arrangements or that our marketing efforts will be successful.
Our new technologies have not been tested on a commercial scale and may not
be accepted by the market. The production of the DNA sequencer, the HTS-MPCE
system, laser diagnostic products and pulmonary diagnostics technology and other
proposed products represent new manufacturing processes which are untested on a
commercial scale. Although we believe that our technologies and products
represent significant technological advances, demand for our products, all of
which are based upon new technologies and designs, is subject to a high degree
of uncertainty. Many of our potential customers, including commercial end
users, may be reluctant to utilize or sell our proposed products until a
sufficient number of other customers have already committed to do so.
We have only limited manufacturing capabilities. We maintain limited
manufacturing facilities and will need to expand these facilities to effectively
manufacture our products on a profitable basis. Expanding our manufacturing
facilities and capabilities will subject us to numerous risks, including
unanticipated technological problems or delays. Such expansion will also require
additional sources of capital, which may not be available to us on commercially
reasonable terms, if at all. In the event that we are unable to expand our
manufacturing facilities and capabilities, we may be required to enter into
arrangements with others for the manufacture and packaging of our proposed
products. We cannot assure you that we will be able to enter into any such
arrangements on commercially reasonable terms, or at all, or that we will ever
be able to establish the capability to manufacture our products on a commercial
basis, in which case our business, results of operations and financial condition
would be materially adversely affected.
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We are dependent upon third party suppliers for components and raw
materials/dyes. Our existing and proposed products require high quality
components and raw materials/dyes which we currently purchase and will continue
to purchase from third-party suppliers. Certain raw materials or components
may, however, from time to time, be difficult to obtain and may cause production
delays or require us to find alternate means of production. In particular, both
the lasers and capillaries used in our DNA sequencer and our HTS-MPCE system are
purchased from one manufacturer who only produces a limited number of units.
Such manufacturer may not be able to supply all of our needs. We do not
currently maintain supply agreements with any of our suppliers. Thus, our
ability to manufacture our products will depend on our ability to establish and
maintain commercial relationships with at least certain of our suppliers.
Our production will also be dependent upon our suppliers satisfying our
performance and quality specifications and dedicating sufficient production
capacity to meet our scheduled delivery times. We cannot assure you that we
will be able to establish any commercial relationships with suppliers or, if we
are able to do so, that such suppliers will be able to satisfy our scheduled
delivery or performance requirements or have sufficient production capacity to
satisfy such requirements during any period of sustained demand. Failure or
delay by our suppliers in supplying us with needed raw materials and components
would materially adversely affect our operating margins and our ability to
manufacture and deliver products on a timely and competitive basis, which could,
in turn, have a material adverse effect on us.
We must continually upgrade our products and introduce new technologies in
order to compete. Our success depends upon establishing and maintaining a
competitive position in the research, development and commercialization of
products and technologies in our areas of focus. The scientific and industrial
instrumentation industry is highly competitive and requires substantial capital.
We compete 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 ours. Accordingly,
such competitors may have substantial competitive advantages over us, 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, our business plan calls for us to develop
additional products and acquire additional technologies in order to expand our
product and technology portfolio . We cannot assure you that we will
successfully compete in any market in which we conduct or may conduct operations
or that developments by such competitors will not render our current or future
products or technologies uncompetitive or obsolete.
We are dependent upon our key employees and must recruit additional
personnel. We are dependent upon the efforts and abilities of Dr. Joseph
Adlerstein as chairman of our board of directors and our chief executive officer
and president, and on other members of our scientific and management staff. Dr.
Adlerstein is our only executive officer. In addition, we are dependent on
collaborators at research institutions and on our scientific advisors and
consultants. Our ability to recruit and retain qualified personnel,
collaborators, advisors and consultants will be critical to our success. Due to
our financial condition, we have had difficulty attracting and retaining the
personnel necessary for our operations.
We have entered into an employment agreement with Dr. Adlerstein that
automatically renews on a yearly basis for successive one year periods. The
loss or unavailability of the services of Dr. Adlerstein for any significant
period of time could have a material adverse effect on our business prospects.
We have obtained, and we are the sole beneficiary of, key-person life insurance
in the amount of $1,000,000 on the life of Dr. Adlerstein. However, we cannot
assure you that such insurance will continue to be available on reasonable
terms, or at all.
Bernard Sonnenschein, our former secretary and treasurer, resigned in
January 1999. Since that time, Dr. Adlerstein and other personnel have had to
handle responsibilities previously assigned to Mr. Sonnenschein, including,
without limitation, preparation of budgets and financial reports and financial
management activities. We are actively seeking and must retain a chief
financial officer.
Our historical lack of working capital adversely impacted our relationship
with our suppliers, creditors and customers. From our inception and continuing
through July 1999, we had insufficient working capital. In the past, our lack
of working capital at times prevented us from making timely payments to
suppliers and creditors or from repairing relationships with such entities. Our
past working capital difficulties may make our
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strategy for expansion more difficult and may adversely affect the development
of our business. We cannot assure you that we will be able to reestablish
relationships with our suppliers, creditors and customers or that we will
successfully implement our expansion plan. In addition, if we fail to generate
significant sales of our products, we may in the near future experience cash
flow difficulties, further adversely impacting our business relationships.
Our ability to protect our technology through patents and other proprietary
rights is uncertain. Our success depends on our ability to obtain patents,
protect our trade secrets and operate without infringing upon the proprietary
rights of others. Our existing and potential competitors have applied for a
substantial number of patents. We cannot assure you that any of our future
patent applications will be approved, that we will develop additional
proprietary products that are patentable, or that any patents issued to us will
provide us with any significant protection or will not be successfully
challenged by third parties. Furthermore, we cannot assure you that others will
not design around the patented products we developed. We cannot assure you that
our products will not be found to infringe upon the patents of others. Any of
such patent applications filed by one or more third parties may conflict with
the products we have under development. If our products are found to infringe
upon the patents or otherwise impermissibly utilize the intellectual property of
others, our development, manufacture and sale of such products could be severely
restricted or prohibited. Any such infringement could have a material adverse
effect on our prospects, business, results of operations or financial condition.
We may be required to obtain licenses from such third parties or otherwise
obtain licenses to utilize patents or proprietary rights of others. We cannot
assure you that any licenses required under any such patents or proprietary
rights could be obtained on terms acceptable to us, or at all. If we do not
obtain such licenses, the development, manufacture or sale of products requiring
such licenses could be materially adversely affected. If we do not obtain such
licenses, we could encounter delays in product introductions while we attempt 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 our patents or those
of our licensors', to protect our trade secrets 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 an adverse impact on, us and
our operations.
Our competitive position is also dependent upon unpatented trade secrets.
Although we take measures to protect our trade secrets, trade secrets are
difficult to protect. We cannot assure you that others will not independently
develop substantially equivalent proprietary information or techniques or
otherwise gain access to our trade secrets. We pursue a policy of having our
employees, consultants and advisors execute confidentiality agreements to
maintain the proprietary nature of its technology, including our trade secrets.
However, we cannot assure you that these agreements will provide meaningful
protection for our trade secrets or other proprietary information in the event
that such information is used or disclosed without our authorization.
We are controlled by our management and current stockholders. Our current
management owns a substantial portion of the outstanding shares of our common
stock. Our management may, therefore, have the ability to elect a majority of
our directors and to control the outcome of all issues submitted to a vote of
our stockholders. We currently have only one executive officer, Dr. Adlerstein,
our chief executive officer and president, who is also a member of our board of
directors and our principal stockholder.
Our stock price may be volatile and trading volume may be limited. We
cannot assure you that an active trading market for our common stock or
redeemable warrants to purchase our units, each of which is comprised of one
share of common stock and one redeemable warrant will be sustained in the
future. In fact, there have been extended periods during which there has been
limited trading in our common stock and redeemable warrants. The market price
of our 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.
We have not paid dividends. We have not paid any cash dividends on our
common stock since inception and do not intend to pay any dividends to our
stockholders in the foreseeable future. We currently intend to reinvest
earnings, if any, in the development and expansion of our business.
A significant number of shares of our common stock are subject to
outstanding options and warrants. At March 31, 2000 there were:
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. options granted to employees to purchase an aggregate of 389,880 shares
of common stock at an exercise price of $0.09375 per share;
. warrants to purchase an aggregate of 100,000 shares of our common stock
at an exercise price of $1.00 per share held by one of our stockholders;
. stock options issued to a consultant to purchase an aggregate of 35,000
shares of common stock at an exercise price of $5.00 per share;
. stock options issued to consultants to purchase an aggregate of 110,000
shares of common stock at an exercise price of $2.50 per share;
. stock options issued to consultants to purchase an aggregate of 50,000
shares of common stock at an exercise price of $0.09375 per share;
. warrants to purchase an aggregate of 1,200,600 shares of common stock at
$7.50 per share;
. stock options issued to a consultant to purchase an aggregate of 25,000
shares of common stock at an exercise price of $6.00 per share;
. stock options issued to a consultant to purchase an aggregate of 100,000
shares of common stock at an exercise price of $10.00 per share;
. warrants to purchase 322,000 units which each consist of one share of
common stock and one redeemable warrant to purchase one share of common
stock at an exercise price of $5.75 per unit ; and
. warrants to purchase 104,400 units which each consist of one share of
common stock and one redeemable warrant to purchase one share of common
stock at an exercise price of $9.49 per unit.
In addition, on July 30, 1999, we issued 2,000 shares of our series A
preferred stock which are convertible into 800,000 shares of our common stock
and on January 13, 2000, we issued 103.125 shares of our Series B Preferred
Stock which are convertible into 825,000 shares of our common stock. The
exercise of such outstanding options and warrants will dilute the percentage
ownership of our stockholders, and any sales in the public market of shares of
common stock underlying such securities may adversely affect prevailing market
prices for our common stock. Moreover, the terms upon which we 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 we would, in all likelihood, be able to obtain any needed
capital on more favorable terms than those provided in such securities.
Holders of our redeemable warrants may only exercise such warrants if a
current prospectus is available. We will be able to issue shares of our common
stock upon exercise of the redeemable warrants only if there is a current
prospectus relating to such common stock. In addition, if such common stock
must be qualified for sale or exempt from qualification under the state
securities laws of the jurisdictions in which the holders of the redeemable
warrants reside. The redeemable warrants may lose 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. We failed to have all the shares of our common stock that underlie our
redeemable warrants qualified for sale under the securities laws of the states
of residence of our holders of redeemable warrants and to maintain a current
prospectus relating thereto until the expiration of our redeemable warrants.
We have the right to redeem certain warrants. We may redeem the redeemable
warrants at a redemption price of $.01 per redeemable warrant upon 30 days
written notice given at any time in the event that the market price of our
common stock equals or exceeds $10.00 per share. For this purpose, "market
price" means:
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(i) the average closing sale price of our 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. Automated Quotation System or the NASD
Electronic Bulletin Board or (ii) the average of the last reported sales price
of our 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 our common
stock is traded, if traded on a national securities exchange. Our redemption of
the redeemable warrants could force the holders to (a) exercise the redeemable
warrants and pay the exercise price at a time when it may be disadvantageous for
them to do so, (b) sell the redeemable warrants at the current market price when
they might otherwise wish to hold the redeemable warrants, or (c) accept the
redemption price which would be substantially less than the market value of the
redeemable warrants at the time of redemption.
Certain restrictions may be imposed on our common stock so long as it
trades below $5.00 per share. The Securities and Exchange 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 our securities that are currently
included on the OTC Bulletin Board are trading at less than $5.00 per security
at any time, our 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 Securities and
Exchange 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 our securities and may affect the ability
of stockholders to sell our securities in the secondary market. See "-- No
Assurance of Public Trading Market."
We have the right to issue preferred stock, which may have possible anti-
takeover effects. Our certificate of incorporation authorizes our board of
directors to issue up to 2,000,000 shares of preferred stock, par value $0.00115
per share, 2,000 of which has been designated as our series A preferred stock
and 750 of which has been designated as series B preferred. The remainder of
our preferred stock may be issued in one or more series, the terms of which may
be 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.
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 our preferred stock could be used to restrict our ability to merge
with, or sell its assets to, a third party. The ability of our board of
directors to issue our preferred stock could discourage, delay, or prevent a
takeover, thereby preserving control of our current stockholders.
ITEM 2. DESCRIPTION OF PROPERTY
-----------------------
We currently lease approximately 18,500 square feet of laboratory and
office space in State College, Pennsylvania 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,
2000, no such notice had been given. We have the right to use this space for
laboratory research and development, storage and distribution, offices,
marketing and other related uses. Although we believe that existing facilities
are adequate to meet our near term requirements, we may need additional space in
the future.
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ITEM 3. LEGAL PROCEEDINGS
-----------------
Robert M. Rubin v. SpectruMedix Corporation et. al. On April 21, 1997, a
complaint was filed against us in the Supreme Court of the State of New York
alleging breach of contract. Specifically, the plaintiff alleges that we
defaulted under a promissory note in the principal amount of $175,000 that we
issued to plaintiff on May 16, 1996 and that we are liable to him in the
principal amount of $175,000 plus interest and expenses. On May 2, 1997, we paid
the principal and interest due under the note. The main remaining issue the
plaintiff asserts is whether, pursuant to an alleged related agreement, he is
entitled to 152,174 shares (adjusted to reflect stock splits) of common stock
or, alternatively, $875,000. Plaintiff alleges that we undertook to enter into
a securities purchase agreement pursuant to which he should have received the
aforementioned shares. Our defense is that such securities purchase agreement
was never discussed and therefore that no agreement was reached with respect to
the terms thereof. Neither we, nor the plaintiff ever signed any such
securities purchase agreement. We believe that we will be able to successfully
defend the plaintiff's claims and intend to defend this litigation vigorously.
However, due to the nature of litigation and because the lawsuit is in the
initial stages, we cannot determine the total expense or possible loss, if any,
we may ultimately incur either in the context of a trial or as a result of a
negotiated settlement. Our management believes that the resolution of this
matter will not have a material adverse effect on our business, financial
condition and results of operations. However, the results of these proceedings
are uncertain and we cannot give any assurance to that effect. Regardless of the
ultimate outcome of this litigation, it could result in significant diversion of
time by our personnel.
Other than the foregoing, we are not a party to any other material legal
proceedings.
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, 2000.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
Market For Common Equity And Related Stockholder Matters
Our common stock and redeemable warrants trade on the Nasdaq OTC Bulletin
Board under the symbols SMDX and SMDXW. Our units were traded under the symbol
"SMDXU" from September 16, 1997 through September 1998. On December 17, 1997,
our common stock and redeemable warrants began trading separately. See "Risk
Factors-No Assurance of Public Trading Market."
Set forth below is the range of high and low bid prices for our common stock
for each quarter during each of our last two fiscal years, 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.
High Low
---- ---
Q1 FY 99 9 1/8 6
Q2 FY 99 9 1
Q3 FY 99 2 3/16
Q4 FY 99 17/32 3/16
Q1 FY 00 9/32 3/32
Q2 FY 00 21/32 5/32
Q3 FY 00 1 3/32
Q4 FY 00 8 1/8
As of March 31, 2000, there were approximately 55 holders of record of our
common stock. No dividends have been paid on the common stock since our
inception, and we do 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
During the past three years, we sold the shares of our capital stock
indicated below without registering the shares under the Securities Act of 1933.
As none of these transactions involved a public offering, they all were exempt
from registration under Section 4(2) of the Securities Act.
In January 2000, we:
. issued a total of 340,000 shares of our common stock to various of our
advisors, for an aggregate amount of $42,500 in cash and promissory
notes;
. issued 100,000 shares of our common stock to Stephen Wertheimer in
connection with our appointment of him to our board of directors, and
in recognition of consulting services he provided to us on an
uncompensated basis since August, 1999;
. issued 100,000 shares of our common stock to Dr. Adlerstein in
exchange for services he has provided to us; and
. issued 103.125 shares of our Series B preferred stock to Dr.
Adlerstein upon conversion of $103,125 owing to Dr. Adlerstein under a
promissory note made in favor of Dr. Adlerstein.
All of the above had a per share fair market value of $0.125 based on the
closing price of our common stock on such date.
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In July 1999, we issued 2,000 shares of our series A preferred stock to PE
Corporation in exchange for $2,000,000.
In May 1999, Dr. Adlerstein, our chief executive officer, president and
chairman of our board, exercised an option to purchase 127,827 shares of our
common stock.
In October 1998, we issued 15,000 shares of our common stock in exchange
for the assets of Laser Diagnostics.
In March 1998, we issued 22,000 shares of our common stock as a gift to a
certain charitable organization.
In February 1998, we issued 7,000 shares of our common stock to a
consultant as compensation in connection with a consulting services agreement
with such consultant.
In October 1997, the holder of a $300,000 promissory note converted such
note into 104,348 shares of our common stock.
In September 1997, we issued 8,166 shares of common stock in lieu of
interest payments on a note payable.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------
Results of Operations for the Years Ended March 31, 2000 and 1999
The Company had total sales of $320,390 and $317,672 for the fiscal years
ended March 31, 2000 and 1999, respectively. Sales for 2000 reflects the sale
of one HTS-MPCE system in addition to sales from product lines other than the
Company's principal products, the DNA sequencer and the HTS-MPCE system. Sales
for 1999 only reflect sales from the Company's other product lines. To date, the
Company has received limited revenues from the sales of products. The nominal
increase in revenue of $2,718 in fiscal 2000 was due to the sale of one HTS-MPCE
system and was offset by a significant decrease in sales of the Company's other
products, which decrease was due primarily to the increased focus of the Company
on its two core products. As noted above, the Company was still developing its
marketing program for its principal products in fiscal 2000 and only hired a
national sales director after the end of the fiscal year.
In addition to its sales revenue, the Company recorded sublicense and
consulting revenue of $873,015 in fiscal year 2000 relating to the sublicense
and consulting agreements that the Company entered into in July 1999 with PE
Biosystems. The Company did not have any such revenue in fiscal year 1999.
Research and development expenses, net, decreased 53% to $499,159 in 2000
from $1,050,933 in 1999 due to the fact that the Company completed the
commercialization of its main products in the Fall of 1999 and the Company
purchased fewer parts for its research and development efforts.
General and administrative expenses were $1,133,589 and $1,380,638 during
the fiscal years ended March 31, 2000 and 1999, respectively, a decrease of
$247,049, or approximately 18% in fiscal 2000. This decrease is attributable to
efforts by the Company to conserve cash and limit certain expenditures.
Approximately $310,682 and $386,118 of general and administrative expenses for
the fiscal years ended March 31, 2000 and 1999, respectively, were attributable
to payroll, payroll taxes and employee benefits. This represents a decrease of
$75,436 during fiscal 2000 as compared to the preceding fiscal year. During
fiscal 2000, legal, accounting and consulting fees decreased by $315,291 to
$296,309. The Company expects its general and administrative expenses to
increase in the future as a result of further Company expansion.
Interest expense of $30,075 and $13,527 for the fiscal years ended March
31, 2000 and 1999, respectively, resulted from borrowings. Interest expense
increased during fiscal 2000 due the fact that the Company needed to borrow
funds to meet its expenses until it consummated its stock purchase, sublicense
and consulting agreements with PE Biosystems. Most of such borrowings were
repaid in September 1999.
Interest income increased $76,213 to $92,271 in 2000 from $16,058 as a
result of the increase in cash deposits primarily as a result of the proceeds
from the transactions with PE Biosystems.
In fiscal 2000, the Company reported other income of $93,191 representing
the reversal of an estimate for interest and penalties due to the Internal
Revenue Service, which interest and penalties were forgiven by the Internal
Revenue Service in connection with a negotiated settlement with the Company in
March 2000.
Results of Operations for the Years Ended March 31, 1999 and 1998
The Company had total revenue of $317,672 and $341,813 for the fiscal years
ended March 31, 1999 and 1998, respectively. Revenue for both periods reflect
sales from product lines other than the Company's principal products. To date,
the Company has received limited revenues from the sales of products. The
decreases in revenue of $24,141, or approximately 7%, during fiscal year 1999
and $220,497, or approximately 39%, during fiscal year 1998, 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
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 $38,491 and $71,938 for the fiscal years ended March
31, 1999 and 1998, respectively. The decrease in service
-20-
<PAGE>
revenue of $33,447, or approximately 46%, during fiscal year 1999 was due to the
non-renewal of one major service contract ascribable entirely to the
discontinued use of the underlying instrumentation by the customer.
Research and development expenses decreased 18% to $1,050,933 in 1999 due
to the offsetting Small Business Innovative Research (SBIR) grant and increased
132% in 1998 to $1,279,959, 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.
General and administrative expenses were $1,380,638 and $1,282,002 during
the fiscal years ended March 31, 1999 and 1998, respectively, an increase of
$98,636, or approximately 8% in fiscal 1999. Approximately $386,118 and
$355,125 of general and administrative expenses for the fiscal years ended March
31, 1999 and 1998, respectively, were attributable to payroll, payroll taxes and
employee benefits. This represents an increase of $30,993 during fiscal 1999 as
compared to the preceding fiscal year. During fiscal 1999, legal, accounting
and consulting fees increased by $149,349 to $611,600.
Interest expense of $13,527 and $133,372 for the fiscal years ended March
31, 1999 and 1998, respectively, resulted from borrowings. Interest expense
decreased during fiscal 1999 due to the repayment of outstanding debt from the
proceeds of the Company's initial public offering. Interest expense decreased
during fiscal 1998 primarily because the obligations which caused such interest
expense were repaid during September 1997 and October 1997.
Liquidity and Capital Resources
Historically, the Company has financed its operations primarily through the
sale of equity securities and loans, most of which loans were repaid with the
proceeds from the Company's initial public offering. All of such funds were
expended on the development and commercialization of the Company's products,
primarily its mass spectrometers and Luminoscopes. From January 1999 until July
1999, the Company had been dependent primarily on funds advanced by its chief
executive officer to meet payroll and expenses. During that period, the Company
failed to make payments under its license agreements.
On July 30, 1999, the Company restructured its license agreement with ISURF
for technology used to develop the Company's DNA Sequencer and entered into a
sublicense agreement relating to certain of such technology with PE Biosystems.
In connection with the sublicense agreement, PE Biosystems made an investment in
the Company. PE Biosystems also retained the Company as a consultant.
The aggregate $5,000,000 in gross proceeds received July 30, 1999 from the
sublicense and sale of preferred stock with PE Biosystems, and other agreements,
as well as the revenues from its products, will provide the Company with
additional liquidity, allow it to pay amounts owing under its license agreement
with ISURF, begin marketing and production of the DNA Sequencer and the HTS-MPCE
system, and, the Company believes, meet all of its existing obligations over the
next twelve months.
In order to further develop and expand the business in accordance with its
plans, the Company anticipates that it will need significant additional capital
by the next fiscal year to greatly expand its manufacturing capabilities, launch
a substantial sales and marketing program, pay various required license and
milestone fees, establish third-party collaborations and pursue additional
research and development. If the Company is unable to generate significant sales
of its core products, it may need to obtain additional debt or equity financing.
There can be no assurance, however, that the Company will be able to obtain such
financing on terms acceptable to it.
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, completing technological and market developments, and the
ability of the Company to develop new collaborative and licensing arrangements.
-21-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
--------------------
Our financial statements, including the auditor's report and notes to the
financial statements, appear on pages F-1 to F-21, which flow immediately after
the signature page on page 26. Pages F-1 to F-21 are incorporated herein by
reference.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
On December 8, 1999, PricewaterhouseCoopers LLP ("PwC") advised the Company
that its client-auditor relationship had ceased.
PwC's reports on the financial statements of the Company for the fiscal
years ended March 31, 1999 and 1998 did not contain any adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles, except for an explanatory paragraph in
both reports which expressed a substantial doubt about the Company's ability to
continue as a going concern. In connection with the audit of the Company's
financial statements for the years ended March 31, 1999 and 1998, and through
the subsequent interim period through December 8, 1999 (the date of
termination), there has not been a disagreement with PwC on any matter of
accounting principle or practices, financial statement disclosure, or auditing
scope or procedure, which disagreement, if not resolved to the satisfaction of
PwC, would have caused it to make reference thereto in its report on the
financial statements for such years. In addition, during the two most recent
fiscal years and through the subsequent interim period through December 8, 1999
(the date of termination), there has not been a reportable event as described in
paragraph(a)(1)(v) of Item 304 of Regulation S-K, promulgated under the
Securities Act of 1934, as amended.
-22-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
-------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE OFFICERS
------------------------------------------------------
The information required by this Item is set forth in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
The information required by this Item is set forth in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required for this Item is set forth in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders, which information is
hereby incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required for this Item is set forth in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders, which information is
hereby incorporated herein by reference.
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 SpectruMedix Corporation, as filed with the
Delaware Secretary of State on March 5, 1993.
3.2(1) Certificate of Amendment to Restated Certificate of Incorporation of SpectruMedix
Corporation, as filed with the Delaware Secretary of State on March 11, 1997.
3.3(1) Second Amended and Restated Certificate of Incorporation of SpectruMedix
Corporation, as filed with the Delaware Secretary of State on September 17, 1997.
3.4(2) Certificate of Designation of the Company's Series A Preferred Stock, as filed with
the Delaware Secretary of State on July 28, 1999.
3.5(1) Certificate of Designation of Rights and Preferences of Series B Preferred Stock of
SpectruMedix Corporation, filed with the Secretary of State of the State of Delaware
on February 22, 2000.
3.6(1) Amended and Restated Bylaws of SpectruMedix Corporation.
4.1(1) Form of Stock Certificate.
4.2(1) Form of Registration Rights Agreement by and between SpectruMedix Corporation and
certain stockholders.
4.3(1) 1997 Stock Incentive Plan of SpectruMedix Corporation and related documents.
4.4(1) Form of SpectruMedix Corporation Unit Purchase Option.
4.5(1) Form of Warrant Agreement by and between SpectruMedix Corporation and ChaseMellon
Shareholder Services, L.L.C.
4.6(1) 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.
</TABLE>
-23-
<PAGE>
<TABLE>
<S> <C>
10.2(1) Asset Purchase Agreement dated April 5, 1993 by and between Lab Software Associates,
Inc and SpectruMedix Corporation.
10.3(1) Form of Warrant Agreement by and between the Company and the Gross Foundation, Inc.
10.5(1) Option Agreement dated May 1, 1995 by between SpectruMedix Corporation and Iowa
State University Research Foundation (ISURF).
10.6(1) Commercial Lease Agreement dated July 9, 1996 by and between FMF Partnership and
SpectruMedix Corporation.
10.7(1) Employment Agreement dated March 31, 1997 by and between SpectruMedix Corporation
and Joseph K. Adlerstein.
10.8(1) Scientific Advisory Board and Consulting Agreement by and between SpectruMedix
Corporation and Dr. Edward Yeung.
10.9(1) Scientific Advisory Board and Consulting Agreement by and between SpectruMedix
Corporation and Dr. Marc Hellerstein.
10.10(1)(4) License Agreement dated June 24, 1997 by and between SpectruMedix Corporation and
Iowa State University Research Foundation (ISURF).
10.11(1) Amendment No. 1 to Employment Agreement by and between SpectruMedix Corporation and
Joseph K. Adlerstein.
10.12(1) Letter Agreement by and between SpectruMedix Corporation and Bernard Sonnenschein.
10.13(5) Sponsored Research Agreement, effective as of March 15, 1998, by and between The
Trustees of the University of Pennsylvania and SpectruMedix Corporation.
10.14(5) License Agreement, effective as of March 15, 1998, by and between The Trustees of
the University of Pennsylvania and SpectruMedix Corporation.
10.15(5) Amendment to License Agreement, dated July 30, 1999, between Iowa State University
Research Foundation (ISURF) and SpectruMedix Corporation
10.16(5) Sublicense Agreement, dated July 30, 1999, between SpectruMedix Corporation and The
Perkin-Elmer Corporation
10.17(2) Stock Purchase Agreement, dated July 30, 1999, between SpectruMedix Corporation and
PE Corporation
10.18(5) Consulting Services Agreement, dated July 30, 1999, between SpectruMedix Corporation
and The Perkin-Elmer Corporation
10.19(6) Amended and Restated Promissory Note, dated as of December 31, 1998, made by
SpectruMedix Corporation in favor of Dr. Joseph K. Adlerstein.
10.20(6) Option Agreement, dated January 13, 2000, between SpectruMedix Corporation and Dr.
Joseph K. Adlerstein.
23.1* Consent of Ernst & Young LLP
23.2* Consent of PricewaterhouseCoopers LLP
27.1* Financial Data Schedule
99(7) Letter of PricewaterhouseCoopers LLP, dated December 15, 1999, addressed to the
Securities and Exchange Commission.
</TABLE>
_________________
* Filed herewith.
(1) Incorporated by reference to exhibits filed with our registration
statement on Form SB-2, File No. 333-06650, which was declared
effective September 16, 1997.
(2) Incorporated by reference to exhibits filed with our annual report
on Form 10-KSB for the year ended March 31, 1999.
(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 Securities and Exchange Commission.
(5) Incorporated by reference to exhibits filed with our current
report on Form 8-K, filed with the Securities and Exchange
Commission on December 15, 1997.
-24-
<PAGE>
(6) Incorporated by reference to exhibits filed with our quarterly
report on Form 10-QSB for the quarter ended December 31, 1999.
(7) Incorporated by reference to exhibits filed with our current
report on Form 8-K, files with the Securities and Exchange
Commission on December 15, 1999.
(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, 2000
-25-
<PAGE>
SIGNATURES
In accordance with 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.
Date: July 14, 2000
SPECTRUMEDIX CORPORATION
By: /s/ Joseph K. Adlerstein
---------------------------------------
Joseph K. Adlerstein, Ph.D.
President, Chief Executive Officer and
Chairman of the Board of Directors
In accordance with the Securities 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 indicates.
Date: July 14, 2000
By: /s/ Joseph K. Adlerstein
---------------------------------------
Joseph K. Adlerstein, Ph.D.
President, Chief Executive Officer and
Chairman of the Board of Directors
Date: July 14, 2000
By: /s/ Stephen Wertheimer
----------------------------------------
Stephen Wertheimer
Director
Date: July 14, 2000
By: /s/ Judy K. Mencher
----------------------------------------
Judy K. Mencher
Director
-26-
<PAGE>
SpectruMedix Corporation
Index to Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Auditors........................................................................ F-2
Report of Independent Accountants..................................................................... F-3
Audited Financial Statements
Balance Sheets as of March 31, 2000 and 1999.......................................................... F-4
Statements of Operations for the years ended March 31, 2000 and 1999.................................. F-5
Statements of Stockholders' Equity (Deficit) for the years ended March 31, 2000 and 1999.............. F-6
Statements of Cash Flows for the years ended March 31, 2000 and 1999.................................. F-7
Notes to Financial Statements......................................................................... F-8
</TABLE>
<PAGE>
Report of Independent Auditors
To the Board of Directors and Stockholders of
SpectruMedix Corporation
We have audited the accompanying balance sheet of SpectruMedix Corporation as of
March 31, 2000 and the related statements of operations, stockholders' equity
(deficit) and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 2000 financial statements referred to above present fairly,
in all material respects, the financial position of SpectruMedix Corporation at
March 31, 2000 and the results of their operations and their cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
Harrisburg, Pennsylvania
May 16, 2000
F-2
<PAGE>
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 (deficit) and of cash flows present fairly,
in all material respects, the financial position of SpectruMedix Corporation as
of March 31, 1999 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 provide 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.
/s/ PricewaterhouseCoopers LLP
New York, New York
July 9, 1999
F-3
<PAGE>
SpectruMedix Corporation
Balance Sheets
<TABLE>
<CAPTION>
March 31
2000 1999
---------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,183,458 $ 20,318
Accounts receivable 181,137 55,319
Inventories 617,191 527,979
Prepaid expenses 14,642 4,582
---------------------------------
Total current assets 2,996,428 608,198
Property and equipment, net 475,855 463,536
Patent fees 490,902 358,816
License and license options, net of accumulated amortization of
$121,675 and $88,672, respectively 20,525 106,343
Security deposit 8,479 8,479
---------------------------------
Total assets $ 3,992,189 $ 1,545,372
=================================
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable and accrued expenses $ 1,719,278 $ 2,389,486
Current portion of long-term capital lease obligations 37,915 29,926
Current portion of deferred revenue 1,238,096 -
Officer's note - 161,423
---------------------------------
Total current liabilities 2,995,289 2,580,835
Long-term capital lease obligations, net of current portion 83,222 103,273
Deferred revenue, net current portion 888,889 -
Stockholders' equity (deficit):
Preferred Stock, $.00115 par value; 2,000,000 shares authorized
at March 31, 2000 and 1999 - -
Series A Preferred stock, 2,000 shares issued
and outstanding in 2000, none in 1999 (liquidation
preference of $2,000,000) 2 -
Series B Preferred stock, 103.125 shares issued and outstanding
in 2000, none in 1999 (liquidation preference of $103,125) - -
Common stock, $.00115 par value, 23,000,000 shares authorized, 4,241,989 and
3,530,214 shares issued and outstanding at
March 31, 2000 and 1999, respectively 4,877 4,059
Note receivable arising from issuance of common stock (37,500) -
Additional paid-in-capital 12,498,434 10,369,889
Accumulated deficit (12,441,024) (11,512,684)
---------------------------------
Total stockholders' equity (deficit) 24,789 (1,138,736)
---------------------------------
Total liabilities and stockholders' equity (deficit) $ 3,992,189 $ 1,545,372
=================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
SpectruMedix Corporation
Statements of Operations
<TABLE>
<CAPTION>
Year ended March 31
2000 1999
------------------------------------------
<S> <C> <C>
Sales $ 320,390 $ 317,672
Sublicense and consulting revenue 873,015 -
------------------------------------------
1,193,405 317,672
Cost of sales 644,384 831,164
------------------------------------------
Gross profit (loss) 549,021 (513,492)
Operating expenses:
Research and development, net 499,159 1,050,933
General and administrative 1,133,589 1,380,638
------------------------------------------
Total operating expenses 1,632,748 2,431,571
Loss from operations (1,083,727) (2,945,063)
Other income (expense):
Interest income 92,271 16,058
Interest expense (30,075) (13,527)
Other 93,191 -
------------------------------------------
Total other income 155,387 2,531
------------------------------------------
Net loss $ (928,340) $ (2,942,532)
==========================================
Basic and diluted loss per share $ (0.25) $ (0.84)
==========================================
Weighted average common shares outstanding used for basic and
diluted loss per share 3,785,900 3,521,419
==========================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
SpectruMedix Corporation
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Series A Series B
Convertible Convertible
Common Stock Preferred Stock Preferred Stock
---------------------- ---------------------- ---------------------
Shares Amount Shares Amount Shares Amount
---------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1998 3,515,214 $4,042 - $ - - $ -
Issuance of common stock in
connection with asset 15,000 17 - - - -
purchase
Compensation expense - - - - - -
Net loss - - - - - -
---------------------- ---------------------- --------------------
Balance at March 31, 1999 3,530,214 4,059 - - - -
Issuance of preferred stock, - - 2,000 2 103.125 -
net
Issuance of common stock 540,000 621 - - - -
Stock options exercised 171,775 197 - - - -
Compensation expense - - - - - -
Net loss - - - - - -
---------------------- ---------------------- --------------------
Balance at March 31, 2000 4,241,989 $4,877 2,000 $ 2 103.125 $ -
====================== ====================== ====================
<CAPTION>
Note Total
Receivable Additional Stockholders'
for Common Paid-In Accumulated Equity
Stock Capital Deficit (Deficit)
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at March 31, 1998 $ - $10,182,069 $(8,570,152) $1,615,959
Issuance of common stock in
connection with asset - 7,933 - 7,950
purchase
Compensation expense - 179,887 - 179,887
Net loss - - (2,942,532) (2,942,532)
--------------------------------------------------------------
Balance at March 31, 1999 - 10,369,889 (11,512,684) (1,138,736)
Issuance of preferred stock, - 2,098,123 - 2,098,125
net
Issuance of common stock (37,500) 66,879 - 30,000
Stock options exercised - 4,070 - 4,267
Compensation expense - (40,527) - (40,527)
Net loss - - (928,340) (928,340)
--------------------------------------------------------------
Balance at March 31, 2000 $ (37,500) $12,498,434 $(12,441,024) $ 24,789
==============================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
SpectruMedix Corporation
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended March 31
2000 1999
---------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (928,340) $ (2,942,532)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation 95,357 95,896
Amortization 36,624 53,003
Noncash compensation expense (15,528) 179,887
Noncash interest expense 19,818 4,843
Changes in assets and liabilities:
Accounts receivable (125,818) (42,513)
Inventory (89,212) (146,856)
Prepaid expenses (10,060) 44,844
Other assets (82,892) (148,006)
Accounts payable and accrued expenses (670,209) 1,246,103
Deferred revenue 2,126,985 -
---------------------------------------
Net cash provided by (used in) operating activities 356,725 (1,655,331)
Cash flows from investing activities
Capital expenditures (107,676) (144,635)
---------------------------------------
Net cash used in investing activities (107,676) (144,635)
Cash flows from financing activities
Principal payments on long term obligations (12,062) (21,782)
Proceeds from officer's notes 222,031 161,423
Repayment of officer's notes (300,000) -
Proceeds from issuance of Common Stock 5,000 -
Proceeds from issuance of Preferred Stock, net of issuance costs 1,995,000 -
Stock options exercised 4,122 -
---------------------------------------
Net cash provided by financing activities 1,914,091 139,641
Net increase (decrease) in cash and cash equivalents 2,163,140 (1,660,325)
Cash and cash equivalents, at beginning of year 20,318 1,680,643
---------------------------------------
Cash and cash equivalents, at end of year $ 2,183,458 $ 20,318
=======================================
Supplemental disclosures of cash flows information
Cash paid during the year for interest $ 30,450 $ 8,684
=========================================
Conversion of promissory note and accrued interest to preferred
stock $ 103,125 $ -
=========================================
Issuance of Common Stock in exchange for professional services
$ 25,000 $ -
=========================================
Stock options exercised in lieu of payment on promissory note
$ 147 $ -
=========================================
</TABLE>
See accompanying notes.
F-7
<PAGE>
SpectruMedix Corporation
Notes to Financial Statements
March 31, 2000
1. The Company
SpectruMedix Corporation (the "Company") was incorporated in the State of
Delaware on April 16, 1992. The Company devotes substantially all of its
resources to the development of its high-speed DNA/gene sequencing
instrumentation (the "DNA Sequencer"), an instrument for the acquisition,
analysis and management of complex genetic information and its high throughput
screening, massive parallel capillary electrophoresis system ("HTS-MPCE
system"), a high throughput system based on the technologies developed for the
DNA Sequencer, used in the pharmaceutical industry for drug discovery. The DNA
Sequencer was developed in part from research efforts conducted at the United
States Department of Energy's Ames Laboratory, which is operated by Iowa State
University's Institute for Physical Research and Technology. The Company
believes DNA sequencing has significant implications for medical, genetic and
forensic science applications.
2. Basis of Presentation
The 1999 financial statements have been prepared assuming the Company will
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. Subsequent to March 31, 1999, the Company
secured additional equity financing (see Note 11), entered into an amended
license agreement, sublicense agreement and consulting agreement (see Note 7),
and sold its first HTS-MPCE system.
3. Summary of Significant Accounting Policies
Use of Estimates
To prepare financial statements in accordance with accounting principles
generally accepted in the United States, 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. Actual results
could differ from these estimates.
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.
F-8
<PAGE>
SpectruMedix Corporation
Notes to Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk and Significant Customers
Financial instruments, which potentially subject the Company to significant
concentrations of credit risk, consist principally of cash and cash equivalents.
The Company maintains cash and cash equivalents with two separate financial
institutions. The Company invests its excess cash in certificates of deposit and
money market funds of major financial institutions that are subject to minimal
credit and market risk.
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 year ended March 31, 2000,
product sales consisted of approximately 56%, to one major customer. During the
year ended March 31, 1999, product sales consisted of approximately 24%, 15% and
12% to three separate customers. The Company generally requires no collateral
from its customers. 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.
Revenue Recognition
Revenue from the sale of products is recognized at the time goods are shipped.
Revenue from maintenance and service agreements is recognized over the terms of
the agreements. Related costs are charged to expense in the period incurred.
Deferred Revenue
Deferred revenue represents the portion of revenue received under sublicense and
consulting agreements that will be credited to income as earned, usually over
the life of the agreement.
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. Grants received for the years ended March 31, 2000 and 1999,
were approximately $328,000 and $522,000, respectively. 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,
2000, 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.
F-9
<PAGE>
SpectruMedix Corporation
Notes to Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
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:
Equipment 5 years
Furniture and fixtures 7 years
Transportation equipment 5 years
Property improvements Shorter of lease term or estimated useful life
Expenditures for maintenance and repairs are charged to expense when incurred.
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
requires that companies consider whether indicators of impairment of long-lived
assets held for use are present. If such indicators are present, companies
determine whether the sum of the estimated undiscounted future cash flows
attributable to such assets is less than their carrying amount, and if so,
companies recognize an impairment loss based on the excess of the carrying
amount of the assets over their fair value. Accordingly, management periodically
evaluates the ongoing value of property and equipment and has determined that
there were no indications of impairment as of March 31, 2000 and 1999.
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 through March
31, 2000 and 1999 of approximately $495,000 and $365,000, respectively. If
patents are granted, the patent fees will be amortized over the expected useful
lives of the patents, or otherwise expensed.
F-10
<PAGE>
SpectruMedix Corporation
Notes to Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
Advertising Costs
The Company expenses advertising costs as incurred. During the years ended March
31, 2000 and 1999, the Company expensed approximately $46,000 and $7,000,
respectively.
Fair Value of Financial Instruments
The carrying value of accounts receivable, accounts payable and accrued
expenses, and officer's note approximate 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 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
Loss per share is accounted for under 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"). FAS 128
also requires presentation of earnings per share by an entity that has made a
filing or is in the process of filing with a regulatory agency in preparation
for the sale of those securities in a public market. Basic EPS is computed by
dividing income available to common stockholders by the weighted average number
of Common Stock outstanding during the period. Diluted EPS adjusts the Basic EPS
to give effect to all potentially dilutive Common Stock equivalents (options,
warrants, convertible securities or contingent stock arrangements) outstanding
during the period. The computation of Diluted EPS does not assume conversion,
exercise or contingent exercise of securities that would be antidilutive.
Reclassification
Certain amounts in the 1999 financial statements have been reclassified to
conform with the 2000 presentation.
F-11
<PAGE>
SpectruMedix Corporation
Notes to Financial Statements (continued)
4. Economic Dependency
Prior to the year ended March 31, 2000, substantially all of the Company's
revenues have been derived from sales of the Company's original product lines,
which included mass spectrometers, Luminoscopes, electronic components and
software. As noted above, currently, the Company is devoting substantially all
of its resources to the development, commercialization and marketing of the DNA
Sequencer and massive capillary electrophoresis analysis system.
The Company achieved limited sales of its other product lines and such sales
were materially dependent on a limited number of customers. The nature of the
Company's business was such that during any individual accounting period it sold
its products to a limited number of significant customers. The Company has only
sold one massive capillary electrophoresis analysis system, and sales of the DNA
Sequencer and the massive capillary electrophoresis analysis system may also be
characterized by sales to a limited number of customers during any individual
accounting period.
The Company's DNA Sequencer requires high quality raw materials and components
that the Company purchases from third-party suppliers. Certain raw materials or
components may, however, from time to time, be difficult to obtain, which
difficulties may result in production delays or require the Company to find
alternate means of production. In particular, both the lasers and capillaries
used in the DNA Sequencer are each purchased from one manufacturer who only
produces a limited number of units. Such manufacturers may not be able to supply
all of the Company's needs. 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
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.
5. Inventories
The components of inventory as of March 31, 2000 and 1999 are as follows:
2000 1999
---------------------------------------
Raw materials $ 165,120 $ 201,505
Work-in-process 323,875 203,889
Finished goods 128,196 122,585
---------------------------------------
$ 617,191 $ 527,979
=======================================
F-12
<PAGE>
SpectruMedix Corporation
Notes to Financial Statements (continued)
6. Property and Equipment
Property and equipment consists of the following as of March 31:
March 31
2000 1999
--------------------------
Equipment $ 723,974 $ 616,498
Furniture and fixtures 1,006 1,006
Transportation equipment 38,339 38,339
Property improvements 2,789 2,589
--------------------------
766,108 658,432
Less accumulated depreciation and amortization (290,253) (194,896)
--------------------------
$ 475,855 $ 463,536
==========================
Equipment includes $179,556 of assets acquired under capital leases. Accumulated
depreciation related to those assets was approximately $56,100 at March 31,
2000.
7. Amended License Agreement and Sublicense Agreement,
and Consulting Agreement
Amended License Agreement and Sublicense
Due to the Company's financial condition during fiscal year 1999, it was not
able to make certain required payments under its license agreement with a major
university relating to the DNA Sequencer. On July 30, 1999, Iowa State
University Research Foundation (the "University") and the Company entered into
an amendment to the license agreement ("Amended License"), pursuant to which the
Company agreed to pay $500,000 under the Amended License and the University
agreed to waive any defaults for the failure to pay overdue amounts. The parties
also agreed to a revised schedule of minimum royalties. Additionally, the
University consented to the grant of a sublicense to an unrelated company, and
the Company agreed to pay the University a majority of the minimum royalties
received under the sublicense for the first three years, and all of the minimum
royalties thereafter. However, in the event royalties under the Sublicense
exceed certain milestone amounts, such royalties will be shared equally with the
University. The Company also granted the University a phantom stock award equal
to 150,000 shares of the Company's Common Stock, which will have the right to
participate in the increase in value of the Company's Common Stock between July
30, 1999 and the date of any sale of the Company. However, if the Company
consummates one or more transactions in which it receives net cash proceeds of
$25,000,000 or more, the Company will be obligated to pay to the University in
the same calendar year and each year thereafter (i) 100 percent of Sublicense
fees up to $1,000,000 and (ii) 50 percent of Sublicense fees greater than
$1,000,000.
F-13
<PAGE>
SpectruMedix Corporation
Notes to Financial Statements (continued)
7. Amended License Agreement and Sublicense Agreement,
and Consulting Agreement (continued)
In the event the Company fails to make required payments to the University under
the Amended License, the Amended License may be canceled. The University may
then require the Company to grant to the University a non-exclusive license to
any patents, trade secrets and other technology owned or developed by the
Company in connection with its business of manufacturing, distributing and/or
selling DNA sequencing equipment. The University would be required to pay the
Company 50 percent of all revenues received by the University in connection with
any such license.
Concurrently with entering into the Amended License with the University, the
Company entered into a sublicense agreement pursuant to which the Company
granted a company (the "Sublicensee") an exclusive sublicense to use certain
patents for the development of DNA sequencing machines using 30 or fewer
capillaries and using side entry illumination. The Company also granted the
Sublicensee a right of first refusal to sublicense such technology for use in
DNA sequencing machines using more than 30 capillaries. On July 30, 1999, the
Sublicensee paid the Company a $1,000,000, as a prepayment of royalties and,
commencing with the twelve-month period beginning August 1, 2000, the
Sublicensee agreed to pay to the Company certain minimum annual royalties. Such
minimum royalties are non-refundable, but are credited against the earned
royalties payable pursuant to the sublicense agreement.
Consulting Agreement
On July 30, 1999, the Company and the Sublicensee entered into a three-year
consulting agreement pursuant to which the Company will provide consulting
services to the Sublicensee. In connection with such agreement, the Company
received a lump sum fee of $2,000,000, which was credited to deferred income.
Such consulting fees are being credited to income over the three-year term of
the agreement as the consulting services are rendered.
8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses are comprised of the following at March
31:
March 31
2000 1999
------------------------------
Trade accounts payable $ 1,350,320 $ 823,726
Accrued payroll 81,628 85,509
Accrued legal 37,908 385,817
Accrued sponsored research fees 417 399,757
Accrued license royalties 56,250 437,500
Other accrued liabilities 192,755 257,177
------------------------------
$ 1,719,278 $ 2,389,486
==============================
F-14
<PAGE>
SpectruMedix Corporation
Notes to Financial Statements (continued)
9. Related Party Transactions
During the period between January 1999 and September 1999 an officer and
stockholder advanced the Company $383,454 under a note agreement. The note bears
interest at a rate of 12% per annum and was due in December 1999, of which
$300,000 was paid back subsequent to September 9, 1999.
In May 1999, the officer and stockholder exercised stock options to purchase
127,827 shares of the Company's common stock at an exercise price of $0.00115,
the market value of the Company's stock on the date of grant, in lieu of payment
on the promissory note in the amount of $147.
On January 13, 2000, the Company amended and restated the promissory note. The
amended note extended the term of the loans to December 31, 2000 and provided
that each $1,000 of principal amount and accrued but unpaid interest outstanding
under the amended note may be converted into one share of the Company's Series B
Preferred Stock.
On January 13, 2000, the remaining amount outstanding under the note (including
$19,818 accrued interest) was converted into 103.125 shares of the Company's
Series B Preferred Stock.
10. Long-Term Obligations
The Company has a loan agreement for the purchase of an automobile in the
principal amount of $36,614, of which $23,703 and $29,916 was outstanding at
March 31, 2000 and 1999, respectively. The loan bears interest at 9% per annum,
is payable in 72 equal monthly installments of $660 through October 2003, and is
secured by the underlying vehicle.
The Company also leases certain office equipment from various third parties
accounted for as capital leases.
Future minimum annual payments due under long term obligations are as follows at
March 31, 2000:
Year
2001 $ 46,149
2002 41,794
2003 35,767
2004 14,895
-------------
138,605
Less: amount representing interest 17,468
-------------
121,137
Less: current portion 37,915
-------------
$ 83,222
=============
F-15
<PAGE>
SpectruMedix Corporation
Notes to Financial Statements (continued)
11. Capital Stock
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 from the IPO 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.
During the year ended March 31, 1999, the Company issued 15,000 shares of Common
Stock valued at approximately $0.53 per share as consideration for the purchase
of certain assets of another company.
As of January 1, 2000, the Company granted 100,000 shares of Common Stock,
having a fair market value of $0.125 per share, in connection with an
appointment to the board of directors and in recognition of the consulting
services the now board members provided to the Company on an uncompensated basis
since August 1999.
On January 13, 2000, the Board of Directors of the Company granted an executive
of the Company 100,000 shares of Common Stock, having a fair market value of
$0.125 per share.
On January 3, 2000, the Company also sold 340,000 shares of its Common Stock for
$0.125 per share, the closing market price of the Company's Common Stock on such
date, to certain of its consultants and advisors, including 40,000 shares to a
consultant who has been acting in the capacity of the Company's chief financial
officer.
Preferred Stock
Series A
The Company has authorized the issuance of 2,000 shares of Preferred Stock
designated as Series A Preferred Stock.
On July 30, 1999, the Company completed the sale and issuance of 2,000 shares of
Series A Preferred Stock ("Series A Preferred") at $1,000 per share, providing
net proceeds of $1,995,000. The shares were sold to the sublicensee per Note 7.
F-16
<PAGE>
SpectruMedix Corporation
Notes to Financial Statements (continued)
11. Capital Stock (continued)
The holders of Series A Preferred are entitled to (i) share in dividends on a
pro-rata basis with common stockholders on an as-converted basis; (ii) a
liquidation preference equal to the sum of the price paid per share and all
declared and unpaid dividends (the "Liquidation Preference"); (iii) optional
redemption by the Company of the Liquidation Preference with notice of at least
20 days; (iv) vote on all matters on an as-converted basis; and (v) convert to
Common Stock at the Liquidation Preference Amount multiplied by the shares to be
converted divided by the conversion price (the "Conversion Price") per share.
The initial Conversion Price is equal to $2.50 per share of Common Stock, and is
subject to adjustment in the event that shares of Common Stock are issued
without consideration or for consideration per share less than the conversion
price.
Series B
The Company has authorized the issuance of 750 shares of Preferred Stock
designated as Series B Preferred Stock.
On January 13, 2000, an officer and stockholder of the Company converted
$103,125 outstanding under a promissory note into 103.125 shares of the
Company's Series B Preferred Stock (see Note 9).
The Series B Preferred Stock have a liquidation preference of $1,000 per share
and rank junior to the Series A Preferred Stock in the event of a dissolution of
the Company. Each share of Series B Preferred Stock is convertible into 8,000
shares of Common Stock, subject to adjustment for stock splits,
reclassifications and recombinations. Except as otherwise required by law, the
Series B Preferred Stock votes together with the Common Stock and each share of
Series B Preferred Stock is entitled to 80,000 votes per share, subject to
adjustment for stock splits, reclassifications and recombinations.
The Company is required at all times to reserve out of its authorized but
unissued shares of Common Stock shares sufficient to effect the conversion into
Common Stock of the Series A and Series B Preferred Stock shares from time to
time. At March 31, 2000 and 1999, the Company reserved and kept available
1,625,000 and zero shares of Common Stock to effect the conversion of the Series
A and B Preferred Stock, respectively.
12. Stock-Based Compensation and Outstanding Warrants
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related interpretations
in accounting for its stock-based compensation and to provide disclosures
required under FAS No. 123, Accounting for Stock-Based Compensation.
F-17
<PAGE>
SpectruMedix Corporation
Notes to Financial Statements (continued)
12. Stock-Based Compensation and Outstanding Warrants (continued)
APB No. 25 requires no recognition of compensation expense for most of the stock
based compensation arrangements provided by the Company, namely, broad-based
employee stock purchase plans and employee and Board of Directors option grants
where the exercise price is equal to the market value at the date of grant.
However, APB No. 25 requires recognition of compensation expense for variable
award plans over the vesting periods of such plans, based upon the then-current
market values of the underlying stock.
Under various stock option plans and awards, options to purchase common stock
generally are granted at the fair market value at the date of grant, vest in
annual installments over a four-year period, and are exercisable for a period of
ten years from the date of grant.
Transactions under the Plan are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------------- ------------------------
Weighted Weighted
Average Average
Number of Exercise Number Exercise
Shares Price of Shares Price
--------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 237,008 $ 0.0938 (1) 207,836 $ 4.60
Options granted 238,956 0.0938 57,000 6.25
Options exercised (43,948) 0.0938 - -
Options forfeited (42,136) 0.0938 (27,828) 4.60
--------------------------------------------------------
Options outstanding at end of year 389,880 $ 0.0938 237,008 $ 5.00
========================================================
Options exercisable at March 31 389,880
==========
Options available for future grant at March 31 610,120
==========
Weighted average years remaining contractual
life at March 31 8.3
==========
(1) Repriced as of May 1, 1999
</TABLE>
In electing to continue to follow APB No. 25 for expense recognition purposes,
the Company is obliged to provide the expanded disclosures required under FAS
No. 123 for stock-based compensation granted in 1995 and thereafter, including,
if materially different from reported results, disclosure of pro forma net
income or loss and per share amounts had compensation expense related to grants
made after December 31, 1994 been measured under the fair value recognition
provisions of FAS No. 123. 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 FAS No. 123, the
Company's net loss and basic and diluted loss per share for the years ended
March 31, 2000 and 1999 would have increased by approximately $12,000 and
$240,000, respectively.
F-18
<PAGE>
SpectruMedix Corporation
Notes to Financial Statements (continued)
12. Stock-Based Compensation and Outstanding Warrants (continued)
The fair values of options granted to employees during the years ended March 31,
2000 and 1999 have been determined on the date of the respective grant using the
Black-Scholes option pricing model based on the following assumptions:
2000 1999
-----------------------
Dividend yield None None
Weighted average risk free interest rate 6.00 5.53
Volatility 60% 60%
Expected life (in years) 5 years 9 years
In May 1998, the Company granted non-plan options to purchase 35,000 shares of
its Common Stock to a consultant. The options have an exercise price of $5.00
per share, vest in one year from the date of grant, and expire in May 2008.
In June 1998, the Company granted non-plan options to purchase 100,000 shares of
its Common Stock to consultants. The options have an exercise price of $10.00
per share, the estimated fair value of the Common Stock on the date of grant,
and expire in June 2008. The options vest in equal annual installments over a
three-year period beginning in June 1998. In the event the Company receives
$5,000,000 or more in equity investments, milestone payments and research
support from a collaborative partner, one-half of the then unvested shares will
become vested. The remaining unvested shares would vest over the remaining term
of the original three-year period. However, upon a second qualifying
collaboration, the remaining unvested shares would vest.
In December 1999, the Company granted non-plan options to purchase 50,000 shares
of its Common Stock to consultants. The options have an exercise price of
$0.093750 per share, the estimated fair value of the Common Stock on the date of
grant, and expire in December 2009. The options vest in equal annual
installments over a five-year period.
In September 1997, and in connection with the Company's IPO, 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 one share of
the Company's Common Stock and one Class B Redeemable Warrant. The Class B
Redeemable Warrant is identical to the Redeemable Warrants except that it has an
exercise price of $12.38 per share and is subject to redemption in the event the
market price of the Company's Common Stock equals or exceeds $16.50 per share.
The Underwriter's Unit Purchase Options are exercisable for a period of four
years commencing in September 1998.
F-19
<PAGE>
SpectruMedix Corporation
Notes to Financial Statements (continued)
12. Stock-Based Compensation and Outstanding Warrants (continued)
Shares reserved for future issuances of Common Stock are as follows:
2000
---------
Stock options 709,880
Warrants (including units) 2,153,400
---------
2,863,280
=========
13. Loss Per Share
The following table sets forth the computation of basic and diluted net loss per
share:
<TABLE>
<CAPTION>
2000 1999
--------------------------------
<S> <C> <C>
Numerator:
Net loss $ (928,340) $ (2,942,532)
================================
Denominator:
Weighted-average shares 3,785,900 3,521,419
================================
Net loss per share, basic and diluted $ (0.25) $ (0.84)
================================
Antidilutive options, warrants, and convertible preferred stock
not included in loss per share calculation 4,448,280 2,252,150
================================
</TABLE>
14. 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 that must be exercised within three months of the end of the
lease term for the respective year. During the fiscal year ended March 31, 2000,
the Company exercised its option to renew the lease through June 30, 2001.
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 annual compensation of $96,000, annual minimum
increases of 5% and annual bonuses of up to 25% of base salary plus $24,000
through the term of the agreement for past services rendered as future
realization is not assured.
F-20
<PAGE>
SpectruMedix Corporation
Notes to Financial Statements (continued)
15. Income Taxes
The Company has incurred losses since inception that have generated net
operating loss carryforwards of approximately $12,300,000 and $11,638,000 at
March 31, 2000 and 1999, respectively, for federal and state income tax
purposes. These carryforwards are available to offset future taxable income and
will expire in years 2006 through 2019 for federal income tax purposes. These
losses may be 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 $4,920,000 and
$4,655,000 at March 31, 2000 and 1999, respectively. 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, 2000 and 1999, 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.
16. Legal Proceedings
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. 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 affect 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.
F-21
