<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 1997
REGISTRATION NO. 333-26129
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 3
TO
REGISTRATION STATEMENT
ON FORM S-1
UNDER
THE SECURITIES ACT OF 1933
------------------------
CHROMAVISION MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3826 75-2649072
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
</TABLE>
------------------------
33171 PASEO CERVEZA
SAN JUAN CAPISTRANO, CALIFORNIA 92675
1-888-776-4276
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------------------------------
DOUGLAS S. HARRINGTON, M.D.
CHIEF EXECUTIVE OFFICER
CHROMAVISION MEDICAL SYSTEMS, INC.
33171 PASEO CERVEZA
SAN JUAN CAPISTRANO, CALIFORNIA 92675
1-888-776-4276
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C> <C>
JAMES A. OUNSWORTH, ESQ. N. JEFFREY KLAUDER, ESQ. ROBERT H. STROUSE, ESQ.
SAFEGUARD SCIENTIFICS, INC. MORGAN, LEWIS & BOCKIUS LLP DRINKER BIDDLE & REATH LLP
800 THE SAFEGUARD BUILDING 2000 ONE LOGAN SQUARE 1000 WESTLAKES DRIVE
435 DEVON PARK DRIVE PHILADELPHIA, PENNSYLVANIA SUITE 300
WAYNE, PENNSYLVANIA 19087 19103-6993 BERWYN, PENNSYLVANIA 19312-2409
(610) 293-0600 (215) 963-5694 (610) 993-2213
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /_________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /_________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /X/
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, JUNE 24, 1997
PROSPECTUS
6,720,000 SHARES
[LOGO]
CHROMAVISION MEDICAL SYSTEMS, INC.
COMMON STOCK
(AND RIGHTS TO ACQUIRE UP TO 6,400,000 OF SUCH SHARES)
----------------------------
ChromaVision Medical Systems, Inc. is granting at no cost to you, as a
holder of common stock of Safeguard Scientifics, Inc., transferable rights to
purchase shares of our Common Stock. As a Safeguard shareholder, you will
receive one right for every five Safeguard common shares that you own as of
, 1997. Each right will entitle you to purchase one share of our Common
Stock at an anticipated exercise price of $5.00 per share. Up to 6,400,000
shares of Common Stock will be offered in the rights offering. Of these shares,
we will be selling 6,020,000 shares and Safeguard and three other selling
stockholders will be selling 380,000 shares.
(CONTINUED)
--------------------------
YOU SHOULD CAREFULLY CONSIDER THE RISKS THAT ARE DISCUSSED UNDER THE CAPTION
"RISK FACTORS" BEGINNING ON PAGE 8.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
ASSUMED UNDERWRITING UNDERWRITING DISCOUNT PROCEEDS
EXERCISE AND DISCOUNT PAID BY SELLING TO THE
OFFER PRICE PAID BY THE COMPANY STOCKHOLDERS COMPANY
<S> <C> <C> <C> <C>
Min. $0.15 Min. $0.15 Max. $4.85
Per Share............ $5.00 Max. $0.35 Max. $0.35 Min. $4.65
Min. $ 903,000 Min. $105,000 Max. $29,197,000
Total................ $33,600,000 Max. $2,107,000 Max. $181,000 Min. $27,993,000
Total with Over- Min. $ 903,000 Min. $329,000 Max. $29,197,000
Allotment........... $36,800,000 Max. $2,107,000 Max. $405,000 Min. $27,993,000
<CAPTION>
PROCEEDS TO
THE SELLING
STOCKHOLDERS
<S> <C>
Max. $4.85
Per Share............ Min. $4.65
Max. $3,395,000
Total................ Min. $3,319,000
Total with Over- Max. $6,371,000
Allotment........... Min. $6,295,000
</TABLE>
The minimum underwriting discount assumes the exercise of all rights in the
rights offering and reflects the payment of a financial advisory fee to the
underwriters equal to 3% of the exercise price on the 6,720,000 shares sold in
the offering. In such a case, the minimum underwriting discount would yield the
maximum proceeds to us and to the selling stockholders. The maximum underwriting
discount assumes that none of the rights offered in the rights offering were
exercised and reflects the payment of an underwriting discount of 4% of the
exercise price on the 6,400,000 shares purchased by the underwriters in addition
to the 3% financial advisory fee on the 6,720,000 shares sold in the offering.
The maximum underwriting discount yields the minimum proceeds to us and to the
selling stockholders.
The last row of the table assumes that the underwriters have exercised their
option granted by the selling stockholders to purchase an additional 640,000
shares of Common Stock. The exercise of the over-allotment option would yield
additional proceeds to the selling stockholders and would require the payment of
the 4% underwriting discount and the 3% financial advisory fee by the selling
stockholders for such shares.
ROBERT W. BAIRD & CO. ADAMS, HARKNESS & HILL, INC.
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
[Inside Front Cover:
A photograph of the ChromaVision Digital Analyzer appears in the foreground with
a magnified slide of stained cells in the background. To the left of the
photograph is the following text: "The ChromaVision Digital Analyzer is an
automated intelligent microscopy system that utilizes proprietary imaging
software and technology to locate target cells by detecting color generated from
common laboratory reagents or stains and is designed to improve patient care by
displacing unnecessary, typically invasive and costly procedures." Above the
photograph appear the words: "ChromaVision Digital Analyzer." The Company's name
and logo appear below the photographs with the phrase: "The Vision in Medical
Imaging."]
<PAGE>
(CONTINUED FROM COVER PAGE)
Safeguard and the other selling stockholders will also be selling an
additional 320,000 shares of our Common Stock to persons selected by us. These
persons may have a relationship with us, Safeguard or one of Safeguard's other
partnership companies.
The exercise period for the rights will expire at 5:00 p.m., New York City
time, on , 1997. You may only exercise your rights if you purchase at
least 20 shares of our Common Stock through such exercise.
Once you exercise a right and we accept the exercise, you may not withdraw
the exercise. The shares of our Common Stock that are sold in the offering will
come first from the shares being issued by us, and then from the shares being
sold by the selling stockholders. If shares remain unsubscribed after the end of
the rights exercise period, the first 300,000 shares not purchased through the
exercise of rights will be offered by us to other persons. These persons may
have a relationship with us, Safeguard or one of Safeguard's other partnership
companies. If any shares remain unsold after this offer, the underwriters will
purchase any remaining unsold shares.
The number of rights that will be granted to the holders of Safeguard common
shares is calculated based upon the number of Safeguard common shares that are
outstanding on , 1997. If there are fewer than 32,000,000 Safeguard common
shares outstanding on , 1997, we will grant fewer than 6,400,000 rights in
the rights offering. If fewer than 6,400,000 rights are granted, we will offer
the remaining shares for purchase at an anticipated price of $5.00 per share to
persons selected by us. In any event, a total of 6,400,000 shares will be sold
in the offering.
We will not receive any proceeds from the sale of shares by the selling
stockholders. After the completion of the offering, the selling stockholders
together will own approximately 40.4% of our Common Stock.
There is no minimum number of shares that must be subscribed for in the
rights offering for the offering to be consummated. However, the rights offering
may be cancelled by the underwriters if certain conditions are not satisfied. In
that event, if you have made any payments to the rights agent, ChaseMellon
Shareholder Services, L.L.C., the full amount of your payments will be promptly
returned to you.
We have filed a Registration Statement with the SEC covering the rights and
the shares of Common Stock. Before this offering, the Common Stock has not been
listed on any stock exchange or The Nasdaq Stock Market. The rights and the
Common Stock have been approved for quotation on the Nasdaq National Market.
The underwriters may engage in transactions involving the Common Stock
during and after the rights exercise period. As a result, the underwriters may
realize profit in addition to the underwriting compensation received for their
participation in this offering. If there are shares of Common Stock that are not
purchased before the expiration date, the underwriters will be obligated to
purchase all of the remaining shares from us. We expect that we will deliver any
remaining shares on or about , 1997 at the offices of Robert W. Baird &
Co. Incorporated in Milwaukee, Wisconsin.
After the offering, we intend to send to all of our stockholders annual
reports containing financial statements that have been examined and reported
upon, with an opinion expressed by, the Company's independent auditors.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK OF THE COMPANY, INCLUDING INITIATING BIDS OR EFFECTING PURCHASES ON THE
NASDAQ NATIONAL MARKET FOR THE PURPOSE OF PREVENTING OR RETARDING A DECLINE IN
THE MARKET PRICE OF THE COMMON STOCK. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) CONTAINED
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT
OPTION, (II) ASSUMES AN EXERCISE PRICE OF $5.00 PER SHARE, (III) GIVES EFFECT TO
A 5-FOR-4 SPLIT OF THE COMMON STOCK EFFECTED AS OF MARCH 19, 1997 AND (IV)
ASSUMES CONVERSION OF ALL OUTSTANDING SHARES OF SERIES A PREFERRED STOCK AND
SERIES B PREFERRED STOCK. UNLESS THE CONTEXT OTHERWISE INDICATES, CHROMAVISION
MEDICAL SYSTEMS, INC., FORMERLY KNOWN AS MICROVISION MEDICAL SYSTEMS, INC., AND
ITS PREDECESSOR DIVISION ARE REFERRED TO HEREIN AS "CHROMAVISION" OR THE
"COMPANY."
THE COMPANY
ChromaVision has developed an automated intelligent microscope system that
uses the Company's proprietary imaging technologies for a wide variety of
diagnostic and research applications. The Company currently markets to research
centers and intends to introduce to the healthcare market its system, the
ChromaVision Microscopic Digital Analyzer (the "ChromaVision Digital Analyzer").
The ChromaVision Digital Analyzer is designed to identify cells with specific
characteristics within a sample of cells by detecting color produced by the
reaction between common laboratory reagents (or stains) and the cells. The
ChromaVision Digital Analyzer uses proprietary imaging software and technology
to capture digital images of cell samples and to detect the presence, count the
number and measure the color intensity of cells containing a particular stain.
The ChromaVision Digital Analyzer offers substantial flexibility because the
software can be configured to identify different stains, thereby allowing the
system to be adapted for use with different reagents to identify a broad range
of target cellular conditions. The Company seeks to establish the ChromaVision
Digital Analyzer as the preferred platform for multiple diagnostic applications.
The Company believes that the ChromaVision Digital Analyzer will be
attractive to healthcare providers and beneficial to their patients because of
its ability to deliver superior diagnostic solutions, thus reducing the need for
more invasive or more costly procedures. Preliminary tests have demonstrated
superior accuracy compared to other existing techniques used in rare event
detection, such as polymerase chain reaction ("PCR") and flow cytometry, as the
ChromaVision Digital Analyzer can locate a single abnormal cell among 100
million normal cells. This improved detection capability enables the
ChromaVision Digital Analyzer to be applied to a variety of diagnostic
situations, such as high-value rare event detection procedures, which include
the detection of minute quantities of cancer cells that have spread to parts of
the body away from a tumor's primary location.
The Company has identified a broad range of potential applications for the
ChromaVision Digital Analyzer, including prenatal screening for Down syndrome,
quantitative viral load measurement for HIV and cancer detection. The Company
focuses on developing diagnostic applications that are clinically and
economically compelling to patients, providers (laboratories) and payors
(insurance and managed care organizations). The Company has completed clinical
trials and has received a 510(k) clearance from the U.S. Food and Drug
Administration (the "FDA") to market the ChromaVision Digital Analyzer with a
stain (marker) to screen blood for malignancy. The Company plans to expand this
clearance for a higher-value use of the ChromaVision Digital Analyzer in its
intended first commercial application called Triple Plus-TM-, a procedure using
a related stain, Urea Resistant Neutrophil Alkaline Phosphatase ("UR-NAP"), as a
marker in the prenatal screening of maternal blood for indicating the risk of a
Down syndrome pregnancy. The current screening processes falsely indicate an
elevated risk of a Down syndrome baby in a significant number of mothers with
normal fetuses (false positives), which typically leads to performing invasive
and expensive amniocenteses. The Company believes its Triple Plus-TM-
application will significantly improve the diagnostic accuracy of the existing
screening process, thereby reducing the number of amniocenteses performed on
mothers with normal fetuses. As a result, once clearance is received for
commercial use, the Triple Plus-TM- application should result in substantial
cost savings to healthcare
3
<PAGE>
providers and improved patient care. The Company is also currently testing the
ChromaVision Digital Analyzer for a number of additional applications, such as
the detection of prostate, breast, lung and colorectal cancers.
To support its 510(k) application for the Triple Plus-TM- procedure, the
Company has entered into an agreement with Cambridge University (Addenbrooke's
Hospital, Cambridge, England), to lead multi-site clinical trials with
participants expected to include Harvard Medical School (Brigham and Women's
Hospital) and The State of California Prenatal Testing Program (Berkeley). Dr.
Sandy Goodburn of Addenbrooke's National Health Services Trust Department of
Medical Genetics and Dr. Tony Andrews of Cambridge University's Department of
Medical Genetics are the co-principal investigators. Dr. Goodburn was one of the
original investigators of a 1990 study that supports the application of UR-NAP
used in the Company's Triple Plus-TM- procedure. While the study supported the
potential superiority of the stain in this application, the manual process used
in the study made it impractical for commercial use. Recently, Dr. Goodburn has
successfully employed the automated ChromaVision Digital Analyzer system in
support of the clinical research relating to the application of UR-NAP in
evaluating prenatally the risk of Down syndrome. The Company's multi-site
clinical trials will enable the Company to rapidly obtain affected and normal
maternal blood specimens and clinical data to validate the Triple Plus-TM- test
for adoption by practitioners and for FDA submission. The Company anticipates
that it will file for clearance from the FDA for the Triple Plus-TM- and
distribute manuscripts for peer-review publication in early 1998.
The Company initially plans to work directly with its clinical collaborators
to gain acceptance in the medical community of the Triple Plus-TM- procedure.
However, the Company intends to pursue strategic alliances with third parties
capable of effectively distributing the ChromaVision Digital Analyzer and
providing related services on a large-scale basis. The Company believes that
such alliances will enable it to minimize certain risks related to the time,
effort and expense associated with the internal development of similar
distribution capabilities, particularly for international markets. The first
alliance partnership in development is with Sigma Diagnostics ("Sigma"), a St.
Louis based subsidiary of Sigma-Aldrich Corporation, and a manufacturer of
diagnostic instruments and reagents with a worldwide distribution capability. In
March 1997, the Company signed a term sheet setting forth the principal terms of
a strategic distribution and application commercialization relationship with
Sigma focusing on the Triple Plus-TM- test. The Company has also signed a letter
of intent regarding a possible joint development agreement with Specialty
Laboratories, a privately held specialized testing services provider located in
Santa Monica, California, to leverage their extensive experience and capability
in developing cutting-edge laboratory tests in the areas of cancer, immunology,
microbiology, genetics and molecular biology. Additionally, ChromaVision has
established a non-exclusive cooperative market development relationship with
Centocor, Inc. ("Centocor") to identify market opportunities and requirements
for various rare event detection applications, such as minimal residual disease.
The Company believes that each new application can provide value to all other
ChromaVision strategic alliance partners, as new applications will drive new
platform installations and in turn make the ChromaVision Digital Analyzer an
increasingly attractive means to access the marketplace for new applications.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Description of the Rights Offering..... If you hold Safeguard common shares on ,
1997, you will receive one right to purchase our
Common Stock for every five Safeguard common shares
you own. Fractional rights will be rounded up to
the next whole number in determining the number of
rights to be issued to Safeguard shareholders. Each
right entitles you to purchase one share of our
Common Stock at a purchase price of $5.00. You must
own at least 20 rights to be eligible to exercise
your rights. In other words, if you own fewer than
96 Safeguard common shares, you will receive fewer
than 20 rights and you will not be eligible to
exercise your rights unless you purchase additional
rights in the market. Together with the selling
stockholders, we are offering up to 6,400,000
shares of our Common Stock for purchase through the
exercise of rights.
The Exercise Price of the Rights....... If you wish to exercise your rights to purchase our
Common Stock, the purchase price will be $5.00 per
share of Common Stock.
When You Can Exercise Your Rights...... The rights will only be exercisable from the period
beginning on , 1997 and ending on
, 1997 at 5:00 p.m., New York City time.
How Your Rights Will be Evidenced...... You will receive certificates that represent your
transferable rights.
Offer of Unsubscribed Shares to Other
Purchasers........................... In the event that not all of the rights are
exercised, we and the selling stockholders will
offer the first 300,000 unsubscribed shares and any
shares of Common Stock subject to rights that were
not distributed, to persons selected by us. These
persons may have a relationship with us, Safeguard
or one of Safeguard's other partnership companies.
Obligations of the Underwriters........ The underwriters will purchase any shares offered
in the rights offering that have not been purchased
through the exercise of rights and have not
otherwise been sold by us by , 1997, if
any, at the exercise price less the underwriters'
discount. The underwriters will then offer these
shares to the public.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Number of Shares of Common Stock
Offered in the Rights Offering....... Of the 6,400,000 shares offered in the rights
offering, we will be selling 6,020,000 shares and
the selling stockholders will be selling 380,000
shares.
Offer of Direct Shares to Direct
Purchasers........................... The selling stockholders are also offering up to
320,000 shares of our Common Stock that are owned
by them to persons selected by us.
Common Stock to be Outstanding After
the Rights Offering.................. After the offering, 17,147,393 shares of Common
Stock will be outstanding, not including 1,608,688
shares issuable upon the exercise of outstanding
stock options at a weighted average exercise price
of $2.09 per share as of May 27, 1997.
How We Intend to Use the Proceeds...... We will use the money received from the sale of
shares to repay our outstanding debt, for the
further development of the ChromaVision Digital
Analyzer, including the financing of clinical
trials and certain pre-marketing activities, for
working capital, for general corporate purposes and
for capital expenditures. We may also use a portion
of the net proceeds for future acquisitions,
although we currently are not engaged in any
acquisition negotiations.
Proposed Nasdaq National Market
Symbols.............................. During the period in which you can exercise your
rights, the rights will trade on the Nasdaq
National Market under the symbol CVSNR and the
Common Stock will trade under the symbol CVSNV on a
when-issued basis. After the expiration of the
rights period, the Common Stock will trade under
the symbol CVSN.
</TABLE>
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED PERIOD FROM MARCH 28, 1996 THREE MONTHS ENDED
DECEMBER 31, JANUARY 1, 1996 (INCORPORATION) MARCH 31,
---------------------- THROUGH MARCH 27, THROUGH DECEMBER 31, -------------------------
1994 1995 1996 1996 1996 1997
---------- ---------- ----------------- -------------------- ------------- ----------
(DIVISIONAL
(DIVISIONAL OPERATIONS(1)) OPERATIONS(1))
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue--product(2).......... $ 220,000 $ 900,000 $ -- $ -- $ -- $ --
Revenue--services(2)......... 76,886 -- -- -- -- --
Cost of revenues--product.... 201,886 310,103 -- -- -- --
Cost of revenues--services... 30,750 -- -- -- -- --
Operating expenses(3)........ 1,645,556 2,553,084 452,157 4,396,617 452,157 1,384,430
Other income (expense)(4).... -- -- 75,000 366,354 75,000 (22,268)
---------- ---------- ----------------- -------------------- ------------- ----------
Net profit (loss)............ $(1,581,306) $(1,963,187) $(377,157) $ (4,030,263) $ (377,157) $(1,406,698)
Net profit (loss) subsequent
to incorporation(1)(5)..... $ (4,030,263) $(1,406,698)
-------------------- ----------
-------------------- ----------
Net profit (loss) per common
share(1)(5)................ $ (0.33) $ (0.11)
-------------------- ----------
-------------------- ----------
Pro forma weighted average
number of common shares
outstanding................ 12,111,580 12,280,331
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
--------------------------
BALANCE SHEET DATA: ACTUAL AS ADJUSTED(6)
---------- --------------
<S> <C> <C>
Cash and cash equivalents.................................................................. $ 65,100 $24,747,280
Total assets............................................................................... 1,187,343 25,869,523
Total indebtedness(7)...................................................................... 2,410,820 --
Total stockholders' equity (deficit)....................................................... (2,063,880) 25,029,120
</TABLE>
- ------------------------
(1) Prior to Incorporation on March 28, 1996, the Company operated as a division
of XL Vision, Inc. See Note 1 to the Notes to the Financial Statements
appearing elsewhere in the prospectus.
(2) Revenue includes income from prototype research instrument sales and support
services.
(3) Operating expenses for the period from March 28, 1996 (incorporation)
through December 31, 1996 include the value of the preferred stock issued to
Centocor as compensation for its clinical collaboration on certain minimal
residual disease applications.
(4) Other income relates to reimbursement of the Company's cost for design work
performed as well as interest income.
(5) See Note 2 of the Notes to Financial Statements for information concerning
the calculation of net profit (loss) per common share.
(6) Adjusted to give effect to the sale by the Company of 6,020,000 shares of
Common Stock, the receipt of approximately $27,093,000 in net proceeds from
this offering, after deducting the maximum total underwriting discount with
respect to such shares of approximately $2,107,000 and estimated offering
expenses of approximately $900,000 (including $200,000 representing the
maximum applicable non-accountable expense allowance to the underwriters)
and the application of proceeds to pay off existing indebtedness.
(7) Total indebtedness includes the Company's revolving line of credit and
amounts due to XL Vision of $1,958,432 and $452,388 at March 31, 1997,
respectively.
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISK FACTORS, AS WELL AS THE OTHER INFORMATION IN THIS PROSPECTUS, BEFORE
INVESTING IN THE SHARES OF THE COMMON STOCK AND RIGHTS OFFERED HEREBY. THIS
PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. FUTURE EVENTS AND THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS REFLECTED IN THESE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN THE FOLLOWING RISK FACTORS.
DEVELOPMENT STAGE ENTERPRISE; HISTORY OF OPERATING LOSSES; UNCERTAIN
PROFITABILITY
The Company is a development stage enterprise, has no commercialized
products or revenue base and has a limited operating history. Since its
inception in 1993 as a division of XL Vision, Inc. ("XL Vision"), the Company
has incurred losses totaling approximately $10.2 million, principally associated
with the research and development of the ChromaVision Digital Analyzer
technology, conducting clinical trials, preparing regulatory approval filings
and other matters related to the commercialization of its system. The Company
anticipates that it will not realize any material commercial revenues before the
third quarter of 1998 and, therefore, will continue to incur losses for the
foreseeable future. Delays in completing research and clinical tests, receiving
necessary regulatory approvals, establishing a scaled-up manufacturing operation
and developing marketing capabilities may significantly limit or prevent the
Company's future profitability. There can be no assurance that the Company will
be able to achieve profitable operations at any time in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business--Governmental Regulation," "Business--Manufacturing;
Research and Development" and "Business--Marketing."
GOVERNMENT REGULATION
The Company's products, services and manufacturing activities are subject to
extensive and rigorous government regulation in the United States and other
countries. In the United States, the Medical Device Amendments to the Federal
Food, Drug and Cosmetic Act, as amended (the "FDC Act"), and other statutes and
regulations, including various state statutes and regulations, govern the
testing, manufacture, labeling, storage, recordkeeping, distribution, sale,
marketing, advertising and promotion of its products. To the extent that the
Company manufactures or distributes its products in foreign countries, the
Company's products will be subject to similar foreign regulation. Foreign
regulatory approvals or clearances can require extensive testing and data
submissions. Failure to comply with applicable requirements in the United States
or in foreign countries can result in fines, recall or seizure of products,
total or partial suspension of production, withdrawal of existing product
approvals or clearances, refusal to approve or clear new applications or notices
and criminal prosecution. See "Business--Governmental Regulation."
Prior to commercial distribution in the United States, most medical devices,
including the Company's products, must be cleared by the FDA. The process of
obtaining required regulatory clearance can be lengthy, expensive and uncertain.
Moreover, regulatory clearance, if granted, may include significant limitations
on the indicated uses for which a product may be marketed. The Company believes
that the FDA will generally require clearance for each application for the
ChromaVision Digital Analyzer. On June 5, 1997, the Company received its first
510(k) clearance from the FDA to market the ChromaVision Digital Analyzer
product for Neutrophil Alkaline Phosphatase ("NAP") quantification. There can be
no assurance that the Company will obtain clearance from the FDA to market the
ChromaVision Digital Analyzer for any other applications in a timely manner, if
at all. See "Business--Governmental Regulation."
The Company intends next to pursue FDA clearance for its Triple Plus-TM-
application. The Triple Plus-TM- application uses the same technology and
methods as the initial NAP quantification application. The filing of a new
510(k) or a PMA would be costly and time consuming. There can be no assurance
that
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the necessary clearance from the FDA for the Triple Plus-TM- application will be
received in a timely manner, if at all.
The FDA actively enforces regulations prohibiting marketing of products for
other than research and investigational use without compliance with the
premarket clearance provisions of applicable laws. The effect of governmental
regulation may be to delay for a considerable period of time or to prevent the
marketing and full commercialization of the Company's products or services and
to impose costly requirements on the Company. There can be no assurance that any
of the Company's products will receive clearance by the FDA for manufacture and
distribution in the United States. See "Business--Governmental Regulation."
The FDA also regulates computer software, such as the Company's software
technology, that performs the functions of a regulated device or that is closely
associated with a given device, such as software for imaging or other devices.
The FDA is in the process of reevaluating its regulation of such software, and
the Company cannot predict the extent to which the FDA will regulate such
software in the future. Should the FDA increase regulation of such software, the
Company's software technology could become subject to more extensive regulatory
processes and clearance requirements. As a result, the Company could be required
to devote additional time, resources and effort in the areas of software design,
production and quality control to ensure compliance. No assurance can be given
that compliance with more extensive regulatory processes would be achieved or
that the necessary clearances for such software be obtained by the Company on a
timely basis, if at all. Delay or failure to achieve any required FDA clearance
with respect to such software could have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business--Governmental Regulation."
Manufacturers of medical diagnostic devices are subject to strict federal
regulations regarding validation and the quality of manufacturing, including
periodic FDA inspections of the manufacturing facilities to determine compliance
with its Good Manufacturing Practice ("GMP") regulations. The Company's
manufacturing operations, including any expansion of such operations, will
continue to be required to comply with these and all other applicable
regulations, and with applicable regulations imposed by other governments. The
Company's failure to comply with GMP regulations could result in civil or
criminal penalties or enforcement proceedings being imposed on the Company,
including the recall of a product or a "cease distribution" order requiring the
Company to stop placing its products in service or selling its products, as the
case may be. Similar results could occur if the Company were to violate foreign
regulations. The Company will be required to be in GMP compliance prior to
completing its first commercial product sale. There can be no assurance that the
Company will be able to attain or maintain compliance with GMP requirements.
Failure to attain or maintain compliance with the applicable manufacturing
requirements of various regulatory agencies would have a material adverse effect
on the Company's business, operating results and financial condition. See
"Business--Governmental Regulation" and "Business--Manufacturing; Research and
Development."
Changes in existing regulations or adoption of new regulations could affect
the timing of, or prevent the Company from obtaining, future regulatory
clearance. There can be no assurance that additional regulations will not be
adopted or that current regulations will not be amended in such a manner as will
materially adversely affect the Company.
DEPENDENCE ON SUCCESSFUL COMMERCIALIZATION OF INITIAL PRODUCT APPLICATION
The Company has identified prenatal screening of maternal blood for Down
syndrome in fetuses as its initial commercial diagnostic application for use on
the ChromaVision Digital Analyzer. The Company's business plan contemplates that
the Company will not begin generating material revenues from commercial use of
this application until the third quarter of 1998 and that this application will
generate a significant portion of the Company's revenues for the foreseeable
future.
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The Company's ability to generate revenues from this application is
dependent upon a number of factors, including successful completion of clinical
trials demonstrating that the use of Triple Plus-TM- is superior to alternative
tests for detection of Down syndrome, FDA clearance for the use of the
ChromaVision Digital Analyzer for this application, adoption by the medical
community of this application as its standard of practice, acceptance by the
medical insurance industry of this application as an eligible reimbursable
expense and the Company's development of a sales force, internally or with a
corporate partner, to successfully market Triple Plus-TM- to laboratories and
other users.
Delays in the commercialization of, or the failure to successfully
commercialize, Triple Plus-TM- would have a material adverse effect on the
Company's business, operating results and financial condition.
DEPENDENCE ON SINGLE PRODUCT LINE; UNCERTAIN MARKET ACCEPTANCE
The Company has focused all of its activities to date on the development of
the ChromaVision Digital Analyzer and has performed only limited research on
specific diagnostic applications for this platform. The Company will depend on
the successful development and marketing of such specific applications in order
to establish a commercially viable market. The extent of market acceptance and
penetration achieved by the ChromaVision Digital Analyzer will depend on a
number of variables including but not limited to: cost, ability of the
ChromaVision Digital Analyzer to perform as expected and acceptance by patients,
physicians, third-party payors and laboratories. There can be no assurance that
a viable commercial market for ChromaVision Digital Analyzer applications will
ever develop, that the ChromaVision Digital Analyzer will perform as intended or
that the ChromaVision Digital Analyzer will achieve the desired market
acceptance. See "Business--The ChromaVision Digital Analyzer Advantage."
POTENTIAL INTELLECTUAL PROPERTY DISPUTE
The Company has been made aware that a third party competitor has a dispute
with the Company relating to the Company's UR-NAP application for the
ChromaVision Digital Analyzer. If a claim is successfully asserted against the
Company, the Company could be subject to significant liabilities to such third
party and may be required to license disputed rights from such other party.
There can be no assurance that if a claim is successfully asserted against the
Company, that any license required under any such patent would be available on
terms acceptable to the Company, if at all. The successful assertion of any such
claim against the Company, could have a material adverse effect on the Company's
business, operating results and financial condition. Furthermore, regardless of
the outcome of such claim, the Company could incur substantial costs in
defending itself in legal proceedings brought in connection with such claim or
in suits brought by the Company asserting its patent or proprietary rights
against another party. See "Business--Patents and Proprietary Technology."
UNCERTAINTY REGARDING INSURANCE REIMBURSEMENTS
The Company is attempting to commercialize the ChromaVision Digital Analyzer
by replacing or augmenting existing diagnostic procedures, most if not all of
which are deemed to be eligible expenses and covered by the medical insurance
industry. Accordingly, the Company's success in commercializing the ChromaVision
Digital Analyzer is, in part, dependent on the ChromaVision Digital Analyzer
related diagnostic procedures also being deemed eligible for reimbursement.
Historically, insurance carriers generally have been slow in adopting new
procedures as eligible expenses and, specifically, have been slow in agreeing to
cover other types of automated microscopy diagnostic procedures. There can be no
assurance that insurance carriers will deem the ChromaVision Digital Analyzer
related procedures as reimbursable expenses at any time in the future. See
"Business--Third-Party Reimbursement and Healthcare Legislation."
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LIMITED MANUFACTURING EXPERIENCE
As a development stage company, ChromaVision has limited manufacturing
experience. As such, the Company may encounter significant delays and incur
significant unexpected costs in scaling-up its manufacturing operations. In
addition, the Company may encounter delays and difficulties in hiring and
training the workforce necessary to manufacture the ChromaVision Digital
Analyzer. There can be no assurance that the Company will be able to manufacture
the ChromaVision Digital Analyzer at a cost or in quantities necessary to make
the product commercially viable. The failure to scale-up manufacturing
operations successfully in a timely and cost-effective manner could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Manufacturing; Research and Development."
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING
The Company currently estimates that its existing capital resources,
together with the net proceeds from this offering, will enable it to sustain
operations for at least one year after receipt of the proceeds. The Company has
expended and will continue to expend substantial funds for research and
development, clinical trials, manufacturing and marketing of its system. The
timing and amounts of such capital requirements will depend upon several
factors, including the progress of research and development efforts, the results
of clinical trials, the receipt of regulatory clearances, technological and
market developments, the commercialization of competing products and market
acceptance and demand for the Company's system. Specifically, the Company's need
for capital will be accelerated if the Company is delayed in bringing the Triple
Plus-TM- application to market or the Company fails to achieve the level of
revenues from this application in the time frame contemplated by its business
plan. To the extent required, the Company may need to seek additional funds
through equity or debt financings, collaborative arrangements with third parties
and from other sources. There can be no assurance that additional financing will
be available on terms acceptable to the Company, if at all. The inability to
obtain sufficient funds may require the Company to delay, scale back or
eliminate some or all of its development activities, clinical studies and/or
regulatory activities or to license to third parties the right to commercialize
products or technologies that the Company would otherwise seek to commercialize
itself. See "Use of Proceeds."
DEPENDENCE ON COLLABORATORS AND STRATEGIC ALLIANCES
The Company's strategy for the development and commercialization of the
ChromaVision Digital Analyzer platform contemplates entering into collaborations
and strategic alliances with third parties. The Company intends to enter into
corporate collaborations for the development of new applications, such as its
arrangement with Centocor, clinical collaborations for testing of the system,
such as its relationship with Cambridge University, and strategic alliances for
the commercialization of its product, such as its proposed alliance with Sigma.
The Company may therefore be dependent upon the subsequent success of third
parties in performing their responsibilities. There can be no assurance that the
Company will be able to enter into arrangements that the Company deems necessary
or appropriate to develop and commercialize its products, or that any of the
contemplated benefits from such arrangements will be realized. Furthermore,
there can be no assurance that any revenues or profits will be derived from the
Company's collaborative and other arrangements. See "Business--Strategic
Alliances."
HEALTHCARE REFORM
From time to time, Congress has considered restructuring the delivery and
financing of healthcare services in the United States. The Company cannot
predict what form such legislation, if any, may take or the effect of such
legislation on its business. It is possible that future legislation will contain
provisions resulting in limitations which may adversely affect the business,
operating results and financial condition of the Company. It is also possible
that future legislation could either result in modifications to the nation's
public and private healthcare insurance systems, which could affect
reimbursement policies in a manner
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adverse to the Company, or encourage integration or reorganization of the
healthcare delivery system in a manner that could adversely affect the Company.
The Company cannot predict what other legislation, if any, relating to its
business or to the healthcare industry may be enacted, including legislation of
third-party reimbursement, or what effect any such legislation may have on its
business, operating results and financial condition. See "Business--Industry
Overview" and "Business--Third-Party Reimbursement and Healthcare Legislation."
RAPID TECHNOLOGICAL CHANGE; DEVELOPMENT OF NEW PRODUCTS
The medical imaging technology market is characterized by rapid
technological change, frequent new product introductions and evolving industry
standards. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete and
unmarketable in short periods of time. The Company expects new products and
services, and enhancements to existing products and services, to be developed
and introduced by others, which will compete with the products and services
offered by the Company. The life cycles of the Company's products are difficult
to estimate. The Company's future success will depend upon its ability to
enhance its current products and to develop and introduce new products that keep
pace with technological developments and emerging industry standards and that
address the increasingly sophisticated needs of its customers. There can be no
assurance that the Company will be successful in developing and marketing such
products or produce enhancements that meet these changing demands, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these products or that its
new products and product enhancements will adequately meet the demands of the
marketplace and achieve market acceptance. The Company's inability to develop
and introduce new products or product enhancements in a timely manner, or its
failure to achieve market acceptance of a new product will have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business--Competition."
DEPENDENCE ON PATENTS, TRADE SECRETS AND PROPRIETARY TECHNOLOGY
The Company's commercial success will depend in part on its ability to
protect and maintain the Company's proprietary technology and to obtain and
enforce patents on the Company's technology. The Company relies primarily on a
combination of copyright, patent and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary
rights. No assurance can be given that the Company's efforts will provide
meaningful protection for its proprietary technology against others who
independently develop or otherwise acquire substantially equivalent techniques
or gain access to, misappropriate or disclose the Company's proprietary
technology. The Company has applied for patents with the U.S. Patent & Trademark
Office ("PTO") regarding certain aspects of the ChromaVision Digital Analyzer
software technology. There can be no assurance that any patent applications
filed by the Company will result in the issuance of patents or that any patents
issued to the Company will afford protection against competitors that develop
similar technology.
Substantial elements of the hardware component of the Company's ChromaVision
Digital Analyzer technology were initially developed by XL Vision for
Intelligent Medical Imaging, Inc. ("IMI"). Pursuant to an agreement with IMI, XL
Vision assigned ownership of the technology underlying those hardware elements
to IMI, subject to a perpetual, transferable, non-exclusive fully paid-up
license to XL Vision to use, develop and sell such technology. XL Vision has
transferred this license to the Company. See "Business--Patents and Proprietary
Technology."
The medical device industry has been the subject of extensive litigation
regarding patents and other proprietary rights. Any claims of infringement by
third parties, with or without merit, could be time-consuming, resulting in
costly litigation, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all. A
determination that the Company is infringing the
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proprietary rights of others could have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business--Patents and Proprietary Technology."
COMPETITION
The markets in which the Company competes are highly competitive.
Competition exists and potential competition may arise from several sources,
including skilled medical technologists and manufacturers of clinical laboratory
equipment. The Company's existing and potential competitors may possess
substantially greater resources than the Company. The Company believes that the
current primary source of competition for the ChromaVision Digital Analyzer is
existing manual methods of microscopic analysis. To compete effectively, the
Company will need to demonstrate that the ChromaVision Digital Analyzer produces
comparable or better performance relative to existing methods. There can be no
assurance that the Company will be able to compete effectively with existing or
potential competitors. The Company is aware of at least six companies that are
developing or have developed similar products for applications which the Company
does not currently intend to pursue. There can be no assurance, however, that
such companies will not adapt their systems for other applications competing
directly with the ChromaVision Digital Analyzer. See "Business--Competition."
PRODUCT LIABILITY AND UNCERTAINTY OF ADEQUATE INSURANCE; POTENTIAL EXPOSURE TO
CLAIMS
The manufacture and sale of the ChromaVision Digital Analyzer entails an
inherent risk of product liability arising from an inaccurate, or allegedly
inaccurate, test or diagnosis. There can be no assurance that the Company will
be able to maintain or acquire additional product liability insurance in the
future with adequate coverages or at acceptable costs. Any product liability
claim against the Company could have a material adverse effect on the Company's
business, operating results and financial condition. The failure to comply with
the FDA's GMP regulations could have a material adverse effect on the ability of
the Company to defend against product liability lawsuits. See "Business."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its continued success depends to a significant
extent upon the efforts and abilities of its executive officers. The loss of
services of any of the Company's executive officers or senior managers could
have a material adverse effect on the Company's business, operating results and
financial condition. Furthermore, the Company's anticipated growth and expansion
into activities requiring additional expertise will require the addition of
highly skilled technical, management, financial, sales and marketing personnel.
Competition for such personnel is intense, and the failure of the Company to
hire and retain talented personnel or the loss of one or more key employees
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Management."
RISK ASSOCIATED WITH RAPID GROWTH
The Company currently has limited management and administrative resources.
If the Company is successful in implementing its strategy, it may experience a
period of rapid growth and expansion which could place significant additional
demands on the Company's management and administrative resources. The failure by
the Company's management team to manage this potential growth effectively could
have a material adverse effect on the Company's business, operating results and
financial condition. See "Business--Employees."
LIMITED NUMBER OF POTENTIAL CUSTOMERS FOR THE INITIAL DOWN SYNDROME SCREENING
APPLICATION
The Company intends to initially market its products to prenatal care
healthcare providers and laboratories. There are currently a limited number of
such organizations in the marketplace. In particular, with respect to Down
syndrome, the Company estimates that approximately 70% of all tests in the
United
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States are performed by five clinical organizations. There can be no assurance
that the Company will be able to market successfully any of its products to any
such organizations. Furthermore, in the event that the Company is successful in
marketing its products to one or more of such organizations, the loss of a
significant customer may have a material adverse effect on the Company. See
"Business--Marketing."
CONTROL BY PRINCIPAL STOCKHOLDERS
After the completion of the offering, XL Vision, Safeguard, Technology
Leaders I and Technology Leaders II (collectively, the "Principal
Stockholders"), will beneficially own in the aggregate approximately 40.4% of
the outstanding Common Stock. In addition, officers of the Principal
Stockholders will own an additional 6.8% of the outstanding Common Stock (before
the exercise of any rights they may receive in the offering). As a result, such
stockholders will collectively have the voting power to substantially control
the election of the Company's entire Board of Directors and all votes on matters
requiring stockholder approval. See "Management--Executive Officers and
Directors" and "Management--Certain Relationships," "Principal and Selling
Stockholders," "Certain Transactions" and "Shares Eligible for Future Sale."
DILUTION
The average price per share paid upon the original issuance by the Company
of Common Stock prior to the offering was $0.73. Purchasers of the Common Stock
of the Company offered hereby will suffer an immediate dilution of $3.54 in the
net tangible book value per share of the Common Stock from the exercise price of
the rights and the offering price for the shares of Common Stock offered hereby.
See "Dilution."
REQUIREMENTS FOR LISTING SECURITIES ON THE NASDAQ NATIONAL MARKET; APPLICATION
OF THE PENNY STOCK RULES
The Common Stock and rights (the "Listed Securities") have been approved for
listing on the Nasdaq National Market. If the Company is unable to maintain the
standards for continued listing, the Listed Securities could be subject to
delisting from the Nasdaq National Market. Trading, if any, in the Listed
Securities would thereafter be conducted on the Nasdaq Small Cap Market. If,
however, the Company did not meet the requirements of the Nasdaq Small Cap
Market, trading of the Listed Securities would be conducted on an electronic
bulletin board established for securities that do not meet the Nasdaq listing
requirements or in what is commonly referred to as the "pink sheets." As a
result, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the price of, the Company's securities.
In addition, if the Company's securities were delisted, they would be
subject to the so-called penny stock rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally defined as an investor
with a net worth in excess of $1,000,000 or annual income exceeding $200,000, or
$300,000 together with a spouse). For transactions covered by this rule, the
broker-dealer must make a special suitability determination for the purchaser
and must have received the purchaser's written consent to the transaction prior
to sale. Consequently, delisting, if it occurred, may affect the ability of
broker-dealers to sell the Company's securities and the ability of purchasers in
the offering to sell their securities in the secondary market.
The Securities and Exchange Commission (the "Commission") has adopted
regulations that define a "penny stock" to be any equity security that has a
market price (as defined in the regulations) of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a disclosure schedule relating to the
penny stock market. The broker-dealer also must disclose the commissions 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
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market in penny stocks. As a result, if the Common Stock is determined to be
"penny stock," an investor may find it more difficult to dispose of the
Company's Common Stock.
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the offering, there has been no public market for the Common Stock
or the rights, and there can be no assurance that an active public market will
develop or be sustained. The exercise price of the rights and purchase price of
the Common Stock has been determined solely by negotiations between the Company
and the underwriters and does not necessarily reflect the price at which shares
of Common Stock may be sold in the public market during or after the offering.
See "The Offering--Why We are Selling Shares Through a Rights Offering" for a
discussion of the factors considered in determining the exercise price. The
public markets, in general, have from time to time experienced extreme price and
volume fluctuations, which have in some cases been unrelated to the operating
performance of particular companies, and the market for information technology,
healthcare technology and biotechnology stocks, such as the Common Stock, can be
subject to greater price volatility than the stock market in general. In
addition, factors such as announcements of technological innovations, new
products by the Company's competitors or third parties, potential litigation,
healthcare reform initiatives, strategic alliances of the Company's competitors,
the status of the Company's regulatory applications, regulatory action and
market conditions in the medical imaging industry may have a significant impact
on the market price of the Common Stock.
CANCELLATION OF RIGHTS OFFERING
If the conditions precedent to the sale of shares of Common Stock to the
underwriters, set forth in the standby underwriting agreement entered into by
the Company, the selling stockholders and the underwriters (the "Standby
Underwriting Agreement"), are not satisfied, the underwriters may elect, on or
before the sixth business day after the Expiration Date (the "Closing Date"), to
cancel the rights offering and the Company and the selling stockholders will not
have any obligations with respect to the rights except to return, without
interest, any payment received in respect of the exercise price. See
"Underwriting." The Company has been advised by the NASD that trades in the
rights and the when-issued shares of Common Stock in the market would be
canceled if the rights offering is not consummated.
SHARES ELIGIBLE FOR FUTURE SALE
A substantial number of outstanding shares of Common Stock and shares of
Common Stock issuable upon exercise of outstanding stock options will become
eligible for future sale in the public market at various times. In addition to
the factors affecting the stock market in general and the market for the Common
Stock discussed above, sales of substantial amounts of Common Stock in the
public market, or the perception that such sales could occur, could adversely
affect the market price of the Common Stock. Upon completion of the offering,
the Company will have 17,147,393 shares of Common Stock outstanding, excluding
1,608,688 shares of Common Stock subject to stock options outstanding as of May
27, 1997 and any stock options granted by the Company after May 27, 1997. Of
these shares, the Common Stock sold by the Company in the offering, except for
certain shares described below, will be freely tradeable without restriction or
further registration under the Securities Act of 1933, as amended (the "Act").
The remaining 11,127,393 shares of Common Stock (the "Restricted Shares") were
sold by the Company in reliance on exemptions from the registration requirements
of the Act and are "restricted securities" as defined in Rule 144 under the Act
("Rule 144") and may not be sold in the absence of registration under the Act
unless an exemption is available, including an exemption afforded by Rule 144 or
Rule 701 ("Rule 701") under the Act. Without considering the contractual
restrictions described below, (i) 10,788,455 Restricted Shares will be eligible
for sale ninety days after the date of this Prospectus, subject to volume and
other resale conditions imposed by Rule 144, and (ii) 338,938 Restricted Shares
will be eligible for future sale subject to the holding period and other
conditions imposed by Rule 144. Rule 144 was recently amended
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to, among other things, reduce the holding period to one year (two years with
respect to Rule 144(k)). Certain restrictions on shares of Common Stock are
applicable to (i) any shares of Common Stock purchased in the offering by
affiliates of the Company, which may generally only be sold in compliance with
the limitations of Rule 144, except for the holding period requirements
thereunder, and (ii) the shares of Common Stock beneficially owned by the
Principal Stockholders all of which, together with the shares of Common Stock
beneficially owned by the executive officers of the Company, all but 29,000
shares of Common Stock beneficially owned by the directors of the Company and
280,000 shares of Common Stock beneficially owned by Warren V. Musser (and/or
his assignees), are subject to lock-up agreements (the "Lock-Up Agreements") and
pursuant to such agreements will not be eligible for sale or other disposition
until 180 days after the Expiration Date (the "Lock-Up Expiry Date") without the
prior written consent of the Underwriters. In addition, the Company has granted
certain registration rights to its shareholders whereby they may cause the
Company to register shares of Common Stock. See "Shares Eligible for Future
Sale."
It is anticipated that a registration statement (the "Form S-8 Registration
Statement") covering the Common Stock that may be issued pursuant to the
exercise of options awarded by the Company will be filed and become effective
prior to the Lock-Up Expiry Date, and that shares of Common Stock that are so
acquired or offered thereafter pursuant to the Form S-8 Registration Statement
generally may be resold in the public market without restriction or limitation.
Subject to the provisions of any Lock-Up Agreement, shares of Common Stock may
be resold in the public market beginning 90 days after the date of this
Prospectus pursuant to Rule 701 (i) by persons who are not affiliates of the
Company, without compliance with the public information, holding period, volume
limitation or notice provisions of Rule 144 and (ii) by affiliates of the
Company, without compliance with the holding period requirements of Rule 144.
See "Management--Equity Compensation Plan," "Shares Eligible for Future
Sale--Stock Options" and "Underwriting."
POSSIBLE ISSUANCES OF PREFERRED STOCK
Shares of preferred stock may be issued by the Company in the future without
stockholder approval and upon such terms as the Board of Directors may
determine. The rights of the holders of the Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding stock of the Company and potentially prevent the
payment of a premium to stockholders in an acquisition transaction. The Company
has no present plans to issue any shares of preferred stock and all shares of
the Company's preferred stock which are currently outstanding will be converted
to Common Stock prior to the consummation of the offering. See "Description of
Capital Stock--Preferred Stock."
NO DIVIDENDS
To date, the Company has not paid any cash dividends on its Common Stock.
The Company currently intends to retain future earnings for use in its business
and, therefore, does not expect to declare or pay any cash or other dividends in
the foreseeable future. See "Dividend Policy."
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THE OFFERING
WHY WE ARE SELLING SHARES THROUGH A RIGHTS OFFERING
We have agreed with Safeguard and the other selling stockholders to make a
rights offering to holders of Safeguard common shares. Although a rights
offering is essentially an initial public offering directed first to Safeguard
shareholders and then to the general public, we believe that the rights offering
provides several advantages over a traditional initial public offering. We
believe that this type of offering gives us the opportunity to offer our Common
Stock to investors who, as Safeguard shareholders, already have some knowledge
of our business, to distribute the securities to a broader, more stable
shareholder base and to minimize costly underwriting discounts and commissions.
In addition, Safeguard prefers the rights offering to a traditional initial
public offering because it affords its shareholders the opportunity to purchase
shares of our Common Stock at the initial offering price before the shares are
offered to the general public by the underwriters.
We determined the exercise price through negotiations with the selling
stockholders and the underwriters. In making this determination, we considered
such factors as our future prospects and historical financial data, our industry
in general and our position in the industry; market valuations of the securities
of companies engaged in activities similar to ours; the quality of our
management team; and, the advice of our underwriters. We will also obtain two
independent appraisals to further support the determination of the final
exercise and offering price.
WHAT YOU CAN DO WITH YOUR RIGHTS
Until , 1997, you may purchase one share of Common Stock for each
right you receive, or you may sell your rights in the market. However, you may
not exercise rights for fewer than 20 shares of Common Stock in an account,
unless you have previously exercised rights for at least 20 shares in the same
account and you provide a letter to ChaseMellon stating that you have already
exercised at least 20 rights. If you hold Safeguard common shares in multiple
accounts, you must meet the minimum purchase requirement for each account. You
may, however, consolidate your rights into one account. If you receive fewer
than 20 rights, you should consider purchasing enough additional rights to be
eligible to exercise your rights or selling your rights in the market. You
should consult with your regular investment advisor and carefully consider your
alternatives.
WHAT IF THE NUMBER OF SAFEGUARD COMMON SHARES YOU OWN IS NOT DIVISIBLE BY FIVE
If the number of Safeguard common shares you own is not evenly divisible by
five, we will round up to the next highest whole number in calculating the
number of rights that you are entitled to receive. For example, if you hold 96
Safeguard common shares, you will receive 20 rights. If you are a nominee for
beneficial holders of Safeguard common shares, we will round the number of
rights that you will receive based upon the amount held by each beneficial
holder individually.
WHEN YOU CAN EXERCISE YOUR RIGHTS
You can exercise your rights at any time during the period beginning on
, 1997 and ending at 5:00 p.m., New York City time, on , 1997. After
that date, you will not be able to exercise or transfer your rights and they
will be worthless. We will not honor any rights received for exercise by
ChaseMellon after , 1997, regardless of when you sent your rights to
ChaseMellon for exercise.
HOW YOU CAN TRANSFER YOUR RIGHTS
You may transfer all or a portion of your rights by endorsing and delivering
to ChaseMellon (at the addresses set forth below) your rights certificate. You
must properly endorse the certificate for transfer,
17
<PAGE>
your signature must be guaranteed by a bank or securities broker and your
certificate must be accompanied by instructions to reissue the rights you want
to transfer in the name of the person purchasing the rights. ChaseMellon will
reissue certificates for the transferred rights to the purchaser, and will
reissue a certificate for the balance, if any, to you if it is able to do so
before , 1997. You will be responsible for the payment of any commissions,
fees and other expenses (including brokerage commissions and any transfer taxes)
incurred in connection with the purchase or sale of your rights. We believe that
a market for the rights may develop during the period in which the rights may be
exercised. To facilitate the market, we have received approval from the Nasdaq
National Market to have the rights listed for the period , 1997 through
, 1997. We have reserved "CVSNR" as the Nasdaq symbol under which the
rights will trade. If you have any questions regarding the transfer of rights,
you should contact ChaseMellon at P.O. Box 798, Midtown Station, New York, New
York 10018, Attention: Reorganization Department, telephone number (800)
223-6554.
HOW YOU CAN EXERCISE YOUR RIGHTS
You may exercise your rights by completing and signing the election to
purchase form that appears on the back of each rights certificate. You must send
the completed and signed form, along with payment in full of the exercise price
for all shares that you wish to purchase to ChaseMellon. ChaseMellon must
receive these documents and the payment by 5:00 p.m. on , 1997. We will
not honor any exercise of rights received by ChaseMellon after that date.
We will, however, accept your exercise if ChaseMellon has received full
payment of the exercise price for shares to be purchased through the exercise of
rights, and has received a letter or telegraphic notice from a bank, trust
company or member firm of the New York Stock Exchange or the American Stock
Exchange setting forth your name, address and taxpayer identification number,
the number of shares you wish to purchase, and guaranteeing that a properly
completed and signed election to purchase form will be delivered to ChaseMellon
by 5:00 p.m. on , 1997. If the properly executed documents are not
received by 5:00 p.m. on , 1997, the subscriptions will not be accepted.
We suggest, for your protection, that you deliver your rights to ChaseMellon
by overnight or express mail courier. If you mail your rights, we suggest that
you use registered mail. If you wish to exercise your rights, you should mail or
deliver your rights and payment for the exercise price to ChaseMellon as
follows:
<TABLE>
<S> <C> <C>
By Mail: By Hand: By Overnight:
ChaseMellon Shareholder ChaseMellon Shareholder ChaseMellon Shareholder
Services, L.L.C. Services, L.L.C. Services, L.L.C.
Reorganization Department Reorganization Department Reorganization Department
P.O. Box 3301 120 Broadway, 13th Floor 85 Challenger Road, Mail
South Hackensack, NJ 07606 New York, New York 10271 Drop--Reorg.
Ridgefield Park, NJ 07660
</TABLE>
You must pay the exercise price in U.S. dollars by cash, check or money
order payable to the "Safeguard Escrow Account." Until the offering is closed,
your payment will be held in escrow by Mellon Bank N.A., who will serve as the
escrow agent of the Safeguard Escrow Account.
ChaseMellon will issue certificates to you representing the Common Stock
purchased through the exercise of rights by , 1997. Until that date,
ChaseMellon will hold all funds received in payment of the exercise price in
escrow and will not deliver any funds to us or to the selling stockholders until
the shares of Common Stock have been issued.
If you are a broker or depository who holds Safeguard common shares for the
account of others and you receive rights certificates for the account of more
than one beneficial owner, you should provide copies
18
<PAGE>
of this Prospectus to the beneficial owners. You should also carry out their
intentions as to the exercise or transfer of their rights.
Safeguard will decide all questions as to the validity, form, eligibility
(including times of receipt, beneficial ownership and compliance with minimum
exercise provisions), and the acceptance of subscription forms and the exercise
price will be determined by Safeguard. We will not accept any alternative,
conditional or contingent subscriptions. Safeguard reserves the absolute right
to reject any subscriptions not properly submitted. In addition, Safeguard may
reject any subscription if the acceptance of the subscription would be unlawful.
Safeguard also may waive any irregularities (or conditions) in the subscription
of shares of Common Stock, and their interpretations of the terms (and
conditions) of the rights offering shall be final and binding.
If you are given notice of a defect in your subscription, you will have five
business days after the giving of notice to correct it. You will not, however,
be allowed to cure any defect later than , 1997. We are not obligated to
give you notification of defects in your subscription. We will not consider an
exercise to be made until all defects have been cured or waived. If your
exercise is rejected, your payment of the exercise price will be promptly
returned by ChaseMellon.
HOW YOU CAN OBTAIN ADDITIONAL INFORMATION
If you wish to receive additional copies of this Prospectus or additional
information concerning the offering, you should contact Patrick T. Wasser at
Robert W. Baird & Co. Incorporated, telephone number (414) 298-7358 or Thomas
Cochran at Adams, Harkness & Hill, Inc., telephone number (617) 371-3900.
EXPECTED EXERCISE OF RIGHTS BY SAFEGUARD CEO
Warren V. Musser, the Chairman and Chief Executive Officer of Safeguard (or
his assignees), is expected to exercise all rights distributed to him. As a
result, he is expected to acquire approximately 560,000 shares of our Common
Stock through the rights offering.
WHAT HAPPENS TO THE UNSUBSCRIBED SHARES
If there are any shares of Common Stock that are not subscribed for at the
end of the rights exercise period, along with the selling stockholders, we will
offer the first 300,000 unsubscribed shares at a purchase price of $5.00 per
share to persons selected by us. These persons may have a relationship with us,
Safeguard or one of Safeguard's other partnership companies. We expect to enter
into agreements with these persons to purchase the unsubscribed shares before
the end of the rights exercise period. If there are less than 300,000
unsubscribed shares at the end of the rights exercise period, the number of
unsubscribed shares offered to each of these persons will be adjusted
accordingly.
To the extent that any unsubscribed shares remain unsold after the offer to
these persons, the underwriters will purchase these shares at the exercise price
less the underwriting discount. The underwriters must purchase these shares no
later than , 1997.
In connection with this offering, the underwriters will receive a financial
advisory fee of 3% of the exercise price for each share of Common Stock being
offered in the offering, regardless of whether they purchase any shares in the
offering. In addition, if the underwriters purchase any shares in the offering
or through the exercise of rights that are purchased in the open market in
stabilizing transactions, they may purchase the shares at the exercise price
less a discount of 4% of the exercise price. The underwriters will offer shares
of Common Stock purchased by them to the public at prices which may vary from
the exercise price. The selling stockholders have granted to the underwriters an
option to purchase an additional 640,000 shares of Common Stock to cover
over-allotments, if any, during the 20-day period beginning on , 1997. The
underwriters will be entitled to purchase these over-allotment shares at the
exercise price less the 4% underwriters' discount.
19
<PAGE>
We intend to supplement the Prospectus after the rights exercise period is
over to set forth the results of the rights offering, the transactions by the
underwriters during the exercise period, the number of unsubscribed shares
purchased, if any, and any resale transactions.
WHAT HAPPENS IF THE RIGHTS OFFERING IS CANCELLED
The underwriters have the right to cancel the rights offering if certain
conditions are not satisfied or if certain circumstances exist prior to the
closing date of the offering. If you exercise rights and the rights offering is
cancelled, ChaseMellon will promptly return to you, without interest, any
payment received in respect of the exercise price, and you will not receive any
shares of our Common Stock. Along with the selling stockholders, we have
established an escrow account with ChaseMellon to hold funds received prior to
the closing date of the offering. The NASD has advised us that trades in the
rights and the when-issued shares of Common Stock in the market would be
cancelled if the offering is not consummated.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
affecting holders of Safeguard common shares receiving rights in the offering.
In the opinion of Morgan, Lewis & Bockius LLP, the distribution of the rights by
the Company to holders of Safeguard common shares may constitute a taxable
transaction under the Internal Revenue Code of 1986, as amended (the "Code"),
and may also be subject to state or local income taxes. Because of the
complexity of the provisions of the Code referred to below and because tax
consequences may vary depending upon the particular facts relating to each
holder of Safeguard common shares, such holders should consult their own tax
advisors concerning their individual tax situations and the tax consequences of
the offering under the Code and under any applicable state, local or foreign tax
laws.
Safeguard has been advised by Morgan, Lewis & Bockius LLP that, under
current interpretations of case law, the Code, and applicable regulations
thereunder, the federal income tax consequences applicable to holders of
Safeguard common shares receiving rights in the offering generally are as
follows:
DISTRIBUTION OF RIGHTS TO HOLDERS OF SAFEGUARD SHARES
The rights, representing the right to acquire shares of Common Stock from
the Company, can be considered as constituting "property" within the meaning of
Section 317(a) of the Code. The federal income tax consequences of a
distribution of the rights by the Company to holders of Safeguard common shares,
as determined under the Code and the regulations thereunder, are as follows: (i)
each noncorporate holder of Safeguard common shares will be deemed to have
received a distribution from Safeguard, generally taxable as ordinary dividend
income, in an amount equal to the fair market value (if any) of the rights, as
of the date of distribution, (ii) each corporate holder of Safeguard common
shares (other than foreign corporations and S corporations) will be deemed to
have received a distribution from Safeguard (generally taxable as a dividend
subject to the dividends received deduction for corporations (generally 70%, but
80% under certain circumstances)) in an amount equal to the fair market value
(if any) of the rights, as of the date of distribution; and (iii) the tax basis
of the rights in the hands of each holder (whether corporate or noncorporate) of
Safeguard common shares will be equal to the fair market value (if any) of the
rights as of the date of distribution. Because of the predominantly factual
nature of determining the fair market value, if any, of the rights, Morgan,
Lewis & Bockius LLP has expressed no opinion with respect to the fair market
value of the rights.
Since the fair market value of the rights will determine the amount of
taxable income deemed received by the holders of Safeguard common shares, the
determination of the fair market value of each Right as of the date of
distribution is critical. The exercise price was determined through arms-length
negotiations among the Company and the underwriters. Based on these
negotiations, Safeguard's Board of Directors believes that the per share value
of Common Stock represented by the rights at the date of the
20
<PAGE>
commencement of the offering approximates the exercise price, and that the
rights should have no value for federal income tax purposes. However, the
Internal Revenue Service is not bound by this determination. See "The
Offering--Why We are Selling Shares Through a Rights Offering."
EXERCISE OF RIGHTS
Holders of rights, whether corporate or noncorporate, will recognize neither
gain nor loss upon the exercise of the rights. A holder of rights who receives
shares of Common Stock upon the exercise of the rights will acquire a tax basis
in such shares equal to the sum of the exercise price paid under the offering
and the tax basis (if any) of the holder of rights in the rights.
TRANSFER OF RIGHTS
The transferable nature of the rights will permit a holder of rights to sell
rights prior to exercise. Pursuant to Section 1234 of the Code, a rights holder
who sells rights prior to exercise will be entitled to treat the difference
between the amount received for the rights and the adjusted tax basis (if any)
of the holder of rights in the rights as a short-term capital gain or capital
loss, provided that Common Stock subject to the rights would have been a capital
asset in the hands of the holder had it been acquired by him. The gain or loss
so recognized will be short-term since the rights will have been held for less
than twelve months.
NON-EXERCISE OF RIGHTS
The income tax treatment applicable to holders of rights who fail to
exercise or transfer their rights prior to the Expiration Date also is set forth
in Section 1234 of the Code. Holders of rights who allow their rights to lapse
are deemed under the Code to have sold their rights on the date on which the
rights expire. Since upon such lapse no consideration will be received by a
holder of rights, and since the rights will have been held for less than twelve
months, a short-term capital loss equal to the tax basis (if any) in the rights
will be sustained by the holder on such lapse, provided that Common Stock
subject to the rights would have been a capital asset in the hands of the holder
had it been acquired by him.
21
<PAGE>
THE COMPANY
The Company began operations in 1993 as the MicroVision division of XL
Vision, a Delaware corporation, located in Sebastian, Florida. In March 1996, XL
Vision formed MicroVision Medical Systems, Inc. as a subsidiary and transferred
to the Company all rights held by XL Vision to the ChromaVision Digital Analyzer
technology. Since that time, the Company has been operating as a separate
entity. The Company was incorporated in the State of Delaware on March 28, 1996.
The Company changed its corporate name to ChromaVision Medical Systems, Inc. on
April 23, 1997. The Company's principal executive offices are located at 33171
Paseo Cerveza, San Juan Capistrano, California 92675 and its telephone number is
1-888-776-4276.
USE OF PROCEEDS
The minimum net proceeds to the Company from the sale of the 6,020,000
shares of Common Stock offered by the Company hereby are estimated to be
approximately $27,093,000 after deducting estimated offering expenses allocable
to and payable by the Company (including the maximum applicable non-accountable
expense allowance to the underwriters) and assuming the sale of all such shares
pursuant to the Standby Underwriting Agreement and the payment to the
underwriters of the total underwriting discount with respect to the shares sold
by the Company pursuant to the Standby Underwriting Agreement. In the event more
of the shares of Common Stock offered hereby are sold pursuant to the exercise
of rights, the Company will not be obligated to pay the underwriting discount
with respect to such shares and will, therefore, realize an amount of net
proceeds greater than approximately $27,093,000. See "The Offering--What Happens
to the Unsubscribed Shares" and "Underwriting."
The Company intends to use $2,410,820 of the net proceeds of this offering
to repay the outstanding balance on its revolving line of credit and amounts due
to XL Vision as of March 31, 1997. The Company's $5.0 million revolving line of
credit bears interest at a rate of LIBOR plus 2.1% and comes due on January 31,
1998. The remainder of the net proceeds will be used for the further development
of the ChromaVision Digital Analyzer technology, including clinical trials and
certain pre-marketing activities, working capital, general corporate purposes
and capital expenditures. The Company has not determined the amounts it intends
to utilize on each of such uses, or the timing of such uses. The amounts
actually expended for each use may vary significantly depending upon a number of
factors, including future revenue growth, if any, the amount of cash generated
or used by the Company's operations and the status of acquisition opportunities,
if any, presented to the Company. The Company believes that the net proceeds
from the sale of the Common Stock offered hereby, together with its current cash
balances will be sufficient to fund its operating requirements for at least one
year from receipt of the proceeds. Pending such uses, the net proceeds of the
offering will be invested in short-term, investment-grade, interest-bearing
securities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Liquidity and Capital Resources."
DIVIDEND POLICY
To date, the Company has not paid any dividends on its Common Stock. The
Company currently intends to retain future earnings for use in its business and,
therefore, does not anticipate paying any dividends in the foreseeable future.
The payment of future dividends, if any, will depend, among other things, on the
Company's results of operations and financial condition and on such other
factors as the Company's Board of Directors may, in its discretion, consider
relevant.
22
<PAGE>
CAPITALIZATION
The following table sets forth the total actual capitalization of the
Company as of March 31, 1997, and pro forma as adjusted to reflect (i) the
conversion of all shares of Series A Preferred Stock and Series B Preferred
Stock, (ii) the sale of 6,020,000 shares of Common Stock by the Company pursuant
to the offering and (iii) the application of the estimated minimum net proceeds
of approximately $27,093,000 therefrom. This table should be read in conjunction
with the financial statements and related notes thereto and other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
-----------------------------
PRO FORMA
ACTUAL AS ADJUSTED(1)
------------- --------------
<S> <C> <C>
Total indebtedness(2).............................................................. $ 2,410,820 $ --
Stockholders' equity (deficit):
Preferred Stock, par value $0.01 per share; 532,150 shares authorized and no
shares issued and outstanding actual, and 8,000,000 shares authorized and no
shares issued and outstanding pro forma as adjusted(3)......................... -- --
Series A Preferred Stock, par value $0.01 per share; 7,246,000 shares authorized,
7,135,064 shares issued and outstanding actual and no shares authorized, issued
and outstanding pro forma as adjusted(3)....................................... 71,351 --
Series B Preferred Stock, par value $0.01 per share; 221,850 shares authorized,
221,850 issued and outstanding actual and no shares authorized, issued and
outstanding pro forma as adjusted(3)........................................... 2,219 --
Common Stock, par value $0.01 per share; 50,000,000 shares authorized, and
1,931,250 shares issued and outstanding actual and 17,147,393 shares issued and
outstanding pro forma as adjusted(3)(4)........................................ 19,313 171,474
Additional paid-in capital(4).................................................... 8,055,955 35,070,364
Accumulated deficit.............................................................. (10,212,718) (10,212,718)
------------- --------------
Total stockholders' equity (deficit)........................................... (2,063,880) 25,029,120
------------- --------------
Total capitalization......................................................... $ 346,940 $ 25,029,120
------------- --------------
------------- --------------
</TABLE>
- ------------------------
(1) Adjusted to give effect to the sale by the Company of 6,020,000 shares of
Common Stock and the receipt and application of approximately $27,093,000 in
net proceeds from the offering, after deducting the maximum total
underwriting discount with respect to such shares of approximately
$2,107,000 and offering expenses of approximately $900,000 (including
$200,000 representing the maximum applicable non-accountable expense
allowance to the underwriters).
(2) Total indebtedness includes the Company's revolving line of credit and
amounts due to XL Vision, $1,958,432 and $452,388 at March 31, 1997,
respectively.
(3) Pro forma as adjusted assumes conversion of all outstanding shares of Series
A Preferred Stock and Series B Preferred Stock. Each share of Series A
Preferred Stock and Series B Preferred Stock will automatically convert into
1.25 shares of Common Stock upon consummation of this offering.
(4) Excludes as of March 31, 1997, 1,539,188 shares of Common Stock issuable
upon the exercise of options at a weighted average exercise price of $1.96
per share (of which options to purchase 299,016 shares were exercisable as
of March 31, 1997). As of May 27, 1997, 1,608,688 shares of Common Stock
were issuable upon the exercise of options at a weighted average exercise
price of $2.09 per share. See "Management--Stock Options."
23
<PAGE>
DILUTION
As of March 31, 1997, the Company had a net tangible book value of
$(2,063,880) or $(0.19) per share of Common Stock. Net tangible book value per
share of Common Stock represents the amount of the Company's tangible assets
less its total liabilities, divided by the total number of shares of Common
Stock outstanding. Without taking into account any changes in net tangible book
value after March 31, 1997, other than to give effect to the items described in
Note 1 appearing immediately below the following table, the pro forma net
tangible book value of the Company as of March 31, 1997, would have been
$25,029,120 or $1.46 per share. This represents an immediate increase in such
pro forma net tangible book value of $1.65 per share to existing stockholders
and an immediate dilution of $3.54 per share to investors purchasing Common
Stock at the exercise price in the offering. New stockholders that acquire
Common Stock from the underwriters at a price greater than the exercise price
will experience greater dilution. The following table illustrates this per share
dilution in net tangible book value:
<TABLE>
<S> <C> <C>
Exercise Price.............................................................. $ 5.00
Net tangible book value per share as of March 31, 1997.................... $ (0.19)
Increase per share attributable to new stockholders(1).................... 1.65
---------
Pro forma net tangible book value per share as of March 31, 1997............ 1.46
---------
Dilution per share to new stockholders...................................... $ 3.54
---------
---------
</TABLE>
- ------------------------
(1) Reflects the conversion of all outstanding shares of Series A Preferred
Stock and Series B Preferred Stock, the sale by the Company of 6,020,000
shares of Common Stock and the receipt of approximately $27,093,000 in net
proceeds from the offering, after deducting the maximum total underwriting
discount with respect to such shares of approximately $2,107,000 and
offering expenses of approximately $900,000 (including $200,000 representing
the maximum applicable non-accountable expense allowance to the
underwriters).
The following table sets forth, on an adjusted basis as of March 31, 1997,
the number of shares of Common Stock issued by the Company, the total
consideration and the average price per share upon original issuance to
stockholders prior to the offering and by new investors before deducting the
underwriters' compensation and estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION(1)
------------------------ ------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE(1)
------------ ---------- ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 11,127,393 64.9% $ 8,148,838(2) 21.3% $ 0.73(2)
New stockholders...................... 6,020,000 35.1 30,100,000 78.7 5.00
------------ ---------- ------------- ----------
Total............................. 17,147,393 100.0% $ 38,248,838 100.0% 2.23
------------ ---------- ------------- ----------
------------ ---------- ------------- ----------
</TABLE>
- ------------------------
(1) Reflects gross consideration from the issuance of stock, and therefore does
not reflect deductions for stock issuance costs, underwriting discount and
offering expenses.
(2) Includes the value attributed to the release of rights and claims by
Centocor related to the issuance of 770,192 shares of Series A Preferred
Stock to Centocor, which is convertible into 962,740 shares of Common Stock.
See Note 11 to the Notes to the Financial Statements.
The foregoing tables assume no exercise of outstanding options. As of March
31, 1997, there were outstanding options to purchase an aggregate of 1,539,188
shares of Common Stock (of which 299,016 were exercisable at March 31, 1997) at
a weighted average exercise price of $1.96 per share, and the Company had an
additional 173,563 shares of Common Stock available for future grants and other
issuances under its Equity Compensation Plan. As of May 27, 1997, there were
outstanding options to purchase an aggregate of 1,608,688 shares of Common Stock
at a weighted average exercise price of $2.09 per share, and the Company had an
additional 232,375 shares of Common Stock available for future grants and other
issuances under its Equity Compensation Plan. See "Management" and Note 9 to the
Notes to the Financial Statements appearing elsewhere in this Prospectus.
24
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below for the years ended December 31,
1994 and 1995 and the period from January 1, 1996 through March 27, 1996 and the
period from March 28, 1996 (incorporation) through December 31, 1996 are derived
from the financial statements of the Company, which have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The audited balance
sheets as of December 31, 1995 and 1996 and the related statements of
operations, stockholders' deficit and cash flows for the years ended December
31, 1994 and 1995, for the period from January 1, 1996 through March 27, 1996,
and the period from March 28, 1996 (incorporation) through December 31, 1996 and
the KPMG Peat Marwick LLP report thereon are included elsewhere in this
Prospectus. The selected financial data for the periods ended December 31, 1993
and 1994 is derived from the Company's financial statements not included herein,
which have also been audited by KPMG Peat Marwick LLP. The selected financial
data as of March 31, 1996 and 1997 is unaudited. The following information
should be read in conjunction with the Financial Statements and Notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM MARCH 28,
JANUARY 1, 1996
1996 (INCORPORATION)
YEAR ENDED DECEMBER 31, THROUGH THROUGH
------------------------------------ MARCH 27, DECEMBER
1993 1994 1995 1996 31, 1996
---------- ----------- ----------- ----------- -----------
(DIVISIONAL OPERATIONS(1))
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues--product(2)........ $ -- $ 220,000 $ 900,000 $ -- $ --
Revenues--services(2)....... -- 76,886 -- -- --
Cost of revenues--product... -- 201,886 310,103 -- --
Cost of
revenues--services........ -- 30,750 -- -- --
---------- ----------- ----------- ----------- -----------
Gross profit................ -- 64,250 589,897 -- --
Operating expenses:
Selling, general and
administrative............ 304,951 787,167 1,040,070 216,579 2,762,673
Research and
development(3)............ 549,156 858,389 1,513,014 235,578 1,633,944
---------- ----------- ----------- ----------- -----------
Total operating
expenses................ 854,107 1,645,556 2,553,084 452,157 4,396,617
Total other income
(expense)(4)............ -- -- -- 75,000 366,354
---------- ----------- ----------- ----------- -----------
Net profit (loss)........... $ (854,107) $(1,581,306) $(1,963,187) $ (377,157) $(4,030,263)
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
Net profit (loss)(1)(5)..... $(4,030,263)
-----------
-----------
Net profit (loss) per common
share subsequent to
incorporation(1)(5)....... $ (0.33)
-----------
-----------
Pro forma weighted average
number of common shares
outstanding............... 12,111,580
-----------
-----------
<CAPTION>
PERIOD FROM
APRIL 1, 1993
THREE MONTHS ENDED (INCEPTION)
MARCH 31, THROUGH
---------------------------- MARCH 31,
1996 1997 1997
-------------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
(DIVISIONAL
OPERATIONS(1))
STATEMENTS OF OPERATIONS DATA:
Revenues--product(2)........ $ -- $ -- $ 1,120,000
Revenues--services(2)....... -- -- 76,886
Cost of revenues--product... -- -- 511,989
Cost of
revenues--services........ -- -- 30,750
-------------- ----------- -------------
Gross profit................ -- -- 654,147
Operating expenses:
Selling, general and
administrative............ 216,579 784,622 5,896,062
Research and
development(3)............ 235,578 599,808 5,389,889
-------------- ----------- -------------
Total operating
expenses................ 452,157 1,384,430 11,285,951
Total other income
(expense)(4)............ 75,000 (22,268) 419,086
-------------- ----------- -------------
Net profit (loss)........... $ (377,157) $(1,406,698) $ (10,212,718)
-------------- ----------- -------------
-------------- ----------- -------------
Net profit (loss)(1)(5)..... $(1,406,698)
-----------
-----------
Net profit (loss) per common
share subsequent to
incorporation(1)(5)....... $ (0.11)
-----------
-----------
Pro forma weighted average
number of common shares
outstanding............... 12,280,331
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------
1993 1994 1995 1996
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DIVISIONAL OPERATIONS(1))
BALANCE SHEET DATA:
Cash and cash equivalents............. $ -- $ -- $ -- $ 124,092
Total assets.......................... 60,000 1,066,328 345,664 880,430
Total liabilities(6).................. 914,107 3,501,741 4,744,264 2,535,937
Accumulated deficit(7)................ (854,107) (2,435,413) (4,398,600) (8,806,020)
Total stockholders' equity
(deficit)........................... (854,107) (2,435,413) (4,398,600) (1,655,507)
<CAPTION>
AS OF
MARCH 31,
1997
-----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 65,100
Total assets.......................... 1,187,343
Total liabilities(6).................. 3,251,223
Accumulated deficit(7)................ (10,212,718)
Total stockholders' equity
(deficit)........................... (2,063,880)
</TABLE>
- ------------------------
(1) Prior to Incorporation on March 28, 1996, the Company operated as a division
of XL Vision, Inc. See Note 1 to the Notes to Financial Statements appearing
elsewhere in the prospectus.
(2) Revenue includes income from prototype instrument sales and support
services.
(3) Research and development expenses for the period from March 28, 1996
(incorporation) through December 31, 1996 include the value of the Preferred
Stock issued to Centocor as compensation for its clinical collaboration on
the minimal residual disease applications.
(4) Other income for 1996 relates to reimbursement of the Company's cost for
design work performed as well as interest income.
(5) See Note 2 of the Notes to the Financial Statements for information
concerning the calculation of net profit (loss) per common share.
(6) Includes the outstanding balance on the revolving line of credit and amounts
due to XL Vision. The balance of the Company's revolving line of credit and
amounts due to XL Vision as of March 31, 1997 were $1,958,432 and $452,388,
respectively.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS
AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE COMPANY'S FISCAL
YEAR ENDS ON DECEMBER 31. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. FUTURE EVENTS AND THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS REFLECTED IN THESE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS."
OVERVIEW
From inception on April 1, 1993 until March 27, 1996, the Company operated
as a business division of XL Vision. On March 28, 1996, XL Vision established
the Company as an incorporated subsidiary to which it transferred all its rights
to the ChromaVision Digital Analyzer. The Company continues to utilize certain
XL Vision resources including administrative support, marketing and development.
The Company has produced fifteen ChromaVision Digital Analyzer systems currently
being used in various research and clinical trial applications. Since inception
through March 31, 1997, the Company had accumulated losses totaling
approximately $10.2 million. The financial statements included in this
Prospectus reflect the Company's operations since inception as if it had been a
separate entity. Until the Company begins to realize significant revenue
associated with its planned operations, the Company will be considered in the
development stage.
The Company has developed and intends to introduce to the healthcare market
the ChromaVision Digital Analyzer, a computer-based, automated intelligent
microscope system. The Company has received 510(k) clearance from the FDA to
market the ChromaVision Digital Analyzer for the use of NAP quantification, a
blood cell application with the ChromaVision Digital Analyzer. The Company
believes this clearance will be a valuable baseline measure from which to
further pursue FDA clearance for its first commercial application, the Triple
Plus-TM- application for prenatal screening of maternal blood for Down syndrome
in fetuses.
In March 1997, the Company executed a letter of intent to form a strategic
distribution alliance with Sigma Diagnostics in order to leverage its worldwide
distribution capabilities and reagent manufacturing capabilities in an attempt
to gain rapid market acceptance of the ChromaVision Digital Analyzer. As the
Company continues to pursue commercialization of the ChromaVision Digital
Analyzer and develop new enhancements and applications for the ChromaVision
Digital Analyzer, the Company expects selling, general and administrative
expenses and research and development expenses to increase accordingly. Upon
completion of the clinical trials for the Triple Plus-TM- application, the
Company intends to seek peer-review publication, which will enable the Company
to commercialize the product in certain international markets. The Company also
plans to file a second 510(k) application with the FDA to gain clearance for the
Triple Plus-TM- application with the ChromaVision Digital Analyzer in order to
commercially market the ChromaVision Digital Analyzer in the United States. No
assurance can be made that the ChromaVision Digital Analyzer will achieve market
acceptance or that the Company will generate significant revenue or
profitability.
The Company believes that charging laboratories and other potential users of
the ChromaVision Digital Analyzer on a per slide or a "per click" basis as
opposed to selling the system outright will result in faster market adoption of
the product and recurring revenues for the Company. The Company believes that
laboratories will be more willing to adopt the ChromaVision Digital Analyzer if
they are required to pay only for system usage, rather than commit the capital
required for the purchase of a full system. The "per click" pricing model
includes all necessary operator training, maintenance and system upgrades. The
per click approach contemplates that the Company will retain ownership of the
ChromaVision Digital Analyzer systems placed at customer sites and consequently
will require a significant capital commitment to purchase the equipment and
components required to manufacture the ChromaVision Digital Analyzer. Each
ChromaVision Digital Analyzer system, upon placement with the customer, will be
classified as
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depreciable equipment and will be depreciated on a straight line basis over its
estimated useful life, anticipated to be three years. The Company anticipates
increasing its level of expenditures for sales, marketing, customer support,
regulatory compliance activities including clinical trials, research and
development, manufacturing and administrative expenses. Therefore, the Company
expects to incur negative cash flow from operations and additional losses for
the foreseeable future.
In March 1997, the Company relocated its headquarters and principal
executive offices from Sebastian, Florida to San Juan Capistrano, California.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996
REVENUE. The Company is a development stage company and had no revenue for
the three months ended March 31, 1997 and March 31, 1996.
GROSS PROFIT. The Company had no gross profits for the three-month periods
ended March 31, 1997 and March 31, 1996 because there were no revenues during
these periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Expenses increased $568,043
to $784,622 as compared to $216,579 in 1996. This increase is due primarily to
relocation costs, totaling $223,781, incurred in moving the Company to
California. Additionally, management and administrative personnel increased by
three to a total of four people.
RESEARCH AND DEVELOPMENT EXPENSES. Expenses increased $364,230 to $599,808
as compared to $235,578 in 1996. This increase was attributable to the clinical
trial costs and the preparation of the necessary information for the submission
of the 510(k) filing with the FDA. The increase was also primarily attributable
to additional headcount which is necessary to further develop the Company's
products.
OTHER EXPENSES. Other expenses were $22,268 as compared to other income of
$75,000 in 1996. This was attributable to the recording of an installment
payment received from IMI for royalties totaling $75,000.
1996 COMPARED TO 1995 AND 1994
OVERVIEW. During 1996, the Company was operated as a business division of
XL Vision until March 28, 1996. After its incorporation on March 28, 1996, the
Company operated as a subsidiary of XL Vision. While the financial statements
segregate the results of operations between periods prior to and after the
Company's incorporation, for comparison purposes below, the results have been
combined for all of 1996 in order to facilitate comparisons of results of
operations for 1996, 1995 and 1994.
REVENUE. The Company is a development stage company and had no revenue in
1996. Revenue of $900,000 for 1995 consisted of the sale of six prototype
ChromaVision Digital Analyzer systems. The Company sold two digital analyzers to
IMI, accounting for all of the Company's 1994 product revenue. The services
revenues in 1994 are comprised of engineering services rendered to IMI primarily
related to software development.
GROSS PROFIT. Gross profit of $589,897 for 1995 or a 65.5% gross margin
consisted of profit associated with the manufacture of six ChromaVision Digital
Analyzer systems. Gross profit of $64,250 for 1994 consisted of profit
associated with the manufacture of two ChromaVision Digital Analyzer systems of
$18,114, or an 8.2% gross margin on product revenues, and support services of
$46,136, for a 60.1% gross margin on service revenues. The increase in gross
margin realized from product sales in 1995 of 65.5% as compared to 8.2% in 1994
is due to the fact that systems sold in 1994 were the first systems to be sold.
27
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Expenses increased $2.0
million to $3.0 million for 1996 as compared to $1.0 million for 1995 and
increased by $252,903 for 1995 as compared to $787,167 for 1994. The increase in
1996 was due primarily to $912,050 in severance costs associated with the
resignation of the Company's former President, including $443,700 for the
repurchase of vested stock options. The balance of the increase was associated
with the hiring of additional management, marketing and technical personnel.
These costs are expected to increase in the future as the Company builds the
necessary infrastructure to support its anticipated growth. The increase in 1995
was due primarily to the continuing development of the Company.
RESEARCH AND DEVELOPMENT EXPENSES. Expenses increased $356,508 to $1.9
million for 1996 as compared to $1.5 million for 1995 and increased $654,625 for
1995 as compared to $858,389 for 1994. The increase in 1996 consisted of
$770,192 of value attributed to Preferred Stock issued to Centocor for its
clinical collaboration on the minimal residual disease application (see Note 11
of the Notes to Financial Statements) which is offset by the decrease primarily
related to the completion of the initial development of the ChromaVision Digital
Analyzer. The increase in 1995 was due to an increase in the overall activity
surrounding the development of the Company. This decrease is due primarily to
the completion of the initial development of the ChromaVision Digital Analyzer.
The Company anticipates that such expenses will increase in the future due to
costs related to the development of new applications, the application for
regulatory clearances and the continuation of technological advances to the
ChromaVision Digital Analyzer system.
OTHER INCOME. Other income of $441,354 related to the reimbursement of the
Company's cost for design work performed for IMI totaling $423,525 (see Note 4
of the Notes to Financial Statements) and interest income of $17,829. There was
no comparable income for the previous periods.
LIQUIDITY AND CAPITAL RESOURCES
Prior to March 28, 1996, the Company operated as a division of, and was
funded by, XL Vision. In June 1996, the Company completed a private placement,
raising $6.4 million. From these proceeds, approximately $4.8 million was paid
to XL Vision to satisfy certain liabilities of the Company as of incorporation.
These liabilities related to costs incurred while operating as a division of XL
Vision and for the net assets contributed to the Company. The remaining proceeds
supported the ongoing operations and capital requirements of the Company. As of
March 31, 1997, the Company had $65,100 of cash and cash equivalents.
In April 1997, the Company renegotiated its existing revolving line of
credit to increase its borrowing limit to $5.0 million. The revolving line of
credit, which is guaranteed by Safeguard, bears interest at LIBOR plus 2.1%,
which is payable monthly. The full amount of the outstanding balance is due on
January 31, 1998. The outstanding balance of the Company's line of credit was
$1,958,432 at March 31, 1997. The Company intends to repay any amounts
outstanding under this loan from proceeds of the Offering.
As a development stage company, the business has not been capital intensive
and capital asset expenditures in any year have not been significant. Capital
expenditures for the year ended December 31, 1996 were $44,117 and related
primarily to the purchase of computers and computer software for employees.
Capital expenditures are expected to be approximately $610,000 in 1997, and are
expected to be primarily related to the Company's relocation to California. As
the Company begins to generate commercial revenues, capital expenditures
associated with the manufacture of the ChromaVision Digital Analyzer will also
be necessary.
The Company anticipates that the net proceeds of this offering will be
sufficient to satisfy its operating cash needs for at least one year from the
receipt of the proceeds. Management expects that losses from operations and
increases in working capital requirements will produce significant negative cash
flows from operations for the foreseeable future. The Company's business plan
anticipates manufacturing the ChromaVision Digital Analyzer instruments, placing
them with users at no charge and charging a "per
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<PAGE>
click" fee for each use of the instrument. The manufacture of these instruments
will require a significant outlay of cash for which revenues will not be
recognized until future periods. As a result, the Company intends to arrange
third-party financing for the instruments. In addition, to support the Company's
future cash needs it intends to consider, but not be limited to, additional
debt, or equity financing. However there can be no assurance that any such
financings will be available to the Company, or that adequate funds for the
Company's operations will be available when needed, or on terms attractive to
the Company. If the Company is unable to obtain sufficient additional funds, the
Company may have to delay, scale back or eliminate some or all of its
development activities, clinical studies and/or regulatory activities.
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<PAGE>
BUSINESS
OVERVIEW
ChromaVision has developed an automated intelligent microscope system that
uses the Company's proprietary imaging technologies for a wide variety of
diagnostic and research applications. The Company currently markets to research
centers and intends to introduce to the healthcare market its system, the
ChromaVision Digital Analyzer. The ChromaVision Digital Analyzer is designed to
identify cells with specific characteristics within a sample of cells by
detecting color produced by the reaction between common laboratory reagents (or
stains) and the cells. The ChromaVision Digital Analyzer uses proprietary
imaging software and technology to capture digital images of cell samples and to
detect the presence, count the number and measure the color intensity of cells
containing a particular stain. The ChromaVision Digital Analyzer offers
substantial flexibility because the software can be configured to identify
different stains, thereby allowing the system to be adapted for use with
different reagents to identify a broad range of target cellular conditions. The
Company seeks to establish the ChromaVision Digital Analyzer as the preferred
platform for multiple diagnostic applications.
The Company believes that the ChromaVision Digital Analyzer will be
attractive to healthcare providers and beneficial to their patients because of
its ability to deliver superior diagnostic solutions, thus reducing the need for
more invasive or more costly procedures. Preliminary tests have demonstrated
superior accuracy compared to other existing techniques used in rare event
detection, such as polymerase chain reaction ("PCR") and flow cytometry, as the
ChromaVision Digital Analyzer can locate a single abnormal cell among 100
million normal cells. This improved detection capability enables the
ChromaVision Digital Analyzer to be applied to a variety of diagnostic
situations, such as high-value rare event detection procedures, which include
the detection of minute quantities of cancer cells that have spread to parts of
the body away from a tumor's primary location.
The Company has identified a broad range of potential applications for the
ChromaVision Digital Analyzer, including prenatal screening for Down syndrome,
quantitative viral load measurement for HIV and cancer detection. The Company
focuses on developing diagnostic applications that are clinically and
economically compelling to patients, providers (laboratories) and payors
(insurance and managed care organizations). The Company has completed clinical
trials and has received 510(k) clearance from the FDA to market the ChromaVision
Digital Analyzer with a stain (marker) to screen blood for malignancy. The
Company plans to expand this clearance for a higher-value use of the
ChromaVision Digital Analyzer in its intended first commercial application
called Triple Plus-TM-, a procedure using a related cytochemical measurement,
UR-NAP, as a marker in the prenatal screening of maternal blood for indicating
the risk of Down syndrome in fetuses. The current screening processes falsely
indicate an elevated risk of a Down syndrome baby in a significant number of
mothers with normal fetuses (false positives), which typically leads to
performing invasive and expensive amniocenteses. The Company believes its Triple
Plus-TM- application will significantly improve the diagnostic accuracy of the
existing screening process, thereby reducing the number of amniocenteses
performed on mothers with normal fetuses. As a result, once clearance is
received for commercial use, the Triple Plus-TM- application should result in
substantial cost saving to healthcare providers and improved patient care. The
Company commenced clinical trials for its Triple Plus-TM- application in May
1997. Assuming the clinical trials for UR-NAP are successfully completed, the
Company anticipates that it will file for FDA clearance of the Triple Plus-TM-
application in early 1998. The Company is also currently testing the
ChromaVision Digital Analyzer for a number of additional applications, such as
the detection of prostate, breast, lung and colorectal cancers.
INDUSTRY OVERVIEW
The healthcare industry, for which total expenditures in the United States
are estimated to have exceeded one trillion dollars in 1996, is experiencing a
shift from predominantly a fee-for-service system to a managed care system. The
pricing structure under the managed care system is based on "firm-fixed"
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pricing, as compared to the "cost-plus" pricing under the fee-for-service
system. This change in pricing structure is effectively shifting much of the
economic liability for healthcare from employers and individuals to insurance
companies, healthcare delivery systems, hospitals and physicians. Unlike the
fee-for-service system, in which each diagnostic examination and each treatment
procedure results in a fee, the cost of many diagnostic examinations and
treatment procedures is not directly reimbursable under the managed care system,
which in turn results in reduced revenue and lower profits for healthcare
providers as service utilization increases. Consequently, healthcare providers
are increasingly seeking more efficient and more accurate methods of disease
diagnosis in order to improve patient care and eliminate many unnecessary and
costly examinations and procedures.
A critical aspect in the diagnosis of many diseases and genetic disorders is
the detection of abnormal cells, or cells and organisms with specific
characteristics, during a microscopic examination of biological specimens taken
from patients. Estimates place the number of diagnostic procedures performed in
the United States at over one billion. The biotechnology industry has responded
to this opportunity by rapidly developing a growing number of highly specific
and increasingly sensitive reagents. Currently, the cell detection process in
the vast majority of microscopic examinations is performed manually by a human
observer. Typically, a biological specimen such as blood, urine, bone marrow,
lymph nodes, sputum or other sample is placed on a microscope slide and treated
with a specific reagent that is reactive to cells or organisms which have
specific characteristics or which are affected by disease or other pathological
conditions. Manual examinations are currently being performed in approximately
10,800 clinical laboratories in the United States, and approximately 31,000
clinical laboratories worldwide.
The manual method of sample review requires a trained technologist or
physician to examine individual cells in the illuminated area of each microscope
slide while attempting to identify target cells or objects relative to normal
cells. The manual method requires a slide containing a specimen sample to be
placed on the stage of a microscope and then manually scanned for cells or
objects of interest one field of view at a time. Most microscopes contain a
mechanical stage that is designed to be manipulated by a series of knobs which
control the X and Y axis of the slide being scanned. To thoroughly scan the
entire area of the slide that is of interest, the observer must tediously
manipulate the stage slide controls. Since most of the specimens look similar
from field to field, there are few visual cues to indicate that an area has not
or has already been examined. These characteristics of the manual process can
inadvertently lead to scans which miss critical diagnostic areas of the slide
potentially resulting in incorrect diagnoses.
The ability of the microscopist to remain focused on the details of a large
number of cells contained in a field of view, while retaining a full knowledge
of all fields examined and to be examined on each slide, is generally accepted
as extremely difficult to accomplish without error by even the most skilled
technologist or physician. The difficulty of a technologist's or physician's
task is compounded by the need to examine high volumes of slides on a daily
basis. In addition, many microscopists remove the mechanical controls from the
stage so that they can manually move the slide over the stage platform at
greater speed. As a result, the microscopist must rely on even greater manual
dexterity which can further increase the probability of missing critical areas
of the slide. These potential sources of error can result in incorrect diagnoses
and lead to inadequate or unnecessary treatment.
Recently, several companies have introduced automated morphology-based
microscopes (i.e. discriminating cells based on size and shape) to the market,
primarily to perform adjunct Pap smear testing for cervical cancer.
Morphology-based systems are inherently complex as they must simultaneously
differentiate a myriad of subtle cellular features, which are not necessarily
unique to each specific disease. Because of this complexity, the Company
believes that morphology-based systems are difficult to adapt to multiple
diagnostic applications.
In addition, as a result of the shift to managed care, healthcare service
providers are developing information systems technology capable of providing
healthcare business managers and clinicians with patient-focused data in a
format commonly referred to as the "Computerized Patient Record" or CPR.
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The Company believes that automated microscopes capable of integrating digital
images and associated patient data into the CPR will eventually become the
industry standard.
THE CHROMAVISION DIGITAL ANALYZER ADVANTAGE
The ChromaVision Digital Analyzer is a fully automated, computer-based
microscope designed to detect and count cells based on color and measure
specific diagnostic characteristics of rare cellular events. The ChromaVision
Digital Analyzer is designed to enable diagnostic procedures that would be
impractical or impossible by using manual methods. Additionally, the Company
believes that the ChromaVision Digital Analyzer can replace the most time
consuming and costly part of many manual microscopic procedures as a result of
its ability to scan large amounts of biological material quickly, accurately and
consistently with minimal operator supervision. The Company believes that the
ChromaVision Digital Analyzer will enable healthcare providers to improve the
consistency and accuracy of patient diagnosis, enhance overall patient care and
lower costs. The key benefits of the ChromaVision Digital Analyzer include:
SUPERIOR SOLUTIONS AT LOWER COST. The Company believes that the increased
speed and accuracy of the ChromaVision Digital Analyzer will lower healthcare
costs by enabling better and more timely diagnoses, which will enable healthcare
providers to avoid more expensive and typically invasive procedures.
Furthermore, as a highly automated system, the ChromaVision Digital Analyzer is
capable of operating continuously with limited human supervision and
maintenance. The Company believes that the ChromaVision Digital Analyzer can
significantly improve the speed, accuracy and consistency of laboratory results
by automating certain steps involved in the basic microscopic procedure, such as
the loading, positioning, focusing, identification, quantification and scanning
of slides thereby enabling labs to provide superior service to physicians,
hospitals and healthcare systems. The ChromaVision Digital Analyzer can
automatically scan and process up to 100 slides while operating unattended. As
each slide is processed, the ChromaVision Digital Analyzer automatically stores
the coordinates of each targeted cell or object enabling the subsequent
examination of cells on the slide, or a stored digital image of the cell on a
computer monitor. The instrument can simultaneously quantify cell and color
characteristics which have prognostic and diagnostic significance. The
ChromaVision Digital Analyzer enables diagnosticians to quickly and efficiently
arrive at accurate diagnoses by reviewing relevant data or stored images of the
cells which have been automatically captured, analyzed and stored.
IMPROVED SENSITIVITY AND ACCURACY. Unlike certain other automated
microscope systems currently available (which primarily discriminate cells on
the basis of morphology), the ChromaVision Digital Analyzer employs
sophisticated proprietary software and algorithms capable of advanced color
detection to identify abnormal cells, specific cells and other objects of
interest using common laboratory stains. The instrument relies on the inherent
sensitivity and specificity of the color characteristics of the reagent reaction
product used in a particular application. This internally developed proprietary
technology was invented by scientists experienced in satellite-based imagery,
reconnaissance and aerial imagery, and complex color space transformations which
are used to yield maximum detail from image-based data. Because of the
sophistication of these software programs and algorithms, the ChromaVision
Digital Analyzer technology provides enhanced detection sensitivity for use in
clinical applications. The ChromaVision Digital Analyzer can rapidly scan large
fields of view at low magnification to detect the presence of specific color
characteristics and then return under high magnification to capture and store
the targeted cells. By contrast, morphology-based microscopes require higher
resolution imaging and are inherently more complex than the ChromaVision Digital
Analyzer due to the need to carefully scrutinize each cell for subtle
differences in morphology.
Preliminary tests using specific color-yielding reagents have shown that the
ChromaVision Digital Analyzer is capable of consistently detecting one abnormal
cell in a population of 100 million normal cells during "spiking" experiments in
which a known number of malignant cells were mixed with a known quantity of
normal cells. In addition to highly sensitive detection, the Company's advanced
technology can
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quantify the color characteristics of each targeted cell, thereby enabling the
measurement of the likelihood or severity of the disease or condition. Through
this capability, the Company believes that the ChromaVision Digital Analyzer can
enhance the speed, accuracy and consistency of test results, thus leading to
improved overall patient care and reduction in the liabilities associated with
diagnostic errors. In certain cases, the use of less sensitive systems which are
incapable of detecting conditions in which an extremely limited number of
abnormal cells are present (rare event detection), can result in false negative
diagnoses. In contrast, the ChromaVision Digital Analyzer is capable of
extremely high levels of sensitivity making significantly more reliable "rare
event detection" possible. For example, the Company believes that the superior
accuracy and precision of the ChromaVision Digital Analyzer can be effectively
used to detect cases of "micrometastases" in patients with previously
undiagnosed and untreated conditions, and "minimal residual disease" in patients
with previously diagnosed and treated conditions, such as cancer. Both of these
conditions are characterized by minute quantities of tumor cells which have
spread to other distant parts of the body away from the tumor (e.g., bone
marrow).
The Company believes that the ChromaVision Digital Analyzer's sensitivity
and accuracy will facilitate not only better diagnoses, but better patient
outcomes as well. In particular, the Company believes that the speed, accuracy
and consistency of the ChromaVision Digital Analyzer can be valuable in aiding
researchers and diagnosticians in characterizing the degree to which cancer has
either been contained (localized) or spread to distant locations (metastasized)
in a patient. This characterization process, known as "cancer staging" is often
dependent upon finding relatively small numbers of tumor cells among large
numbers of normal cells in various samples including peripheral blood, bone
marrow, lymph nodes and other tissues. The Company believes that the
ChromaVision Digital Analyzer has the ability to detect cancer cells from a wide
variety of locations and samples within patients, and in turn will become a
valuable tool in the staging process.
ADAPTABLE PLATFORM FOR EXPANSION. The Company's technology supports a
variety of established reagents and stains, and as a result the Company believes
its technology can be readily adapted for use in multiple applications. To the
extent new reagents and stains are introduced, the ChromaVision Digital Analyzer
is designed to be "reconfigured" to detect new colors, thus giving the
ChromaVision Digital Analyzer a technological flexibility unique among currently
available automated microscope systems. The ability to add new applications can
further increase cost savings for healthcare providers and patients by
minimizing the need for specialized machines performing individual procedures.
The Company believes these capabilities will enable the ChromaVision Digital
Analyzer to penetrate potential markets quickly and will enable the Company to
commercialize a broad spectrum of healthcare markets.
INFORMATION SYSTEM INTEGRATION. Recently, healthcare providers have begun
to develop information system technologies capable of providing patient-focused
data in a format known as the Computerized Patient Record. Microscopy is one of
the last systems within medical technology to be integrated into such
patient-focused information systems. The Company has designed the ChromaVision
Digital Analyzer to capture, store, display and print cellular images and
related data in digital format, which can be integrated into the Computerized
Patient Record. As a result, this portion of patient data may be stored,
retrieved, printed or displayed across local and wide area networks. The Company
believes that providing for more timely, improved diagnostics and collaboration
consistent with the emerging trends in medical technology can result in
significantly enhanced patient care.
STRATEGY
The Company seeks to introduce selected "high-value" applications on the
ChromaVision Digital Analyzer and develop a foundation from which to establish
the ChromaVision Digital Analyzer as the preferred platform for multiple
microscopic diagnostic applications. The Company plans to pursue this objective
through the following strategic initiatives:
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DELIVER VALUE THROUGH SUPERIOR DIAGNOSTIC SOLUTIONS. ChromaVision intends
to offer the ChromaVision Digital Analyzer based applications with the specific
goal of enabling clinical laboratories to deliver value to healthcare providers
through superior diagnostic solutions. The Company believes that the
ChromaVision Digital Analyzer can provide value to all of the constituents of
the healthcare industry by (i) detecting disease sooner (rare event detection)
and thereby enabling the appropriate treatment, (ii) monitoring therapeutic
response, (iii) employing an adaptable platform which supports multiple
applications to achieve cost-effectiveness, (iv) eliminating costly and invasive
procedures and (v) improving throughput with consistent and rapid results.
Consequently, the Company believes it is well-positioned to benefit from the
increased emphasis on cost and quality driven by both healthcare providers and
patients.
FOCUS INITIAL LAUNCH ON DOWN SYNDROME APPLICATION. ChromaVision is focusing
its initial commercialization efforts for the ChromaVision Digital Analyzer on
the Triple Plus-TM- application for prenatal screening of maternal blood
indicating the risk of Down syndrome in fetuses. In 1990, pilot tests indicated
that UR-NAP screening could increase the detection rate while significantly
reducing the occurrence of false positives from the current Triple Screen test.
One conclusion drawn from these pilot tests, however, was that the
commercialization of the UR-NAP application was not feasible without the
development of an automated microscope because of the impractical and subjective
nature of the manual examination for UR-NAP. The Company is collaborating with
the initial investigator of the pilot study to conduct multi-centered clinical
trials using the ChromaVision Digital Analyzer technology to evaluate the
utility of Triple Plus-TM- for commercial use. The Company estimates that this
enhanced screening test could lead to cost savings of approximately $85 million
per year as a result of the elimination of as many as 85,000 amniocentesis
procedures in the United States alone. The Triple Plus-TM-, which the Company
believes will enhance the widely used Triple Screen, was chosen as the initial
application for the ChromaVision Digital Analyzer to pursue near term market
acceptance due to the significant improvement in predictive value and dramatic
reduction in costly and potentially dangerous amniocenteses. Additionally, this
application is particularly attractive as an entry into the automated microscopy
market due to the relatively concentrated distribution of laboratories currently
performing the Triple Screen test. The Company estimates that in the United
States, over 70% of all Triple Screen tests are provided by five laboratory
enterprises, and the balance are provided by an additional 200 hospital-based
laboratories. The Company believes that this concentration of users is ideal for
rapid penetration into the market. The Company further believes that similar
market demographics in Europe also make Triple Plus-TM- an ideal initial
application for developing international markets for the ChromaVision Digital
Analyzer. In conjunction with its sales effort, the Company intends to create
awareness with obstetricians and gynecologists on the clinical efficacy, safety
and economic value of Triple Plus-TM-through peer-reviewed publications,
selected involvement in clinical trials and other appropriate educational
materials in order to facilitate worldwide market acceptance. See
"Business--ChromaVision Digital Analyzer Applications--Triple Plus-TM-
Application."
IMPLEMENT "PER CLICK" PRICING. ChromaVision believes that, by providing
laboratories with the ChromaVision Digital Analyzer on a "per click" basis, the
Company will be able to introduce its color-based technology to its targeted
markets rapidly and enhance its long-term revenue potential. The Company
believes that laboratories will be more willing to adopt the ChromaVision
Digital Analyzer if they are required to pay only for system usage, rather than
commit the capital required for the purchase of a full system. The "per click"
pricing model also includes all necessary operator training, maintenance and
system upgrades. Using a "per click" approach allows the Company to better
monitor and control the use of its technology to ensure proper use, obtain
customer feedback and implement product upgrades, including new applications.
PURSUE ADDITIONAL APPLICATIONS. ChromaVision intends to pursue additional
applications for the ChromaVision Digital Analyzer technology in the diagnosis
of breast, prostate, lung, colorectal and other cancers, as well as infectious
agents, genetically-based abnormalities and other diseases. Because the
underlying technology used in the ChromaVision Digital Analyzer is based on
color detection, the ChromaVision Digital Analyzer offers significant
flexibility to aid in the diagnosis and treatment of
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multiple diseases. Furthermore, the Company believes that the ChromaVision
Digital Analyzer may be effectively used in the identification of abnormal cells
or cells with specific characteristics within a wide variety of sample types
including blood, urine, bone marrow, lymph node and fine needle aspirates. The
Company will continue to devote significant time and resources developing
certain of these applications, including those related to the evaluation of
cancer pervasiveness and avoidance of unnecessary invasive procedures. In
addition, the Company also intends to examine market opportunities for an
enhanced ChromaVision Digital Analyzer architecture with "front-end" slide
preparation handling components and "back-end" information system interfaces.
See "Business--Other Potential Applications."
FORM STRATEGIC ALLIANCES. ChromaVision intends to develop and pursue new
applications for the ChromaVision Digital Analyzer system through strategic
alliances. The Company is seeking to form strategic alliances with reagent
manufacturers, researchers and other third parties to market reagents using the
ChromaVision Digital Analyzer as the platform of choice for the detection and
quantification of such reagents. These application specific alliances will focus
on integrating the reagents and other color-based detection probes with the
ChromaVision Digital Analyzer platform in a manner which provides quality and
economic value to patients, laboratories and healthcare payors. In addition, the
Company intends to enhance its distribution capabilities through alliances.
The Company initially plans to work directly with its clinical collaborators
to gain acceptance in the medical community for the Triple Plus-TM- procedure.
However, in capturing market share for this application and pursuing other
applications in which distribution would be more widely disbursed, the Company
intends to pursue relationships with third parties capable of effectively
distributing ChromaVision Digital Analyzer and providing related services on a
large-scale basis. The Company believes that such alliances will enable it to
minimize certain risks related to the time, effort and expenses associated with
the internal development of similar distribution capabilities, particularly for
international markets. The first application partnership in development is with
Sigma, a St. Louis based diagnostic instrument and reagent manufacturer with a
worldwide distribution capability. In March 1997, the Company signed a term
sheet setting forth the principal terms of a strategic distribution and
application commercialization relationship with Sigma focusing on the Down
syndrome screening test using UR-NAP. In May 1997, the Company signed a letter
of intent regarding a proposed joint development agreement with Specialty
Laboratories, a privately held specialized testing services provider located in
Santa Monica, California, to leverage their extensive experience and capability
in developing cutting edge laboratory tests in the areas of cancer, immunology,
microbiology, genetics and molecular biology. In addition, ChromaVision has
established a nonexclusive cooperative market development relationship with
Centocor to identify market opportunities and requirements for various minimal
residual disease applications. The Company believes that each new application
alliance can provide value to all other ChromaVision application partners as new
applications will drive new platform installations, and in turn make the
ChromaVision Digital Analyzer an increasingly attractive means to access the
marketplace. See "Business--Strategic Alliances."
EXPEDITIOUSLY GAIN NECESSARY REGULATORY CLEARANCES. The Company has
obtained its first 510(k) clearance from the FDA to market the ChromaVision
Digital Analyzer with an NAP marker to screen blood for malignancy. The Company
had submitted this application primarily to establish the various key
operational parameters of the ChromaVision Digital Analyzer, including
sensitivity and reproducibility. The Company believes that the FDA's review and
approval of this application has provided the FDA with a certain level of
familiarity and a set of baseline information to facilitate the expeditious
review and clearance of subsequent filings.
CHROMAVISION DIGITAL ANALYZER APPLICATIONS
The Company believes that its technology can be used in the identification
of abnormal cells within blood, urine, bone marrow, lymph node, fine needle
aspirates and other sample types and may be used to aid in the diagnosis of
breast, prostate, lung, colorectal and other cancers, as well as infectious
agents,
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genetically based abnormalities and other diseases. The following are the
initial target applications being pursued by the Company:
TRIPLE PLUS-TM- APPLICATION
The Company is focusing its initial commercialization efforts for the
ChromaVision Digital Analyzer on the Triple Plus-TM- application. Through its
use in prenatal screening, women who are at high risk of a Down syndrome
pregnancy will be more effectively identified for a diagnostic amniocentesis.
The Triple Plus-TM- test makes use of the cytochemical marker UR-NAP either
alone or in combination with one or more of the biochemical components of the
current Triple Screen. Triple Plus-TM- is intended to become the successor to
the Triple Screen test, which is currently the most commonly used prenatal
screen of maternal blood to indicate the degree of risk of carrying a fetus
affected with Down syndrome. The Triple Screen test is considered to be the
"standard of practice" for pregnant women under the age of 35 years, and the
Company believes that it is performed approximately 2.5 million times per year
in the United States and approximately 6 million times per year worldwide.
In the case of prenatal screening for Down syndrome, the patient is usually
under the care of a primary care physician, most commonly an obstetrics and
gynecology specialist or, less frequently, a family physician. Based on the age
of the patient and the results of the Triple Screen test, the patient is
evaluated for the need of undergoing an amniocentesis to diagnose a Down
syndrome fetus. Down syndrome risk estimates are currently derived by a complex
mathematical process that combines results of the Triple Screen with the known
odds of a Down syndrome fetus based on maternal age. The combined risk indicates
likelihood of Down syndrome affecting a pregnancy, and thus the need for
amniocentesis. Approximately 85% of the patients identified as patients with a
high risk pregnancy by the Triple Screen test choose to undergo amniocentesis.
The Company has entered into an agreement with Cambridge University
(Addenbrooke Hospital, Cambridge, England) to lead multi-site clinical trials
with participants expected to include Harvard Medical School (Brigham and Womans
Hospital) and the State of California Prenatal Testing Program (Berkeley). Dr.
Sandy Goodburn of Addenbrooke's National Health Services Trust Department of
Medical Genetics, and Dr. Tony Andrews of Cambridge University Department of
Medical Genetics are the co-principal investigators. Dr. Goodburn was one of the
original investigators in the research team that documented the utility of the
UR-NAP test in 1990. These clinical trials will evaluate the Triple Plus-TM-
test, which uses UR-NAP as a screening marker for Down syndrome using the
ChromaVision Digital Analyzer. This new test is designed to improve the existing
predictive value and to significantly lower the overall false positive rates in
initial screens for Down syndrome. Clinical trials have begun using samples
collected at more than a dozen sites worldwide.
In the 1990 study, tests indicated that UR-NAP is capable of producing
better than a 68% detection rate with a false positive rate of approximately 1%.
An improvement in the detection rate will increase the screening efficacy and
reduce the number of undetected Down syndrome pregnancies over the Triple Screen
test, which is capable of producing a detection rate between 60-65%, with a
false positive rate of 5%. In addition, achievement of a 1% false positive rate
could reduce the number of amniocenteses with normal fetuses by 80% or
approximately 85,000 annually in the United States and 200,000 worldwide. Based
on an average price of $1,000 for an amniocentesis, the Company estimates that
the reduction in the number of amniocenteses performed would yield a cost
savings of approximately $85 million annually in the United States and $200
million worldwide. Additionally, the Company believes that the Triple Plus-TM-
test would reduce the number of fetal deaths resulting from amniocenteses which,
based on an estimated fetal loss rate of 0.5%--0.8% (GUIDE TO CLINICAL
PREVENTATIVE SERVICES), the Company estimates to be between 425 to 680 fetal
deaths per year in the United States and 1,000 to 1,600 fetal deaths per year
worldwide. The Company believes that the significant cost savings to healthcare
providers and improvement to patient care will provide an economic and clinical
incentive for healthcare providers to select laboratories offering the
ChromaVision Digital Analyzer based Triple Plus-TM- test.
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Women 35 years of age or older are generally not considered as candidates
for the initial screen for Down syndrome because the high risk of carrying a
Down syndrome fetus for women in that age group requires higher detection rates
than can be obtained by the current screening test. Pregnant women in the over
35 year age group are typically offered amniocentesis as the test for Down
syndrome. The Company believes, however, that Triple Plus-TM- represents a
significantly more effective alternative to using age alone as a screening
marker for Down syndrome in women in this age group. By targeting those
pregnancies that are at a high risk of Down syndrome on the basis of the Triple
Plus-TM- test, amniocenteses are more effectively assigned to those women most
likely to be carrying a Down syndrome fetus, thus increasing the detection rate
while dramatically reducing the number of unnecessary amniocenteses. For
example, in a test of women 35 years of age and older using the original Triple
Screen, it was demonstrated that (i) at a 5% false positive rate, the detection
rate of Down syndrome was 59%, (ii) at a 15% false positive rate the detection
rate was 78%, and (iii) at a 25% false positive rate the detection rate was 89%.
UR-NAP alone has been documented to provide a detection rate of 89% at a false
positive rate of only 12%. It is estimated that such an improvement has the
potential to significantly reduce the number of amniocenteses for women over 35
years of age.
The Company believes that the multi-site clinical trial will enable it to
rapidly obtain affected and normal maternal blood specimens and clinical data to
validate the Triple Plus-TM- test for adoption by practitioners and for FDA
submission. The Company anticipates that it will file for clearance from the FDA
and distribute manuscripts for peer-review publication in early 1998.
CANCER APPLICATIONS
The Company is currently evaluating the use of the ChromaVision Digital
Analyzer for various cancer applications including prostate, breast, lung and
colorectal cancer. The applications currently under investigation are referred
to as micrometastases ("MM"), minimal residual disease ("MRD") and hematologic
malignancies. Scientists researching MM and MRD during the last 15 years have
had to employ manual microscopy to test samples from patients with many forms of
cancer. Researchers attempting to detect and quantify MM or MRD seek to address
issues such as the location and pervasiveness of various forms of cancer, and
the effectiveness of treatments in preventing the relapse of a disease.
Typically, MM and MRD require the search for a few tumor cells on slides with
potentially one million or more cells and the tedious manual examination
required for such diseases may hinder clinical acceptance and usefulness of test
procedures. The Company believes that the speed, accuracy and consistency made
possible by the ChromaVision Digital Analyzer can have a material impact on
addressing clinical issues such as the location and pervasiveness of various
forms of cancer, and further, can hasten the clinical practicality and
acceptance of the procedure. Such information is important during the on-going
monitoring of a patient's condition as it may contribute to the categorization
or "staging" of the cancer's status. This monitoring and staging procedure is
generally regarded as necessary to prescribing appropriate treatments.
Preliminary results from tests conducted for the Company by Centocor at the
University of Rotterdam (Netherlands) and at the Kenneth Norris Cancer Center at
the University of Southern California indicate that the ChromaVision Digital
Analyzer may be useful in MM and MRD applications, and the Company believes that
the ChromaVision Digital Analyzer may make MM and MRD applications practical on
a broader scale than had previously been possible.
The Company is focusing initially on prostate and breast cancer for
micrometastases and minimal residual disease applications, as well as blood and
lymph node malignancies for diagnosis and prognosis. Due to the time required to
conduct clinical trials, determine viability, review outcomes and gain FDA
clearance, the Company does not anticipate that it will be able to commercialize
the ChromaVision Digital Analyzer for any of the following applications, if at
all, until after 1998.
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PROSTATE CANCER
The Company, in collaboration with Centocor, is examining the feasibility of
using the ChromaVision Digital Analyzer to detect MM in patients diagnosed with
prostate cancer. Prostate cancer is the second leading cause of death among
adult males in the United States. A common form of current treatment is the
radical prostatectomy (surgical removal of the prostate gland), which is
performed 95,000 times annually in the United States and estimated to be
conducted over 200,000 times annually worldwide. Prostatectomies can result in
severe side effects, including impotence in 20% of patients and incontinence in
2% of patients. Furthermore, one-half of prostate cancer patients are clinically
understaged (cancer has spread outside of the prostate gland) potentially making
the prostatectomy unnecessary. In such cases, surgical removal of the prostate
could be avoided if an improved diagnostic tool, such as the ChromaVision
Digital Analyzer, is employed. At an average cost of $15,000 per prostatectomy
procedure in the United States, the Company estimates that the potential savings
attributable to the elimination of unnecessary operations would be significant.
BREAST CANCER
Approximately 182,000 new cases of breast cancer occur annually in the
United States. The impressive success of chemotherapy for treating early-stage,
operable breast cancer has stimulated significant interest in prognostic factors
for breast cancer. Prognostic factors are important tools to predict patients
destined for recurrence, and those that are likely to remain disease free. This
distinction is clinically critical because patients who will likely experience a
recurrence can be selected for systemic chemotherapy, while patients who will
not have a recurrence can avoid the significant side effects of a treatment that
offers no benefit and great risk. During breast cancer surgery, axillary lymph
nodes are typically removed for analysis to determine whether the cancer has
spread beyond the breast. Unfortunately, approximately 30% of patients with
primary breast cancer and no apparent axillary lymph node contamination by the
tumor at the time of surgery will relapse within 10 years and 10-20% of the
patients with distant metastases will be lymph node negative at surgery.
Alternatively, recent studies have demonstrated that finding tumor cells in
bone marrow biopsies is a valuable prognostic tool for predicting the risk of
cancer recurrence in patients with early stage breast cancer. In these studies,
tumor cells were detected in 31% of patients who had no tumor cells in their
lymph node glands at the time of surgery. Consequently, those patients who had
no tumor cells in their lymph nodes would have been presumed to have no
additional disease present, even though 31% of the time a bone marrow diagnosis
would have found tumor cells indicating that their disease had spread outside of
the breast. The finding of tumor cells in bone marrow of patients with no tumor
in their lymph nodes suggests that these patients should receive additional
treatment. In fact, among patients with tumors less than two cm, tumor cells in
bone marrow were the most powerful predictor of outcome. Preliminary clinical
trials with the ChromaVision Digital Analyzer device have revealed its
superiority to manual screening in cost, accuracy, reproducibility and
sensitivity at detecting tumor cells in bone marrow. The Company believes that
these preliminary studies indicate the potential for the ChromaVision Digital
Analyzer device to make micrometastasis examinations practical in the clinical
arena and intends to aggressively pursue this application.
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BLOOD AND LYMPH NODE MALIGNANCIES
Malignancies involving blood and lymphoid tissue are called leukemias and
lymphomas, respectively. In 1996, 27,600 new leukemia cases and 74,600 new
lymphoma cases occurred. Proper treatment of these patients requires
classification of these leukemias and lymphomas into specific subtypes to
determine proper therapy. Manually identifying special stains on slides or using
automated technology known as flow cytometry are two methods most commonly used
to assist subtyping these tumors. The former is manual and the latter is
expensive, complex and destructive of the specimen. Alternatively, the
ChromaVision Digital Analyzer can enhance and automate these determinations
without destroying the specimen and does not require expensive maintenance or
personnel.
QUANTITATIVE VIRAL LOAD (HIV, HPV, CMV)
The Center for Disease Control estimates that approximately 1,000,000
Americans are currently infected with HIV, the virus responsible for Acquired
Immune Deficiency Syndrome (AIDS). Early studies quickly identified the value of
following the levels of certain types of blood cells, known as CD4 and CD8
T-cells, to predict patient prognosis. The absolute level of CD4 T-cells and the
ratio of CD4 to CD8 T-cells are markers of disease progression and prognosis.
The determination of these markers currently requires flow cytometry and
hematology analyzers. More recent studies have demonstrated the value of
directly measuring the amount of virus in the bloodstream to predict disease
progression and monitor therapy. However, most of the virus is inside cells and
current methods only measure virus that is shed into the blood fluid. The
ChromaVision Digital Analyzer can perform viral load quantification at the
cellular level and simultaneous CD4 and CD8 T-cell determinations, allowing more
accurate assessment of prognosis and therapeutic response. The technology also
has application to cervical cancer screening by identifying and quantifying
certain types of Human Papilloma Virus (HPV) in cervical cells that are
associated with a high risk of progression to cervical cancer. Cytomegalovirus
(CMV) is a virus that can cause blindness in immune deficient patients. CMV
serum markers are unreliable in diagnosing active disease and only demonstration
of actual virus in cells allows treatment to be initiated.
OTHER POTENTIAL APPLICATIONS
The Company is evaluating the potential use of the ChromaVision Digital
Analyzer in other applications, including colon cancer (133,500 new cases per
year), lung cancer (177,000 new cases per year), blood screening for various
contaminants and mycobacteria (tuberculosis). As with all applications, the
Company intends to employ the ChromaVision Digital Analyzer color detection as
the primary means of cellular detection. While the Company believes that the
ChromaVision Digital Analyzer may be effective for these potential applications,
additional tests are required to address the clinical efficacy, value
propositions, regulatory requirements and other issues associated with each
application. There can be no assurance that the Company will successfully
develop the ChromaVision Digital Analyzer for any of these applications.
THE CHROMAVISION DIGITAL ANALYZER TECHNOLOGY
In 1993, XL Vision developed and produced an automated microscope. This
internally developed, proprietary technology was developed by scientists
experienced in satellite-based imagery, reconnaissance and aerial imagery, and
color space transformations used to extract maximum detail from image-based
data. In March 1996, XL Vision contributed the rights to the technology to
ChromaVision for $4.8 million and 1,545,000 shares of Common Stock of
ChromaVision.
SOFTWARE. The technology underlying the ChromaVision Digital Analyzer is
the Company's internally developed software which enables it to detect colored
objects (i.e. stained cells) dramatically better than the human eye and with
greater accuracy and sensitivity than morphology-based automated systems. The
Company's software utilizes advanced imaging concepts referred to as "color
spaces" and "color space
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conversion." In this manner, the ChromaVision Digital Analyzer reduces the cell
detection problem to finding bright objects on a dark background. The
ChromaVision Digital Analyzer's ability to locate stained objects is not limited
to any specific reagent color nor is it affected by the brightness of the
background. Additionally, the sophisticated autofocus algorithms, fast image
acquisition and proprietary color space transformations occur at rapid
processing speeds, thereby making possible rare event detection and "imaging on
the fly."
HARDWARE. The hardware components used in the ChromaVision Digital Analyzer
consist primarily of (i) an optically superior visible light microscope, (ii) a
color CCD camera, (iii) an automated, precision robotics slide transport system,
(iv) a central processor unit with a specialized image processor subsystem and
(v) system interfaces including two monitors, trackball or mouse, keyboard,
serial dial-up and local area network ports and color printer. The Company
employs a development and manufacturing strategy which uses "state of the art"
components which are generally available off-the-shelf to make development,
service and upgrades less costly.
The ChromaVision Digital Analyzer is designed to enable a laboratory
technician to operate the system using simple "point and click" commands. The
system interface includes one monitor for system commands and status, and one
monitor for viewing high quality color images of the cells. Initial setup of the
system is configurable through extensive preference and configuration menus so
that scanning magnifications, stain types and other operations may be tailored
to the application.
During normal operation, a laboratory technologist mounts prepared
microscope slides onto a specially designed slide carrier, which has the
capacity to hold up to four slides. Up to 25 slide carriers can be loaded into
the ChromaVision Digital Analyzer slide transport system. The operator may
specify the size, shape and location of the area on the microscope slide to be
scanned or alternatively, the system will automatically locate the relevant
area. The scanning process begins with the automatic loading of the first
carrier of slides onto the microscope stage. During this stage of the process,
the ChromaVision Digital Analyzer automatically reads bar codes affixed to the
slides to facilitate patient data storage and access. During scanning, the
ChromaVision Digital Analyzer automatically focuses each field of the object,
images the object using the CCD camera and processes the resulting digital image
through the image processor. Slides are then scanned at a "low" optical
magnification (typically 20x objective) to identify objects of interest based
primarily on their color characteristics. The locations of suspected cells are
stored until scanning is completed. When the "low" power scanning is completed,
the system automatically returns to each suspected object, reimages it at "high"
power (typically 60x objective), verifies that it is a proper cell candidate,
and stores a digital image of the cell for scoring and later review by the
laboratory technician or pathologist.
After scanning is completed, the operator is able to view a montage of all
stored images for interpretation of the detected objects, along with
quantitative information, such as the number of objects detected. If desired,
the operator may also directly view a detected object through oculars using the
ChromaVision Digital Analyzer's automatic repositioning feature, which
automatically repositions the slide according to the previously stored cell
coordinates. Upon completion of this review, a report containing relevant images
identified by the ChromaVision Digital Analyzer may be printed. Images may be
saved on a removable hard disk, optical disk or archived on magnetic tape. The
ChromaVision Digital Analyzer can be configured to support the transmission and
reception of images via local area network and wide area network communications
facilities, including the Internet. The Company believes that by presenting
clinical information in a digital format, including relevant cell images, the
ChromaVision Digital Analyzer is potentially capable of integrating cell-based
laboratory information with Computerized Patient Records.
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PATENTS AND PROPRIETARY TECHNOLOGY
Substantial elements of the hardware component of the Company's ChromaVision
Digital Analyzer were initially developed by XL Vision for IMI. Pursuant to an
agreement with IMI, XL Vision assigned ownership of the technology underlying
those hardware elements to IMI, subject to a perpetual, transferable,
non-exclusive, fully paid-up license to XL Vision to use, develop and sell such
technology. At the inception of the Company, XL Vision transferred this license
to the Company.
The Company's commercial success will depend in part on its ability to
protect and maintain its proprietary technology and to obtain and enforce
patents on its technology. The Company has applied for two patents with the PTO
regarding certain aspects of the ChromaVision Digital Analyzer software
technology. There can be no assurance that any patent will be issued. The
Company is not aware of any patents held by others that would prevent the
Company from manufacturing and commercializing ChromaVision Digital Analyzer in
the United States and abroad. However, the Company has not performed an
exhaustive worldwide search. There can be no assurance that any patent
applications filed by the Company will result in the issuance of patents or that
any patents issued to the Company will afford protection against competitors
that develop similar technology, or that a competitor will not reverse-engineer
the Company's software. The Company is aware of an existing patent regarding the
UR-NAP test. Although the Company has been made aware that a third party
competitor has a dispute with the Company relating to this technology, the
Company believes that the use of the Company's Triple Plus-TM- application for
the ChromaVision Digital Analyzer product will not infringe upon or violate any
third-party rights. The Company entered into an agreement with such third-party
competitor dated April 17, 1997, by which the Company and the third party
competitor agreed to negotiate in good faith their dispute over the patent for a
period of six months. During this period, each party agreed that it will not
initiate any lawsuit or other proceeding based on such dispute.
The Company currently relies on a combination of trade secrets, proprietary
knowledge, technological advances and disclosure, confidentiality and
non-competition agreements entered into with its employees and certain
consultants to protect its proprietary rights. No assurance can be given that
the Company's efforts will provide meaningful protection for its unpatented
proprietary technology against others who independently develop or otherwise
acquire substantially equivalent technologies or gain access to misappropriate
or disclose the Company's proprietary technology.
There can be no assurance that other parties will not in the future make
claims or threaten to take legal action against the Company alleging
infringement of patents by the Company. The medical device industry has been the
subject of extensive litigation regarding patents and other rights. Patent
litigation can be costly and time consuming, and there can be no assurance that
the Company's litigation expenses will not increase in the future. If the
Company were determined to be infringing any patent, the Company could be
required to pay damages, alter its products or processes, obtain licenses and/or
cease certain activities. In addition, if patents are issued to others which
contain claims that cover subject matter made, used or sold by the Company, the
Company may be required to obtain licenses to these patents, to develop or
obtain alternative technology or to cease using such technology. If the Company
is required to obtain any licenses, there can be no assurance that the Company
will be able to do so on terms acceptable to the Company, if at all. A
determination that the Company is infringing the patents of others could have a
material adverse effect on the Company's business and results of operations.
MARKETING
The Company intends to focus its marketing efforts on independent reference
laboratories, hospital laboratories and Health Maintenance Organization
laboratories by offering the ChromaVision Digital Analyzer on a "per click"
basis. This strategy is intended to simplify customer procurement decisions,
facilitate the introduction of new diagnostic tests as they become available and
develop recurring revenue for the Company.
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Currently, the Company intends to market and distribute its Down syndrome
screening product (Triple Plus-TM-), through an agreement under negotiation with
Sigma. Sigma has a worldwide distribution and service capability in conjunction
with its parent, Sigma-Aldrich. The Company believes that significant advantages
exist as a result of its relationship with Sigma, which will greatly enhance the
time to market and reduce the cost of sales. The current Triple Screen
application is performed by a relatively concentrated market. The Company
estimates that in the United States, approximately 70% of all tests are
performed by five laboratory enterprises. An additional 30% of the tests are
performed at approximately 70 hospital laboratories. Similar characteristics
exist for the European market. The Company believes that these market
characteristics make the Triple Plus-TM- test the ideal application to introduce
the ChromaVision Digital Analyzer device to the healthcare market and to use as
a platform to subsequently launch follow-on applications.
The Company currently has two executive officers with combined experience of
over 20 years in the marketing and sales of healthcare services, including 11
years in the business development of digital imaging systems for healthcare
applications. The Company's clinical collaboration will facilitate the
commercialization efforts through professional and clinical market development
programs including the on-going publication of clinical results and other
related information. The Company's marketing and sales personnel will work
closely with Sigma to assist laboratory customers to develop their local
marketing campaign to generate referrals among physicians and managed care
providers.
The Company intends to broaden the applicability of the ChromaVision Digital
Analyzer as the market recognizes the system's ability to operate effectively in
identifying rare events and the resulting reduction in costs associated with
more timely and cost-effective treatments. Additionally, the Company believes
that the expected improvement in patient outcomes generated by the ChromaVision
Digital Analyzer will eventually be viewed as giving managed care providers a
strategic advantage in their effort to attract more subscribers based on
superior quality of care.
STRATEGIC ALLIANCES
As part of its business strategy, the Company intends to develop and pursue
new applications for the ChromaVision Digital Analyzer product and enhance its
distribution, marketing and manufacturing capabilities through strategic
alliances. These application-specific alliances will focus on integrating the
reagents and other color-based detection probes with the ChromaVision Digital
Analyzer platform in a manner which provides quality and economic value to
patients, laboratories and healthcare payors. The Company is seeking to form
strategic alliances with reagent manufacturers, researchers and other third
parties under which the ChromaVision Digital Analyzer will be used as the
platform of choice for the detection and quantification of such reagents. The
Company believes that each new application alliance can provide value to all
other ChromaVision application partners as new applications drive new platform
installations, and in turn make the ChromaVision Digital Analyzer an
increasingly attractive means to access the marketplace for new applications.
The Company initially plans to work directly with its clinical collaborators
to gain acceptance in the medical community for the Triple Plus-TM- procedure.
In order to capture market share for this application and other applications in
which distribution would be more widely disbursed, the Company intends to pursue
relationships with third parties capable of effectively distributing the
ChromaVision Digital Analyzer and providing related services on a large-scale
basis. The Company believes that such alliances will enable it to minimize
certain risks related to the time, effort and expenses associated with the
internal development of similar distribution capabilities, particularly for
international markets.
In March 1997, the Company agreed to a term sheet setting forth the
principal terms of a strategic distribution and application commercialization
relationship with Sigma focusing on the Down syndrome test using UR-NAP. In
addition to manufacturing the primary reagents used for the test, Sigma also has
worldwide marketing and sales capabilities. Sigma is a vertically integrated,
ISO 9000 certified, in vitro
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device manufacturer. Sigma was the first in vitro diagnostics manufacturer to
kit chemistries for the clinical diagnostics market. For the past 50 years,
Sigma-Aldrich, the parent company of Sigma, has developed a worldwide
distribution and communication network that serves as the basis for an extensive
distribution capability for Sigma. This capability gives Sigma a greater sales
and distribution reach than it would normally have for a manufacturer of its
size. Sigma is able to utilize the more than 30 subsidiaries of Sigma-Aldrich
throughout the world and their distributors to promote its products in over 140
countries. In the subsidiaries located in Western Europe including France,
Germany, United Kingdom, Italy, the Netherlands and Luxembourg, Sigma maintains
support capabilities for both reagents and instruments. All Sigma distributors
are trained and qualified to support their product lines.
The Company has signed a letter of intent and expects to enter into a joint
development agreement with Specialty Laboratories, a privately held specialized
testing services provider located in Santa Monica, California, to leverage their
extensive experience and capability in developing laboratory tests in the areas
of cancer, immunology, microbiology, genetics and molecular biology on the
ChromaVision Digital Analyzer device and also pursue joint ventures where
appropriate. Specialty Laboratories serves approximately 8,000 clients worldwide
including hospitals, reference laboratories, clinics, physicians, universities
and the pharmaceutical industry.
ChromaVision has established a nonexclusive cooperative market development
relationship with Centocor to identify market opportunities and requirements for
various minimal residual disease applications. The Centocor relationship is
focused on applying various reagents to the ChromaVision Digital Analyzer
platform in a manner which provides quality and economic value to patients,
laboratories, and healthcare payors. Based upon the results of clinical trials
being conducted on the ChromaVision Digital Analyzer platform by Centocor
researchers and Centocor's academic research partners, ChromaVision and Centocor
intend to pursue further arrangements for offering Centocor oncology reagents
and the ChromaVision Digital Analyzer platform either through a combination of
Centocor and ChromaVision distribution channels, or through one or more third
parties. At this time, the Centocor relationship is focused on application and
market development activities.
GOVERNMENTAL REGULATION
The Company's products are subject to stringent governmental regulation in
the United States and other countries. In the United States, the Medical Device
Amendments to the FDC Act, and other statutes and regulations, including various
state statutes and regulations, govern the testing, manufacture, labeling,
storage, recordkeeping, distribution, sale, marketing, advertising and promotion
of such products. Failure to comply with applicable requirements can result in
fines, recall or seizure of products, total or partial suspension of production,
withdrawal of existing product approvals or clearances, refusal to approve or
clear new applications or notices and criminal prosecution.
Prior to commercial sale in the United States, most medical devices,
including the ChromaVision Digital Analyzer, must be cleared by the FDA for
specific uses. The regulatory process can be lengthy, expensive and uncertain.
Securing FDA clearance may require the submission of extensive clinical data
together with other supporting information to the FDA. Any clinical testing of
medical devices must be conducted in conformity with applicable FDA regulations.
In addition, state and local approvals may be required for some clinical
activities.
Under the FDC Act, medical devices are classified into one of three classes
on the basis of the controls necessary to reasonably ensure their safety and
effectiveness. Class I devices are those whose safety and effectiveness can
reasonably be ensured through general controls, such as labeling, premarket
notification and adherence to FDA-mandated GMP. Class II devices are those whose
safety and effectiveness can reasonably be ensured through "special controls,"
such as performance standards, post-market surveillance, patient registries and
FDA guidelines. Class III devices are devices that must receive premarket
approval ("PMA") by the FDA to ensure their safety and effectiveness. They are
generally life-
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sustaining, life-supporting or implantable devices, and also include most
devices that were not on the market before May 18, 1976 and for which the FDA
has not made a finding of substantial equivalence based upon a 510(k).
Before a new device or a new use of an existing device can be introduced to
the market, the manufacturer generally must obtain FDA clearance of a 510(k) or
approval of a PMA application. Following submission of the 510(k), the
manufacturer may not market the new device until an order is issued by the FDA
finding the device to be "substantially equivalent" to a legally marketed
medical device, i.e., a legally marketed Class I or Class II medical device or a
legally marketed Class III medical device for which the FDA has not called for
PMA applications ("predicate device"). The FDA has no specific time limit by
which it must respond to a 510(k). It generally takes from three to nine months
from the date of submission for the FDA to respond with a clearance for a 510(k)
application depending on the complexity of the technology and the level of
review the FDA employs for evaluating the 510(k), but it may take longer. The
FDA may determine that the proposed device is not substantially equivalent, or
that additional clinical or other data are needed before a substantial
equivalence determination can be made. Modification or enhancement of a product
that has been cleared through the 510(k) process requires clearance of a new
510(k) if the modification or enhancement could significantly affect the safety
or effectiveness of the original device.
The Company has obtained its first 510(k) clearance from the FDA to market
the ChromaVision Digital Analyzer with an NAP marker to screen blood for
malignancy. The Company is developing, and intends to develop, additional
applications for the device, and plans on developing new, and/or enhanced
capabilities for the device. The Company will file additional 510(k)s or PMAs as
required.
For future applications, should the FDA determine that ChromaVision Digital
Analyzer is not substantially equivalent to other 510(k) predicate devices, the
Company may be required to file for a PMA. The PMA process is significantly more
complex, expensive and time consuming than the 510(k) process. The PMA process
generally requires the performance of well controlled clinical investigations in
order to obtain FDA clearance, although other kinds of valid scientific evidence
may be sufficient to determine the effectiveness of some devices. The PMA
process typically requires two years, and may never result in approval.
Determination by the FDA that any of the Company's products or applications are
subject to the PMA process could have a material adverse effect on the Company's
business, results of operations and financial condition. Nonetheless, should a
PMA be required, a business benefit can accrue in the sense that a PMA can serve
as a competitive barrier to entry. Although no time frames can be assured for
either a 510(k) or PMA clearance, it is generally assumed that a 510(k) may be
more readily obtained. The time allocated to clinical testing accounts for a
considerable amount of the difference in 510(k) versus PMA clearance.
The FDC Act requires that medical devices be manufactured in accordance with
the FDA's current GMP regulations. These regulations require, among other
things, that (i) the manufacturing process must be regulated and controlled by
the use of written procedures and (ii) the ability to produce devices which meet
the manufacturer's specifications be validated by extensive and detailed testing
of every aspect of the process. They also require investigation of any
deficiencies in the manufacturing process or in the products produced and
detailed record keeping. Manufacturing facilities are therefore subject to FDA
inspection on a periodic basis to monitor compliance with GMP requirements. If
violations of the applicable regulations are noted during FDA inspections of the
Company's manufacturing facilities or the manufacturing facilities of its
contract manufacturers, there may be a material adverse effect on the continued
marketing of the Company's products.
Other applicable requirements include the medical device reporting
regulation, which requires that the Company provide information to the FDA on
deaths or serious injuries alleged to have been associated with the use of its
devices, as well as product malfunctions that would likely cause or contribute
to a death or serious injury if the malfunction were to recur.
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The FDA regulates certain computer products as medical devices, such as
control software for imaging or other diagnostic devices, including the
Company's ChromaVision Digital Analyzer software. The FDA is in the process of
reevaluating its regulation of such software, and if the FDA undertakes
increased or more rigorous regulation of such software (which the Company cannot
predict), the Company's ChromaVision Digital Analyzer software may become
subject to further regulatory processes and clearance requirements. The Company
is currently in full compliance with FDA guidelines with respect to its
software. No assurance can be given that compliance with more extensive
regulatory processes will be achieved or that the necessary clearances for such
software will be obtained by the Company on a timely basis, if at all. The
Company may, as a result, be required to expend additional time, resources and
effort in the areas of software design, production and quality control to ensure
full technical compliance.
Laws and regulations regarding the manufacture, sale and use of medical
devices are subject to change and depend heavily on administrative
interpretations. There can be no assurance that future changes in regulations or
interpretations made by the FDA or other regulatory bodies, with possible
retroactive effect, will not adversely affect the Company.
The Company and its products may be subject to a variety of other laws and
regulations in those states and countries where its products are or will be
marketed. These restrictions may hinder the Company's ability to market its
products in those states or countries. Use of the Company's products may further
be subject to periodic inspection, quality control, quality assurance,
proficiency testing, documentation and safety reporting standards pursuant to
the Joint Commission on Accreditation of Healthcare Organizations.
If the FDA believes that the Company is not in compliance with the law, the
FDA can take one or more of the following actions: withdraw previously approved
applications; require notification to users regarding newly found, unreasonable
risks; request repair or refund of faulty devices; request corrective
advertisements, formal recalls or temporary marketing suspension; refuse to
review or clear applications to market any of the Company's future products in
the United States or to allow the Company to enter into government supply
contracts; or institute legal proceedings to detain or seize products, enjoin
future violations or assess criminal or civil penalties against the Company, its
officers or employees. Any such action by the FDA could result in disruption of
the Company's operations for an indeterminate period of time. Various states in
which the Company's product may be sold in the future may impose additional
regulatory requirements.
In addition, the Company's products are subject to a variety of regulations
in certain international markets. Depending on circumstances, including but not
limited to Company strategies and discussions with potential distribution
partners, the Company may develop a distribution strategy that initiates
marketing in international markets prior to marketing in the United States.
THIRD-PARTY REIMBURSEMENT AND HEALTHCARE LEGISLATION
The willingness of hospitals, laboratories and other healthcare providers to
purchase or lease the ChromaVision Digital Analyzer may depend on the extent to
which such providers limit capital expenditures due to cost reimbursement
regulations, including regulations promulgated by the Health Care Finance
Association and other regulatory agencies, and general uncertainty about
government healthcare policy. In addition, sales volumes and prices of the
Company's products will depend in part upon the level of reimbursement available
to hospitals, laboratories and other healthcare providers for automated
microscopic blood tests from third-party payors, such as government and private
insurance plans, health maintenance organizations and preferred provider
organizations. There can be no assurance that existing reimbursement levels will
not be decreased in the future and that any such decrease will not reduce the
demand for, or the price of, the Company's products. Healthcare reform measures
adopted by the federal government or state governments could adversely affect
the prices of medical devices in the United States
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or the amount of reimbursement available, and, consequently, could have a
material adverse effect on the Company's business, results of operations and
financial condition. No prediction can be made as to the outcome of any reform
initiatives or their impact on the Company.
COMPETITION
The Company believes that the primary current source of competition for the
ChromaVision Digital Analyzer is the use of medical technicians to perform
microscopic analysis. Additionally, the Company is aware of six potential
competitors that are substantially engaged in efforts to automate microscope
examinations. Five of the six are currently focused primarily on the use of
morphology for specific clinical applications, as opposed to the color-based
approach to addressing multiple applications that has been developed by
ChromaVision. Four of the primarily morphology-based companies identified,
Morphometrix, Inc., Neuromedical Systems, Inc. ("NSI"), Neopath, Inc., and
Autocyte, Inc. are focused on Pap smear testing. The fifth potential competitor,
IMI, is focused on white blood cell differential tests and uses morphology and
neural networks. Several elements of the hardware components and robotics
control of the IMI system are similar to those used in the ChromaVision Digital
Analyzer. ChromaVision has developed completely different and proprietary image
analysis application software which includes the algorithms used by the
ChromaVision Digital Analyzer to detect objects based primarily on color, a
technique that the Company believes is more sensitive and flexible than
morphology alone. This color-based technique differentiates the Company from
other automated microscope manufacturers that target labor savings as the
primary value proposition by enabling a platform that can use the multitude of
available reagents to color cells or objects resulting in multiple applications
and markets.
The sixth potential competitor, Intelligent Remote Imaging Systems Inc.
utilizes flow cytometry to image cellular material for various urine and blood
applications. Flow cytometry does not use a glass slide to preserve samples, but
rather destroys samples as cells are imaged. Additionally, the Company believes
that the sensitivity of the ChromaVision Digital Analyzer substantially exceeds
that of flow cytometry.
Although each of these companies is initially focusing on one application or
a limited set of specific applications, each has expressed a desire to pursue
multiple applications as part of their respective strategies for product and
market development.
SERVICE
The Company intends to offer service and maintenance to ChromaVision Digital
Analyzer customers as part of the "per click" pricing structure. The Company has
developed a support, field service, and parts distribution plan designed with
the goal of enabling greater than 98% system functionality for its customers.
This plan will offer the following services as part of the "per click" fee
structure: (i) installation, (ii) customer training, (iii) a 24-hour a day,
seven-day per week customer help desk available via a toll free number, (iv) the
ability to remotely diagnose ChromaVision Digital Analyzer units and load new
software via dial-up modems with a goal of correcting 80% of customer problems
on a remote basis, and (v) on-site field service and parts replacement utilizing
regionally based ChromaVision field engineers which will be supported by
headquarters development and engineering staff. To achieve customer
response-time and system up-time requirements, the Company plans to employ both
preventive maintenance programs and as-needed service by deploying one field
engineer for approximately every 20 ChromaVision Digital Analyzer units in
operation. In addition, the Company may enter into agreements with third parties
to provide service and support to the Company's customers.
RESEARCH AND DEVELOPMENT
The Company's core competency to date has been centered on research and
development, specifically in the area of advanced imaging as applied to the
detection and quantification of reagent-stained cellular material. Currently,
the Company has seven employees dedicated to research and development, including
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several scientists who hold Ph.D. degrees in various disciplines, primarily in
the areas of image science and software algorithms. The senior members of the
research and development staff that initially developed the proprietary
technology have experience in the development of sophisticated imaging systems
including those used in the Strategic Defense Initiative and the Cruise Missile
program. ChromaVision's research and development staff is experienced in the
rapid prototyping and development of advanced software-based,
electro-optical-mechanical systems. The Company intends to continue to invest
heavily in the recruitment of experienced scientists and engineers with an
emphasis on achieving a balance between research and development innovation and
support of focused, market driven requirements.
MANUFACTURING
As a development stage company, the Company currently has limited commercial
scale manufacturing capabilities. The ChromaVision Digital Analyzer is currently
developed and manufactured at the Company's headquarters in San Juan Capistrano,
California. At the San Juan Capistrano facility, components are assembled, the
microscope is optically aligned, software is loaded, and the system is tested.
Components of the system are either manufactured by the Company, purchased
off-the-shelf, or manufactured by subcontractors to the Company's
specifications. The system uses an off-the-shelf CCD camera and an
Intel/Microsoft-based personal computer. The system can be adapted for use with
most popular microscopes and related optical accessories. A proprietary video
capture and processing board is used along with proprietary color detection
techniques developed by ChromaVision researchers. The Company intends to enhance
its manufacturing capabilities to coincide with the commercialization of the
ChromaVision Digital Analyzer. The Company is required to be GMP compliant prior
to completing its first product. The Company is working toward, but has not yet
achieved GMP compliance.
FACILITIES
The Company's executive and development and manufacturing facilities are
located in San Juan Capistrano, California, in approximately 21,000 square feet.
The Company leases the space at an annual rent of approximately $123,000. This
lease expires on February 28, 2000. Management of the Company believes that this
facility will be adequate to meet the Company's needs through the year 2000.
EMPLOYEES
As of March 31, 1997, the Company employed 13 persons in product development
and engineering, four persons in manufacturing, four persons in finance,
executive and administrative capacities and one person in sales and marketing.
In addition to the above 22 employees, pursuant to the Administrative Services
Agreement with XL Vision, the Company currently has access to certain resources
of XL Vision, including accounting, shipping and receiving and payroll
functions. Such services may be utilized by ChromaVision on an "as needed"
basis. ChromaVision intends to continue this relationship until such time as
ChromaVision's growth dictates the hiring of such additional personnel. The
Company is not subject to any collective bargaining agreements and the Company
believes that the relationship with its employees is good. See "Certain
Transactions."
LEGAL PROCEEDINGS
Currently, the Company is not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names, ages and positions held by the executive officers and directors
of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Douglas S. Harrington, M.D........................... 44 Chief Executive Officer and Director
Kenneth S. Garber.................................... 43 Vice President of Marketing and Sales and Business
Development
Kevin C. O'Boyle..................................... 41 Vice President and Chief Financial Officer
Michael G. Schneider................................. 47 Vice President of Manufacturing and Service
John S. Scott, Ph.D.................................. 45 Chairman of the Board of Directors
Christopher Moller, Ph.D.(1)......................... 43 Director
Richard C. E. Morgan(2).............................. 53 Director
Charles A. Root(1)(2)................................ 64 Director
</TABLE>
- ------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
DOUGLAS S. HARRINGTON, M.D. has been Chief Executive Officer since December
1996. From 1995 until he joined the Company in 1996, Dr. Harrington served as
Chairman and President of Strategic Business Solutions, Inc., a privately held
company specializing in commercialization of biotechnology, and as a Principal
in Douglas S. Harrington and Associates, a strategic consulting firm. From 1992
to 1995, Dr. Harrington served as President of Nichols Institute, a publicly
traded healthcare laboratory services provider, now part of Quest Diagnostics,
Inc., a publicly traded laboratory services provider. Prior to 1992, Dr.
Harrington held various management positions within Nichols Institute including
Vice President of Operations and Medical Director. Dr. Harrington currently sits
on the Boards, Advisory Boards, or Scientific Advisory Boards of ten healthcare
and medical device companies, including as a director of Pacific Biometric,
Inc., a publicly traded company and is an Associate Professor of Clinical and
Anatomic Pathology at the University of Nebraska Medical Center. Dr. Harrington
has over 18 years experience in the commercialization of healthcare technology
and has published over 80 peer-reviewed publications.
KENNETH S. GARBER has been Vice President of Marketing, Sales and Business
Development of the Company since March 1996. From 1994 to 1996, Mr. Garber was
Vice President and General Manager of the Imagelink Business Unit for Kodak
Health Imaging Systems, Inc. In 1993, he was Assistant to the President of Kodak
Health Imaging Systems and during 1992 was Director of Strategic Sales
Development for Kodak Health Imaging Systems, Inc. From 1990 to 1991, Mr. Garber
also was Director of Strategic Sales Development for Vortech Data, Inc. He
previously held sales management and sales positions with Hughes Network
Systems, Satellite Business Systems and Federal Data.
KEVIN C. O'BOYLE has been Vice President and Chief Financial Officer of the
Company since December 1996. From 1990 to 1994, Mr. O'Boyle was the Chief
Financial Officer and from 1994 to 1996, he was Sr. Vice President of Operations
for Albert Fisher North America, a publicly traded international food processor
and distributor. From 1984 to 1990, Mr. O'Boyle served as the Vice President and
Controller of American Cablesystems, a publicly traded cable television firm. He
previously held various accounting positions on the audit and tax staff with
Pannell, Kerr & Forster, a public accounting firm.
MICHAEL G. SCHNEIDER has been Vice President of Manufacturing and Service
since June 1996. From 1995 to May 1996, Mr. Schneider was Vice President of
Manufacturing at Kodak Health Imaging Systems, Inc. From 1993 to 1995, Mr.
Schneider was Director of Worldwide Service at Kodak's Customer Service
Division. From 1990 to 1993, Mr. Schneider was Manager of Services Support at
Kodak's Health Science Division. Mr. Schneider has twenty-four years of
experience in manufacturing and service management.
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JOHN S. SCOTT has been Chairman of the Board of the Company since March
1996. Since May 1993, he has also been Chairman of the Board, Chief Executive
Officer and President of XL Vision. From 1991 until July 1993, Dr. Scott was the
President of Lenzar Electro-Optics, Inc., a manufacturer of imaging devices. Dr.
Scott has a Ph.D. in both physics (turbulence and particle acceleration,
associated space-borne instrumentation, plasma physics and electro-optical
sensor system development) and astrophysics. He has designed and developed
scanners for a wide range of media types including intelligence imagery,
microfiche, microfilm, fingerprint cards, aerial photos, voter registration
cards and medical x-rays.
CHRISTOPHER MOLLER has been a director of the Company since June 1996. Dr.
Moller has served as Managing Director of Technology Leaders III and since 1994
Technology Leaders II Management L.P., and, in various capacities since 1990
with its predecessors. He is a director of five biotechnology companies
including ViroPharma, Inc. (VPHM). Dr. Moller serves on the medical advisory
board of the Lankenau Research Institute. He holds a Ph.D in immunology from the
University of Pennsylvania.
RICHARD C. E. MORGAN has been a director of the Company since March 1996.
Mr. Morgan has been the Managing General Partner of Wolfensohn Partners L.P., a
venture capital firm, since 1986 and is the Chairman and Chief Executive Officer
of Lasertechnics, Inc., which manufactures and distributes small secure card
printing systems and related equipment and small character coding systems. From
1990 to 1996, Mr. Morgan was the Chairman of MediSense, Inc., a manufacturer and
distributor of blood glucose biosensors. Mr. Morgan has been a director of
Quidel Corporation, a manufacturer and distributor of rapid diagnostic devices,
for the past five years and, since July 1995, has served as Chairman. Mr. Morgan
is also a director and member of the executive committee of Celgene Corporation,
and a director of Sequus Pharmaceuticals, Inc., both biopharmaceutical
companies.
CHARLES A. ROOT has been a director of the Company since March 1996. Since
1986, Mr. Root has served as an Executive Vice President of Safeguard. From 1988
until March 1994, Mr. Root served as Chairman and Chief Executive Officer of
Coherent Communications Systems Corporation, a manufacturer of
telecommunications equipment and teleconferencing products, where he continues
to serve as Chairman. Mr. Root is Chairman of the Board of CompuCom Systems,
Inc. ("CompuCom"), and a director of Tangram Enterprise Solutions, Inc.
("Tangram"). CompuCom and Tangram are majority-owned subsidiaries of Safeguard.
Each director is elected to hold office until the next annual meeting of
stockholders and until his or her respective successor is elected and qualified.
The Board of Directors has a Compensation Committee, which makes recommendations
concerning salaries and incentive compensation for employees of and consultants
to the Company, and an Audit Committee, which reviews the results and scope of
the audit and other services provided by the Company's independent auditors. In
consideration for his service on the Board of Directors, Mr. Morgan received
options to purchase 83,750 shares of Common Stock, that vest over a four year
period beginning in December 1997. These options expire in December 2003. All
non-employee directors are reimbursed for travel and other expenses related to
their service on the Board of Directors.
ADVISORY BOARD
The Company's Advisory Board consists of individuals with expertise in the
medical diagnostic technology field who advise the Company concerning long-term
scientific planning, research and development, personnel and technological
matters. The members of the Advisory Board are:
DAVID A. THOMPSON is currently Chairman of the Board and Chief Executive
Officer of Diagnostic Marketing Strategies, a management consulting firm. From
1994 until his retirement in June 1995, Mr. Thompson served as Senior Vice
President, Strategic Improvement Processes at Abbott Laboratories. From 1990 to
1994, he served as President, Diagnostics Division and Senior Vice President,
Diagnostic Operations at Abbott Laboratories.
JEFFREY K. COHEN, M.D. is currently a urologist and Assistant Professor at
the Medical College of Pennsylvania and Allegheny University. Mr. Cohen is also
a member of the Executive Committee of the
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Medical Staff and the Operating Room Committee, and a Board member of the
Integrated Health Care Systems at Allegheny General Hospital. From 1994 until
1995, Mr. Cohen served as President of Integrated Health Care Systems, and from
1990 until 1994, he served as Medical Director of the Short Procedure Unit.
HENRY T. PIETRASZEK is currently President and Chief Executive Officer of
Ventana Medial Systems, a manufacturer of autostaining equipment. From 1994 to
1996, Mr. Pietraszek served as President and Chief Executive Officer of Biostar,
Inc., a medical diagnostic company. From 1975 to 1994, Mr. Pietraszek served as
President and Chief Executive Officer of Tap Pharmaceuticals, a joint venture
between Abbott Laboratories and Dainippon Pharmaceutical Company of Japan
engaged in research, product development, manufacturing and marketing of U.S.
pharmaceuticals.
ERIK HORNAESS has been Divisional Vice President & General Manager at Abbott
Diagnostics Division, a subsidiary of Abbott Laboratories located in
Wiesbaden-Delkenheim, Germany, since October 1982. Mr. Hornaess has over thirty
years of experience in the international medical diagnostic industry, most
recently focused on Europe, Africa and the Middle East.
ANEAL S. MASIH, M.D. is currently a Staff Pathologist at Space Coast
Pathologists, and also serves as an outside consultant to the Company. From
January 1992 to December 1994, Dr. Masih was an Assistant Professor in the
Pathology Department at the University of Florida. From January 1992 to December
1994, Dr. Masih served as medical consultant at Veterans Administration Medical
Center and the Eastern Cooperative Oncology Group.
None of the members of the Advisory Board is employed by the Company, and
members may have other commitments to or consulting or advisory contracts with
their employers or other entities which may conflict or compete with their
obligations to the Company. Accordingly, such persons are expected to devote
only a portion of their time to the Company and are not expected to participate
actively in the Company's affairs or in the development of the Company's
technology. Members of the Company's Advisory Board receive options to purchase
the Company's Common Stock as well as shares of Series A Preferred Stock. As of
May 27, 1997, the Company has granted options to purchase 101,875 shares of the
Company's Common Stock and has sold 134,000 shares of Series A Preferred Stock
to members of its Advisory Board. Advisory Board members are reimbursed for
travel and other expenses in connection with their services on the Advisory
Board.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1996, the Company did not have a Compensation Committee or any other
committee of the Board of Directors performing similar functions.
Recommendations concerning the aggregate of the Company's employees were made to
the Board of Directors by the Company's Chief Executive Officer. There are
currently no compensation committee interlocks with other entities or insider
participation on the Compensation Committee.
CERTAIN RELATIONSHIPS
Technology Leaders Management L.P., a limited partnership, is the sole
general partner of Technology Leaders L.P. and a co-general partner of
Technology Leaders Offshore C.V. Technology Leaders L.P. and Technology Leaders
Offshore C.V. are venture capital funds that are required by their governing
documents to make all investment, voting and disposition actions in tandem.
Technology Leaders L.P. and Technology Leaders Offshore C.V. are referred to
collectively in this Prospectus as "Technology Leaders I." Technology Leaders
Management L.P. has sole responsibility for all investment, voting and
disposition decisions for Technology Leaders I. The general partners of
Technology Leaders Management L.P. are (i) Technology Leaders Management, Inc.,
a privately held subsidiary of Safeguard, (ii) TL Partners I, a general
partnership among Technology Leaders Management, Inc. and the Managing Directors
of Technology Leaders Management, Inc., other than Mark J. DeNino, and (iii)
four other corporations (the "TLA Corporations") owned by individuals, one of
whom serves as a director of Safeguard, and three of
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whom are not currently otherwise affiliated with Safeguard or the Company.
Technology Leaders Management L.P. is managed by an executive committee, by
whose decisions the general partners have agreed to be bound, that consists of
seven voting members including (i) Warren V. Musser, Robert E. Keith, Jr. and
Gary J. Anderson, M.D., each of whom are designees of Technology Leaders
Management, Inc., and (ii) one designee of each of the TLA Corporations. Clayton
S. Rose is a non-voting member of that executive committee. Technology Leaders
Management, Inc. is the administrative manager of Technology Leaders, subject to
the control and direction of the executive committee of Technology Leaders
Management L.P. Mr. Musser is the chairman and Mr. Keith is president and chief
executive officer of Technology Leaders Management, Inc. and Mr. Keith, Ira M.
Lubert, Dr. Anderson, Mr. DeNino and Christopher Moller, Ph.D., are the managing
directors of Technology Leaders Management, Inc. Mr. Keith, Mr. Lubert and Dr.
Anderson are former officers of Safeguard and Mr. Keith is a director of
Safeguard.
Technology Leaders II Management L.P., a limited partnership, is the sole
general partner of Technology Leaders II L.P. and a co-general partner of
Technology Leaders II Offshore C.V. Technology Leaders II L.P. and Technology
Leaders II Offshore C.V. are venture capital funds that are required by their
governing documents to make all investment, voting and disposition actions in
tandem. Technology Leaders II L.P. and Technology Leaders II Offshore C.V. are
referred to in this Prospectus as "Technology Leaders II." Technology Leaders II
Management L.P. has sole authority and responsibility for all investment, voting
and disposition decisions for Technology Leaders II. The general partners of
Technology Leaders II Management , L.P. are (i) Technology Leaders Management,
Inc., a wholly-owned subsidiary of Safeguard, (ii) Robert E. Keith, Jr., Gary J.
Anderson, M.D., Ira M. Lubert, Mark J. DeNino and Christopher Moller, a director
of the Company, and (iii) four other corporations (the "TLA Corporations") owned
by natural persons, one of whom is a director of Safeguard. Technology Leaders
II Management L.P. is managed by an executive committee, by whose decisions the
general partners have agreed to be bound, which consists of ten voting members
including (i) Warren V. Musser, who is a designee of Technology Leaders
Management, Inc., (ii) Mr. Keith, Dr. Anderson, Mr. Lubert, Mr. DeNino,
Christopher Moller, individually, and (iii) one designee of each of the TLA
Corporations and (as a non-voting member) Clayton S. Rose. Technology Leaders
Management, Inc. is the administrative manager of Technology Leaders II, subject
to the control and direction of the executive committee of Technology Leaders II
Management L.P. Mr. Keith is a director of Safeguard.
Safeguard Scientifics (Delaware), Inc., a privately held subsidiary of
Safeguard, is a limited partner in Technology Leaders L.P. and Technology
Leaders II, holding 3.3% of the aggregate limited partnership interest in
Technology Leaders L.P. and 4.4% of the aggregate limited partnership interest
in Technology Leaders II L.P. Technology Leaders Management, Inc. holds directly
or indirectly 31% of the general partnership interests in Technology Leaders
Management L.P. and 39% of the general partnership interests in Technology
Leaders II Management L.P.
Safeguard, Technology Leaders I and Technology Leaders II collectively
beneficially own approximately 32% of the voting common stock of XL Vision and
approximately 97% of the non-voting convertible preferred stock of XL Vision,
and have the right to designate two of the nine members of XL Vision's Board of
Directors. After the Company was spun out from XL Vision in March 1996, it
raised its initial equity capital through a private offering of its Series A
Preferred Stock primarily to XL Vision's stockholders.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Dr. Douglas S.
Harrington as of December 30, 1996, which obligates him to serve as Chief
Executive Officer until December 30, 1997. The agreement provides for the
payment of an annual base salary of $160,000, bonuses up to 100% of his base
salary upon the achievement of certain targets and an option to purchase 725,000
shares of Common Stock. Dr. Harrington's employment will continue on an at-will
basis after December 30, 1997, subject to severance pay upon termination under
certain conditions. Upon any change of control of the Company, Dr. Harrington
will be entitled to immediate vesting of all stock options or the payment of an
amount
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<PAGE>
equal to the difference between the exercise price and the fair market value for
each share of Common Stock which underlies an option which cannot vest and, if
his employment terminates, one year salary continuation and payment of his
maximum bonus for such year. In addition, upon the expiration of the Employment
Agreement or the termination of employment after the expiration of the
Employment Agreement, the Company has the option to retain Dr. Harrington as a
consultant whereby Dr. Harrington would be entitled to receive monthly
consulting fees equal to his prior monthly salary upon the provision of up to 20
hours of consulting services each month.
On February 15, 1996, the Company entered into an at-will employment
agreement with Kenneth S. Garber. Mr. Garber agreed to serve as Vice President
of Marketing and Sales and Business Development in return for an annual salary
of $130,000, the opportunity to earn additional compensation in the form of
commissions upon the achievement of certain performance objectives and an option
to purchase 277,313 shares of Common Stock. Upon a termination of Mr. Garber's
employment by the Company for any reason other than cause, one-half of Mr.
Garber's non-vested stock options automatically become vested, all
performance-related compensation becomes immediately payable and the Company may
elect to pay Mr. Garber his base salary for up to an 18-month period in return
for Mr. Garber's agreement not to engage in activities in competition with the
Company during such period. Upon any change of control of the Company, Mr.
Garber will be entitled to immediate vesting of all stock options or the payment
of the in-the-money value of all unvested options.
On November 27, 1996, the Company entered into an at-will employment
agreement with Kevin O'Boyle. Mr. O'Boyle agreed to serve as Vice President and
Chief Financial Officer in return for the payment of an annual salary of
$130,000, the opportunity to earn additional compensation in the form of bonuses
and an option to purchase 68,750 shares of Common Stock. Upon a termination of
Mr. O'Boyle's employment by the Company for any reason other than cause,
one-half of Mr. O'Boyle's non-vested stock options automatically become vested,
all performance related compensation becomes immediately payable and the Company
will pay Mr. O'Boyle his base salary for a 12-month period in return for Mr.
O'Boyle's agreement not to engage in activities in competition with the Company
during such period. Upon any change of control of the Company, Mr. O'Boyle will
be entitled to immediate vesting of all stock options or the payment of the
in-the-money value of all unvested options.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
paid or accrued from the inception of the Company through December 31, 1996 with
respect to the Company's Chief Executive Officer, its former President and its
other most highly compensated executive officer as of December 31, 1996
(collectively, the "Named Officers"):
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL -------------
COMPENSATION(1) SECURITIES ALL
NAME AND -------------------- UNDERLYING OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- ------------------------------------------------------- --------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Douglas S. Harrington, M.D.(2)......................... 1996 $ -- $ -- 737,500 $ 83,160
Chief Executive Officer
Kenneth S. Garber(3)................................... 1996 110,000 37,500 277,313 --
Vice President of
Marketing and Sales and
Business Development
Michael S. Shiff(4).................................... 1996 146,565 -- 554,625 468,350
Former President
</TABLE>
- ------------------------
(1) The annual compensation described in this table reflects actual salary and
bonus paid to such executive officers from the inception of the Company
through December 31, 1996. In 1996, Messrs. Shiff and Garber were paid
52
<PAGE>
based upon an annual salary of $150,000 and $130,000, respectively. The
compensation described in this table does not include medical, group life
insurance or other benefits received by the Named Officers which are
available generally to all salaried employees of the Company and certain
perquisites and other personal benefits, securities or property received by
the Named Officers which do not exceed the lesser of $50,000 or 10% of the
aggregate of any such Named Officer's salary and bonus.
(2) Dr. Harrington joined the Company on December 30, 1996. Dr. Harrington is
paid a base salary of $160,000. Prior to that time, Dr. Harrington served on
the Company's Advisory Board, in consideration for which Dr. Harrington was
granted options to purchase 12,500 shares of the Company's Common Stock. In
addition, Dr. Harrington received $83,160 in 1996 as payment for consulting
services provided to the Company and reimbursement for expenses related
thereto, which appears under the caption "All Other Compensation." Dr.
Harrington received options to purchase 25,000 shares of the Company's
Common Stock in January 1997.
(3) Mr. Garber joined the Company in March 1996. Mr. Garber earned a bonus of
$37,500 in 1996.
(4) Mr. Shiff resigned as President of the Company as of December 10, 1996. The
amounts in the table above reflect salary earned during the period beginning
in March 1996 and ending on December 10, 1996. Upon resigning from the
Company, Mr. Shiff received a cash severance payment of $468,350, which is
listed in the table above under the caption "All Other Compensation."
The following table provides information on stock options granted by the
Company in 1996 to the Named Officers. All Company option grants depicted below
were made pursuant to the 1996 Equity Compensation Plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF REALIZABLE POTENTIAL VALUE
TOTAL AT
OPTIONS ASSUMED ANNUAL RATE OF
NUMBER OF GRANTED TO STOCK PRICE APPRECIATION
SHARES EMPLOYEES FOR
UNDERLYING IN EXERCISE OPTION TERM(1)
OPTIONS FISCAL PRICE PER EXPIRATION --------------------------
NAME GRANTED YEAR SHARE DATE 5.0% 10.0%
- ----------------------------------- ---------- ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Douglas S. Harrington, M.D.(2)..... 12,500 0.6% $0.80 6/13/2003 $ 4,071 $ 9,487
725,000 37.7 2.40 12/30/2006 1,094,277 2,773,112
Kenneth S. Garber(3)............... 277,313 14.4 0.80 6/13/2003 90,315 210,473
Michael S. Shiff(4)................ 554,625 28.8 0.80 6/13/2003 180,630 420,945
</TABLE>
- ------------------------
(1) The amounts shown are calculated assuming that the market value of the
Common Stock was equal to the exercise price per share as of the date of
grant of the options. This value is the approximate price per share at which
shares of the Common Stock would have been sold in private transactions on
or about the date on which the options were granted. The dollar amounts
under these columns assume a compounded annual market price increase for the
underlying shares of the Common Stock from the date of grant to the end of
the option term of 5% and 10%. This format is prescribed by the Commission
and is not intended to forecast future appreciation of shares of the Common
Stock. The actual value, if any, a Named Officer may realize, will depend on
the excess of the market price for shares of the Common Stock on the date
the option is exercised over the exercise price. Accordingly, there is no
assurance that the value realized by a Named Officer will be at or near the
value estimated above.
(2) Dr. Harrington received options to purchase 12,500 shares of the Company's
Common Stock in June 1996 in consideration for his service as a member of
the Company's Advisory Committee vesting 50% on March 31, 1997 and 50% on
March 31, 1998. In December 1996, Dr. Harrington received options to
purchase 725,000 shares of the Common Stock in connection with his
employment as Chief Executive Officer, vesting in four equal annual
installments beginning on December 12, 1996. Vesting accelerates in whole,
or in part upon certain events including a termination without cause and a
change of control. Dr. Harrington received options to purchase 25,000 shares
of the Company's Common Stock in January 1997 at an exercise price of $2.40
per share.
(3) Mr. Garber's options vest in equal installments over a four-year period
beginning December 30, 1996, provided that 50% of the unvested options will
vest upon closing of the Company's initial public offering and the first
anniversary of the closing date. Vesting also will accelerate in whole or in
part upon certain other events including a termination without cause and a
change of control.
53
<PAGE>
(4) Mr. Shiff resigned as President of the Company as of December 10, 1996. In
connection with his resignation from the Company, the Company repurchased
all of Mr. Shiff's vested options for an aggregate purchase price of
$443,700. In addition, effective upon his resignation, all of Mr. Shiff's
unvested options (exercisable for 277,313 shares of Common Stock)
automatically terminated.
The following table sets forth information concerning options exercised
during 1996 and the number and the hypothetical value of certain unexercised
options of the Company held by the Named Officers as of December 31, 1996. This
table is presented solely for purposes of complying with the Commission rules
and does not necessarily reflect the amounts the optionees will actually receive
upon any sale of the shares acquired upon exercise of the options.
AGGREGATE OPTION EXERCISES AND
LAST FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-
OPTIONS AT MONEY OPTIONS AT
SHARES DECEMBER 31, 1996 DECEMBER 31, 1996(1)
ACQUIRED VALUE ------------------------- --------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------- ----------- ---------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Douglas S. Harrington, M.D......... -- $ -- 187,500 550,000 $ 497,500 $ 1,505,000
Kenneth S. Garber.................. -- -- 69,328 207,985 291,178 873,537
Michael S. Shiff................... 277,313 443,700(2) -- -- -- --
</TABLE>
- ------------------------
(1) Assumes, for presentation purposes only, a per share fair market value of
$5.00.
(2) Reflects the actual value realized by Mr. Shiff upon the sale of 277,313
shares to the Company as of December 27, 1996, at a purchase price of $2.40,
less the $0.80 exercise price per share.
EQUITY COMPENSATION PLAN
The Company has adopted the ChromaVision Medical Systems, Inc. 1996 Equity
Compensation Plan (the "Plan") pursuant to which it has awarded and may in the
future award stock options and equity compensation awards to its employees,
officers, non-employee directors and independent contractors.
The Plan, as amended on May 27, 1996, provides for the issuance to
employees, non-employee directors and eligible independent contractors of up to
1,420,000 shares of Common Stock pursuant to the grant of incentive stock
options ("ISOs"), non-qualified stock options ("NQSOs"), Stock Appreciation
Rights ("SARs") and restricted stock awards. The maximum aggregate number of
shares of stock that shall be subject to grants under the Plan to any recipient
may not exceed 875,000. The Plan is administered by a Committee of two or more
non-employee directors appointed by the Board of Directors (the "Committee").
Subject to the provisions of the Plan, the Committee has the authority to
determine to whom stock options and equity compensation awards will be granted
and the terms of the awards granted, including the number of shares subject to
each award, vesting provisions and the duration of an award, to amend the terms
of any outstanding award and to generally deal with any other matters arising
under the Plan. Prior to the adoption of the Plan, the Company also granted
NQSOs to purchase 975,688 shares of Common Stock, of which 277,313 have been
repurchased and 277,313 have been cancelled.
As of May 27, 1997, options to purchase a total of 1,608,688 shares of
Common Stock, at a weighted average exercise price per share of $2.09, were
outstanding. Of these options, options to purchase 299,016 shares were fully
vested and exercisable as of May 27, 1997. As of May 27, 1997, the Company had
an additional 232,375 shares of Common Stock available for future grants and
other issuances under the Plan.
The option price per share of stock under the Plan shall be determined by
the Committee at the time of each grant, provided, however, that the option
price per share for any ISO shall not be less than 100% of the fair market value
of the stock at the time of the grant. If a 10% stockholder receives an ISO, the
exercise price shall not be less than 110% of the fair market value at the time
of grant. The term of each stock option shall be fixed by the Committee, but may
not exceed ten years. In the case of a 10%
54
<PAGE>
stockholder, the term may not exceed five years. Stock options shall be
exercisable at such time or times as shall be determined by the Committee.
Payment for the exercise of an option shall be made by cash, check or other
instrument as the Committee may accept, including, in the discretion of the
Committee, unrestricted stock of the Company. The Committee may also agree to
allow an optionholder to elect to cash out the excess of the fair market value
over the option price of all or a portion of a stock option. The Committee may
also grant, in its sole discretion, a "cashless exercise" feature for the
exercise of stock options.
The Board of Directors may amend or revise the terms of the Plan in any
respect whatsoever, provided, that certain amendments of the Plan are subject to
shareholder approval. Unless sooner terminated, the Plan will terminate in 2006.
Under Section 162(m) of the Code, the Company may be precluded from claiming
a federal income tax deduction for total remuneration in excess of $1,000,000
paid to the Chief Executive Officer or to any of the other four most highly
compensated officers in any one year. Total remuneration would include amounts
received upon the exercise of stock options granted under the Plan. An exception
does exist, however, for "performance-based compensation," including amounts
received upon the exercise of stock options pursuant to a plan approved by
stockholders that meets certain requirements. The Plan is intended to meet the
requirements of Treasury Regulation section 1.162-27(f), and the options granted
under the Plan are intended to meet the requirements of "performance-based
compensation."
CERTAIN TRANSACTIONS
The Company's business commenced as an unincorporated business division of
XL Vision in 1993 to develop an automated intelligent microscopy system. From
the inception of the business through its incorporation as a separate entity in
March 1996, the Company incurred approximately $4.8 million in development
costs. On March 28, 1996, XL Vision transferred the assets of the business to
the Company in exchange for 1,931,250 shares of the Company's Common Stock and
the assumption of the $4.8 million intercompany debt.
In 1996, the Company sold 6,364,872 shares of Series A Preferred Stock to
certain stockholders of XL Vision, including Safeguard, Technology Leaders I,
Technology Leaders II, John S. Scott and Charles A. Root, and certain officers
and advisors of the Company, including Michael S. Shiff and Kenneth S. Garber.
All of the shares were sold at a purchase price of $1.00 per share. The Company
used a portion of the proceeds from the private placement to repay a portion of
the intercompany debt to XL Vision. In connection with the purchase of shares in
the private placement, the purchasers were granted certain registration rights.
See "Shares Eligible for Future Sale--Registration Rights." In addition, the
holders of Series A Preferred Stock are entitled to elect two members of the
Company's Board of Directors for as long as the Series A Preferred Stock remains
outstanding. The holders entered into an agreement to vote their shares of
Series A Preferred Stock to elect one designee of Safeguard and one designee of
Technology Leaders I and Technology Leaders II, together, to the Company's Board
of Directors. Also, the Company agreed with Safeguard to make a rights offering
to holders of Safeguard common shares.
In August 1996, the Company issued 770,192 shares of Series A Preferred
Stock to Centocor as partial consideration for the release and assignment of
certain rights that Centocor may have had related to the ChromaVision Digital
Analyzer resulting from the joint development arrangements between the Company
and Centocor. The Company continues to collaborate with Centocor on a
nonexclusive basis to develop certain applications for the ChromaVision Digital
Analyzer. Pursuant to the agreement with Centocor, as amended, the Company is
obligated to provide to Centocor, at no charge, technical support through
September 30, 1997 and software development services through December 31, 1997
related to the ChromaVision Digital Analyzer.
In December 1996, Michael S. Shiff resigned as President of the Company. In
connection with his separation, the Company repurchased Mr. Shiff's vested stock
options for an aggregate purchase price of $443,700 and paid a severance payment
of $468,350 plus the continuation of his base salary for three
55
<PAGE>
months. The Company financed such payments through the sale of 221,850 shares of
Series B Preferred Stock to Safeguard for an aggregate purchase price of
$998,325. In addition, the Company assigned its right to repurchase 49,300
shares of Series A Preferred Stock from Mr. Shiff to Safeguard. Safeguard
purchased such shares for an aggregate purchase price of $221,850.
Upon consummation of the rights offering, all outstanding shares of Series A
Preferred Stock and Series B Preferred Stock will automatically convert into
shares of Common Stock.
Since the Company's incorporation in March 1996, XL Vision has provided
certain personnel and administrative services to the Company at cost.
Administrative expenses incurred in 1996 were approximately $740,600. The
Company anticipates that this arrangement will cease after June 1997, however,
the Company may continue to utilize XL Vision personnel thereafter on a cost
reimbursement basis. In addition, the Company subleased office and manufacturing
space from XL Vision in Sebastian, Florida at a total cost of $72,200 during
1996. In March 1997, the Company relocated to San Juan Capistrano, California,
and does not anticipate incurring any additional lease expenses to XL Vision.
The Company entered into an Administrative Services Agreement with XL Vision
and Safeguard, as of January 1, 1997. Under this agreement, XL Vision and
Safeguard are obligated to provide the Company with administrative support
services, including management consultation, investor relations, legal services
and tax planning. In consideration for these services, the Company will pay an
annual fee of 0.75% of the Company's gross revenues each year to each of XL
Vision and Safeguard up to a maximum of $300,000 a year. Fees will accrue until
the Company achieves a positive cash flow from operations. The agreement extends
through January 31, 2002 and continues thereafter unless terminated by either
party.
The Company also entered into a Direct Charge Administrative Services
Agreement with XL Vision, as of January 1, 1997. Under this agreement, XL Vision
provides administrative services to the Company on an hourly basis at the
request of the Company. The Company pays the Company for these services based
upon an hourly fee. The agreement is month-to-month and may be terminated by
either party.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of the date of this Prospectus and as adjusted
to reflect the sale of the shares offered hereby (i) by each selling
stockholder, (ii) by each person who is known by the Company to own beneficially
more than 5% of the outstanding shares of Common Stock, (iii) by each director
of the Company, (iv) by each Named Officer and (v) by all directors and
executive officers of the Company as a group. Unless otherwise indicated below,
to the knowledge of the Company, all persons listed below have sole voting and
investment power with respect to their shares of Common Stock, except to the
extent authority is shared by spouses under applicable law.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
PRIOR TO THE NUMBER OF BENEFICIAL OWNERSHIP
OFFERING(1) SHARES AFTER THE OFFERING(1)
---------------------- TO BE SOLD IN ----------------------
NUMBER OF THE NUMBER OF
NAME AND ADDRESS SHARES PERCENTAGE OFFERING(2) SHARES PERCENTAGE
- -------------------------------------------- ---------- ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Safeguard Scientifics, Inc.(3).............. 4,159,517 37.4% 381,780 3,777,737 22.0%
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
XL Vision, Inc.(4).......................... 1,737,500 15.6 159,530 1,577,970 9.2
10305 102nd Terrace
Sebastian, FL 32958
Centocor, Inc............................... 962,740 8.7 -- 962,740 5.6
244 Great Valley Parkway
Malvern, PA
Technology Leaders II(4).................... 891,668 8.0 81,900 809,768 4.7
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Technology Leaders I(4)..................... 836,718 7.5 76,790 759,928 4.4
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
John S. Scott, Ph.D.(5)..................... 470,625 4.2 -- 470,625 2.7
Douglas S. Harrington, M.D.(6).............. 193,750 1.7 -- 193,750 1.1
Kenneth S. Garber(7)........................ 204,134 1.8 -- 204,134 1.2
Charles A. Root(8).......................... 49,219 * -- 49,219 *
Christopher Moller(9)....................... -- -- -- -- --
Richard C.E. Morgan......................... -- -- -- -- --
All executive officers and directors
as a group (8 persons)(10).................. 956,790 8.3 -- 956,790 5.5
</TABLE>
- ------------------------
* Less than 1% of the outstanding Common Stock.
(1) Solely for the purpose of the percentage ownership calculation for each
beneficial owner depicted herein, the number of shares of Common Stock
deemed outstanding prior to the offering (i) assumes shares of Common Stock
outstanding as of the date of this Prospectus, (ii) the conversion of all
shares of Preferred Stock outstanding as of the date of this prospectus and
(iii) includes additional shares issuable pursuant to options held by such
owner which may be exercised within 60 days after the date of this
Prospectus ("presently exercisable options"), as set forth below. Solely for
the purpose of the percentage ownership calculation for each beneficial
owner depicted herein, the number of shares of Common Stock deemed
outstanding after the offering (i) assumes 17,147,393 shares of Common Stock
will be outstanding upon the successful completion of the offering, and (ii)
includes
57
<PAGE>
additional shares issuable pursuant to presently exercisable options held by
such owner. The beneficial ownership after the offering does not account for
the exercise of rights by such stockholders in the offering.
(2) Includes an aggregate of up to (i) 380,000 shares of Common Stock being sold
in the rights offering and (ii) 320,000 shares of Common Stock being sold to
certain persons selected by the Company.
(3) The shares are held of record by Safeguard Scientifics (Delaware), Inc., a
wholly-owned subsidiary of Safeguard. Includes 70,680 shares of Common Stock
granted by Safeguard to certain of its employees pursuant to a long term
incentive plan. Safeguard will continue to exercise voting control of these
shares until the occurrence of certain vesting requirements. Excludes all
shares of Common Stock beneficially owned by Technology Leaders I,
Technology Leaders II and XL Vision, Inc., in each of which Safeguard has a
beneficial interest. See "Management--Certain Relationships" for a
description of the relationships between Safeguard, Technology Leaders I,
Technology Leaders II and XL Vision. The largest shareholder of Safeguard is
Warren V. Musser, the chairman and chief executive officer of Safeguard, who
is the record holder of approximately 9.5% of the total Safeguard Common
Shares outstanding.
(4) See "Management--Certain Relationships" for a description of the
relationships between Safeguard and Technology Leaders I, Technology Leaders
II and XL Vision.
(5) Includes 343,750 shares held by a family partnership, and 12,500 shares held
by immediate family members for which Dr. Scott disclaims beneficial
ownership. Excludes shares owned by XL Vision, of which Dr. Scott is
Chairman and CEO.
(6) Represents shares of Common Stock issuable pursuant to presently exercisable
options or options exercisable within 60 days of the date hereof.
(7) Includes 173,320 shares of Common Stock issuable pursuant to presently
exercisable options.
(8) Excludes shares owned by Safeguard, of which Mr. Root is Executive Vice
President. Mr. Root disclaims beneficial ownership of such shares.
(9) Excludes shares owned by Technology Leaders I and Technology Leaders II, for
each of which Mr. Moller serves as an indirect general partner. Mr. Moller
disclaims beneficial ownership of such shares.
(10) Includes 406,134 shares of Common Stock issuable pursuant to presently
exercisable options or options exercisable within 60 days of the date
hereof.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, par value $.01 per share, and 8,000,000 shares of Preferred Stock,
par value $.01 per share.
COMMON STOCK
As of March 31, 1997, there were 11,127,393 shares of Common Stock
outstanding, after giving effect to the conversion to the shares of Preferred
Stock. After giving effect to the issuance of the 6,020,000 shares of Common
Stock offered by the Company hereby, there will be 17,147,393 shares of Common
Stock outstanding.
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. The election of directors is determined by a plurality
of the votes cast and, except as otherwise required by law, all other matters
are determined by a majority of the votes cast. Accordingly, holders of a
majority of the shares of Common Stock entitled to vote in any election of
directors may elect all of the directors standing for election. See "Risk
Factors--Control by Principal Stockholders." Holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor, subject to any
preferential dividend rights of outstanding Preferred Stock. Upon the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to receive ratably the net assets of the Company available
after the payment of all debts and other liabilities. Holders of the
58
<PAGE>
Common Stock have no preemptive, subscription, redemption or conversion rights.
The outstanding shares of Common Stock are, and the shares offered by the
Company in the Offering will be, when issued and paid for, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common Stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock which the Company may designate and
issue in the future. See "Description of Capital Stock--Preferred Stock."
RIGHTS
The Company is granting on the date hereof the rights to the holders of
Safeguard common shares. The rights, subject to minimum exercise requirements,
are each exercisable for one share of Common Stock at an exercise price of $5.00
per share. Persons may not exercise rights for fewer than 20 shares of Common
Stock. For purposes of the offering, a person that holds Safeguard common shares
in multiple accounts must meet the 20 share minimum purchase requirement in each
account. Accordingly, persons holding fewer than 20 rights in an account should
consider the advisability of consolidating the rights in one account, selling
rights, or purchasing additional rights to comply with the minimum exercise
requirements of the offering. Rights may be transferred, in whole or in part, by
endorsing and delivering to ChaseMellon Shareholder Services, L.L.C. a rights
certificate that has been properly endorsed for transfer, with instructions to
reissue the rights, in whole or in part, in the name of the transferee.
ChaseMellon Shareholder Services, L.L.C. will reissue certificates for the
transferred rights to the transferee, and will reissue a certificate for the
balance, if any, to the holder of the rights, in each case to the extent it is
able to do so prior to the Expiration Date. The offering will terminate and the
rights will expire at 5:00 p.m., New York City time, on the Expiration Date,
which is , 1997. After the Expiration Date, unexercised rights will be
null and void. For more information about the rights and the offering process,
reference should be made to "The Offering" and to "Risk Factors--Cancellation of
Rights Offering."
PREFERRED STOCK
The Company, by resolution of the Board of Directors and without any further
vote or action by the stockholders, has the authority, subject to certain
limitations prescribed by law, to issue from time to time up to an aggregate of
8,000,000 shares of Preferred Stock in one or more classes or series and to
determine the designation and the number of shares of any class or series as
well as the voting rights, preferences, limitations and special rights, if any,
of the shares of any such class or series, including the dividend rights,
dividend rates, conversion rights and terms, voting rights, redemption rights
and terms, and liquidation preferences. The issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change of control of the
Company. As of the date of this Prospectus, assuming the conversion of each
outstanding share of Series A Preferred Stock and Series B Preferred Stock into
1.25 shares of Common Stock, there are no shares of Preferred Stock outstanding,
and the Company has no plans to issue any shares of Preferred Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C., 85 Challenger Road, Overpeck Centre, Ridgefield
Park, New Jersey 07660.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have 17,147,393 shares of
Common Stock outstanding, excluding 1,608,688 shares of Common Stock subject to
stock options outstanding as of May 27, 1997 and any stock options granted by
the Company after May 27, 1997. Of these shares, the Common Stock sold in the
offering, except for certain shares described below, will be freely tradeable
without restriction or further registration under the Act. The remaining
11,127,393 shares of Common Stock (the "Restricted Shares") were sold by the
Company in reliance on exemptions from the registration
59
<PAGE>
requirements of the Act and are "restricted securities" as defined in Rule 144
and may not be sold in the absence of registration under the Act unless an
exemption is available, including an exemption afforded by Rule 144 or Rule 701.
See "Risk Factors--Shares Eligible for Future Sale."
In general, under Rule 144 as currently in effect, if two years have elapsed
since the date of acquisition of restricted securities from the Company or any
affiliate and the acquiror or subsequent holder is not deemed to have been an
affiliate of the Company for at least 90 days prior to a proposed transaction,
such person would be entitled to sell such shares under Rule 144(k) without
regard to the limitations described below. If one year has elapsed since the
date of acquisition of restricted securities from the Company or any affiliate,
the acquiror or subsequent holder thereof (including persons who may be deemed
affiliates of the Company) is entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of the then-outstanding
shares of Common Stock or the average weekly trading volume in the Common Stock
on the Nasdaq National Market during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain provisions regarding the
manner of sale, notice requirements and the availability of current public
information about the Company. Without considering the contractual restrictions
described below, approximately 10,788,455 Restricted Shares will be eligible for
sale ninety days after the date of this Prospectus, subject to manner of sale
and other resale conditions imposed by Rule 144. Certain restrictions apply to
any shares of Common Stock purchased in the offering by affiliates of the
Company, which may generally only be sold in compliance with the limitations of
Rule 144, except for the holding period requirements thereunder. See "Risk
Factors--Shares Eligible for Future Sale."
Rule 144A under the Act provides a nonexclusive safe harbor exemption from
the registration requirements of the Act of specified resales of restricted
securities to certain institutional investors. In general, Rule 144A allows
unregistered resales of restricted securities to a "qualified institutional
buyer," which generally includes an entity, acting for its own account or for
the account of other qualified institutional buyers, that in the aggregate owns
or invests at least $100 million in securities that, when issued, were of the
same class as securities listed on a national securities exchange or quoted on
Nasdaq. The shares of Common Stock outstanding as of the date of this Prospectus
would be eligible for resale under Rule 144A because such shares, when issued,
were not of the same class as any listed or quoted securities.
STOCK OPTIONS
As of May 27, 1997 there were outstanding options to purchase an aggregate
of 1,608,688 shares of Common Stock (of which 299,016 were exercisable at May
27, 1997), at a weighted average exercise price of $2.09 per share. As of May
27, 1997, the Company had an additional 233,375 shares of Common Stock available
for future grants and other issuances under the Plan. After the offering, the
holders of options to purchase a total of 1,292,313 shares will be subject to
Lock-Up Agreements, which restrict, until after the Lock-Up Expiry Date (without
the underwriters' prior written consent), the holders' ability to sell or
otherwise dispose of Common Stock acquired upon the exercise of such options.
See "Management-- Equity Compensation Plan."
The Company issued options and underlying shares of Common Stock to
employees of the Company who were not executive officers and directors of the
Company pursuant to Rule 701. Under Rule 701, such employees of the Company who
prior to the Offering purchased shares pursuant to the Stock Option Plan are
entitled to sell such shares without having to comply with the public
information, holding period, volume limitation or notice provisions of Rule 144
commencing 90 days after the date of this Prospectus. Rule 701 also permits the
shares subject to unexercised options under such Plan to be sold upon exercise
without having to comply with such provisions of Rule 144. As of March 31, 1997,
approximately 175,000 shares of Common Stock subject to unexercised options will
be eligible for sale under Rule 701 by Company employees (subject to applicable
vesting provisions).
60
<PAGE>
It is anticipated that a Form S-8 Registration Statement covering the Common
Stock that may be issued pursuant to the exercise of options after the
effectiveness of the Form S-8 Registration Statement will be filed and declared
effective prior to the Lock-Up Expiry Date and that shares of Common Stock that
are so acquired and offered thereafter pursuant to the Form S-8 Registration
Statement generally may be resold in the public market without restriction or
limitation, except in the case of affiliates of the Company, which generally may
only resell such shares in compliance with Rule 144, except for the holding
period requirements thereunder.
LOCK-UP AGREEMENTS
The Principal Stockholders, Centocor, each executive officer and each
director of the Company, who will in the aggregate own 8,438,799 shares of
Common Stock after the completion of the offering and will be deemed to
beneficially own an additional 406,133 shares of Common Stock, have agreed with
the Underwriters that they will not sell or otherwise dispose of any shares of
Common Stock (except for 29,000 shares owned by one director) until after the
Lock-Up Expiry Date without the prior written consent of the underwriters. See
"Management--Equity Compensation Plan" and "Shares Eligible for Future Sale." In
addition, Warren V. Musser has agreed that he and/or his assignees will not sell
or otherwise dispose of 280,000 shares of Common Stock without the prior written
consent of the Underwriters. See "Management--Stock Options" and "Shares
Eligible for Future Sale."
REGISTRATION RIGHTS
The Company has granted certain piggyback and demand registration rights to
holders of Preferred Stock. Holders of at least 1,200,000 shares of Preferred
Stock have the right to request that the Company effect the registration, under
the Securities Act, of the Common Stock issuable upon the conversion of the
Preferred Stock, provided that the securities to be registered have a value of
at least $3,000,000. These registration rights become exercisable six months
after the completion of this offering. In addition, the holders of Preferred
Stock have the right to include their securities in the offerings of the
Company's securities under the Securities Act. By exercising such registration
rights, subject to certain limitations, such holders could cause a significant
number of shares to be registered and sold in the public market. Such sales may
have an adverse effect on the market price for the Common Stock and could impair
the Company's ability to raise capital through an offering of its equity
securities. All of the holders of registration rights have waived their
respective rights to participate in this offering.
61
<PAGE>
UNDERWRITING
The Company and the underwriters have entered into the Standby Underwriting
Agreement on the date hereof, pursuant to which the underwriters are required,
subject to certain terms and conditions (all of which are set forth below), to
purchase the shares of Common Stock offered in the rights offering and not
purchased (the "Excess Unsubscribed Shares") in accordance with the percentages
set forth below. If all of the rights are exercised there will be no Excess
Unsubscribed Shares and the underwriters will not be required to purchase any
shares of Common Stock.
<TABLE>
<CAPTION>
% OF UNDERWRITER
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------ ----------------------
<S> <C>
Robert W. Baird & Co. Incorporated........................................................ 50
Adams, Harkness & Hill, Inc............................................................... 50
</TABLE>
The underwriters have agreed, severally and not jointly, subject to the
condition that the Company complies with its obligations under the Standby
Underwriting Agreement and subject to the Underwriter's right to terminate their
obligations under the Standby Underwriting Agreement (as specified below), to
purchase all of the Excess Unsubscribed Shares. The Company will pay the
underwriters the financial advisory fee equal to 3% of the exercise price for
each share of Common Stock included in the offering. The financial advisory fee
is for services and advice rendered in connection with the structuring of the
offering, valuation of the business of the Company, and financial advice to the
Company before and during the offering. An additional fee of 4% of the exercise
price will be paid to the underwriters (i) for each share of Common Stock
purchased by the underwriters pursuant to the Standby Underwriting Agreement and
(ii) for each share of Common Stock purchased upon the underwriters' exercise of
rights if such rights were purchased by the underwriters at a time when the
Common Stock was trading (on a "when issued" basis) at a per share price of less
than 120% of the exercise price or if the underwriters purchase such rights with
Safeguard's prior acknowledgment that it would be entitled to receive the
underwriting discount for Common Stock purchased pursuant to the exercise of
such rights. In addition, the Company has agreed to pay the underwriters a
non-accountable expense allowance in the aggregate amount of $200,000, provided,
however, such non-accountable expense allowance shall be reduced to $100,000 or
zero if, on the Expiration Date, the closing price for the Common Stock traded
on a "when issued" basis is at least $7.25 per share or greater than $8.25 per
share, respectively. The selling stockholders have granted to the underwriters a
20-day option commencing on the Expiration Date to purchase a maximum of 640,000
additional shares of Common Stock at a per share price equal to the exercise
price less the financial advisory fee and the underwriting discount. The
underwriters may exercise such option in whole or in part only to cover
over-allotments made in connection with the sale of shares of Common Stock by
the underwriters.
Prior to the Expiration Date, the underwriters may offer shares of Common
Stock on a when-issued basis, including shares to be acquired through the
purchase and exercise of rights, at prices set from time to time by the
underwriters. It is not contemplated that the offering price set on any calendar
day will be increased more than once during such day. After the Expiration Date,
the underwriters may offer shares of Common Stock, whether acquired pursuant to
the Standby Underwriting Agreement, the exercise of the rights or the purchase
of Common Stock in the market, to the public at a price or prices to be
determined. The underwriters may thus realize profits or losses independent of
the underwriting discount and the financial advisory fee. Shares of Common Stock
subject to the Standby Underwriting Agreement will be offered by the
underwriters when, as and if sold to, and accepted by, the underwriters and will
be subject to their right to reject orders in whole or in part.
Prior to the offering, there has been no public market for the Common Stock
or the rights. Consequently, the exercise price was determined by negotiations
among the Company and the underwriters. In determining the exercise price, the
underwriters and the Board of Directors of the Company considered such factors
as the future prospects and historical growth rate in revenues and earnings of
the Company, its industry in general and the Company's position in its industry;
revenues, earnings and certain other financial and operating information of the
Company in recent periods; market valuations of the
62
<PAGE>
securities of companies engaged in activities similar to those of the Company;
the management of the Company; and, with respect to the Company, the advice of
the underwriters.
The underwriters will be prohibited from engaging in any market making
activities with respect to the Company's when-issued Common Stock and Common
Stock until the underwriters have completed their participation in the
distribution of shares offered hereby. As a result, the underwriters may be
unable to provide a market for the Company's when-issued Common Stock and Common
Stock should it desire to do so, during certain periods while the rights are
exercisable.
In connection with the offering, the underwriters and certain selling group
members may engage in stabilizing, syndicate short covering transactions or
other transactions that stabilize, maintain or otherwise effect the market price
of the Common Stock. After the opening of quotations for the Common Stock on the
Nasdaq National Market, stabilizing bids for the purpose of preventing or
retarding a decline in the market price may be initiated by the underwriters or
selling group members in any market at a price no higher than the last
independent transaction price for the Common Stock and then maintained, reduced
or raised to follow the independent market. Such transactions may stabilize the
market price of the Common Stock at a level above that which might otherwise
prevail and, if commenced, may be discontinued at any time.
The Company has agreed to indemnify the underwriters against certain
liabilities arising out of or based upon misstatements or omissions in this
Prospectus or the Registration Statement of which this Prospectus is a part and
certain other liabilities, including liabilities under the Act, and to
contribute to certain payments that the underwriters may be required to make.
The underwriters may terminate their obligations under the Standby
Underwriting Agreement (i) if any calamitous domestic or international event or
act or occurrence has disrupted or, in the underwriters' opinion, will in the
immediate future materially disrupt, the general securities market in the United
States; (ii) if trading in the Common Stock (on a when-issued basis) shall have
been suspended by the Commission or Nasdaq; (iii) if trading on the New York
Stock Exchange, the American Stock Exchange or the Nasdaq National Market or in
the over-the-counter market shall have been suspended, or minimum or maximum
prices for trading shall have been fixed, or maximum ranges for prices for
securities shall have been required on the over-the-counter market by the NASD
or by order of the Commission or any other government authority having
jurisdiction; (iv) if the United States shall have become involved in a war or
major hostilities which, in the underwriters' opinion, will affect the general
securities market in the United States; (v) if a banking moratorium has been
declared by a California, New York, Pennsylvania, Massachusetts, Wisconsin or
federal authority; (vi) if a moratorium in foreign exchange trading has been
declared; (vii) if the Company shall have sustained a loss material to the
Company by fire, flood, accident, hurricane, earthquake, theft, sabotage or
other calamity or malicious act, whether or not such loss shall have been
insured, or from any labor dispute or any legal or governmental proceeding;
(viii) if there shall be such material adverse market conditions (whether
occurring suddenly or gradually between the date of this Prospectus and the
closing of the offering) affecting markets generally, or technology or
healthcare issues particularly, as in the underwriters' reasonable judgment
would make it inadvisable to proceed with the offering, sale or delivery of the
shares of Common Stock offered hereby; or (ix) if there shall have been such
material adverse change, or any development involving a prospective material
adverse change, in the condition (financial or otherwise), business prospects,
net worth or results of operations of the Company since December 31, 1996, or
that materially impacts the Standby Underwriting Agreement.
The Company has agreed that, without the prior written consent of the
underwriters, it will not offer, sell, grant any option for the sale of, or
otherwise dispose of any shares of Common Stock (or securities convertible into
shares of Common Stock) (collectively, the "Securities") acquired in the
offering or held by it as of the date hereof until after the Lock-Up Expiry
Date, other than (i) Common Stock to be sold in the offering, and (ii) Company
option issuances and sales of Common Stock pursuant to the Stock Option Plan and
(iii) Securities issued as consideration for an acquisition if the party being
issued the Securities agrees not to transfer, sell, offer for sale, contract or
otherwise dispose of such Securities until after the Lock-Up Expiry Date. The
Principal Stockholders, Centocor, each executive officer and each director of
63
<PAGE>
the Company, who will in the aggregate own 8,438,799 shares of Common Stock
after the completion of the Offering and will be deemed to beneficially own an
additional 406,133 shares of Common Stock, have agreed with the Underwriters
that they will not sell or otherwise dispose of any shares of Common Stock
(except for 29,000 shares owned by one director) until after the Lock-Up Expiry
Date without the prior written consent of the underwriters. See
"Management--Equity Compensation Plan" and "Shares Eligible for Future Sale." In
addition, Warren V. Musser has agreed that he and/or his assignees will not sell
or otherwise dispose of 280,000 shares of Common Stock without the prior written
consent of the Underwriters. See "Management--Stock Options" and "Shares
Eligible for Future Sale."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania.
Certain legal matters in connection with the Offering are being passed upon for
the Underwriters by Drinker Biddle & Reath LLP, Philadelphia, Pennsylvania.
EXPERTS
The financial statements of ChromaVision Medical Systems, Inc. as of
December 31, 1996 and 1995 and for the years ended December 31, 1995 and 1994
and for the periods from January 1, 1996 through March 27, 1996 and the period
from March 28, 1996 (incorporation) through December 31, 1996 included in this
Prospectus and elsewhere in the Registration Statement have been included herein
in reliance on the report of KPMG Peat Marwick LLP, independent accountants,
given upon the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (including all amendments thereto, the "Registration Statement") under the
Act with respect to the Common Stock and rights offered hereby. As permitted by
the rules and regulations of the Commission, this Prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and the Common Stock and rights offered hereby,
reference is hereby made to the Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus regarding the
contents of any agreement or other document filed as an exhibit to the
Registration Statement are not necessarily complete, and in each instance
reference is made to the copy of such agreement filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, DC 20549, and copies of all or
any part thereof may be obtained from such office upon payment of the prescribed
fees. In addition, the Commission maintains a Web site at http://www.sec.gov
that contains reports, proxy statements, information statements and other
information regarding the Company.
64
<PAGE>
CHROMAVISION MEDICAL SYSTEMS, INC.
(FORMERLY MICROVISION MEDICAL SYSTEMS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-2
Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997 (unaudited)........ F-3
Statements of Operations for the years ended December 31, 1994, 1995, the period from
January 1, 1996 through March 27, 1996, the period from March 28, 1996
(incorporation) through December 31, 1996, the three months ended March 31, 1996 and
1997 (unaudited), the period from April 1, 1993 (inception) through December 31,
1996 and the period from April 1, 1993 (inception) through March 31, 1997
(unaudited)......................................................................... F-4
Statements of Stockholders' Deficit at December 31, 1995 and 1996 and March 31, 1997
(unaudited)......................................................................... F-5
Statements of Cash Flows for the years ended December 31, 1994, 1995, the period from
January 1, 1996 through March 27, 1996, the period from March 28, 1996
(incorporation) through December 31, 1996, the three months ended March 31, 1996 and
1997 (unaudited), the period from April 1, 1993 (inception) through December 31,
1996 and the period from April 1, 1993 (inception) through March 31, 1997
(unaudited)......................................................................... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
ChromaVision Medical Systems, Inc.:
(formerly MicroVision Medical Systems, Inc.):
We have audited the accompanying balance sheet of ChromaVision Medical
Systems (a development stage enterprise), a division of XL Vision, Inc., as of
December 31, 1995 and ChromaVision Medical Systems, Inc. (a development stage
enterprise) as of December 31, 1996 and the related statements of operations,
stockholders' deficit and cash flows of ChromaVision Medical Systems (a
development stage enterprise), a division of XL Vision, Inc., for the years
ended December 31, 1994 and 1995 and the period from January 1, 1996 through
March 27, 1996, and ChromaVision Medical Systems, Inc. (a development stage
enterprise) for the period from March 28, 1996 (incorporation) through December
31, 1996, and for the cumulative development stage from April 1, 1993
(inception) through December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ChromaVision Medical Systems
(a development stage enterprise), a division of XL Vision, Inc., at December 31,
1995 and ChromaVision Medical Systems, Inc. (a development stage enterprise) at
December 31, 1996 and the results of operations and cash flows of ChromaVision
Medical Systems (a development stage enterprise), a division of XL Vision, Inc.,
for the years ended December 31, 1994 and 1995 and for the period from January
1, 1996 through March 27, 1996, and ChromaVision Medical Systems, Inc. (a
development stage enterprise) for the period from March 28, 1996 (incorporation)
through December 31, 1996 and for the cumulative development stage from April 1,
1993 (inception) through December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Orlando, Florida
March 19, 1997
F-2
<PAGE>
CHROMAVISION MEDICAL SYSTEMS, INC.
(FORMERLY MICROVISION MEDICAL SYSTEMS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
DIVISIONAL
OPERATIONS
(NOTE 1)
---------- MARCH 31,
ASSETS 1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents............................ $ -- $ 124,092 $ 65,100
Accounts receivable.................................. 200,000 550 550
Inventory............................................ 74,202 502,511 468,411
Prepaid expenses..................................... -- 27,677 42,422
Capitalized offering costs........................... -- 144,760 344,760
---------- ---------- ----------
Total current assets............................... 274,202 799,590 921,243
Deposits............................................... -- -- 35,682
Property and equipment, net............................ 71,462 80,840 230,418
---------- ---------- ----------
Total assets........................................... $ 345,664 $ 880,430 $1,187,343
---------- ---------- ----------
---------- ---------- ----------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C> <C>
Current liabilities:
Revolving line of credit............................. $ -- $ -- $1,958,432
Due to XL Vision, Inc................................ 4,726,635 380,439 452,388
Accounts payable..................................... 8,783 183,373 318,973
Accrued liabilities:
Salaries and benefits.............................. 8,846 89,066 158,522
Severance costs.................................... -- 912,050 --
Warranty costs..................................... -- 60,000 60,000
Offering costs..................................... -- 105,000 273,000
Other.............................................. -- -- 29,908
---------- ---------- ----------
Total current liabilities........................ 4,744,264 1,729,928 3,251,223
Revolving line of credit............................. -- 806,009 --
---------- ---------- ----------
Total liabilities................................ 4,744,264 2,535,937 3,251,223
---------- ---------- ----------
Commitments and contingencies
Stockholders' deficit:
Series A preferred stock, $.01 par value, authorized
7,246,000 shares, issued and outstanding 7,135,064
shares in 1996 and 1997............................ -- 71,351 71,351
Series B preferred stock, $.01 par value, authorized
221,850 shares, issued and outstanding -0- shares
in 1996 and 221,850 shares in 1997................. -- -- 2,219
Common stock $.01 par value, authorized 50,000,000
shares, issued and outstanding 1,931,250 shares in
1996 and 1997...................................... -- 19,313 19,313
Additional paid-in capital........................... -- 7,059,849 8,055,955
Accumulated deficit during the development stage..... (4,398,600) (8,806,020) (10,212,718)
---------- ---------- ----------
Total stockholders' deficit...................... (4,398,600) (1,655,507) (2,063,880)
---------- ---------- ----------
Total liabilities and stockholders' deficit............ $ 345,664 $ 880,430 $1,187,343
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CHROMAVISION MEDICAL SYSTEMS, INC.
(FORMERLY MICROVISION MEDICAL SYSTEMS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM MARCH 28,
JANUARY 1, 1996 PERIOD FROM
1996 (INCORPORATION) APRIL 1, 1993
YEARS ENDED DECEMBER 31, THROUGH THROUGH (INCEPTION) THROUGH
------------------------ MARCH 27, DECEMBER 31, DECEMBER 31,
1994 1995 1996 1996 1996
----------- ----------- ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C>
(DIVISIONAL OPERATIONS--NOTE 1)
Revenue:
Products.................... $ 220,000 $ 900,000 $ -- $ -- $ 1,120,000
Services.................... 76,886 -- -- -- 76,886
----------- ----------- ------------ ------------ -------------------
296,886 900,000 -- -- 1,196,886
----------- ----------- ------------ ------------ -------------------
Cost of revenue:
Products.................... 201,886 310,103 -- -- $ 511,989
Services.................... 30,750 -- -- -- 30,750
----------- ----------- ------------ ------------ -------------------
232,636 310,103 -- -- 542,739
----------- ----------- ------------ ------------ -------------------
Gross profit................ 64,250 589,897 -- -- 654,147
----------- ----------- ------------ ------------ -------------------
Operating expenses:
Selling, general and
administrative............ 787,167 1,040,070 216,579 2,762,673 5,111,440
Research and development.... 858,389 1,513,014 235,578 1,633,944 4,790,081
----------- ----------- ------------ ------------ -------------------
Total operating
expenses................ 1,645,556 2,553,084 452,157 4,396,617 9,901,521
----------- ----------- ------------ ------------ -------------------
Profit (loss) from
operations.............. (1,581,306) (1,963,187) (452,157) (4,396,617) (9,247,374)
----------- ----------- ------------ ------------ -------------------
Other income (expense):
Interest income (expense)... -- -- -- 17,829 17,829
Other income (note 4) -- -- 75,000 348,525 423,525
----------- ----------- ------------ ------------ -------------------
Total other income
(expense)............... -- -- 75,000 366,354 441,354
----------- ----------- ------------ ------------ -------------------
Profit (loss) before
income taxes............ (1,581,306) (1,963,187) (377,157) (4,030,263) (8,806,020)
Income tax expense
(benefit)................... -- -- -- -- --
----------- ----------- ------------ ------------ -------------------
Net profit (loss)......... $(1,581,306) $(1,963,187) $ (377,157) $(4,030,263) $(8,806,020)
Net profit (loss) subsequent
to incorporation (notes 1
and 2) $(4,030,263)
------------
------------
Net loss per common share
subsequent to incorporation
(notes 1 and 2)............. $ (0.33)
------------
------------
Pro forma weighted average
number of common shares
outstanding................. 12,111,580
<CAPTION>
PERIOD FROM
APRIL 1,
THREE MONTHS 1993
ENDED (INCEPTION)
MARCH 31, THROUGH
----------------------- MARCH 31,
1996 1997 1997
---------- ----------- ------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(DIVISIONAL
OPERATIONS-
NOTE 1)
Revenue:
Products.................... $ -- $ -- $ 1,120,000
Services.................... -- -- 76,886
---------- ----------- ------------
-- -- 1,196,886
---------- ----------- ------------
Cost of revenue:
Products.................... -- -- 511,989
Services.................... -- -- 30,750
---------- ----------- ------------
-- -- 542,739
---------- ----------- ------------
Gross profit................ -- -- 654,147
---------- ----------- ------------
Operating expenses:
Selling, general and
administrative............ 216,579 784,622 5,896,062
Research and development.... 235,578 599,808 5,389,889
---------- ----------- ------------
Total operating
expenses................ 452,157 1,384,430 11,285,951
---------- ----------- ------------
Profit (loss) from
operations.............. (452,157) (1,384,430) (10,631,804 )
---------- ----------- ------------
Other income (expense):
Interest income (expense)... -- (22,278) (4,449 )
Other income (note 4) 75,000 10 423,535
---------- ----------- ------------
Total other income
(expense)............... 75,000 (22,268) 419,086
---------- ----------- ------------
Profit (loss) before
income taxes............ (377,157) (1,406,698) (10,212,718 )
Income tax expense
(benefit)................... -- -- --
---------- ----------- ------------
Net profit (loss)......... $ (377,157) $(1,406,698) $(10,212,718)
Net profit (loss) subsequent
to incorporation (notes 1
and 2) $(1,406,698)
-----------
-----------
Net loss per common share
subsequent to incorporation
(notes 1 and 2)............. $ (0.11)
-----------
-----------
Pro forma weighted average
number of common shares
outstanding................. 12,280,331
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CHROMAVISION MEDICAL SYSTEMS, INC.
(FORMERLY MICROVISION MEDICAL SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------------------------------
SERIES A SERIES B COMMON STOCK ADDITIONAL
--------------------- ---------------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- --------- --------- ----------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993............. -- $ -- -- $ -- -- $ -- $ --
Net profit (loss)......................... -- -- -- -- -- -- --
---------- --------- --------- ----------- ---------- --------- ------------
Balances at December 31, 1994............. -- -- -- -- -- -- --
Net profit (loss)......................... -- -- -- -- -- -- --
---------- --------- --------- ----------- ---------- --------- ------------
Balances at December 31, 1995............. -- -- -- -- -- -- --
Net profit (Loss)......................... -- -- -- -- -- -- --
---------- --------- --------- ----------- ---------- --------- ------------
Balances at March 27, 1996................ -- -- -- -- -- -- --
Net profit (loss)......................... -- -- -- -- -- -- --
Issuance of common stock on March 28, 1996
(Incorporation)......................... -- -- -- -- 1,545,000 15,450 --
Sale of preferred stock................... 6,364,872 63,649 -- -- -- -- 6,301,222
Issuance of preferred stock for release of
rights and claims (note 11)............. 770,192 7,702 -- -- -- -- 762,490
Five-for-four common stock split (note
12)..................................... -- -- -- -- 386,250 3,863 (3,863)
---------- --------- --------- ----------- ---------- --------- ------------
Balances at December 31, 1996............. 7,135,064 71,351 -- -- 1,931,250 19,313 7,059,849
Sale of preferred stock (unaudited)....... -- -- 221,850 2,219 -- -- 996,106
Net profit (loss) (unaudited)............. -- -- -- -- -- -- --
---------- --------- --------- ----------- ---------- --------- ------------
Balances at March 31, 1997 (unaudited).... 7,135,064 $ 71,351 221,850 $ 2,219 1,931,250 $ 19,313 $ 8,055,955
---------- --------- --------- ----------- ---------- --------- ------------
---------- --------- --------- ----------- ---------- --------- ------------
<CAPTION>
ACCUMULATED
DEFICIT
DURING THE
DEVELOPMENT
STAGE TOTAL
------------- ------------
<S> <C> <C>
Balances at December 31, 1993............. $ (854,107) $ (854,107)
Net profit (loss)......................... (1,581,306) (1,581,306)
------------- ------------
Balances at December 31, 1994............. (2,435,413) (2,435,413)
Net profit (loss)......................... (1,963,187) (1,963,187)
------------- ------------
Balances at December 31, 1995............. (4,398,600) (4,398,600)
Net profit (Loss)......................... (377,157) (377,157)
------------- ------------
Balances at March 27, 1996................ (4,775,757) (4,775,757)
Net profit (loss)......................... (4,030,263) (4,030,263)
Issuance of common stock on March 28, 1996
(Incorporation)......................... -- 15,450
Sale of preferred stock................... -- 6,364,871
Issuance of preferred stock for release of
rights and claims (note 11)............. -- 770,192
Five-for-four common stock split (note
12)..................................... -- --
------------- ------------
Balances at December 31, 1996............. (8,806,020) (1,655,507)
Sale of preferred stock (unaudited)....... -- 998,325
Net profit (loss) (unaudited)............. (1,406,698) (1,406,698)
------------- ------------
Balances at March 31, 1997 (unaudited).... $ (10,212,718) $ (2,063,880)
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CHROMAVISION MEDICAL SYSTEMS, INC.
(FORMERLY MICROVISION MEDICAL SYSTEMS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM PERIOD FROM APRIL 1,
JANUARY 1, MARCH 28, 1996 1993 THREE MONTHS
YEARS ENDED 1996 (INCORPORATION) (INCEPTION) ENDED
DECEMBER 31, THROUGH THROUGH THROUGH MARCH 31,
---------------------- MARCH 27, DECEMBER 31, DECEMBER 31, -----------------------
1994 1995 1996 1996 1996 1996 1997
---------- ---------- -------------- -------------- ------------ ----------- ----------
(DIVISIONAL OPERATIONS-NOTE 1) (UNAUDITED) (UNAUDITED)
(DIVISIONAL
OPERATIONS-
NOTE 1)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from development
stage activities:
Net profit (loss).......... $(1,581,306) $(1,963,187) $ (377,157) $ (4,030,263) $(8,806,020) $(377,157) $(1,406,698)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization........... 27,159 54,417 6,080 28,659 116,315 6,080 9,605
Non-cash issuance of
preferred stock........ -- -- -- 770,192 770,192 -- --
Write-off of note
receivable............. -- 40,000 -- -- 40,000 -- --
Changes in operating
assets and liabilities:
Accounts receivable.... (100,000) (100,000) 200,000 (550) (550) 200,000 --
Inventory.............. (1,646) (52,556) (1,888) (426,421) (502,511) (1,888) 34,100
Prepaid expenses....... -- -- -- (27,677) (27,677) -- (14,745)
Deposits............... -- -- -- -- -- -- (35,682)
Accounts payable....... 466 8,317 -- 174,590 183,373 -- 135,600
Accrued liabilities.... 1,110 5,080 21,514 1,135,756 1,166,116 21,514 (644,686)
---------- ---------- -------------- -------------- ------------ ----------- ----------
Net cash used in
operating
activities........... (1,654,217) (2,007,929) (151,451) (2,375,714) (7,060,762) (151,451) (1,922,506)
---------- ---------- -------------- -------------- ------------ ----------- ----------
Cash flows from investing
activities:
Notes receivable........... (785,000) -- -- -- (825,000) -- --
Collections on notes
receivable............... -- 785,000 -- -- 785,000 -- --
Purchases of property and
equipment................ (146,841) (6,197) (348) (43,769) (197,155) (348) (159,183)
---------- ---------- -------------- -------------- ------------ ----------- ----------
Net cash provided by
(used in) investing
activities........... (931,841) 778,803 (348) (43,769) (237,155) (348) (159,183)
---------- ---------- -------------- -------------- ------------ ----------- ----------
Cash flows from financing
activities:
Due to (from) XL Vision,
Inc...................... 2,586,058 1,229,126 151,799 (4,497,995) 380,439 136,349 71,949
Sale of common stock....... -- -- -- 15,450 15,450 15,450 --
Borrowing under revolving
line of credit........... -- -- -- 806,009 806,009 -- 1,152,423
Sale of preferred stock.... -- -- -- 6,364,871 6,364,871 -- 998,325
Capitalized offering
costs.................... -- -- -- (144,760) (144,760) -- (200,000)
---------- ---------- -------------- -------------- ------------ ----------- ----------
Net cash provided by
financing
activities........... 2,586,058 1,229,126 151,799 2,543,575 7,422,009 151,799 2,022,697
---------- ---------- -------------- -------------- ------------ ----------- ----------
Net increase (decrease)
in cash and cash
equivalents.......... -- -- -- 124,092 124,092 -- (58,992)
Cash and cash equivalents--
beginning of period........ -- -- -- -- -- -- 124,092
---------- ---------- -------------- -------------- ------------ ----------- ----------
Cash and cash
equivalents--end of
period..................... $ -- $ -- $ -- $ 124,092 $ 124,092 $ -- $ 65,100
---------- ---------- -------------- -------------- ------------ ----------- ----------
---------- ---------- -------------- -------------- ------------ ----------- ----------
<CAPTION>
PERIOD FROM
APRIL 1,
1993
(INCEPTION)
THROUGH
MARCH 31,
1997
------------
(UNAUDITED)
<S> <C>
Cash flows from development
stage activities:
Net profit (loss).......... ($10,212,718)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization........... 125,920
Non-cash issuance of
preferred stock........ 770,192
Write-off of note
receivable............. 40,000
Changes in operating
assets and liabilities:
Accounts receivable.... (550)
Inventory.............. (468,411)
Prepaid expenses....... (42,422)
Deposits............... (35,682)
Accounts payable....... 318,973
Accrued liabilities.... 521,430
------------
Net cash used in
operating
activities........... (8,983,268)
------------
Cash flows from investing
activities:
Notes receivable........... (825,000)
Collections on notes
receivable............... 785,000
Purchases of property and
equipment................ (356,338)
------------
Net cash provided by
(used in) investing
activities........... (396,338)
------------
Cash flows from financing
activities:
Due to (from) XL Vision,
Inc...................... 452,388
Sale of common stock....... 15,450
Borrowing under revolving
line of credit........... 1,958,432
Sale of preferred stock.... 7,363,196
Capitalized offering
costs.................... (344,760)
------------
Net cash provided by
financing
activities........... 9,444,706
------------
Net increase (decrease)
in cash and cash
equivalents.......... 65,100
Cash and cash equivalents--
beginning of period........ --
------------
Cash and cash
equivalents--end of
period..................... $ 65,100
------------
------------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
CHROMAVISION MEDICAL SYSTEMS, INC.
(FORMERLY MICROVISION MEDICAL SYSTEMS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED
(1) ORGANIZATION
ChromaVision Medical Systems, Inc. (formerly MicroVision Medical Systems,
Inc.) (a development stage enterprise) ("ChromaVision" or the "Company") is a
Delaware corporation. Prior to the formation of the Company on March 28, 1996,
the Company's business was conducted as the MicroVision Medical Systems Division
(the "Division") of XL Vision, Inc. ("XL Vision").
On March 28, 1996, the assets and liabilities of the Division were
contributed to the Company, which is a wholly owned subsidiary of XL Vision.
This transaction was accounted for as a reorganization of entities under common
control and, accordingly, the assets and liabilities were recorded at their
historical book value. As of the date of incorporation, the Division had assets,
net of assumed liabilities of $102,677 and an accumulated deficit of $4,775,757.
The Company assumed a liability to XL Vision totaling $4,862,984 which consisted
of the net assets, the accumulated deficit of the Division less consideration
paid for common stock, $15,450.
Subsequent to incorporation, the Company raised $6.4 million from a private
equity placement in June 1996, for which the proceeds were used primarily to
fund the repayment of amounts due to XL Vision and for working capital.
The accompanying financial statements for the period from April 1, 1993,
inception, through March 27, 1996, reflect operations within XL Vision.
Significant management assumptions were made in allocating costs from XL Vision
in order to present the balance sheet and statement of operations for those
periods. The Company was allocated all incremental costs and certain indirect or
common costs based upon the proportional value of all expenses incurred by XL
Vision. Management of the Company believes the allocated costs reasonably
reflects the costs of the Division as if it were on a stand alone basis.
The Company was established to develop medical imaging technologies and to
introduce a computer-based microscope for the healthcare services market. From
inception on April 1, 1993 through December 31, 1996, the Company has devoted
substantially all of its resources to the development of the ChromaVision
Digital Analyzer technology.
The ChromaVision Digital Analyzer is designed to identify cells with
specific characteristics within a sample of cells by detecting color produced by
the reaction between common laboratory reagents (or stains) in the cells. The
ChromaVision Digital Analyzer uses proprietary imaging software and technology
to capture digital images of cell samples and detect the presence, count the
number and measure the color intensity of cells containing a particular stain.
The Company believes the ChromaVision Digital Analyzer offers flexibility
because the software can be configured to identify different stains; thereby
allowing the system to be adapted for use with different reagents to identify a
broad range of cellular conditions. The Company intends to establish the
ChromaVision Digital Analyzer as the preferred platform for multiple microscopic
diagnostic applications.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DEVELOPMENT STAGE
From the inception of ChromaVision on April 1, 1993, the Company was
considered to be in the development stage as defined by the Statement of
Financial Accounting Standards ("SFAS") No. 7, "ACCOUNTING AND REPORTING BY
DEVELOPMENT STAGE ENTERPRISES". Until the Company begins to realize significant
revenue associated from its planned operations, the Company will be considered
in the development stage.
F-7
<PAGE>
CHROMAVISION MEDICAL SYSTEMS, INC.
(FORMERLY MICROVISION MEDICAL SYSTEMS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(B) MANAGEMENT'S PLANS
At March 31, 1997, the Company had a working capital deficiency of
$2,329,980 and a stockholders' deficit of $2,063,880. Management expects
additional working capital requirements as the Company continues its marketing
and development efforts leading to initial revenues from its ChromaVision
Digital Analyzer. Management expects initial system revenues to begin in 1998.
The Company's business plans anticipate manufacturing the ChromaVision Digital
Analyzer instruments, placing them with users at no charge and charging a "per
click" fee for each use of the instruments. The manufacturing of these
instruments will require a significant outlay of cash for which revenues will
not be recognized until future periods. As a result, the Company intends to
arrange third-party financing for the instruments. In addition, to support the
Company's future cash needs, it may consider additional debt or equity
financing. Although management believes that its initial public offering ("IPO")
will be successful, there can be no assurances that it will be achieved or that
the Company will be successful in raising other financing. The Company
anticipates that net proceeds from its planned IPO of common stock (see note 13)
will be sufficient to satisfy its operating cash needs for at least twelve
months following the IPO. If the Company is unable to obtain sufficient
additional funds, the Company may have to delay, scale back or eliminate some or
all of its development activities and clinical studies.
(C) INTERIM FINANCIAL INFORMATION
The financial statements for the three months ended March 31, 1997 and 1996
are unaudited but reflect adjustments which are, in the opinion of management,
necessary for the fair presentation of financial position and results of
operations. Operating results for the three months ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
(D) REVENUE RECOGNITION
The Company's revenues in 1994 and 1995 were derived from the sale of
digital analyzers and the provision of engineering services. The Company's
revenue recognition policy for the 1994 and 1995 years was to recognize product
revenues when a digital analyzer was sold and title transferred. The sales of
the digital analyzers in 1994 and 1995 was inclusive of the software necessary
to operate the various applications. None of the product sales made in 1994 and
1995 included any obligations related to future services required to be
performed. Services revenue in 1994 was recognized at the completion of the
performance of the related engineering services.
The policy for future revenues on a "per use" or "per click" basis will be
to record the revenues as each "per use" is incurred. It is anticipated that
under this new pricing model the Company will own all digital analyzers that are
engaged in service and accordingly, all development and maintenance costs will
be expensed as incurred.
(E) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of amounts held as bank deposits and
marketable securities with a maturity of three months or less.
(F) INVENTORIES
Inventories are stated at standard cost which approximates the lower of
first-in, first-out cost or market.
F-8
<PAGE>
CHROMAVISION MEDICAL SYSTEMS, INC.
(FORMERLY MICROVISION MEDICAL SYSTEMS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) DEPRECIATION AND AMORTIZATION
Demonstration equipment and property and equipment are stated at cost.
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the assets which are generally 7-10
years for production and engineering equipment, and 5-7 years for all other
assets. Demonstration equipment is amortized over a 3 year period.
(H) INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Prior to March 28, 1996, the Company operated as a division of XL Vision
and, as such, did not record any income tax benefit for losses prior to that
date.
(I) STOCK-BASED COMPENSATION
During 1996, the Company adopted SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION", which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings and pro
forma earnings per share disclosures for stock option grants made in 1996 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
(J) USE OF ESTIMATES
The preparation of the Company's financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates. In
particular, as further described in note 1, significant assumptions were made to
allocate indirect costs from XL Vision to ChromaVision for periods prior to
incorporation.
(K) NET LOSS PER SHARE
Pursuant to the requirements of the Securities and Exchange Commission,
common shares and common equivalent shares issued at prices below the estimated
public offering price during the 12 months immediately preceding the date of the
initial filing of the registration statement have been included in the
calculation of common shares and common share equivalents, using the modified
treasury stock method, as if they were outstanding for all periods presented
whether they are antidilutive or not. Calculation of net loss per share assumes
that all outstanding preferred shares have been converted into common shares.
Calculation of net loss per share is based upon operations subsequent to the
initial capitalization (incorporation) of the Company in March 1996.
F-9
<PAGE>
CHROMAVISION MEDICAL SYSTEMS, INC.
(FORMERLY MICROVISION MEDICAL SYSTEMS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(L) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, accounts payable and
accrued liabilities reflected in the financial statements approximates fair
value due to the short-term maturity of these instruments.
The carrying value of the Company's line of credit approximates fair value
as the underlying interest rate fluctuates with current market rates.
(3) INVENTORY
The following is a summary of inventory:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Raw materials.................................................................. $ 74,202 $ 105,520 $ 85,987
Finished goods................................................................. -- 396,991 382,424
--------- ---------- ----------
$ 74,202 $ 502,511 $ 468,411
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
(4) NOTES RECEIVABLE
In June 1993, the Company executed a letter of understanding with
Intelligent Medical Imaging, Inc. ("IMI") under which ChromaVision agreed in
principle to manufacture IMI's Micro21 System design units. During 1993,
ChromaVision advanced $40,000 to IMI in contemplation of an equity investment in
IMI. During 1994, an additional $785,000 was advanced. In addition to amounts
advanced, ChromaVision incurred costs in developing hardware for the Micro21
System. The parties were unable to agree to definitive terms for the equity
investment and their manufacturing relationship. On July 23, 1994, a settlement
agreement was reached whereby IMI issued an $825,000 secured convertible
promissory note payable (the "$825,000 note"), a $500,000 noninterest bearing
secured promissory note payable (the "$500,000 note") and a $220,000 purchase
order (the "purchase order") to ChromaVision. During 1994 the purchase order was
paid in full. In 1995, ChromaVision accepted $785,000 in full payment of the
$825,000 note.
The $500,000 note was issued by IMI for support services but was not
recognized as income based upon doubts as to its collectibility. During 1996,
ChromaVision accepted $423,525 in full payment of the $500,000 note, $75,000 of
which has been reflected in other income in the period from January 1, 1996
through March 27, 1996 and $348,525 of which has been reflected in other income
in the period from March 28, 1996 (incorporation) through December 31, 1996.
(5) PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Demonstration equipment...................................................... $ 140,000 $ 140,000 $ 140,000
Office and computer equipment................................................ 8,067 46,771 164,982
Furniture and fixtures....................................................... 4,971 5,874 5,874
Engineering and manufacturing equipment...................................... -- 4,510 16,286
Leasehold improvements....................................................... -- -- 29,196
---------- ---------- ----------
153,038 197,155 356,338
</TABLE>
F-10
<PAGE>
CHROMAVISION MEDICAL SYSTEMS, INC.
(FORMERLY MICROVISION MEDICAL SYSTEMS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED
(5) PROPERTY AND EQUIPMENT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Less: accumulated depreciation and amortization.............................. 81,576 116,315 125,920
---------- ---------- ----------
Total property and equipment, net............................................ $ 71,462 $ 80,840 $ 230,418
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(6) LINE OF CREDIT
The Company has an unsecured line of credit with a bank under which it may
borrow up to $3,000,000 at the LIBOR plus 2.1% (7.76% at December 31, 1996). The
outstanding balance on the line of credit was $806,009 at December 31, 1996. The
line of credit is due on January 31, 1998. The line of credit is guaranteed by
Safeguard Scientifics, Inc. ("Safeguard"). A default by Safeguard on their
existing line of credit agreement with another bank would constitute default by
the Company.
As of March 31, 1997, the outstanding balance on the line of credit was
$1,958,432. Availability under the line of credit was increased to $5,000,000
during April 1997.
(7) PREFERRED STOCK
As of December 31, 1996, the Company had authorized the issuance of
8,000,000 shares of preferred stock. The Company has designated 7,246,000 and
221,850 shares as Series A and Series B preferred shares, respectively. Series B
shares are junior to Series A shares.
SERIES A--The Company sold 6,364,872 shares of convertible Series A
preferred stock in an offering based upon a private placement memorandum dated
May 17, 1996 for $1 per share. Each share of Series A preferred stock is
convertible into 1.25 shares of common stock at the option of the holder or upon
the vote of holders of two-thirds of the Series A preferred shares outstanding.
The Series A preferred stock is required to be converted upon a qualified
initial public offering of at least $10 million with a Company valuation of at
least $30 million or a public rights offering of the Company to shareholders of
Safeguard Scientifics, Inc. ("Safeguard") (see note 13). The holders of
preferred stock are entitled to vote as a separate class to elect two directors
to the Board of Directors of the Company. The Series A shares are entitled to a
liquidation preference before any distribution to common stockholders equal to
the greater of (a) $1.00 per share plus an additional $.10 per year from June
30, 1996, or (b) the amount which would be distributed if all of the preferred
stock of the Company were converted to common stock prior to liquidation.
SERIES B--Each share of Series B preferred stock is convertible into 1.25
shares of common stock at the option of the holder or upon the vote of holders
of two-thirds of the Series B preferred shares outstanding. The Series B
preferred stock is required to be converted upon a qualified initial public
offering of at least $10 million with a Company valuation of at least $30
million or a public rights offering of the Company to shareholders of Safeguard
Scientifics, Inc. ("Safeguard") (see note 13). The Series B shares are entitled
to a liquidation preference before any distribution to common stockholders equal
to the greater of (a) $4.50 per share plus an additional $.10 for each year per
year from January 1, 1997, or (b) the amount which would be distributed if all
of the preferred stock of the Company were converted to common stock prior to
liquidation. The Company sold 221,850 shares of convertible Series B preferred
stock to Safeguard for $4.50 per share in January 1997.
F-11
<PAGE>
CHROMAVISION MEDICAL SYSTEMS, INC.
(FORMERLY MICROVISION MEDICAL SYSTEMS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED
(8) INCOME TAXES
Prior to March 28, 1996 (incorporation), the Company operated as a division
of XL Vision and as such was not directly subject to income taxes. Accordingly,
no income tax disclosures are presented for periods prior to 1996. The results
of the Company's operations will be included in consolidated income tax returns
of XL Vision for the period January 1, 1996 through May 17, 1996, when XL Vision
was no longer deemed to control the Company for income tax purposes. The amount
of net operating loss carryforward that will be allocated to the Company is
estimated to be approximately $3,000,000. The Company's net operating loss was
allocated on a separate return basis, but was limited by approximately $1
million based upon operating income generated by the XL Vision consolidated
group. As the Company is a development stage enterprise, deferred tax benefits
generated by deferred tax assets are offset by a corresponding valuation
allowance.
As ChromaVision was not a legal entity prior to incorporation, the transfer
of funds to XL Vision of approximately $4,800,000 was deemed, for income tax
purposes, to be the cost of the technology transfer from XL Vision (see note 1).
For income tax purposes, this amount is considered to be an intangible asset
which is being amortized over a fifteen year period.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
Significant components of the Company's deferred income tax assets and
liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Deferred tax assets:
Net operating loss carryforward................................................................... $1,185,019
Intangible asset, net of amortization............................................................. 1,701,363
Accrued liabilities............................................................................... 40,883
------------
Deferred tax assets........................................................................... 2,927,265
Deferred tax liability:
Depreciation...................................................................................... (1,859)
------------
Total......................................................................................... 2,925,406
Less valuation allowance for deferred tax assets.................................................... (2,925,406)
------------
Deferred tax assets (liability), net.......................................................... $ --
------------
------------
</TABLE>
The difference between the "expected" tax benefit (computed by applying the
federal corporate income rate of 34% to the loss before income taxes) and the
actual tax benefit is due to limitations on the benefit for the net operating
losses recognized, resulting from allocations of the consolidated income tax
results of XL Vision for the year ended December 31, 1996, and the effect of the
valuation allowance.
(9) STOCK OPTIONS
In June 1996, the Company granted 975,688 non-qualified stock options to
officers, key employees and members of the Company's Advisory Board, including
554,626 stock options which were issued to the former president of the Company.
Unvested options of the former president, 277,313, were cancelled in December
1996. In December 1996, the Company agreed to repurchase vested options of the
former president, 277,313, for $2.40 per share less the $.80 per share exercise
price. The aggregate cash paid of $443,700 was expensed in selling general and
administrative expenses during the period from March 28,
F-12
<PAGE>
CHROMAVISION MEDICAL SYSTEMS, INC.
(FORMERLY MICROVISION MEDICAL SYSTEMS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED
(9) STOCK OPTIONS (CONTINUED)
1996 (incorporation) to December 31, 1996 and was included in accrued
liabilities as of December 31, 1996. This liability was paid in full in January
1997. Through December 31, 1996, the Company granted 71,875 stock options to
members of the Company's Advisory Board. In addition, the Company also sold
134,000 shares of Series A Preferred Stock to members of the Company's Advisory
Board as part of the Series A Preferred Stock Offering described in Note 7.
In December 1996, the Company adopted a stock option plan (the "Plan")
pursuant to which the Company's Board of Directors may grant stock options to
officers and key employees. The Plan authorizes grants of options to purchase up
to 1,291,688 shares of authorized but unissued common stock. All options granted
by the Company during 1996 and the three months ended March 31, 1997 had an
exercise price equal to the stock's deemed fair market value at the date of
grant. The fair value at the date of the grant was determined by the Company's
Board of Directors based on several factors, including marketing and
distribution arrangements and FDA applications. Stock options granted during
1996 have a maximum of ten year terms and have vesting schedules which are at
the discretion of the Company and determined on the effective date of the grant.
A summary of option transactions follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RANGE OF WEIGHTED REMAINING
EXERCISE AVERAGE CONTRACTUAL
PRICES EXERCISE LIFE
SHARES PER SHARE PRICE (IN YEARS)
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance outstanding March 28, 1996
(incorporation)................................................ -- $ -- $ --
Granted in June.............................................. 975,688 0.80 0.80
Granted in December.......................................... 949,375 2.40 2.40
Cancelled.................................................... (277,313) 0.80 0.80
----------
Balance outstanding December 31, 1996............................ 1,647,750 $ .80-2.40 $ 1.72 9.20
---------- ---------- ----- ---
---------- ---------- ----- ---
Granted...................................................... 168,751 2.40 2.40
Repurchased and cancelled.................................... (277,313) 0.80 0.80
----------
----------
Balance outstanding March 31, 1997............................... 1,539,188 $ .80-2.40 $ 1.96 8.05
---------- ---------- ----- ---
---------- ---------- ----- ---
</TABLE>
The following summarizes information about the Company's stock options
outstanding at December 31, 1996 of which the exericisable stock options had a
weighted average exercise price of $1.39.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE OPTIONS NUMBER REMAINING
PRICE OUTSTANDING EXERCISABLE CONTRACTUAL LIFE
- ----------- ----------- ----------- -----------------
<S> <C> <C> <C>
$ 0.80 698,375 346,641 6.46
$ 2.40 949,375 204,687 9.25
</TABLE>
At March 31, 1997, 299,016 options were exercisable at a weighted average
price of $1.94. At December 31, 1996, and March 31, 1997, 342,313 and 173,562
options were available for grant, respectively.
The per share weighted-average fair value of stock options granted during
1996 was $1.59 on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions:
F-13
<PAGE>
CHROMAVISION MEDICAL SYSTEMS, INC.
(FORMERLY MICROVISION MEDICAL SYSTEMS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED
(9) STOCK OPTIONS (CONTINUED)
expected dividend yield 0%, risk-free interest rate of 6.35%, and an expected
life of 6.75 years. No volatility was assumed due to the use of the Minimum
Value Method of computation for options issued by the Company prior to becoming
a public entity as prescribed by SFAS 123.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net loss would have been increased to the pro forma amounts indicated
below:
<TABLE>
<S> <C>
Net loss as reported subsequent to incorporation................ $(4,030,263)
Pro forma net loss subsequent to incorporation.................. $(4,312,126)
Net loss per share subsequent to incorporation.................. $ (0.33)
Proforma net loss per share subsequent to incorporation......... $ (0.36)
</TABLE>
(10) RELATED PARTY TRANSACTIONS
Prior to April 1, 1996, personnel and other administrative services were
provided by XL Vision and allocated to ChromaVision. Administrative service fees
incurred between April 1, 1996 and December 31, 1996 were approximately
$740,600.
In addition, the Company subleased its main facility in Sebastian, Florida
from XL Vision under a facilities agreement effective April 1, 1996. Rental and
facility costs totaled approximately $72,200 through December 31, 1996.
The Company also shares its main facility with XL Vision and is responsible
for certain allocated operating and maintenance costs of the facility.
As of December 31, 1995 and 1996 and March 31, 1997, the Company owed XL
Vision $4,726,635, $380,439 and $452,388 respectively. The advances from XL
Vision do not provide for interest.
Effective March 31, 1997, amounts due to XL Vision are due within thirty
days of receipt. The average outstanding balance due to XL Vision for the years
ended December 31, 1994 and 1995, the period from January 1, 1996 through March
27, 1996, the period from March 28, 1996 (incorporation) through
F-14
<PAGE>
CHROMAVISION MEDICAL SYSTEMS, INC.
(FORMERLY MICROVISION MEDICAL SYSTEMS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED
(10) RELATED PARTY TRANSACTIONS (CONTINUED)
December 31, 1996 and the three months ended March 31, 1997 were $2,203,480,
$4,111,072, $4,794,810, $942,833 and $359,115, respectively. An analysis of
amounts due to XL Vision is summarized as follows:
<TABLE>
<S> <C>
Amounts due to XL Vision at December 31, 1993................... $ 911,451
Allocation of costs and funding of working capital to the
Company..................................................... 2,584,058
---------
Amounts due to XL Vision at December 31, 1994................... 3,495,509
Allocation of costs and funding of working capital to the
Company..................................................... 1,231,126
---------
Amounts due to XL Vision at December 31, 1995................... 4,726,635
Allocation of costs and funding of working capital to the
Company..................................................... 136,349
---------
Amount due to XL Vision at March 28, 1996 (incorporation)....... 4,862,984
Allocation of costs to the Company............................ 1,710,403
Cash transferred to XL Vision................................. (6,275,000)
Transfers of inventory, at cost............................... 82,052
---------
Amount due to XL Vision at December 31, 1996.................... 380,439
Allocation of costs to the Company............................ 321,949
Cash transferred to XL Vision................................. (250,000)
---------
Amount due to XL Vision at March 31, 1997....................... $ 452,388
---------
---------
</TABLE>
Effective January 1997, the Company entered into an administrative service
agreement which specifies a fee based upon a percentage of gross revenues. The
fee is payable quarterly. The fee is payable to Safeguard and XL Vision based
upon an aggregate of 1.5% of gross revenues subject to an annual limit of
$300,000. The fee is payable upon achievement of positive cash flow from
operations. The agreement extends through January 31, 2002 and continues
thereafter unless terminated by either party.
F-15
<PAGE>
CHROMAVISION MEDICAL SYSTEMS, INC.
(FORMERLY MICROVISION MEDICAL SYSTEMS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED
(11) COMMITMENTS AND CONTINGENCIES
AGREEMENT WITH CENTOCOR. The Company sold Centocor six digital analyzers in
1995 to facilitate their clinical trials for cancer applications. As Centocor
received feedback from those trials the Company, which was continuing its
research and development efforts, incorporated the feedback into their
technology. In July 1996, both parties entered into an agreement stipulating
their various rights to the reagents being tested for cancer and the digital
analyzer technology. As an outcome of this agreement, the Company agreed to a
put option by which Centocor would have the right to return the six instruments
for $800,000 and the issuance of 770,192 shares of preferred stock at $1.00. As
a result of this agreement, the Company has recognized $770,192 of research and
development expenses for the period from March 28, 1996 (incorporation) through
December 31, 1996. However, none of the instruments were returned to the Company
during 1996. Accordingly, no liability for these instruments was recorded by the
Company.
During December 1996 negotiations commenced which prompted Centocor's waiver
of their rights to return the six instruments and extinguished any commitment to
repurchase these insruments. In exchange for Centocor's waiver, the Company is
to provide a specified number of hours of technical support and software
development services. The Company accrued an expense totaling $60,000 in the
statement of operations as research and development costs related to these
services for the period from March 28, 1996 (incorporation) through December 31,
1996.
VOLUNTARY EMPLOYEE SAVINGS 401(K) PLAN. The Company established a voluntary
employee savings 401(k) plan in 1996 which is available to all full time
employees 21 years or older. The plan provides for a matching by the Company of
the employee's contribution to the plan for 50% of the first 6% of the
employee's annual compensation. The Company matching contributions were
approximately $12,000 for the period from March 28, 1996 (incorporation) through
December 31, 1996.
LEASE COMMITMENT. In conjunction with a planned relocation of the Company to
California, the Company entered into a lease beginning on March 1, 1997 and
ending on February 28, 2000 for office space with monthly base rent of $10,227
and provisions for increases based on the cost of living indices.
UNASSERTED CLAIM. The Company has been made aware of an unasserted claim
relating to an application for its ChromaVision Digital Analyzer. In the opinion
of management this claim is without merit. While the Company could vigorously
defend against any such dispute, the successful assertion of such a claim could
have a material adverse effect on the Company's financial position.
(12) STOCK SPLIT
On March 19, 1997, the Company authorized a five-for-four common stock
split. As of December 31, 1996 preferred stock conversion factors, stock options
outstanding and common shares outstanding have been adjusted to reflect
retroactive effect of this stock split.
(13) SUBSEQUENT EVENT
INITIAL PUBLIC OFFERING. On March 26, 1997, the Company's Board of Directors
authorized the filing of a registration statement on Form S-1. This will be
conducted as a 6,400,000 rights offering primarily to Safeguard's stockholders
and will result in the expected sale of new common shares totaling 6,020,000, to
be sold in an initial public offering. Costs directly related to the proposed
offering, $144,760, have been capitalized as of December 31, 1996. As of March
31, 1997, offering costs capitalized totaled $344,760. Upon completion of the
proposed initial public offering, the offering costs will be netted against
proceeds raised in the offering. Should the offering not be consummated, the
offering costs will be expensed by the Company.
F-16
<PAGE>
[Inside Back Cover:
Photographs of the same breast cancer sample appear. The top photograph shows an
image of the sample without the use of the Company's Digital Analyzer. The
following text appears next to the top photograph: "This is a view of a slide in
which a physician attempts to locate a breast tumor cell amongst potentially
millions of normal cells." The middle photograph shows an image of the same
sample as identified by the ChromaVision Digital Analyzer. The following text
appears next to the middle photograph: "This is what the automated ChromaVision
Digital Analyzer sees-all abnormal cells are rapidly distinguished from the
normal cellular background using proprietary color-based imaging technology.
This makes rare event detection analogous to looking at bright stars against the
dark night sky." The bottom photograph shows the image of the same sample as it
appears to the user of the ChromaVision Digital Analyzer. The following text
appears next to the bottom photograph: "After identifying abnormal cells, the
ChromaVision Digital Analyzer provides a high resolution image of the targeted
cells." Above the photographs appear the words: "ChromaVision Color-Based
Technology." The Company's name and logo appear below the photographs with the
phrase: "The Vision in Medical Imaging."]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary................................... 3
Risk Factors......................................... 8
The Offering......................................... 17
Federal Income Tax Consequences...................... 20
The Company.......................................... 22
Use of Proceeds...................................... 22
Dividend Policy...................................... 22
Capitalization....................................... 23
Dilution............................................. 24
Selected Financial Data.............................. 25
Management's Discussion and Analysis of Financial
Condition and Results
of Operations...................................... 26
Business............................................. 30
Management........................................... 48
Certain Transactions................................. 55
Principal and Selling Stockholders................... 57
Description of Capital Stock......................... 58
Shares Eligible for Future Sale...................... 59
Underwriting......................................... 62
Legal Matters........................................ 64
Experts.............................................. 64
Additional Information............................... 64
Index to Financial Statements........................ F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE HEREOF), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
6,720,000 SHARES
(AND RIGHTS TO ACQUIRE
UP TO 6,400,000 OF SUCH SHARES)
[LOGO]
CHROMAVISION MEDICAL
SYSTEMS, INC.
COMMON STOCK
-----------------
PROSPECTUS
-----------------
ROBERT W. BAIRD & CO.
INCORPORATED
ADAMS, HARKNESS & HILL, INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses (other than underwriting discounts and commissions and
underwriters' non-accountable expense allowance) payable in connection with the
offering of the rights and the sale of the Common Stock offered hereby are as
follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 11,152
NASD filing fee................................................... 4,180
Nasdaq filing fee................................................. *
Printing and engraving expenses................................... *
Legal fees and expenses........................................... *
Accounting fees and expenses...................................... *
Blue Sky fees and expenses (including legal fees)................. *
Transfer agent and rights agent and registrar fees and expenses... *
Miscellaneous..................................................... *
---------
Total............................................................. $ 700,000
---------
---------
</TABLE>
- ------------------------
* To be filed by amendment.
The foregoing, except for the Securities and Exchange Commission
registration fee, the NASD filing fee, and the Nasdaq filing fee, are estimates.
All of the foregoing expenses will be borne by the Registrant.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's By-laws require the Registrant to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed proceeding by reason of the fact that he is or was a director or
officer of the Registrant or is or was serving at the request of the Registrant
as a director, officer, employee, fiduciary or agent of another corporation,
trust or other enterprise against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such proceeding if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the Registrant, and, with respect to any such criminal proceeding, had no
reasonable cause to believe his conduct was unlawful. Such indemnification as to
expenses is mandatory to the extent the individual is successful on the merits
of the matter. Delaware law permits the Registrant to provide similar
indemnification to employees and agents who are not directors or officers. The
determination of whether an individual meets the applicable standard of conduct
may be made by the disinterested directors, independent legal counsel or the
stockholders. Delaware law also permits indemnification in connection with a
proceeding brought by or in the right of the Registrant to procure a judgment in
its favor. Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers, or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in that Act and is therefore unenforceable.
The Registrant expects to obtain a directors and officers liability insurance
policy prior to the effective date of this Registration Statement.
The Standby Underwriting Agreement provides that the Underwriters are
obligated, under certain circumstances, to indemnify directors, officers and
controlling persons of the Registrant against certain liabilities, including
liabilities under the Act. Reference is made to Section 8 of the form of Standby
Underwriting Agreement which will be filed by amendment as Exhibit 1.1 hereto.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this registration statement, the
Registrant has issued the following securities that were not registered under
the Act (the following information reflects the 5-for-4 split of the Company's
Common Stock described in the prospectus):
Since its inception, the Company has sold to employees and certain other
persons, (i) an aggregate of 1,931,250 shares of Common Stock, (ii) an aggregate
of 7,135,064 shares of Series A Preferred Stock, at a price of $1.00 per share,
and (iii) an aggregate of 221,850 shares of Series B Preferred Stock at a price
of $4.50 per share. All of such sales were made under the exemption from
registration provided under Section 4(2) of the Act.
Pursuant to the Company's Equity Compensation Plan, the Company has granted
options to purchase a total of 1,608,688 shares of Common Stock to its employees
and certain other persons during the past three fiscal years at a weighted
average exercise price of $2.09 per share. For a more detailed description of
the Company's Equity Compensation Plan, see "Management--Stock Options" in this
registration statement. In granting the options and selling the underlying
securities upon exercise of the options, the Company is relying upon exemptions
from registration set forth in Rule 701 and Section 4(2) of the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- ----------------- -------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Standby Underwriting Agreement.*
3.1 Certificate of Incorporation of the Company (as amended).**
3.2 By-laws of the Company, as amended.*
5.1 Opinion of Morgan, Lewis & Bockius LLP.*
8.1 Opinion of Morgan, Lewis & Bockius LLP regarding tax matters.*
10.1 ChromaVision Medical Systems, Inc. 1996 Equity Compensation Plan.**
10.2 Stock Option Grant Letter (Dr. Douglas S. Harrington).**
10.3 Stock Option Grant Letter (Kevin C. O'Boyle).**
10.4 Stock Option Grant Letter (Michael G. Schneider).**
10.5 Stock Option Grant Letter (Kenneth S. Garber).**
10.6 Employment Agreement between Dr. Douglas S. Harrington and the Company, as of December 30,
1996.**
10.7 Employment Agreement between Kenneth S. Garber and the Company, dated February 15, 1996.**
10.8 Employment Agreement between Kevin C. O'Boyle and the Company, dated November 27, 1996.**
10.9 Separation Agreement between Michael S. Shiff and the Company, dated December 27, 1996.**
10.10 Stock Purchase Agreement between the Company and the Series A Preferred Stockholders, dated as of
June 6, 1996.**
10.11 Registration Rights Agreement between the Company and the Series A Preferred Stockholders, dated
as of June 6, 1996.**
10.12 Stockholders' Agreement between the Company and the Series A Preferred Stockholders, dated as of
June 6, 1996.**
10.13 Loan Agreement between the Company and the Barnett Bank, N.A., dated December 24, 1996.**
10.14 Unconditional and Unlimited Guaranty Agreement between Safeguard Scientifics, Inc. and Barnett
Bank, N.A., dated December 24, 1996.**
10.15 Promissory Note by the Company to Barnett Banks, N.A., dated December 24, 1996.**
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- ----------------- -------------------------------------------------------------------------------------------------
<C> <S>
10.16 Tax Indemnity Agreement between the Company and Barnett Bank, N.A., dated December 24, 1996.**
10.17 Administrative Services Agreement among the Company, XL Vision, Inc. and Safeguard Scientifics,
Inc., dated as of March 21, 1997.**
10.18 Direct Charge Administrative Services Agreement between the Company and XL Vision, Inc., dated as
of March 21, 1997.**
10.19 Lease Agreement between CEO/Executive Suites, Inc. and XL Vision, Inc., dated as of March 7,
1996.**
10.20 Subscription Agreement between the Company and Safeguard Scientifics, Inc., dated as of December
31, 1996.**
10.21 Contribution Agreement between the Company and XL Vision, Inc., dated as of May 13, 1996.**
10.22 Collaboration Agreement between the Company, XL Vision, Inc. and Centacor, Inc., as amended, as
of February 25, 1997.**
10.23 Lease Agreement between Blue Family Trust, Lingo Family Trust and the Company, dated January 13,
1997.**
11.1 Statement Regarding Computation of Earnings Per Share.*
21.1 Subsidiaries of the Registrant.**
23.1 Consent of KPMG Peat Marwick LLP.*
23.2 Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit 5.1).
23.3 Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit 8.1).
24.1 Power of Attorney (included on signature page).**
27.1 Financial Data Schedule.*
</TABLE>
- ------------------------
* Filed herewith.
** Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
All information for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission is either included in the
financial statements or is not required under the related instructions or are
inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
II-3
<PAGE>
offering price set forth in "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement; and
(iv) To reflect the results of the Offering.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 14 above, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the standby underwriting agreement
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Act, the information omitted
from the form of prospectus filed as part of a registration statement in
reliance upon Rule 430A and contained in the form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be
deemed to be part of this registration statement as of the time it was declared
effective; and (3) that for the purpose of determining any liability under the
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to supplement the prospectus,
after the expiration of the subscription period, to set forth the results of the
subscription offer, the transactions by the underwriters during the subscription
period, the amount of unsubscribed securities to be purchased by the
underwriters, and the terms of any subsequent reoffering thereof. If any public
offering by the underwriters is to be made on terms differing from those set
forth on the cover page of the prospectus, a post-effective amendment will be
filed to set forth the terms of such offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment no. 3 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in San Juan
Capistrano, California on June 24, 1997.
CHROMAVISION MEDICAL SYSTEMS, INC.
BY: /S/ DOUGLAS S. HARRINGTON
-----------------------------------------
Douglas S. Harrington
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this amendment
no. 3 to the registration statement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURES TITLE(S) DATE
- ------------------------------ --------------------------- -------------------
/s/ DOUGLAS S. HARRINGTON Chief Executive Officer and
- ------------------------------ Director (Principal June 24, 1997
Douglas S. Harrington Executive Officer)
Vice President and Chief
/s/ KEVIN O'BOYLE Financial Officer
- ------------------------------ (Principal Financial and June 24, 1997
Kevin O'Boyle Accounting Officer)
* Chairman of the Board of
- ------------------------------ Directors June 24, 1997
John S. Scott
* Director
- ------------------------------ June 24, 1997
Christopher Moller
* Director
- ------------------------------ June 24, 1997
Richard Morgan
* Director
- ------------------------------ June 24, 1997
Charles A. Root
* By: /s/ DOUGLAS S. HARRINGTON
- --------------------------------------
Douglas S. Harrington as
Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE NO.
- ----------------- --------------------------------------------------------------------------------------- -------------
<C> <S> <C>
1.1 Form of Standby Underwriting Agreement.*
3.1 Certificate of Incorporation of the Company (as amended).**
3.2 By-laws of the Company, as amended.*
5.1 Opinion of Morgan, Lewis & Bockius LLP.*
8.1 Opinion of Morgan, Lewis & Bockius LLP regarding tax matters.*
10.1 ChromaVision Medical Systems, Inc. 1996 Equity Compensation Plan.**
10.2 Stock Option Grant Letter (Dr. Douglas S. Harrington).**
10.3 Stock Option Grant Letter (Kevin C. O'Boyle).**
10.4 Stock Option Grant Letter (Michael G. Schneider).**
10.5 Stock Option Grant Letter (Kenneth S. Garber).**
10.6 Employment Agreement between Dr. Douglas S. Harrington and the Company, as of December
30, 1996.**
10.7 Employment Agreement between Kenneth S. Garber and the Company, dated February 15,
1996.**
10.8 Employment Agreement between Kevin C. O'Boyle and the Company, dated November 27,
1996.**
10.9 Separation Agreement between Michael S. Shiff and the Company, dated December 27,
1996.**
10.10 Stock Purchase Agreement between the Company and the Series A Preferred Stockholders,
dated as of June 6, 1996.**
10.11 Registration Rights Agreement between the Company and the Series A Preferred
Stockholders, dated as of June 6, 1996.**
10.12 Stockholders' Agreement between the Company and the Series A Preferred Stockholders,
dated as of June 6, 1996.**
10.13 Loan Agreement between the Company and the Barnett Bank, N.A., dated December 24,
1996.**
10.14 Unconditional and Unlimited Guaranty Agreement between Safeguard Scientifics, Inc. and
Barnett Bank, N.A., dated December 24, 1996.**
10.15 Promissory Note by the Company to Barnett Banks, N.A., dated December 24, 1996.**
10.16 Tax Indemnity Agreement between the Company and Barnett Bank, N.A., dated December 24,
1996.**
10.17 Administrative Services Agreement among the Company, XL Vision, Inc. and Safeguard
Scientifics, Inc. dated as of March 31, 1997.**
10.18 Direct Charge Administrative Services Agreement between the Company and XL Vision,
Inc., dated as of March 31, 1997.**
10.19 Lease Agreement between CEO/Executive Suites, Inc. and XL Vision, Inc., dated as of
March 7, 1996.**
10.20 Subscription Agreement between the Company and Safeguard Scientifics, Inc., dated as of
December 31, 1996.**
10.21 Contribution Agreement between the Company and XL Vision, Inc., dated as of May 13,
1996.**
10.22 Collaboration Agreement between the Company, XL Vision, Inc. and Centacor, Inc., as
amended, as of February 25, 1997.**
10.23 Lease Agreement between Blue Family Trust, Lingo Family Trust and the Company, dated
January 13, 1997.**
11.1 Statement Regarding Computation of Earnings Per Share.*
21.1 Subsidiaries of the Registrant.**
23.1 Consent of KPMG Peat Marwick LLP.*
23.2 Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit 5.1).
23.3 Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit 8.1).
24.1 Power of Attorney (included on signature page).**
27.1 Financial Data Schedule.*
</TABLE>
- ------------------------
* Filed herewith.
** Previously filed.
<PAGE>
DRAFT 062397 EXHIBIT 1.1
CHROMAVISION MEDICAL SYSTEMS, INC.
6,720,000 Shares of Common Stock
(Par Value $.01 Per Share)
Standby Underwriting Agreement
_________ ___, 1997
Robert W. Baird & Co. Incorporated
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-5391
Adams, Harkness & Hill, Inc.
60 State Street
Boston, Massachusetts 02109
Ladies and Gentlemen:
ChromaVision Medical Systems, Inc., a Delaware corporation (the
"Company"), Safeguard Scientifics (Delaware), Inc., a Delaware corporation
("Safeguard (DE)"), XL Vision, Inc., a Delaware corporation ("XL Vision"),
Technology Leaders, L.P., a Delaware limited partnership ("TL"), Technology
Leaders Offshore, C.V., a Netherlands Antilles limited partnership ("TL CV"
and, together with TL, "Technology Leaders I"), Technology Leaders II, L.P.,
a Delaware limited partnership ("TL II"), Technology Leaders II Offshore,
C.V., a Netherlands Antilles limited partnership ("TL II CV" and, together
with TL II, "Technology Leaders II"), and Safeguard Scientifics, Inc., a
Pennsylvania corporation ("SSI" and, together with Safeguard (DE),
"Safeguard" and, together with Safeguard (DE), XL Vision, Technology Leaders
I and Technology Leaders II, the "Selling Stockholders"), hereby confirm
their respective agreements with you with respect to:
(i) the proposed distribution by the Company to the Safeguard
Shareholders of up to an aggregate of 6,400,000 rights (the "Rights") (which
represent 6,020,000 shares of the Company's common stock, par value $.01 per
share (the "Common Stock"), to be sold by the Company upon the exercise of
6,020,000 of such Rights and an aggregate of 380,000 shares of Common Stock
being sold by the Selling Stockholders upon exercise of 380,000 Rights with
<PAGE>
207,252, 86,602, 44,460 and 41,686 shares of Common Stock being sold by
Safeguard, XL Vision, Technology Leaders II and Technology Leaders I,
respectively), with (A) each Right entitling the holder thereof to purchase
at any time prior to the Expiration Date, at a subscription price of $5.00
per share, one share of Common Stock of the Company, and (B) Rights being
distributed on the basis of one Right for each five shares of Safeguard Stock
held (with the holder of a number of shares of Safeguard Stock not evenly
divisible by five entitled to receive the next higher whole number of Rights);
(ii) the proposed sale of all Unsubscribed Shares by the Company
and the Selling Stockholders, acting severally and not jointly, with:
(A) the Other Purchasers Standby Shares being deemed to be
Company Unsubscribed Shares to be sold pursuant to the Other
Purchasers Standby Purchase Agreements; and
(B) all Excess Unsubscribed Shares to be sold to and purchased
by the Underwriters, severally and not jointly, in accordance with the
terms and conditions of this Agreement; and
(iii) the proposed sale by the Company to the Other Purchasers of the
Undistributed Shares; and
(iv) the grant by the Selling Stockholders to the Underwriters of an
option described in Section 3(b) hereof to purchase additional shares of Common
Stock for the purpose of covering over-allotments, if any.
The parties acknowledge that concurrently with the Offering of the
Rights, the Selling Stockholders intend to offer and sell to the Direct
Purchasers the Direct Shares for purchase at a subscription price of $5.00
per share. The parties also acknowledge that, except as set forth in Section
7, the Direct Shares shall not be deemed to be Shares for purposes of this
Agreement and are not otherwise a part of this Agreement.
-2-
<PAGE>
1. Certain Definitions. The following terms shall, when used in this
agreement, have the following meanings:
"Act" means the Securities Act of 1933, as amended.
"Adverse Claim" means the term as used in Section 8-302 of the Delaware
Uniform Commercial Code.
"Application" means the application described in Section 9(a)(i)(B)
hereof.
"Associated Person Lock-Ups" means the agreements, acceptable in form and
substance to the Underwriters, pursuant to which each of the Company's
officers, directors and principal stockholders listed in Schedule A attached
hereto has agreed not to, without the prior written consent of the
Underwriters, transfer, sell, offer for sale, contract to sell or otherwise
dispose of any shares of Common Stock or any securities exercisable or
exchangeable for or convertible into shares of Common Stock owned by such
person or with respect to which such person has the power of disposition
during a period commencing on the date the Registration Statement is declared
effective by the Commission and ending 180 days following the Expiration
Date, except as otherwise permitted in the Associated Person Lock-Ups.
"Bona Fide Purchaser" means the term as defined in Section 8-302 of the
Delaware Uniform Commercial Code.
"Closing" means 10:00 a.m., New York City time on the sixth business day
after the Expiration Date (or the first business day thereafter), or at such
other time on the same or such other date, not later than ________, 1997, as
shall be agreed to by the Selling Stockholders, the Company and the
Underwriters.
"Closing Date" means the time and date of payment for and delivery of the
Excess Unsubscribed Shares.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the shares of Common Stock, par value $.01 per
share, of the Company.
"Company Unsubscribed Shares" means the shares of Common Stock which had
been offered by the Company pursuant to the Rights but which were not
acquired through the exercise of Rights on or prior to the Expiration Date
(after taking into account the agreement of the Company and the Selling
Stockholders that the 560,000 shares of Common Stock that are expected to be
sold to Warren V. Musser upon exercise of the Musser Rights shall be deemed
to be sold by the Company).
-3-
<PAGE>
"Controlling Person" means a person who controls the Underwriters, the
Company or the Selling Stockholders within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act.
"Direct Purchasers" means the certain persons selected by the Company to
whom the Direct Shares are being offered.
"Direct Shares" means the 320,000 shares of Common Stock offered to the
Direct Purchasers.
"Disagreement" means the term as used in Item 304 of Regulation S-K of the
Rules and Regulations.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Agent" means the escrow agent named in the Rights Agent Agreement.
"Excess Unsubscribed Shares" means all of the Unsubscribed Shares other
than the Other Purchasers Standby Shares.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exercise Price" means the subscription price of $5.00 per share.
"Expiration Date" means 5:00 p.m., New York City time, on ____________,
1997 or such later date as may be agreed upon by the Underwriters and the
Company.
"Intellectual Property" means all patents, trademarks, service marks,
trade names, copyrights, inventions, trade secrets, proprietary techniques,
including, without limitation, all software service codes, processes and
substances, technology and know-how necessary to conduct (or used to conduct)
the business now operated or proposed to be operated by the Company as
described in the Prospectus.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"KPMG" means KPMG Peat Marwick, LLP.
"Material Adverse Effect" means a material adverse effect on the
condition, financial or otherwise, or on the earnings, business affairs,
financial position, value, operations, properties, results of operation or
business of the Company.
"Musser Group" means Warren V. Musser and/or his assignees.
-4-
<PAGE>
"Musser Lock-Up" means the agreement of the Musser Group not to, without
the prior written consent of the Underwriters, transfer, sell, offer for
sale, contract to sell or otherwise dispose of any shares of Common Stock
acquired by the Musser Group upon exercise of the Musser Rights or any
securities exercisable or exchangeable for or convertible into Common Stock
(including the Musser Rights) owned on the date hereof or acquired through
the rights offering or with respect to which the Musser Group has the power
of disposition during a period commencing on the date the Registration
Statement is declared effective and ending 180 days after the Expiration
Date; provided, however, that the Musser Group may transfer, sell, offer for
sale, contract to sell or otherwise dispose of up to 280,000 shares of Common
Stock without the prior written consent of the Underwriters so long as the
Musser Group notifies the Underwriters of any such transaction at least one
business day before such transfer, sale, offer or disposition.
"Musser Rights" means all Rights granted to the Musser Group as a
shareholder of Safeguard.
"NASD" means the National Association of Securities Dealers, Inc.
"Offering" means the public offering of the Excess Unsubscribed Shares as
set forth in the Prospectus; provided that the Offering shall also include the
Other Purchasers Standby Shares purchased by the Underwriters, if any.
"Option Closing Date" means the time of delivery of any of the Option
Shares."
"Option Shares" means any and all shares of Common Stock to be purchased by
the Underwriters pursuant to the option described in Section 3(b) of this
Agreement.
"Other Purchasers" means certain persons selected by the Company.
"Other Purchasers Standby Purchase Agreement" means the agreements between
the Company and the Other Purchasers to be entered into after the date hereof
and obligating the Other Purchasers to purchase from the Company up to 300,000
Other Purchasers Standby Shares on the Closing Date at a price of $5.00 per
share.
"Other Purchasers Standby Shares" means that number of Unsubscribed Shares
purchased by the Other Purchasers pursuant to the Other Purchasers Standby
Purchase Agreement.
"Preliminary Prospectus" means each prospectus subject to completion filed
with the Registration Statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration Statement
or any amendment thereto at the time of the Registration Statement was or is
declared effective).
"Prospectus" means the prospectus first filed with the Commission pursuant
to Rule 424(b) under the Act, or, if no prospectus is required to be filed
pursuant to said Rule 424(b),
-5-
<PAGE>
the prospectus included in the Registration Statement. For purposes of
Sections 2 and 8(d)(v) hereof, all references to the "Prospectus" are deemed
to include, in the alternative, the most recent Preliminary Prospectus if the
Prospectus is not in existence.
"Provided Information" means the statements made in the second paragraph
preceding the stabilization legend on the inside of the front cover page, the
stabilization legend on the inside of the front cover page and the third and
sixth paragraph under the heading "UNDERWRITING" in the Prospectus (and the same
paragraphs and stabilization legend in any Preliminary Prospectus).
"Registration Statement" means the registration statement described in
Section 2(a)(i) hereof.
"Reportable Event" means the term as used in Item 304 of Regulation S-K of
the Rules and Regulations.
"Rights Agent" means ChaseMellon Shareholder Services, L.L.C.
"Rights Agent Agreement" means the agreement in the form previously
approved by the Underwriters, dated the date hereof, by and among the Company,
the Escrow Agent and ChaseMellon Shareholder Services, L.L.C., as Rights Agent.
"Rules and Regulations" means the rules and regulations adopted by the
Commission under either the Act or the Exchange Act.
"Safeguard Shareholders" means the holders of record of Safeguard Stock as
of __________, 1997.
"Safeguard Stock" means the common shares, $.10 par value per share, of
Safeguard.
"Selling Stockholders Unsubscribed Shares" means the shares of Common Stock
which had been offered by the Selling Stockholders pursuant to the Rights but
which were not acquired through exercise of the Rights on or prior to the
Expiration Date (after taking into account the agreement of the Company and the
Selling Stockholders that the 560,000 shares of Common Stock that are expected
to be sold to Warren V. Musser upon exercise of the Musser Rights shall be
deemed to be sold by the Company).
"Shares" means the Option Shares, the Excess Unsubscribed Shares to be
purchased by the Underwriters and the Other Purchasers Standby Shares purchased
by the Underwriters, if any, pursuant to Section 3.
"Significant Subsidiary" means the term as defined in Rule 405 of the Rules
and Regulations.
-6-
<PAGE>
"Transfer Agent and Registrar" means the transfer agent and registrar
described in Section 6(a)(ix) hereof.
"Underwriters" means Robert W. Baird & Co. Incorporated and Adams, Harkness
& Hill, Inc.
"Underwriters' Counsel" means Drinker Biddle & Reath LLP.
"Undistributed Shares" means 6,400,000 shares of Common Stock less those
shares of Common Stock that had been offered by the Company and the Selling
Stockholders pursuant to the Rights if Rights to purchase fewer than 6,400,000
shares of Common Stock are granted to holders of the Safeguard Stock.
"Unsubscribed Shares" means the Selling Stockholders Unsubscribed Shares,
the Company Unsubscribed Shares and the Undistributed Shares.
2. Representations and Warranties of the Company and the Selling
Stockholders.
(a) The Company represents and warrants to, and agrees with, the
Underwriters as follows:
(i) The Company has filed with the Commission a registration
statement on Form S-1 (No. 333-26129), including a prospectus subject to
completion, for the registration of the Rights, the shares of Common Stock
subject to the Rights, the Direct Shares and the Option Shares under the
Act, and have filed with the Commission one or more amendments thereto.
After the execution of this Agreement, the Company will file with the
Commission either (A) if such registration statement, as it may have been
amended, has been declared by the Commission to be effective under the Act
as of the time of effectiveness of this Agreement, a prospectus in the form
most recently included in an amendment to such registration statement (or,
if no such amendment shall have been filed, in such registration
statement), with such changes or insertions as are required by Rule 430A
under the Act or permitted by Rule 424(b) under the Act and as have been
provided to and approved by the Underwriters prior to the execution of this
Agreement, or (B) if such registration statement, as it may have been
amended, has not been declared by the Commission to be effective under the
Act as of the time of effectiveness of this Agreement, an amendment to such
registration statement, including a form of prospectus, a copy of which
amendment has been furnished to and approved by the Underwriters prior to
the execution of this Agreement;
(ii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or any part thereof and,
to the best knowledge of the Company, no proceedings for a stop order have
been instituted or are pending or threatened. When any Preliminary
Prospectus was filed with the Commission, it contained all statements
required to be stated therein in accordance with,
-7-
<PAGE>
and complied in all material respects with the requirements of, the Act and
the Rules and Regulations except to the extent that such Preliminary
Prospectus did not contain any such required statements, or did not so
comply, in a manner corrected in the Prospectus. When the Registration
Statement or any amendment thereto was (or is) declared effective, it (A)
contained (or will contain) all statements required to be stated therein in
accordance with, and complied in all material respects (or will comply in all
material respects) with the requirements of, the Act and the Rules and
Regulations and (B) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading. When the Prospectus or any amendment or
supplement thereto is filed pursuant to Rule 424(b) (or, if the Prospectus or
such amendment or supplement is not required to be so filed, when the
Registration Statement or the amendment thereto containing such amendment or
supplement to the Prospectus was or is declared effective) and on the Closing
Date and any Option Closing Date, the Prospectus, as amended or supplemented
at any such time, (A) contained or will contain all statements required to be
stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the Rules and
Regulations and (B) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading. The foregoing provisions of this paragraph (ii)
do not apply to the Provided Information;
(iii) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, is
duly qualified to transact business and is in good standing as foreign
corporations in each jurisdiction in which its ownership or leasing of any
properties or the character or conduct of its operations requires such
qualification, except where failures to be so qualified, individually or in
the aggregate, would not result in a Material Adverse Effect. The Company
does not own any stock of or other equity in, or otherwise control directly
or indirectly, any corporation, firm, partnership, trust, joint venture or
other business entity, except as disclosed in the Prospectus. The Company
does not own capital stock in any other corporation;
(iv) The Company has all requisite power and authority (corporate
and other), and has obtained and currently maintains in full force and
effect and is operating in compliance with any and all authorizations,
approvals, orders, licenses, certificates, franchises and permits of and
from all governmental or regulatory officials and bodies (including those
having jurisdiction over environmental or similar matters) necessary or
required to own or lease its properties and conduct its business as
described in the Registration Statement, the Prospectus and any amendment
or supplement thereto, except where the failure to so maintain or operate
would not result in a Material Adverse Effect. The Company is and has been
doing business in compliance with all such authorizations, approvals,
orders, licenses, certificates, franchises and permits and all federal,
state, local and foreign laws, rules and regulations (including without
limitation
-8-
<PAGE>
those relating to employment matters and the payment of taxes)
except as disclosed in the Prospectus and except where failures to be in
compliance, individually or in the aggregate, would not result in a
Material Adverse Effect. The Company has not received any notice or
notices of proceedings relating to the revocation or modification of any
such authorization, approval, order, license, certificate, franchise or
permit that if the subject of unfavorable decisions, rulings or findings,
would, individually or in the aggregate, result in a Material Adverse
Effect;
(v) The Company has duly executed and delivered the Rights Agent
Agreement. The shares of Common Stock to be sold by the Company and the
Selling Stockholders hereunder and upon the exercise of the Rights are
subject to the rights and interests of the Underwriters and the Rights
Agent hereunder and under the Rights Agent Agreement. Except to the extent
otherwise provided therein, the arrangements for custody or reservation and
delivery of the certificates for such shares, made by the Company hereunder
and under the Rights Agent Agreement, are irrevocable, and are not subject
to termination by any acts of the Company, the Selling Stockholders or by
operation of law;
(vi) The Company has all requisite power and authority (corporate
and other) to enter into this Agreement, the Other Purchasers Standby
Purchase Agreements and the Rights Agent Agreement, and to consummate the
transactions provided for herein and therein; and this Agreement, the Other
Purchasers Standby Purchase Agreements and the Rights Agent Agreement have
each been duly authorized by the Company. Each of this Agreement and the
Rights Agent Agreement have been and the Other Purchasers Standby Purchase
Agreements will be prior to the Closing Date duly executed and delivered by
the Company. Each of this Agreement and the Rights Agent Agreement
constitutes and the Other Purchasers Standby Purchase Agreements will
constitute prior to the Closing Date, assuming due authorization, execution
and delivery by the other parties to such agreements, the legal, valid and
binding obligation of the Company enforceable against the Company in
accordance with their respective terms, subject to the effect of general
principles of equity (including standards of materiality, good faith, fair
dealing and reasonableness) whether applied by a court of law or equity,
and except as rights to indemnity and contribution hereunder may be limited
by applicable law, statutory duties or public policy. The Company's
execution and delivery of this Agreement, the Other Purchasers Standby
Purchase Agreements and the Rights Agent Agreement, its performance of its
obligations hereunder and thereunder, the consummation of the transactions
contemplated hereby and thereby by it, and its conduct of its business as
described in the Registration Statement, the Prospectus and any amendment
or supplement thereto, will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, or result in the creation or imposition of any material liens,
charges, claims, encumbrances, pledges, security interests, defects or
other like restrictions or material equities of any kind whatsoever upon,
any right, property or assets (tangible or intangible) of the Company
pursuant to the terms of (A) the Certificate of Incorporation or bylaws,
each as amended
-9-
<PAGE>
to date, of the Company, (B) any lease, license, permit,
contract, indenture, mortgage, deed of trust, voting trust agreement,
stockholders agreement, note, loan or credit agreement (including any
related to indebtedness) or any other agreement or instrument to which the
Company is a party or by which the Company is or may be bound or to which
any of its properties or assets (tangible or intangible) is or may be
subject, except to the extent that any such conflict, breach, violation or
default, individually or in the aggregate, does not and would not result in
a Material Adverse Effect and does not and would not interfere with the
Offering or (C) any statute, judgment, decree, order, rule or regulation
applicable to the Company or any of its activities or properties adopted or
issued by an arbitrator, court, regulatory body or administrative agency or
other governmental agency or body (including those having jurisdiction over
environmental or similar matters), domestic or foreign, having jurisdiction
over the Company or any of its activities or properties (other than such as
may be required under state securities or "Blue Sky" laws and such as may
be required by the by-laws and rules of the NASD in connection with the
purchase and distribution of the Shares by the Underwriters);
(vii) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is required in
connection with the offer, issuance and sale of the shares of Common Stock
to be sold by the Company hereunder or upon exercise of the Rights, the
Company's performance of its obligations hereunder, or the consummation by
the Company of the other transactions contemplated hereby, except (A) such
as may be required under the state securities or "Blue Sky" laws of any
jurisdiction or as may be required by the by-laws and rules of the NASD in
connection with the purchase and distribution of the Shares by the
Underwriters, (B) any filing of the Prospectus pursuant to Rule 424(b) or
430A of the Rules and Regulations and, if the Registration Statement has
not been declared effective, an order of the Commission declaring the
Registration Statement effective under the Act, and (C) such other
approvals as have been obtained and remain in full force and effect;
(viii) The authorized, issued and outstanding capital stock of
the Company is set forth, and conforms to the description thereof
contained, in the Registration Statement, the Prospectus, and any amendment
or supplement thereto. All of the issued shares of capital stock of the
Company, including the shares to be sold by the Selling Stockholders, have
been duly authorized and validly issued, and are fully paid and
nonassessable; the holders thereof have no rights of rescission against the
Company with respect thereto and are not subject to personal liabilities
solely by reason of being such holders (except to the extent that as a
result of acquiring a substantial number of shares of Common Stock a holder
may be subject to claims of personal liability as an affiliate or control
person of the Company, as to which no representation is made hereby); and
none of such shares have been issued in violation of the preemptive rights
of any security holders of the Company arising as a matter of law or under
or pursuant to the Company's Certificate of Incorporation, as amended, the
Company's By-Laws, as amended, or any agreement or instrument to which the
Company is a party or by which it is bound. The shares of Common Stock
offered by the Company and to be sold upon
-10-
<PAGE>
the exercise of the Rights or pursuant to this Agreement and the Other
Purchasers Standby Purchase Agreements have been duly authorized and at the
Closing Date, after payment therefor in accordance herewith or in
accordance with the terms and conditions of the Rights (as the case may
be), will be validly issued, fully paid and nonassessable and not subject
to any Adverse Claim, with no personal liability attaching to the holder
solely as a result of the ownership thereof (except to the extent that as
a result of acquiring a substantial number of shares of Common Stock a
holder may be subject to claims of personal liability as an affiliate or
control person of the Company, as to which no representation is made
hereby). Upon the issuance and delivery pursuant to this Agreement and the
Rights Agent Agreement of the Shares to be sold by the Company, assuming
that each of the Underwriters is a Bona Fide Purchaser, the Underwriters
will acquire good and marketable title to the Shares free and clear of any
liens, charges, claims, preemptive rights, encumbrances, pledges, security
interests, defects or other like restrictions or like material equity of
any kind whatsoever. The shares of Common Stock offered by the Company and
to be sold upon the exercise of the Rights or pursuant to this Agreement or
the Other Purchasers Standby Purchase Agreements will conform to the
description thereof contained in the Prospectus. There are no preemptive
or other rights to subscribe for or to purchase nor any restriction upon
the voting or transfer of, any shares of Common Stock pursuant to the
Company's Certificate of Incorporation or By-Laws, as each amended to date,
or pursuant to any agreement among stockholders to which the Company is a
party, by which it is bound or of which it has knowledge, and the Shares to
be sold by the Company are not otherwise subject to any preemptive or other
similar rights of any security holder. The Company is not a party to or
bound by any instrument, agreement or other arrangement providing for it to
issue any capital stock, rights, warrants, options or other securities,
except for this Agreement and as described in the Prospectus. Except as
described in the Prospectus with respect to Common Stock that may be
registered by the Company in a registration statement on Form S-8, no
holder of any securities of the Company has the right to include any
securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company during a period
commencing on the date the Registration Statement is declared effective by
the Commission and ending 180 days following the Expiration Date or to
require the Company to file a registration statement under the Act during
such period. All of the (i) Rights and (ii) outstanding shares of Common
Stock and all of the shares of Common Stock to be issued by the Company as
contemplated herein have been approved for quotation upon notice of
issuance on the Nasdaq National Market of the Nasdaq Stock Market;
(ix) The financial statements and schedules of the Company
included in the Registration Statement, the Prospectus and any amendment or
supplement thereto fairly present the financial position and results of
operations of the Company as of the dates and for the periods therein
specified. Such financial statements and schedules have been prepared in
accordance with generally accepted accounting principles as in effect in
the United States and as consistently applied throughout the periods
involved and in accordance with the Rules and Regulations. The selected
financial data set forth under
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<PAGE>
the caption "SELECTED FINANCIAL DATA" in the Prospectus fairly present, on
the basis stated therein, the information included therein. The Company
maintains a system of internal accounting controls sufficient to provide
reasonable assurance that (A) transactions are executed in accordance with
management's general or specific authorizations; (B) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
asset accountability; (C) access to assets is permitted only in accordance
with management's general or specific authorization; and (D) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences. The Company's internal accounting controls are designed to
cause the Company to comply in all material respects with the Foreign
Corrupt Practices Act of 1977, as amended. KPMG, whose reports are filed
with the Commission as a part of the Registration Statement, are
independent auditors as required by the Act and the Rules and Regulations.
Since April 1, 1993, KPMG has been the only public accountants engaged by
the Company, and the Company has not had any Disagreement with KPMG, and
has not experienced any Reportable Event since that date;
(x) The Company has filed all federal, state, local and foreign
tax returns that are required to be filed by it or has duly requested
extensions thereof, except in any case in which the failure so to file,
individually or in the aggregate, would not have a Material Adverse Effect.
The Company has paid all taxes required to be paid by it and all other
assessments, fines or penalties, if any, levied against it, to the extent
that any of the foregoing are due and payable, except for (A) any such
assessment, fine or penalty that is currently being contested in good faith
or (B) any case in which the failure so to pay, individually or in the
aggregate, would not have a Material Adverse Effect;
(xi) No transfer tax, stamp duty or other similar tax is payable
by or on behalf of the Underwriters in connection with the issuance by the
Company, or the purchase by the Underwriters, of the Shares to be sold by
the Company or any resales of such Shares by the Underwriters;
(xii) The Company has good and marketable title to, or valid
and enforceable leasehold estates in, all items of real and personal
property stated in the Prospectus to be owned or leased by it, free and
clear of all liens, charges, claims, encumbrances, pledges, security
interests, defects or other like restrictions or like equities of any kind
whatsoever, other than (A) liens for taxes not yet due and payable, (B)
liens as described or referred to in the Prospectus, and (C) liens that are
not material in amount in relation to the business of the Company and which
do not interfere with the Offering;
(xiii) Except as disclosed in the Prospectus, the Company owns
or possesses adequate licenses or other rights, in each case free of fees,
charges or royalties payable after the date hereof, to use the Intellectual
Property, except where the lack thereof would not result in a Material
Adverse Effect. Except as disclosed in the
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Prospectus, the Company has not received any notice of infringement of or
conflict with (and does not know of any such infringement of or conflict
with) rights or claims of others with respect to the Intellectual Property,
any of the activities engaged in, or proposed to be engaged in, by the
Company or any challenge to the ownership or right of the Company with
respect to the Intellectual Property which could result in a Material
Adverse Effect or which could have a material adverse effect on the
development, marketing or sale of any of the Company's existing or
contemplated products, services or processes as described in the
Prospectus. None of the products, services or processes of the Company
referred to in such Prospectus and relating to the business of the Company
now operated or proposed to be operated by it as described in such
Prospectus infringes or conflicts with any right or patent, or with
any discovery, invention, product or process which is the subject of any
patent application known to the Company, in a manner which would result in
a Material Adverse Effect;
(xiv) The Company is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts
as are prudent and customary in the business in which they are engaged, and
the Company has no reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not result in a Material Adverse Effect;
(xv) The Company is not in breach of, or in default under, any
term, covenant or provision of any license, permit, contract, indenture,
mortgage, installment sale agreement, lease, deed of trust, voting trust
agreement, stockholders agreement, note, loan or credit agreement, or any
other agreement or instrument evidencing an obligation for borrowed money,
or any other agreement or instrument to which it is a party or by which it
may be bound or to which any of its property or assets (tangible or
intangible) is subject or affected, except as disclosed in the Registration
Statement and Prospectus and except as to defaults that (A) individually or
in the aggregate would not have a Material Adverse Effect and (B) would not
interfere with the Offering. The Company is not in violation of any term
or provision of its charter or bylaws, each as amended to date;
(xvi) Other than as disclosed in the Prospectus, there is not
pending or, to the Company's knowledge, threatened against the Company or
involving the properties or business of the Company (or, to the Company's
knowledge, any circumstance that may give rise to the same), any action,
suit, proceeding, investigation, litigation or governmental proceeding
(including those having jurisdiction over environmental or similar
matters), domestic or foreign, that (A) is required to be disclosed in the
Registration Statement and is not so disclosed, (B) questions the validity
of the capital stock of the Company or the validity or enforceability of
this Agreement, (C) questions the validity of any action taken or to be
taken by the Company pursuant to or in connection with this Agreement, or
(D) could materially adversely affect the
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<PAGE>
present or prospective ability of the Company to perform its obligations
under this Agreement or result in a Material Adverse Effect. Any such
proceedings summarized in the Prospectus are accurately summarized in all
material respects;
(xvii) Subsequent to the respective dates as of which
information is set forth in the Registration Statement and Prospectus, and
except as may otherwise be indicated or contemplated herein or therein, the
Company has not (A) issued any securities other than the Rights, the shares
of Common Stock to be sold by the Company upon the exercise of the Rights,
the Shares to be sold by the Company pursuant to this Agreement and shares
of Common Stock issuable upon the exercise of stock options disclosed in
the Prospectus as outstanding as of the date hereof, (B) incurred any
liability or obligation, direct or contingent, for borrowed money, (C)
entered into any transaction other than in the ordinary course of business,
(D) declared or paid any dividend or made any other distribution on or in
respect of its capital stock, or (E) entered into any transactions with any
affiliate, including, without limitation, the Selling Stockholders or their
respective affiliates;
(xviii) The Company has satisfactory employer-employee
relationships with its employees. No labor or other dispute with the
employees of the Company exists, or, to the best knowledge of the Company,
is imminent;
(xix) Except as disclosed in the Registration Statement or
the Prospectus, each employee benefit plan, within the meaning of Section
3(3) of ERISA that is maintained, administered or contributed to by the
Company or any of its affiliates for employees or former employees of the
Company and its affiliates has been maintained in compliance with its terms
and the requirements of any applicable statutes, orders, rules and
regulations, including but not limited to ERISA and the Code; no prohibited
transaction, within the meaning of Section 406 of ERISA or Section 4975 of
the Code has occurred with respect to any such plan excluding transactions
effected pursuant to a statutory or administrative exemption; and for each
such plan which is subject to the funding rules of Section 412 of the Code
or Section 302 of ERISA no "accumulated funding deficiency" as defined in
Section 412 of the Code has been incurred, whether or not waived, and the
fair market value of the assets of each such plan (excluding for these
purposes accrued but unpaid contributions) exceeded the present value of
all benefits accrued under such plan determined using reasonable actuarial
assumptions;
(xx) The minutes books of the Company made available to
Underwriters' Counsel, (A) contain minutes and consents from all meetings
and actions of the Company's stockholders, board of directors, and the
committees of such board since the respective dates of organization of the
Company and (B) reflect all transactions referred to in such minutes
accurately in all material respects;
(xxi) All agreements filed as exhibits to the Registration
Statement to which the Company is a party or by which the Company may be
bound or to which any
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<PAGE>
of its assets, properties or businesses may be subject have been duly and
validly authorized, executed and delivered by the Company and constitute
the legal, valid and binding agreements of the Company, enforceable in
accordance with their respective terms, subject in each case to the effect
of general principles of equity (including standards of materiality, good
faith, fair dealing and reasonableness) whether applied by a court of law
or equity and except as rights to indemnity and contribution under this
Agreement may be limited by applicable law, statutory duties or public
policy. The descriptions in the Registration Statement, the Prospectus
and any amendment or supplement thereto of agreements, whether written or
oral, and of other documents are accurate and fairly present the
information required to be shown with respect thereto by Form S-1 under the
Act. There are no agreements, whether written or oral, or other documents
that are required by the Act or the Rules and Regulations to be described
in the Registration Statement or filed as exhibits to the Registration
Statement that are not described or filed as required;
(xxii) Neither the Company nor any of its officers, directors,
or affiliates (within the meaning of the Rules and Regulations) has taken
or will take, directly or indirectly, any action designed to or that has
constituted or that might reasonably be expected to cause or result in
stabilization or manipulation of the price of the Common Stock or the
Rights in violation of Regulation M under the Exchange Act;
(xxiii) There are no claims, payments, issuances, arrangements
or understandings for services in the nature of a finder's, advisory or
origination fee or otherwise, either with respect to the sale of the shares
of Common Stock to be sold by the Company upon exercise of the Rights, the
sale of the Shares hereunder or with respect to the proceeds received by
the Company from such sales. Other than as reflected in this Agreement,
there are no other arrangements, agreements, understandings, payments or
issuances with respect to the Company or, to the Company's knowledge, any
of its officers, directors, or affiliates that may constitute
"underwriter's compensation," as determined by the NASD;
(xxiv) The Company has delivered or caused to be delivered to
the Underwriters the Associated Person Lock-Ups;
(xxv) All of the Rights have been duly authorized, and, when
issued and distributed as set forth in the Prospectus, will be legally
issued and valid and binding obligations of the Company having the rights
summarized in the Prospectus; and none of such Rights will have been issued
in violation of the preemptive rights of any security holders of the
Company arising as a matter of law or under or pursuant to the Company's
Certificate of Incorporation, as amended, the Company's By-Laws, as
amended, or any agreement or instrument to which the Company is a party or
by which it is bound.
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<PAGE>
(xxvi) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not been
any material adverse change, or any development involving a prospective
material adverse change, in or affecting the general affairs, business,
prospects, management, financial position, stockholders' equity or results
of operations of the Company otherwise than as set forth or contemplated in
the Prospectus;
(xxvii) No relationship, direct or indirect, exists between or
among the Company on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company, Safeguard or XL
Vision, on the other hand, which is required by the Act to be described in
the Registration Statement and the Prospectus which is not so described;
(xxviii) The Company is not and, after giving effect to the
Offering, will not be an "investment company" or entity "controlled" by an
"investment company," as such terms are defined in the Investment Company
Act; and
(xxix) The Company has complied with all provisions of Section
517.075, Florida Statutes (Chapter 92-198, Laws of Florida), relating to
doing business with the Government of Cuba or with any person or affiliate
located in Cuba;
(b) Each Selling Stockholder severally represents and warrants to,
and agrees with, the Underwriters as follows:
(i) The Selling Stockholder has delivered certificates in
negotiable form for the shares of Common Stock to be sold by it upon the
exercise of the Rights and pursuant to this Agreement to the Company to be
placed in custody for delivery pursuant to the terms of the Rights Agent
Agreement and this Agreement. The shares represented by the certificates
so held in custody for the Selling Stockholder are subject to the interests
hereunder of the Underwriters, the Company and the Rights Agent under the
Rights Agent Agreement. The arrangements for custody and delivery of such
certificates are, to the extent provided hereunder, irrevocable, and are
not subject to termination by any acts of the Selling Stockholder, or by
operation of law;
(ii) The Selling Stockholder has the legal right and power to
enter into this Agreement and to sell, transfer and deliver the Shares
proposed to be sold by it hereunder and the shares of Common Stock to be
sold by it upon the exercise of the Rights. This Agreement has been duly
authorized, executed and delivered by the Selling Stockholder and, assuming
due authorization, execution and delivery by the other respective parties
hereto, constitutes the legal, valid and binding obligation of the Selling
Stockholder enforceable against the Selling Stockholder in accordance with
its terms, subject to the effect of general principles of equity (including
standards of materiality, good faith, fair dealing and reasonableness)
whether applied by a court of law or equity,
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<PAGE>
and except as rights of indemnity and contribution hereunder may be limited
by applicable law, statutory duties or public policy;
(iii) The execution and delivery of this Agreement and the
performance by the Selling Stockholder of its obligations hereunder will
not conflict with or result in a breach or violation of any of the terms
and provisions of, or constitute a default under (A) any charter documents,
including articles or certificates of incorporation, partnership agreements
or by-laws, of the Selling Stockholder, as amended to date, (B) any lease,
permit, license, contract, indenture, mortgage, deed of trust, voting trust
agreement, shareholders agreement, note, loan or credit agreement or any
other agreement or instrument to which the Selling Stockholder is a party
or by which it is or may be bound or to which any of its properties or
assets (tangible or intangible) is or may be subject, or any indebtedness,
except to the extent that any such conflict, breach, violation or default,
individually or in the aggregate, does not and would not result in a
material adverse effect on the condition, financial or otherwise, or on the
earnings, business affairs, financial position, prospects, value,
operation, properties, results of operation or business of the Selling
Stockholder and does not and would not interfere with the Offering or (C)
any statute, judgment, decree, order, rule or regulation applicable to the
Selling Stockholder or any of its activities or properties adopted or
issued by any arbitrator, court, regulatory body or administrative agency
or other governmental agency or body (including those having jurisdiction
over environmental or similar matters), domestic or foreign, having
jurisdiction over the Selling Stockholder or any of its activities or
properties. No consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court is required for the
consummation by the Selling Stockholder of the transactions contemplated
herein, except (A) such as may be required under the state securities or
"Blue Sky" laws of any jurisdiction or as may be required by the by-laws of
the NASD in connection with the purchase and distribution of the Shares by
the Underwriters, (B) any filing of the Prospectus pursuant to Rule 424(b)
or 430A of the Rules and Regulations and, if the Registration Statement has
not been declared effective, an order of the Commission declaring the
Registration Statement effective under the Act, and (C) such other
approvals as have been obtained and remain in full force and effect;
(iv) The Selling Stockholder has, and on the Closing Date will
have, good and marketable title to the Shares proposed to be sold by the
Selling Stockholder hereunder and the shares of Common Stock to be sold
upon the exercise of the Rights, and none of such shares will be subject to
any Adverse Claim. Upon delivery of and payment for the Shares to be sold
by the Selling Stockholder hereunder, assuming that each of the
Underwriters is a Bona Fide Purchaser, the Underwriters will acquire good
and marketable title thereto free and clear of any liens, charges, claims,
preemptive rights, encumbrances, pledges, security interests, voting
trusts, defects or other like restrictions or other like material equity of
any kind whatsoever;
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<PAGE>
(v) To the best knowledge of the Selling Stockholder, the
Commission has not issued any order preventing or suspending the use of any
Preliminary Prospectus or any part thereof and, to the best knowledge of
the Selling Stockholder, no proceedings for a stop order have been
instituted or are pending or threatened. When any Preliminary Prospectus
was filed with the Commission, it contained all statements required to be
stated therein in accordance with, and complied in all material respects
with the requirements of, the Act and the Rules and Regulations except to
the extent that such Preliminary Prospectus did not contain any such
required statements, or did not so comply, in a manner corrected in the
Prospectus. To the best knowledge of the Selling Stockholder, when the
Registration Statement (or any amendment thereto) was (or is) declared
effective, it (A) contained (or will contain) all statements required to be
stated therein in accordance with, and complied in all material respects
(or will comply in all material respects) with the requirements of, the Act
and the Rules and Regulations and (B) did not or will not include any
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading. To the best
knowledge of the Selling Stockholder, when the Prospectus or any amendment
or supplement thereto is filed pursuant to Rule 424(b) (or, if the
Prospectus or such amendment or supplement is not required to be so filed,
when the Registration Statement or the amendment thereto containing such
amendment or supplement to the Prospectus was or is declared effective) and
on the Closing Date and any Option Closing Date, the Prospectus, as amended
or supplemented at any such time, (A) contained or will contain all
statements required to be stated therein in accordance with, and complied
or will comply in all material respects with the requirements of, the Act
and the Rules and Regulations and (B) did not or will not include any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (v) do not apply to the Provided Information;
(vi) To the best knowledge of the Selling Stockholder, the
descriptions in the Registration Statement, the Prospectus and any
amendment or supplement thereto of agreements, whether written or oral, and
of other documents are accurate and fairly present the information required
to be shown with respect thereto by Form S-1 under the Act. To the best
knowledge of the Selling Stockholder, there are no agreements, whether
written or oral, or other documents that are required by the Act or the
Rules and Regulations to be described in the Registration Statement or
filed as exhibits to the Registration Statement that are not described or
filed as required;
(vii) Neither the Selling Stockholder nor any of its
officers, directors, or affiliates (within the meaning of the Rules and
Regulations) has (a) made or caused to be effected any transaction,
directly or indirectly, designed to or that has constituted or that might
reasonably be expected to cause or result in stabilization of the price of
the Common Stock or the Rights, (b) taken or will take, directly or
indirectly, any action designed to or that has constituted or that might
reasonably be expected to cause or result
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<PAGE>
in manipulation of the price of the Common Stock or the Rights in violation
of Regulation M under the Exchange Act, or (c) failed to comply with the
Act or the Rules and Regulations in order to effect the transactions
contemplated hereby.
3. Purchase, Sale and Delivery of the Shares.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, and subject to the terms and conditions herein set
forth, the Company agrees to issue and the Company and the Selling Stockholders
agree, severally and not jointly, to sell to the Underwriters, and the
Underwriters agree, severally and not jointly, to purchase in the percentages
set forth in Schedule B hereto, all of the Excess Unsubscribed Shares at a price
of $5.00 per share.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained and upon not less than two business
days' notice from the Underwriters, for a period of 20 days after the Expiration
Date, the Selling Stockholders agree to sell to the Underwriters all or part of
up to 640,000 Option Shares at a purchase price of $5.00 per share for the sole
purpose of covering over-allotments that may be made in connection with the
offering and distribution of the shares of Common Stock. The Underwriters may
exercise their option to purchase all or any portion of the Option Shares from
the Company up to two times, provided that the aggregate number of Option Shares
purchased by the Underwriters shall not exceed 640,000. Delivery of the Option
Shares shall be made concurrently with payment therefor. Option Shares may be
purchased by the Underwriters only for the purpose of covering over-allotments
that may be made in connection with the offering and distribution of the shares
of Common Stock. No Option Shares shall be delivered unless the Excess
Unsubscribed Shares (if any are purchased by the Underwriters) shall be
simultaneously delivered or shall theretofore have been delivered as herein
provided.
(c) Payment of the respective aggregate purchase prices of the Excess
Unsubscribed Shares purchased from the Company and the Selling Stockholders
shall be made by the Underwriters on the Closing Date by wire transfer in same
day funds, payable to or upon the order of the Company and the Selling
Stockholders at the offices of Robert W. Baird & Co. Incorporated at 777 E.
Wisconsin Avenue, Milwaukee, Wisconsin 53202-5391, or at such other place as
shall be agreed upon by the Underwriters and the Company, upon delivery of
certificates (in form and substance satisfactory to the Underwriters)
representing the Excess Unsubscribed Shares to the Underwriters. Delivery and
payment for the Excess Unsubscribed Shares shall be made at the Closing. In
addition, in the event that any or all of the Option Shares are purchased by the
Underwriters, payment of the purchase price for, and delivery of certificates
for, such Option Shares shall be made at the above mentioned office or at such
other place as shall be agreed upon by the Underwriters and the Company, on each
Option Closing Date as specified in the notice from the Underwriters to the
Company. Certificates for the Excess Unsubscribed Shares and the Option Shares,
if any, shall be in definitive, fully registered form, shall bear no restrictive
legends and shall be in such denominations and registered in such names as the
Underwriters may request in writing at least two business days prior to the
Closing
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<PAGE>
Date or the relevant Option Closing Date, as the case may be. The
certificates for the Excess Unsubscribed Shares and the Option Shares, if
any, shall be made available to the Underwriters at such office or such other
place as the Underwriters may designate for inspection, checking and
packaging not later than 9:30 a.m., New York City time, on the last business
day prior to the Closing Date or the relevant Option Closing Date, as the
case may be.
(d) Delivery of certificates representing the shares of Common Stock
to be sold pursuant to the exercise of the Rights, and the payment of the
subscription price therefor to the Company and the Selling Stockholders shall be
made at the Closing on the Closing Date pursuant to the Rights Agent Agreement,
irrespective of whether or not any Excess Unsubscribed Shares are to be
purchased by the Underwriters at such Closing.
4. Public Offering of the Excess Unsubscribed Shares.
As soon after the Registration Statement becomes effective as the
Underwriters deem advisable, the Underwriters shall make the Offering.
5. Registration of Common Stock in Certain States.
(a) On the basis of the representations, warranties and covenants
herein contained, but subject to the terms and conditions herein set forth, the
Underwriters will act (or at their expense, will cause another broker-dealer
registered in such state to act) as the agent of the Company and the Selling
Stockholders to effect the offering of the Rights and the sale of the shares of
Common Stock upon exercise thereof or pursuant to the Other Purchasers Standby
Purchase Agreements in the States of Connecticut, Florida, Nebraska, Nevada, New
Hampshire and New York, such states being those states in which applicable state
law requires that a registered broker-dealer effect the offering of the Rights
or the shares of Common Stock purchasable upon exercise thereof or pursuant to
the Other Purchasers Standby Purchase Agreements. The Underwriters may delegate
their obligations under the immediately preceding sentence through another
registered broker-dealer satisfactory to them in states where the Underwriters
are not registered as such. The Underwriters shall not be liable under this
Section 5(a), except for gross negligence, lack of good faith and for their
obligations expressly assumed hereunder.
(b) The Company will deliver to the Underwriters, on or before the
day the Registration Statement becomes effective, a "Blue Sky Memorandum"
(herein so called), prepared by Morgan, Lewis & Bockius LLP relating to the
securities or Blue Sky laws of any jurisdictions in which the transfer of the
Rights or the offer and sale of the Common Stock is required to be qualified or
registered, which will set forth the circumstances under which said transfer or
offers and sales may be made and advising that the appropriate action, if any,
will be taken in each of such jurisdictions so as to permit the transfer of the
Rights and the offer and sale of the Common Stock (whether upon or in connection
with the exercise of Rights, as part of the public offering of the Shares by the
Underwriters or pursuant to the Other Purchasers Standby Purchase Agreements) to
the persons resident in the jurisdictions indicated in such
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<PAGE>
survey. Such Blue Sky Memorandum may be based upon qualification of the
Rights and the Common Stock as necessary with appropriate persons in such
jurisdictions and an examination of the statutes and regulations, if any, of
such jurisdictions as reported in standard compilations and upon interpretive
advice obtained from representatives of certain securities commissions and
such local counsel as may be necessary. Such Blue Sky Memorandum will be
furnished only for the Underwriters' general information and guidance rather
than as an opinion of counsel with regard to the laws of the jurisdictions
referred to therein.
6. Covenants of the Company and the Selling Stockholders.
(a) The Company covenants and agrees with the Underwriters as
follows:
(i) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto, to become effective as promptly as
possible. Unless required by law, the Company will not file with the
Commission the prospectus or amendment referred to in the second sentence
of Section 2(a)(i) hereof, any amendment or supplement to such prospectus,
any amendment to the Registration Statement, or any document under the
Exchange Act before termination of the offering of the Shares by the
Underwriters of which the Underwriters shall not previously have been
advised and furnished with a copy, or to which the Underwriters shall have
reasonably objected by notice to the Company in writing after having been
provided a copy thereof, or which is not in compliance with the Act, the
Exchange Act or the Rules and Regulations. During the time when a
prospectus relating to the Shares is required to be delivered under the
Act, the Company will comply with all requirements imposed upon it by the
Act and the Rules and Regulations to the extent necessary to permit the
continuance of sales of or dealings in the Shares in accordance with the
provisions hereof and of the Prospectus, as amended or supplemented. The
Company will prepare and file with the Commission, promptly upon the
reasonable request by the Underwriters or Underwriters' Counsel, any
amendments to the Registration Statement or amendments or supplements to
the Prospectus that may be necessary or advisable in connection with the
distribution of the Shares by the Underwriters, and will use its best
efforts to cause the same to be filed with the Commission as promptly as
possible;
(ii) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Underwriters, with a confirmation in
writing, of (A) the time when the Registration Statement or any amendment
thereto has been filed or declared effective or the Prospectus or any
amendment or supplement thereto has been filed, (B) the issuance by the
Commission of any stop order, or of the initiation or threatening of any
proceeding, suspending the effectiveness of the Registration Statement or
any amendment thereto or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, (C) the issuance by any state securities commission of any notice
of any proceedings for the suspension of the qualification of the Shares
for offering or sale in any jurisdiction or of
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the initiation, or the threatening, of any proceeding for that purpose,
(D) the receipt of any comments from the Commission, and (E) any request
by the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional information.
The Company will use its best efforts to prevent the issuance of any such
order or the imposition of any such suspension and, if any such order is
issued or suspension is imposed, to obtain the withdrawal thereof as
promptly as possible;
(iii) If required, the Company will file the Prospectus and
any amendment or supplement thereto with the Commission in the manner and
within the time period required by Rule 424(b) and Rule 430A(a)(3) of the
Rules and Regulations;
(iv) The Company will arrange for the qualification of the shares
of Common Stock for offering and sale under the securities or "Blue Sky"
laws of such jurisdictions in which recipients of Rights and the Other
Purchasers are resident and such jurisdictions as the Underwriters may
reasonably designate and will continue such qualifications in effect for as
long as may be necessary to complete the distribution of the shares of
Common Stock, provided, however, that in connection therewith the Company
shall not be required to qualify as a foreign corporation or to execute a
general consent to service of process in any jurisdiction;
(v) If, at any time when a prospectus relating to the Shares is
required to be delivered under the Act, any event occurs as a result of
which, in the opinion of the Company or counsel for the Company, the
Prospectus, as then amended or supplemented, includes an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading, or if it
is otherwise necessary at any time to amend or supplement the Prospectus to
comply with the Act or the Rules and Regulations, the Company will promptly
notify the Underwriters thereof and, subject to Section 6(a)(i) hereof,
prepare and file with the Commission, at the Company's expense, an
amendment to the Registration Statement or an amendment or supplement to
the Prospectus that corrects such statement or omission or effects such
compliance. If, at any time when a prospectus relating to the Shares is
required to be delivered under the Act, any event occurs as a result of
which, in the opinion of the Underwriters or Underwriters' Counsel, the
Prospectus, as then amended or supplemented, includes an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading, the
Underwriters will promptly notify the Company thereof and the Company will,
subject to Section 6(a)(i) hereof, prepare and file with the Commission, at
the Company's expense, an amendment to the Registration Statement or an
amendment or supplement to the Prospectus that corrects such statement or
omission or effects such compliance. The Company will furnish to the
Underwriters and dealers (whose names and addresses shall be furnished to
the Company by the Underwriters) to which Shares may have been
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sold on behalf of the Underwriters and to any other dealers upon request,
a reasonable number of copies of any amendment or supplement prepared
pursuant to this paragraph (v);
(vi) The Company will furnish to each of the Underwriters and to
Underwriters' Counsel, without charge, a signed copy of the registration
statement originally filed with respect to the Shares and each amendment
thereto. So long as the Underwriters or any dealer is required by the Act
or the Rules and Regulations to deliver a prospectus, the Company will also
furnish as many copies of each Preliminary Prospectus or the Prospectus or
any amendment or supplement thereto as the Underwriters may reasonably
request. The Company will provide to the Underwriters a copy of the report
on Form SR filed by the Company pursuant to Rule 463 of the Rules and
Regulations;
(vii) As soon as practicable after the effective date of the
Registration Statement, the Company will make generally available to its
security holders, in the manner specified in Rule 158(b) of the Rules and
Regulations, and to the Underwriters an earnings statement that will be in
the detail required by, and will otherwise comply with, the provisions of
Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations;
(viii) For a period of five years following the date hereof,
the Company will furnish to its stockholders, as soon as practicable,
annual reports (including financial statements audited by independent
public accountants) and will deliver to the Underwriters unaudited
quarterly reports of earnings (through delivery of the Company's quarterly
reports filed with the Commission on Form 10-Q or Form 10-QSB) and the
following:
(A) concurrently with furnishing quarterly reports, if any,
to the stockholders, statements of income of the Company for each
quarter in the form furnished to the Company's stockholders;
(B) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of operations,
stockholders equity, and cash flows of the Company for such fiscal
year, accompanied by a copy of the certificate thereon of independent
public accountants;
(C) as soon as they are available, copies of all reports
(financial or other) mailed to its stockholders;
(D) as soon as they are available, copies of all reports
(other than preliminary proxy materials) and financial statements
furnished to or filed with the Commission, the NASD or Nasdaq which
are available to the public;
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(E) as soon as they are available every press release and
every material news item or article of interest to the financial
community in respect of the Company or its affairs that is released or
prepared by the Company; and
(F) any additional information of a public nature
concerning the Company that the Underwriters may reasonably request
from time to time;
(ix) The Company will maintain a Transfer Agent and Registrar for
the shares of Common Stock. Effective as of the Closing Date, the Company
will cause the Transfer Agent for the shares of Common Stock to make
appropriate "stop transfer" restrictions in its records relating to the
certificates representing all shares of Common Stock subject to
restrictions under the agreements described in Sections 2(a)(xxiv), 2(b)(i)
and 6(b)(i) hereof;
(x) During the period commencing on the date the Registration
Statement is declared effective by the Commission and ending 180 days after
the Expiration Date, the Company, will not, without the prior written
consent of the Underwriters, (A) directly or indirectly, transfer, sell,
offer for sale, contract for sale, grant any option for the sale of, or
otherwise dispose of (or announce any transfer, sale, offer for sale,
contract for sale, grant of any option for sale of, or other disposition
of) any shares of Common Stock, or other securities convertible into, or
exercisable or exchangeable for, shares of Common Stock (except as
contemplated by this Agreement) or (B) file any registration statement
relating to any such securities with the Commission or any other authority
except as contemplated herein, provided, however, that (1) the Company may
grant or issue securities pursuant to any employee stock option plan or
stock purchase plan or outstanding stock options described in the
Prospectus and, commencing after the Closing Date, may file a registration
statement on Form S-8 with respect to such plans and (2) the Company may
issue shares of Common Stock, or other securities convertible into, or
exercisable or exchangeable for shares of Common Stock, as consideration
for any acquisition by the Company so long as the party being issued such
securities signs an agreement, acceptable in form and substance to the
Underwriters, that such party will not transfer, sell, offer for sale,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for shares of
Common Stock owned by such party or with respect to which such party has
the power of disposition during a period commencing on the date of issuance
of such securities and ending 180 days following the Expiration Date;
(xi) The Company will apply the net proceeds from the sale of the
Common Stock sold by it in the manner set forth under "USE OF PROCEEDS" in
the Prospectus. Except as described in the Prospectus, no portion of the
net proceeds will be used directly or indirectly to acquire any securities
issued by the Company;
(xii) The Company will furnish to the Underwriters as early
as practicable prior to each of the date hereof, the Closing Date and each
Option Closing
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Date, if any, but no later than two full business days prior
thereto, a copy of the latest available unaudited interim financial
statements of the Company (which in each case shall not be earlier than the
last day of the preceding month, unless such month-end shall be less than
three business days prior to the date such statements are to be delivered)
that have been read by the Company's independent public accountants, as
stated in their letters to be furnished pursuant to Section 8(h) hereof;
(xiii) The Company will cause the Shares and the Rights to be
approved for quotation on the Nasdaq National Market and will use its
reasonable efforts to maintain such approvals;
(xiv) The Company will file and cause to become effective
prior to the Closing Date a registration statement with respect to the
Common Stock pursuant to Section 12(g) of the Exchange Act and will use its
best efforts to maintain such registration;
(xv) The Company will apply the net proceeds from the sale of the
shares of Common Stock sold by it and conduct its operations in a manner
that will not subject it to registration as an investment company under the
Investment Company Act of 1940, as amended; and
(xvi) The Company will furnish, without charge, to the
Underwriters and Underwriters' Counsel within four months of the Closing
Date such number of closing binders as the Underwriters and Underwriters'
Counsel may reasonably request.
(b) Each Selling Stockholder covenants and agrees with the
Underwriters as follows:
(i) During the period commencing on the date the Registration
Statement is declared effective by the Commission and ending 180 days after
the Expiration Date, the Selling Stockholder will not, without the prior
written consent of the Underwriters, directly or indirectly, transfer,
sell, offer for sale, contract for sale, grant any option for the sale of
or otherwise dispose of any shares of Common Stock or other securities
convertible into, or exercisable or exchangeable for, shares of Common
Stock except (A) as contemplated in this Agreement or (B) pursuant to
grants or sales of such shares to employees of the Selling Stockholder or
its subsidiaries, provided that such transferees agree to be bound by the
restrictions contained in this paragraph.
(ii) The Selling Stockholder will pay all applicable state
transfer taxes, if any, involved in the transfer to the Underwriters of the
Shares to be purchased by the Underwriters from such Selling Stockholder.
(iii) The Company and the Selling Stockholders covenant and
agree with each other and covenant and agree with the Underwriters that the
Other Purchasers
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Standby Shares to be sold and the 560,000 shares of Common
Stock that are expected to be sold to the Musser Group upon exercise of the
Musser Rights shall be deemed to be sold by the Company.
7. Payment of Expenses; Fees.
(a) As compensation to the Underwriters for their services in
connection with the transactions contemplated by this Agreement and their
commitment hereunder, the Company and the Selling Stockholders hereby agree,
jointly and severally, to pay to the Underwriters, by wire transfer, on the
sixth business day following the Expiration Date, an amount equal to the sum of
(i) 3% of the Exercise Price for each share of Common Stock subject to Rights,
(ii) 3% of the subscription price for each Direct Share and each Undistributed
Share sold to the Direct Purchasers, and (iii) an additional fee of 4% of the
Exercise Price for each share (other than the Option Shares) purchased by the
Underwriters pursuant to Section 3(a) of this Agreement or upon the exercise of
Rights by the Underwriters if such Rights were purchased by the Underwriters at
a time when the Common Stock was trading (on a "when-issued" basis) at a per
share price of less than $6.00 or with the prior acknowledgement of Safeguard
that the Underwriters would be entitled to receive such compensation pursuant to
the exercise of such Rights. As compensation to the Underwriters for their
commitment hereunder, the Company hereby agrees to pay the Underwriters, by wire
transfer, on each Option Closing Date an amount equal to 7% of the Exercise
Price for each Option Share purchased on such date by the Underwriters. As
additional compensation to the Underwriters for their commitment hereunder, the
Company shall reimburse the Underwriters, by wire transfer on the sixth business
day following the Expiration Date, for a non-accountable expense allowance of
(i) $200,000 if, on the Expiration Date, the closing price for the Common Stock
was trading (on a "when-issued" basis) at a per share price of less than $7.25,
(ii) $100,000 if, on the Expiration Date, the closing price for the Common Stock
was trading (on a "when-issued basis) at a per share price between $7.25 and
$8.25 or (iii) no expense allowance if, on the Expiration Date, the closing
price for the Common Stock was trading (on a "when-issued" basis) at a per share
price greater than $8.25.
(b) The Company hereby agrees to pay all expenses and fees incident
to the performance of the obligations by the Company and the Selling
Stockholders under this Agreement, including all expenses and fees of the
Company and the Selling Stockholders incurred in connection with or by (i) the
engagement of accountants, counsel for the Company, counsel for Safeguard, the
Rights Agent and the Transfer Agent and Registrar for the Common Stock, (ii)
preparation, duplication, printing, filing and distribution of the registration
statement originally filed with respect to the Shares and any amendments
thereto, any Preliminary Prospectus and the Prospectus and any amendments and
supplements thereto and related documents used in connection with the Offering,
including in each case the cost of all copies supplied to the Underwriters in
quantities as hereinabove stated, (iii) the printing, engraving, issuance and
delivery of certificates representing the Rights and the Shares, (iv) the
qualification of the Shares under state securities or "Blue Sky" laws, including
filing fees, costs of printing and mailing of a "Preliminary Blue Sky
Memorandum" and "Final Blue Sky Memorandum" and
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disbursements and fees of Underwriters' Counsel in connection with the review
of such materials (which shall be paid at the Closing), (v) the approval of
the Common Stock and Rights for quotation on the Nasdaq National Market, (vi)
the filing fees of the Underwriters in connection with any filings required
to be made with the NASD, (vii) travel and out of pocket expenses of the
Company and Safeguard in connection with meetings with prospective investors
in the Shares (other than such expenses as shall have been specifically
approved in writing by the Underwriters to be paid for by the Underwriters),
and (viii) any expenses incurred by the Company in connection with a "road
show" presentation to potential investors.
(c) If this Agreement is terminated by the Underwriters in accordance
with the provisions of Section 8, Sections 12(a)(vii) or (a)(viii), or Section
13, the Company and Safeguard hereby agree, jointly and severally, to reimburse
and indemnify the Underwriters for all of their reasonable accountable
out-of-pocket expenses, including the reasonable fees and disbursements of
Underwriters' Counsel and any of the state securities, "Blue Sky" and NASD fees
and expenses identified in Sections 7(b)(iv) and 7(b)(vi) above, that shall have
been incurred by them in connection with the proposed purchase and sale of the
Shares.
8. Conditions of the Underwriters' Obligations.
The obligations of the Underwriters to purchase and pay for the Shares
shall be subject, in their sole discretion, to the accuracy of the
representations and warranties of the Company and the Selling Stockholders
herein as of the date hereof and as of the Closing Date, as if they had been
made on and as of the Closing Date, to the accuracy on and as of the Closing
Date of the statements of the officers of the Company and the Selling
Stockholders made in certificates delivered pursuant to the provisions hereof,
to the performance by the Company and the Selling Stockholders on and as of the
Closing Date of their respective covenants and obligations hereunder, and to the
following further conditions:
(a) If the Registration Statement or any amendment thereto filed
prior to the Closing Date has not been declared effective as of the time of
execution hereof, the Registration Statement or such amendment shall have been
declared effective not later than the first full business day next following the
date hereof or such later date and time as shall have been consented to in
writing by the Underwriters. If required, the Prospectus shall have been timely
filed with the Commission in accordance with Rule 424(b) of the Rules and
Regulations. If required, any amendment or supplement to the Prospectus shall
have been filed in accordance with Rule 424(c) under the Act. No stop order
suspending the effectiveness of the Registration Statement or any amendment
thereto shall have been issued and no proceedings for that purpose shall have
been instituted or, to the knowledge of the Company, the Selling Stockholders or
the Underwriters, shall be contemplated by the Commission. The Company shall
have complied, to the reasonable satisfaction of the Underwriters and
Underwriters' Counsel, with any request of the Commission for additional
information (to be included in the Registration Statement, the Prospectus or
otherwise).
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(b) The Underwriters shall not have advised the Company or any
Selling Stockholders that, in the opinion of the Underwriters or Underwriters'
Counsel, (i) the Registration Statement, or any amendment thereto, includes an
untrue statement of a material fact or omits to state a material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading or (ii) the Prospectus, or any amendment or supplement
thereto, includes an untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(c) The Underwriters shall have received from Underwriters' Counsel
an opinion dated the Closing Date, with respect to the issuance and sale of the
Shares, the Registration Statement, the Prospectus and such other related
matters as the Underwriters reasonably may request. Underwriters' Counsel shall
have received from the Company and the Selling Stockholders such papers and
information as they may request to enable them to review or pass upon such
matters or in order to evidence the accuracy, completeness or satisfaction of
any of the representations, warranties, or covenants of the Company or any
Selling Stockholder contained herein.
(d) The Underwriters shall have received from Morgan, Lewis & Bockius
LLP, counsel to the Company, an opinion, on or prior to the date Rights
certificates and Prospectuses are first mailed to Safeguard Shareholders and on
the Closing Date, dated the respective dates thereof and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) The Company is duly incorporated, validly existing and in
good standing under the laws of its jurisdiction of organization and is
duly qualified to transact business as foreign corporations and is in good
standing in each jurisdiction in which the Company has represented to such
counsel that they conduct business;
(ii) The Company has all requisite corporate power and authority
necessary or required to own or lease their respective properties and
conduct its businesses as described in the Registration Statement and the
Prospectus;
(iii) The Company has all requisite power and authority
(corporate and other) to enter into this Agreement, the Rights Agent
Agreement and the Other Purchasers Standby Purchase Agreements and to
consummate the transactions provided for herein and therein; and this
Agreement, the Other Purchasers Standby Purchase Agreements and the Rights
Agent Agreement have each been duly authorized, executed and delivered by
the Company. Each of this Agreement, assuming due authorization, execution
and delivery by the Underwriters, and each of the Other Purchasers Standby
Purchase Agreements, and the Rights Agent Agreement, assuming due
authorization, execution and delivery by the parties thereto other than the
Company, constitutes the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms,
except as enforceability may be limited by bankruptcy,
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insolvency, reorganization, moratorium, arrangement or similar laws
affecting creditors' rights generally or by general principles of equity
(including standards of materiality, good faith, fair dealing and
reasonableness) whether applied by a court of law or equity, and except as
rights to indemnity and contribution hereunder may be limited by applicable
law, statutory duties or public policy (provided that as of the first date
of the opinion only, such opinion need not express any opinion set forth
above with respect to the Other Purchaser Standby Purchase Agreements that
have not theretofore been executed and delivered). The Company's execution
and delivery of this Agreement, the Other Purchasers Standby Purchase
Agreements and the Rights Agent Agreement, its performance of its
obligations hereunder and thereunder and the consummation of the
transactions contemplated hereby and thereby do not and will not conflict
with or result in a breach or violation of any of the terms or provisions
of, or constitute a default under, or result in the creation or imposition
of any liens, charges, claims, encumbrances, pledges, security interests,
defects or other like restrictions or equities of any kind whatsoever upon,
any right, property or asset (tangible or intangible) of the Company
pursuant to the terms of (A) the charter or bylaws, each as amended through
the date of the opinion, of the Company, (B) any material lease, permit,
license, contract, indenture, mortgage, deed of trust, voting trust
agreement, stockholders agreement, note, loan or credit agreement or any
other agreement or instrument known to such counsel to which the Company is
a party or by which it is or may be bound or to which any of its properties
or assets (tangible or intangible) is or may be subject, or any
indebtedness, except that such counsel need not express an opinion with
respect to any violation based upon any covenant of a financial or
numerical nature or that requires arithmetic computation and such counsel
has not otherwise known of or had reason to expect the occurrence of such
default, or (C) to the knowledge of Company counsel, any statute, rule,
regulation, judgment, decree or order applicable to the Company or any of
its activities or properties adopted or issued by an arbitrator, court,
regulatory body or administrative agency or other governmental agency or
body (including those having jurisdiction over environmental or similar
matters), domestic or foreign, having jurisdiction over the Company or any
of its respective activities or properties (other than such as may be
required under state securities or "Blue Sky" laws and such as may be
required by the by-laws and rules of the NASD in connection with the
purchase and distribution of the Shares by the Underwriters);
(iv) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or, to such counsel's knowledge, any
court is required in connection with the issuance of the shares of Common
Stock to be sold by the Company, the Company's performance of its
obligations hereunder, the Offering, or the consummation by the Company of
the other transactions contemplated hereby, except such as may be required
under the state securities or "Blue Sky" laws of any jurisdiction or as may
be required by the by-laws and rules of the NASD in connection with the
purchase and distribution of the Shares by the Underwriters and except such
other approvals as have been obtained and remain in full force and effect.
Upon the effectiveness of the Registration Statement, the Common Stock will
be registered
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pursuant to Section 12(g) of the Exchange Act, and will be
included in the Nasdaq National Market;
(v) At the date or dates indicated in the Prospectus, the
authorized, issued and outstanding capital stock of the Company was as set
forth therein, and conformed as to legal matters, to the extent that it
constitutes matters of law or legal conclusions, to the description thereof
contained therein under the captions "CAPITALIZATION" and "DESCRIPTION OF
CAPITAL STOCK." All of the issued shares of Common Stock of the Company
(including the Shares sold by the Selling Stockholders) have been duly
authorized and validly issued, and are fully paid and non-assessable; the
holders thereof are not subject to personal liabilities solely by reason of
holding such shares; and none of such shares have been issued in violation
of the preemptive rights of any security holders of the Company known to
Company counsel. The Shares to be sold by the Company have been duly
authorized and, when paid for in accordance herewith, will be validly
issued, fully paid and non-assessable, and with no personal liability
resulting solely from the ownership thereof. Upon the issuance and
delivery pursuant to this Agreement of the Shares to be sold by the Company
to the Underwriters, assuming the Underwriters do not have knowledge of any
Adverse Claim, the Underwriters will acquire good and marketable title to
such Shares free and clear of any liens, charges, claims, encumbrances,
pledges, security interests, defects or other like restrictions or like
equities of any kind whatsoever. Except as described in the Prospectus,
there are no preemptive or other rights to subscribe for or to purchase,
nor any restriction upon the voting or transfer of, any shares of Common
Stock pursuant to the Company's Certificate of Incorporation or By-Laws,
each as amended to date, or pursuant to any agreement among stockholders to
which the Company is a party or of which it has knowledge, and the Shares
to be sold by the Company are not subject to any preemptive or other
similar rights of any security holder. The Company is not a party to or
bound by any instrument, agreement or other arrangement providing for it to
issue any capital stock, rights, warrants, options or other securities,
except for this Agreement and as described in the Prospectus. Except as
described in the Prospectus with respect to stock options (and shares
issuable upon exercise thereof) that may be registered by the Company in a
registration statement on Form S-8, no holder of any securities of the
Company or of any options, warrants or other convertible or exchangeable
securities of the Company which are exercisable for or convertible or
exchangeable for securities of the Company has any right (which has not
been waived) to include any securities issued by the Company in the
Registration Statement or any registration statement to be filed by the
Company within the period commencing on the date the Registration Statement
is declared effective by the Commission and ending 180 days after the
Expiration Date or to require the Company to file a registration statement
under the Act during such period. Based on the form of specimen
certificate filed as an exhibit to the Registration Statement, the
certificates representing the Shares are in due and proper form;
(vi) The Registration Statement has become effective under the
Act. Any required filing of the Prospectus pursuant to Rule 424(b) and
430A(a)(3) of the
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Rules and Regulations has been made in accordance with the time period
required thereby. To such counsel's knowledge, no stop order suspending
the effectiveness of the Registration Statement has been issued, and no
proceedings for that purpose have been instituted or are pending or
threatened, by the Commission;
(vii) At the time the Registration Statement was declared
effective by the Commission, the Registration Statement and the Prospectus
and any amendment or supplement thereto (other than the financial
statements, and notes thereto, the financial schedules, and the other
financial and statistical data included in the Registration Statement or
the Prospectus or omitted therefrom, as to which such counsel need express
no opinion) complied as to form in all material respects with the
requirements of the Act and the Rules and Regulations;
(viii) Such counsel has reviewed all contracts and other
documents referred to in the Registration Statement and the Prospectus, and
the summaries of and other disclosures regarding such contracts and other
documents included in the Registration Statement and the Prospectus fairly
present the information required to be shown with respect thereto. To such
counsel's knowledge, there are no contracts or other documents of a
character required to be filed as exhibits to the Registration Statement or
required to be described in the Registration Statement or the Prospectus
that were not filed or disclosed as required;
(ix) Except as disclosed in the Prospectus, to such counsel's
knowledge, there is not pending or threatened or contemplated against the
Company, or involving the properties or business of the Company, any
action, suit, proceeding, inquiry, investigation, litigation or
governmental proceeding (including those having jurisdiction over
environmental or similar matters), domestic or foreign, that (A) is
required to be disclosed in the Registration Statement and is not so
disclosed, (B) questions the validity of the capital stock of the Company
or the validity or enforceability of this Agreement, (C) questions the
validity of any action taken or to be taken by the Company pursuant to or
in connection with this Agreement, or (D) could materially adversely effect
the present or prospective ability of the Company to perform its
obligations under this Agreement or result in a Material Adverse Effect;
(x) The Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act, nor, by receipt of the proceeds from its sale by it
of the Shares pursuant to this Agreement, will the Company become or be
deemed to be an "investment company" under such Act;
(xi) No transfer taxes are required to be paid in connection with
the sale and delivery of the Common Stock by the Company to the
Underwriters hereunder;
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(xii) The certificates evidencing the Rights to be
distributed to the Safeguard Shareholders and the shares of Common Stock to
be delivered hereunder are in due and proper form under Delaware law; and
(xiii) All of the Rights have been duly authorized and validly
issued, and, when issued and distributed as set forth in the Prospectus,
will be legally issued and valid and binding obligations of the Company
having the rights summarized in the Prospectus; and none of such Rights
will have been issued in violation of the preemptive rights of any security
holders of the Company arising as a matter of law or under or pursuant to
the Company's Certificate of Incorporation, as amended, the Company's
By-Laws, as amended, or any agreement or instrument to which the Company is
a party or by which it is bound.
In addition, such opinion shall contain statements substantially
to the following effect:
In the course of the preparation by the Company and its
counsel of the Registration Statement and the Prospectus, such
counsel attended conferences with certain of the officers of, and
the independent public accountants for, the Company, at which the
Registration Statement and the Prospectus were discussed (some of
which were attended by representatives of the Underwriters).
Between the date of effectiveness of the Registration Statement
and the Closing Date, such counsel attended (if applicable)
additional conferences with certain of the officers of, and the
independent public accountants for, the Company, at which the
contents of the Registration Statement and the Prospectus were
discussed. Given the limitations inherent in the independent
verification of factual matters and the character of
determinations involved in the registration process, such counsel
is not passing upon and does not assume any responsibility for
the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus (other
than as set forth in the first sentence of paragraph (v) and as
set forth in paragraph (viii) above). Subject to the foregoing
and on the basis of the information such counsel gained in the
performance of the services referred to above, including
information obtained from officers and other representatives of
the Company, no facts have come to such counsel's attention that
cause such counsel to believe (except that such counsel need not
express any opinion or belief with respect to the financial
statements, schedule and the notes thereto and other financial
and statistical data included therein) that (y) the Registration
Statement, at the time it was declared effective by the
Commission, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (z)
the Prospectus, as of its date or the Closing Date, contained or
contains
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an untrue statement of a material fact or omitted or
omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
In rendering such opinions, such counsel may rely as to matters
of fact, to the extent they deem proper, on certificates and written statements
of the Company or responsible officers of the Company and certificates or other
written statements of officers of departments of various jurisdictions having
custody of documents respecting the corporate existence or good standing of the
Company, provided that copies of any such statements or certificates shall be
delivered to Underwriters' Counsel if requested.
References to the Prospectus and Registration Statement in this
Section 8(d) shall include any amendment or supplement thereto at the date of
such opinion.
(e) The Underwriters shall have received from Morgan, Lewis and
Bockius LLP, counsel to the Selling Stockholders, an opinion, on or prior to the
date Rights certificates and Prospectuses are first mailed to Safeguard
Shareholders and on the Closing Date, dated the respective dates thereof and in
form and substance satisfactory to Underwriters' Counsel, to the effect that:
(i) Each Selling Stockholder has the legal right and power to
enter into this Agreement and to sell, transfer and deliver hereunder the
Shares proposed to be sold hereunder. This Agreement has been duly
authorized by each Selling Stockholder, has been duly executed and
delivered by or on behalf of each Selling Stockholder and constitutes, the
legal, valid, and binding obligations of each Selling Stockholder
enforceable against each Selling Stockholder in accordance with its
respective terms, subject to the effect of general principles of equity
(including standards of materiality, good faith, fair dealing and
reasonableness) whether applied by a court of law or equity and except as
rights to indemnity and contribution hereunder or thereunder may be limited
by applicable law, statutory duties or public policy;
(ii) The execution and delivery of this Agreement, the
performance by each Selling Stockholder of its obligations hereunder will
not conflict with or result in a breach or violation of any of the terms
and provisions of, or constitute a default under (A) the charter documents,
including articles and certificates of incorporation or by-laws, of any
Selling Stockholder, as amended through the date of the opinion, or (B) any
statute, judgment, decree, order, rule or regulation, known to such
counsel, applicable to any Selling Stockholder or any of its activities or
properties adopted or issued by any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body (including those
having jurisdiction over environmental or similar matters), having
jurisdiction over any Selling Stockholder or any of its activities or
properties, in each case except where such breach, violation or default
would not (i) affect the enforceability of this Agreement, (ii) affect the
Offering or the sale of the
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Common Stock contemplated hereby, or (iii) have a material impact, financial
or otherwise, on any Selling Stockholder or any of its subsidiaries. To
such counsel's knowledge, no consent, approval, authorization or order of,
or filing with, any governmental agency or body or any court is required
for the consummation by any Selling Stockholder of the transactions
contemplated herein, except such as may be required under the state
securities or "Blue Sky" laws of any jurisdiction or as may be required by
the by-laws and rules of the NASD in connection with the purchase and
distribution of the Shares by the Underwriters and except such other
approvals as have been obtained and remain in full force and effect;
(iii) To such counsel's knowledge, each Selling Stockholder
has title to the Shares proposed to be sold by such Selling Stockholder
hereunder free of any adverse claims and upon delivery of and payment for
such Shares hereunder, assuming that each Underwriter does not have any
notice of an adverse claim, such Underwriter will be a protected purchaser
(as defined in Section 8303 of the Uniform Commercial Code as in effect in
the Commonwealth of Pennsylvania); and
(iv) The descriptions in the Registration Statement, the
Prospectus and any amendment or supplement thereto of agreements, whether
written or oral, and of other documents to which each Selling Stockholder
or any of its affiliates (other than the Company) is a party, are accurate
and fairly present the information required to be shown with respect
thereto by Form S-1 under the Act. There are no agreements, whether
written or oral, or other documents to which each Selling Stockholder or
any of its affiliates (other than the Company) is a party, which, to the
knowledge of such counsel, exist that are required by the Act or the Rules
and Regulations to be described in the Registration Statement or filed as
exhibits to the Registration Statement that are not described or filed as
required.
In addition, such opinion shall contain statements
substantially to the following effect:
In the course of the preparation by the Company and its counsel
of the Registration Statement and the Prospectus, such counsel
attended conferences with certain of the officers of, and the
independent public accountants for, the Company, at which the
Registration Statement and the Prospectus were discussed. Between the
date of effectiveness of the Registration Statement and the Closing
Date, such counsel attended additional conferences with certain of the
officers of, and the independent public accountants for, the Company,
at which the contents of the Registration Statement and the Prospectus
were discussed. Given the limitations inherent in the independent
verification of factual matters and the character of determinations
involved in the registration process, such counsel is not passing upon
and does not assume any responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration Statement
and the Prospectus. Subject to the foregoing and on the basis of the
information
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such counsel gained in the performance of the services
referred to above, including information obtained from officers and
other representatives of the Company and each Selling Stockholder, no
facts have come to such counsel's attention that cause such counsel to
believe that (x) the Registration Statement, at the time it was
declared effective by the Commission, contained an untrue statement of
a material fact or omitted to state a material fact relating to the
Selling Stockholders or any of their affiliates (other than the
Company) required to be stated therein or necessary to make the
statements therein not misleading or (y) the Prospectus, as of its
date or the Closing Date, contained or contains an untrue statement of
a material fact or omitted or omits to state a material fact relating
to the Selling Stockholders or any of their affiliates (other than the
Company) required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which
they were made, not misleading, provided such counsel need not express
any belief as to the contents of the eighth paragraph under the
heading "UNDERWRITING" in the Prospectus.
The Underwriters are entitled to rely on the opinion of such firm,
filed as an exhibit to the Registration Statement, as to the matters discussed
in the Prospectus under the heading "FEDERAL INCOME TAX CONSEQUENCES" in the
Prospectus.
In rendering such opinion, such counsel may rely as to matters of
fact, to the extent they deem proper, on certificates and written statements of
responsible officers of the Company and each Selling Stockholder, as
appropriate, and certificates or other written statements of officers of
departments of various jurisdictions having custody of documents respecting the
corporate existence or good standing of each Selling Stockholder, provided that
copies of any such statements or certificates shall be delivered to
Underwriters' Counsel if requested.
References to the Prospectus and Registration Statement in this
Section shall include any amendment or supplement thereto at the date of such
opinion.
(f) The Underwriters shall have received a certificate, dated the
Closing Date and in form and substance satisfactory to the Underwriters, of the
Company signed by each of the Chief Executive Officer and Chief Financial
Officer of the Company to the effect that each of such officers has carefully
examined the Registration Statement, the Prospectus and this Agreement and, to
his best knowledge, that:
(i) The representations and warranties of the Company in
this Agreement are true and correct, as if made on and as of the Closing
Date, and the Company has complied in all material respects with all
agreements and covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior to the
Closing Date;
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(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose
have been instituted or are pending or, to the best of such officers'
knowledge, are contemplated or threatened by the Commission; and
(iii) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, (A)
there has been no material adverse change, or development involving a
prospective material adverse change (including a change in management or
control of the Company), in the condition (financial or otherwise),
business prospects, net worth or results of operations of the Company,
except in each case as described in or contemplated by the Prospectus; (B)
the Company has not entered into any transactions not in the ordinary
course of business; (C) the Company has not incurred any material
liabilities or obligations, direct or contingent, other than as disclosed
in the Registration Statement and the Prospectus; (D) the Company has not
sustained a loss material to the Company by fire, flood, accident,
hurricane, earthquake, theft, sabotage or other calamity or malicious act,
whether or not such loss shall have been insured, or from any labor dispute
or from any legal or governmental proceeding; (E) no action, suit or
proceeding, at law or in equity, has been filed or, to the knowledge of
such officer, is threatened against the Company before or by any court or
federal, state or foreign commission, board or other administrative agency
that (1) alleges that the conduct of such business as currently conducted
or as proposed to be conducted infringes on any trademarks, service marks,
copyrights, service names, trade names, patents, patent applications or
trade secrets currently held by any third party and (2) has had as of the
date of such certificate or, if pending and if decided unfavorably, is
likely to have a Material Adverse Effect; and (F) there has not occurred
any other event required to be set forth in the Prospectus that has not
been so set forth.
Except as otherwise provided in clause (iii)(A) above, references to
the Prospectus and Registration Statement in this Section 8(f) shall include any
amendment or supplement thereto at the date of such opinion.
(g) The Underwriters shall have received a certificate, dated the
Closing Date, of each of the Chairman and the Vice President and General Counsel
of each Selling Stockholder or other principal officer, as appropriate, to the
effect that such officers have carefully examined the Registration Statement,
the Prospectus and this Agreement and that the representations and warranties of
each Selling Stockholder in this Agreement are true and correct on and as of the
Closing Date, and that each Selling Stockholder has complied with all agreements
and satisfied all conditions on its part to be performed or satisfied at or
prior to the Closing Date.
(h) The Underwriters shall have received from KPMG letters dated,
respectively, the date hereof and the Closing Date, in form and substance
satisfactory to the Underwriters and Underwriters' Counsel, with respect to
matters set forth below:
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(i) confirming that they are and were independent public
accountants with respect to the Company within the meaning of the Act
and the Rules and Regulations;
(ii) stating that it is their opinion that the audited financial
statements and schedules examined by them and included in the
Registration Statement and the Prospectus comply as to form in all
material respects with the applicable accounting requirements of the
Act and the Rules and Regulations;
(iii) stating that, on the basis of certain procedures which
included a reading of the latest available unaudited interim financial
statements of the Company (with an indication of the date of the
latest available unaudited interim financial statements), a reading of
the latest available minutes of meetings and actions of the
stockholders and board of directors and the various committees of the
board of directors of the Company, inquiries of officers and other
employees of the Company responsible for financial and accounting
matters and other specified procedures and inquiries, nothing came to
their attention that caused them to believe that (A) the unaudited
financial statements, if any, and schedules of the Company included in
the Registration Statement and the Prospectus do not comply as to form
in all material respects with the applicable accounting requirements
of the Act and the Rules and Regulations or are not fairly presented
in conformity with generally accepted accounting principles applied on
a basis substantially consistent with that of the audited financial
statements of the Company included in the Registration Statement and
the Prospectus, (B) at a specified date not more than five days prior
to the date of such letter, there was any change in the capital stock
or long-term debt of the Company, or any decrease in the stockholders'
equity, or net current assets of the Company, in each case, as
compared with amounts shown in the December 31, 1996 balance sheet
included in the Registration Statement and the Prospectus, except for
changes set forth in such letter, and (C) during the period from
December 31, 1996 to such specified date, there was any decrease in
revenues, income before income taxes, or net income, or any decrease
in net income per common share of the Company, in each case as
compared with the corresponding period beginning January 1, 1996,
except for changes set forth in such letter;
(iv) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements
and other financial information pertaining to the Company set forth in
the Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the
general accounting records, including work sheets, of the Company with
the results obtained from the application of specified readings,
inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted
auditing standards) set forth in the letter and found them to be in
agreement; and
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(v) statements as to such other matters incident to the
transaction contemplated hereby as the Underwriters may reasonably
request.
In the event that either of the letters referred to above set forth
any such changes, decreases or increases, it shall be a further condition of the
obligations of the Underwriters that (A) such letter shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Underwriters deem such explanation unnecessary, and (B) such changes, decreases
or increases do not, in the sole judgment of the Underwriters, make it
impractical or inadvisable to proceed with the purchase and delivery of the
Shares as contemplated by the registration statement originally filed with
respect to the Shares, as amended as of the date hereof.
References to the Registration Statement and the Prospectus in this
Section 8(h) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
(i) The Associated Person Lock-Ups with respect to each person listed
on Schedule A annexed hereto and the Musser Lock-Up shall be in full force and
effect.
(j) The outstanding shares of Common Stock and the shares of Common
Stock to be issued by the Company as contemplated by this Agreement shall have
been approved for quotation on the Nasdaq National Market (upon notice of
issuance in the case of the latter shares).
(k) No order suspending the sale of the Shares in any jurisdiction
designated by the Underwriters pursuant to Section 6(a)(iv) hereof shall be in
effect on the Closing Date and no proceedings for that purpose shall have been
instituted or, to the knowledge of the Company or the Underwriters, shall be
contemplated.
(l) On or prior to the date that Rights certificates are first mailed
to Safeguard Shareholders and on the Closing Date, dated the respective dates
thereof and in form and substance satisfactory to Underwriters' counsel, the
Company shall furnish to the Underwriters such information, certificates and
documents as either of the Underwriters may reasonably request.
(m) The Underwriters shall have received from Morris, Manning &
Martin, L.L.P., intellectual property counsel to the Company, an opinion, on or
prior to the date Rights certificates and Prospectuses are first mailed to
Safeguard Shareholders and on the Closing Date, dated the respective dates
thereof and in form and substance satisfactory to Underwriters' Counsel, to the
effect that:
(i) To such counsel's knowledge, except as disclosed in the
Prospectus, the Company has not received any notice of infringement of or
conflict with (and such counsel does not know of any such infringement of
or conflict with) any rights or claims
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of others with respect to the ChromaVision Medical Digital Analyzer and its
Triple Plus-TM- application, any of the activities engaged in, or proposed
to be engaged in, by the Company as described in the Prospectus, in any such
case which could reasonably be expected to result in a Material Adverse
Effect or could reasonably be expected to have a Material Adverse Effect on
the development, marketing or sale of any of the Company's existing or
contemplated products, services or processes as described in the Prospectus.
(ii) To such counsel's knowledge, the factual representations
concerning the Company's Intellectual Property contained in the Prospectus
under the captions: "RISK FACTORS - POTENTIAL PATENT DISPUTE" and "RISK
FACTORS - DEPENDENCE ON PATENTS, TRADE SECRETS AND PROPRIETARY TECHNOLOGY"
are accurate in all material respects.
(iii) To such counsel's knowledge, the factual
representations concerning the Company's Intellectual Property contained in
the Prospectus under the caption: "BUSINESS - PATENTS AND PROPRIETARY
TECHNOLOGY" are accurate in all material respects. Such counsel has issued
an opinion to the Company that the Company's Triple Plus-TM- application
does not infringe U.S. Patent No. 5,352,613 which is owned by Idea
Research.
(iv) The Company has filed a U.S. Patent Application and a
Continuation-In-Part Application and both applications are presently
pending before the PTO. The U.S. patent application is directed to the
aspects of the ChromaVision Medical Digital Analyzer for locating cellular
objects of interest on a slide and the Continuation-In-Part application is
directed to the Triple Plus-TM- application. Such counsel has no knowledge
or information that would invalidate the claims of the Company's pending
patent applications as filed or that would render an issued patent
containing those claims unenforceable.
In rendering such opinions, such counsel may rely as to matters
of fact, to the extent they deem proper, on certificates and written statements
of responsible officers of the Company and each Selling Stockholder, as
appropriate, and certificates or other written statements of officers of
departments of various jurisdictions having custody of documents respecting the
corporate existence or good standing of the Company, provided that copies of any
such statements or certificates shall be delivered to Underwriters' Counsel if
requested.
References to the Prospectus and Registration Statement in this
Section shall include any amendment or supplement thereto at the date of such
opinion.
(n) The Underwriters shall have received from the counsel of
Safeguard Scientifics, Inc. as special counsel to the Selling Stockholders, an
opinion, on or prior to the date Rights certificates and Prospectuses are first
mailed to Safeguard Shareholders and on the Closing Date, dated the respective
dates thereof and in form and substance satisfactory to
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Underwriters' Counsel, to the effect that the execution and delivery of this
Agreement, the performance by each Selling Stockholder of its obligations
hereunder will not conflict with or result in a breach or violation of any of
the terms and provisions of, or constitute a default under any lease, permit,
license, contract, indenture, mortgage, deed of trust, voting trust
agreement, shareholders agreement, note, loan or credit agreement or any
other agreement or instrument, known to such counsel, to which any Selling
Stockholder is a party or by which it is or may be bound or to which any of
its properties or assets (tangible or intangible) is or may be subject, or
any indebtedness, except to the extent that any such conflict, breach,
violation or default, individually or in the aggregate, does not and would
not result in a material adverse effect on the condition, financial or
otherwise, or on the earnings, business affairs, financial position,
prospects, value, operation, properties, results of operation or business of
any Selling Stockholder and does not and would not interfere with the
Offering, except where such breach, violation or default would not (A) affect
the enforceability of this Agreement, (B) affect the Offering or the sale of
the Common Stock contemplated hereby, or (C) have a material impact,
financial or otherwise, on any Selling Stockholder or any of its subsidiaries.
In addition, such opinion shall contain statements
substantially to the following effect:
In the course of the preparation by the Company and its counsel
of the Registration Statement and the Prospectus, such counsel attended
conferences with certain of the officers of, and the independent public
accountants for, the Company, at which the Registration Statement and
the Prospectus were discussed. Between the date of effectiveness of
the Registration Statement and the Closing Date, such counsel attended
additional conferences with certain of the officers of, and the
independent public accountants for, the Company, at which the contents
of the Registration Statement and the Prospectus were discussed. Given
the limitations inherent in the independent verification of factual
matters and the character of determinations involved in the
registration process, such counsel is not passing upon and does not
assume any responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement and the
Prospectus. Subject to the foregoing and on the basis of the
information such counsel gained in the performance of the services
referred to above, including information obtained from officers and
other representatives of the Company and each Selling Stockholder, no
facts have come to such counsel's attention that cause such counsel to
believe that (x) the Registration Statement, at the time it was
declared effective by the Commission, contained an untrue statement of
a material fact or omitted to state a material fact relating to the
Selling Stockholders or any of their affiliates (other than the
Company) required to be stated therein or necessary to make the
statements therein not misleading or (y) the Prospectus, as of its
date or the Closing Date, contained or contains an untrue statement of
a material fact or omitted or omits to state a material fact relating
to the Selling Stockholders or any of their affiliates (other than the
Company) required to be stated therein or necessary in order to make
the
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statements therein, in the light of the circumstances under which
they were made, not misleading, provided such counsel need not express
any belief as to the contents of the eighth paragraph under the
heading "UNDERWRITING" in the Prospectus.
In rendering such opinion, such counsel may rely as to matters of
fact, to the extent they deem proper, on certificates and written statements of
responsible officers of the Company and each Selling Stockholder, as
appropriate, and certificates or other written statements of officers of
departments of various jurisdictions having custody of documents respecting the
corporate existence or good standing of each Selling Stockholder, provided that
copies of any such statements or certificates shall be delivered to
Underwriters' Counsel if requested.
References to the Prospectus and Registration Statement in this
Section shall include any amendment or supplement thereto at the date of such
opinion.
If any condition of the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date is not so fulfilled, the Underwriters
may terminate this Agreement or, if the Underwriters so elect, they may waive
any such conditions that have not been fulfilled or extend the time for their
fulfillment. In the event the Underwriters so elect to terminate this
Agreement, all Rights and the Other Purchasers Standby Purchase Agreements shall
become immediately null and void and the Company shall cause the Escrow Agent
under the Rights Agent Agreement to promptly return to the subscribers any
payments received by the Escrow Agent in respect of the exercise price relating
thereto. All opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Underwriters and
Underwriters' Counsel. The Company shall furnish to the Underwriters such
conformed copies of such opinions, certificates, letters and documents in such
quantities as the Underwriters and Underwriters' Counsel shall reasonably
request.
The obligations of the Underwriters to purchase and pay for any Option
Shares after having exercised an option set forth in Section 3(b) hereof shall
be subject, in its discretion, to each of the foregoing conditions of this
Section 8 to purchase the Excess Unsubscribed Shares, with all references to the
Excess Unsubscribed Shares and the Closing Date being deemed to refer to such
Option Shares and the related Option Closing Date, respectively.
9. Indemnification.
(a) The Company and each Selling Stockholder, jointly and severally,
agree to indemnify and hold harmless each of the Underwriters and each person,
if any, who is a Controlling Person with respect to either of the Underwriters
against any and all losses, claims, damages, expenses and liabilities, joint or
several (and actions in respect thereof), whatsoever (including any and all
reasonable expenses incurred in investigating, preparing or defending
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against any litigation, commenced or threatened, or any claim whatsoever), as
such are incurred, (i) to which the Underwriters or such Controlling Person
may become subject under the Act, the Exchange Act or any other statute or at
common law or otherwise or under the laws of foreign countries, arising out
of or based upon any untrue statement or alleged untrue statement of a
material fact contained (A) in any Preliminary Prospectus, the Registration
Statement or the Prospectus (as from time to time amended and supplemented)
or (B) in any application or other document or written communication (in this
Section 9 collectively called "Application") executed by the Company or the
Selling Stockholders or based upon written information furnished by the
Company or the Selling Stockholders in any jurisdiction in order to qualify
the Common Stock under the securities laws thereof or filed with the
Commission, any state securities commission or agency, the Nasdaq National
Market or any other securities exchange, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
under which they were made, unless such statement or omission was made in
reliance upon, and in strict conformity with, the Provided Information or
(ii) to which the Underwriters or such Controlling Person may become liable
to any party which relate to, or arise out of, the Underwriters' or such
Controlling Person's consummation of the transactions contemplated hereby or
the Underwriters' or such Controlling Person's role in connection herewith
(including without limitation as a result of any breach of any representation
or warranty made by the Company or the Selling Stockholders); provided,
however, that neither the Company nor the Selling Stockholders shall be
responsible for any losses, claims, damages, expenses or liabilities that are
finally judicially determined to have resulted primarily from the gross
negligence or intentional or reckless misconduct of the Underwriters or such
Controlling Person. The indemnity agreement contained in this subsection (a)
with respect to any Preliminary Prospectus shall not inure to the benefit of
the Underwriters and such Controlling Person with respect to a person
asserting any such losses, claims, damages, liabilities or expenses who
purchased the Shares if at or prior to the written confirmation of the sale
of such Shares a copy of the Prospectus (or the Prospectus as amended or
supplemented) was not sent or delivered to such person and the untrue
statement contained in, or omission of a material fact from, such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as amended or
supplemented). The indemnity agreements in this subsection (a) shall be in
addition to any liability that the Company or the Selling Stockholders may
have at common law or otherwise.
(b) The Underwriters agree to indemnify and hold harmless the
Company, each of its directors, each of its officers who has signed the
Registration Statement, the Selling Stockholders and each other Controlling
Person, if any, who controls the Company or the Selling Stockholders, to the
same extent as the foregoing indemnity from the Company and the Selling
Stockholders to the Underwriters but only with respect to statements made in, or
omissions from, any Preliminary Prospectus, the Registration Statement or
Prospectus or any amendment thereof or supplement thereto or in any Application
made in reliance upon, and in strict conformity with, the Provided Information.
(c) Promptly after receipt by any indemnified party or parties
under this Section 9 of notice of the commencement of any action, suit or
proceeding, such indemnified
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party shall, if a claim in respect thereof is to be made against one or more
indemnifying parties under this Section 9, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party or parties shall not relieve
it from any liability that it may have under this Section 9 except to the
extent that it has been prejudiced in any material respect by such failure or
from any liability that it may have otherwise). In case any such action is
brought against any indemnified party or parties, and it notifies the
indemnifying party or parties of the commencement thereof, the indemnifying
party or parties will be entitled to participate therein, and to the extent
it may elect, by written notice delivered to the indemnified party or parties
promptly after receiving the aforesaid notice from such indemnified party or
parties, to assume the defense thereof with counsel reasonably satisfactory
to such indemnified party or parties. Notwithstanding the foregoing, the
indemnified party or parties shall have the right to employ its or their own
counsel in any such case but the fees and expenses of such counsel shall be
at the expense of such indemnified party or parties unless (i) the employment
of such counsel shall have been authorized in writing by the indemnifying
party in connection with the defense of such action, (ii) the indemnifying
party shall not have employed counsel reasonably satisfactory to such
indemnified party or parties to have charge of the defense of such action
within a reasonable time after notice to the indemnifying party or parties of
commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
that are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party
or parties), in any of which events such fees and expenses of one additional
counsel shall be borne by the indemnifying parties. In no event shall the
indemnifying parties be liable for fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar
or related actions in the same jurisdiction arising out of the same general
allegations or circumstances. Anything in this Section 9 to the contrary
notwithstanding, an indemnifying party shall not be liable for any settlement
of any claim or action effected without its written consent; provided,
however, that such consent was not unreasonably withheld.
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification
pursuant to this Section 9, but it is judicially determined (by the entry of
a final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the
fact that the express provisions of this Section 9 provide for
indemnification in such case, or (ii) contribution under the Act may be
required on the part of any indemnified party, then each indemnifying party
shall contribute to the amount paid as a result of such losses, claims,
damages, expenses or liabilities (or action in respect thereof) (A) in such
proportion as is appropriate to reflect the relative benefits received by
each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand, from the offering of the Shares or (B) if the
allocation provided by clause (A) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (A) above but also the relative fault of
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each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages, expenses or liabilities, as well
as any other relevant equitable considerations. In any case where either the
Company and/or the Selling Stockholders are the contributing parties and the
Underwriters are the indemnified parties, the relative benefits received by the
Company and/or the Selling Stockholders, on the one hand (treated collectively
as one person for this purpose), and the Underwriters, on the other, shall be
deemed to be in the same proportion as the total proceeds from the offering of
the Shares and the shares of Common Stock sold upon exercise of the Rights (net
of underwriting discounts and other commissions paid to the Underwriters but
before deducting the other expenses incurred by the Company and the Selling
Stockholders in connection with the sale of the Shares) bear to the total
underwriting discounts and other commissions received by the Underwriters
hereunder, in each case as set forth in the table on the cover page of the
Prospectus. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact related to information
supplied by the Company and the Selling Stockholders (treated collectively, as
one person for this purpose) or by the Underwriters, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, expenses or liabilities (or
actions in respect thereof) referred to above in this Section 9(d) shall be
deemed to include any legal or other expense reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 9(d) the Underwriters
shall not be required to contribute any amount in excess of the underwriting
discount and other commissions applicable to the Shares purchased by the
Underwriters hereunder. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 9, each person, if any, who
controls the Company or any Selling Stockholder within the meaning of the Act,
each officer of the Company who has signed the Registration Statement, and each
director of the Company shall have the same rights to contribution as the
Company and the Selling Stockholders, subject in each case to this Section 9(d).
Any party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect to
which a claim for contribution may be made against another party or parties
under this Section 9(d), notify such party or parties from whom contribution may
be sought, but the omission so to notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have hereunder or otherwise than under this Section 9(d), but only
to the extent that such party or parties were not adversely affected by such
omission. The contribution agreement set forth above shall be in addition to
any liabilities which any indemnifying party may have at common law or
otherwise.
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<PAGE>
10. Representations and Agreements to Survive Delivery.
All representations, warranties, agreements and covenants contained in this
Agreement or contained in certificates of each of the officers of the Company or
of each Selling Stockholder submitted pursuant hereto, shall be deemed to be
representations, warranties, agreements and covenants at the Closing Date and
the Option Closing Date, as the case may be, and such representations,
warranties, agreements and covenants of the Underwriters, the Company and each
Selling Stockholder, and the indemnity agreements contained in Section 9 hereof,
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Underwriters, the Company and each
Selling Stockholder, or any Controlling Person, and shall survive termination of
this Agreement or the issuance and delivery of the Shares to the Underwriters,
provided that to the extent any such representations, warranties, agreements or
covenants are expressly waived in writing by the Underwriters, the survival of
the same shall be as set forth in such waiver, or, if not so set forth, as
provided in this Section 10.
11. Effective Date.
This Agreement shall become effective at 9:00 a.m., New York time, on
the next full business day following the date hereof or upon the commencement of
the Rights Offering, whichever is earlier; provided, however, that the
provisions of Sections 6, 7, 9, 10 and 12 of this Agreement shall at all times
be effective.
12. Termination.
(a) Subject to subsection (c) of this Section 12, the Underwriters
shall have the right to terminate this Agreement (i) if any calamitous domestic
or international event or act or occurrence has disrupted or, in the
Underwriters' opinion, will in the immediate future materially disrupt, the
general securities market in the United States; (ii) if trading in the Common
Stock (on a when-issued basis) shall have been suspended by the Commission or
the Nasdaq National Market; (iii) if trading on the New York Stock Exchange, the
American Stock Exchange or the Nasdaq National Market or in the over-the-counter
market shall have been suspended, or minimum or maximum prices for trading shall
have been fixed, or maximum ranges for prices for securities shall have been
required on the over-the-counter market by the NASD or by order of the
Commission or any other government authority having jurisdiction; (iv) if the
United States shall have become involved in a war or major hostilities which, in
the Underwriters' opinion, will affect the general securities market in the
United States; (v) if a banking moratorium has been declared by a California,
New York, Pennsylvania, Massachusetts, Wisconsin or federal authority; (vi) if a
moratorium in foreign exchange trading has been declared; (vii) if the Company
shall have sustained a loss material to the Company by fire, flood, accident,
hurricane, earthquake, theft, sabotage or other calamity or malicious act,
whether or not such loss shall have been insured, or from any labor dispute or
any legal or governmental proceeding; (viii) if there shall have been such
material adverse change, or any development involving a prospective material
adverse change (including a change in management
-45-
<PAGE>
or control of the Company) in the condition (financial or otherwise),
business prospects, net worth or results of operations of the Company since
December 31, 1996 or that materially impacts this Agreement; or (ix) on any
date commencing on the date hereof and ending on the Closing Date, if there
shall be such material adverse market conditions (whether occurring suddenly
or gradually between the date hereof and the Closing Date) affecting the
markets generally or technology or healthcare issues particularly as in the
Underwriters' reasonable judgment would make it inadvisable to proceed with
the offering, sale or delivery of the Shares.
(b) If the Underwriters elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 12, they
shall so notify the Company on the same day as such election is made by
telephone or telegram, confirmed by letter.
(c) Notwithstanding any contrary provision contained in this
Agreement, any election hereunder or any termination of this Agreement
(including pursuant to Section 13 hereof), and whether or not this Agreement is
otherwise carried out, the provisions of Section 7 and Section 9 shall not be in
any way affected by such election or termination or failure to carry out the
terms of this Agreement or any part hereof.
13. Default by the Company or the Selling Stockholders.
If the Company or the Selling Stockholders shall fail to sell and deliver
to the Underwriters the Excess Unsubscribed Shares to be sold and delivered by
the Company or the Selling Stockholders at the Closing Date or the Option Shares
to be sold and delivered by the Company at any Option Closing Date under the
terms of this Agreement, then the Underwriters may at their option, by written
notice to the Company and Selling Stockholders either (a) terminate this
Agreement without any liability on the part of any non-defaulting party other
than pursuant to Section 12 or (b) purchase the Shares which the Company and the
Selling Stockholders have agreed to sell and deliver in accordance with the
terms hereof. In the event of a failure of the Selling Stockholders to sell and
deliver as referred to in this Section, either the Underwriters or the Company
shall have the right to postpone the Closing Date or the Option Closing Date, as
the case may be, for a period not exceeding seven business days in order that
the necessary changes in the Registration Statement, Prospectus and any other
documents, as well as any other arrangements, as may be effected. No action
taken pursuant to this Section shall relieve the Company or the Selling
Stockholders from liability in respect of such default.
14. Notices.
All notices and communications hereunder may be mailed or transmitted by
any standard form of telecommunication and, except as herein otherwise
specifically provided, shall be in writing and shall be deemed to have been duly
given when delivered to a notice party hereto at the address specified herein or
at the address subsequently communicated in writing by the notice parties.
Notices to the Underwriters shall be directed to the Underwriters in care of
Robert W. Baird & Co. Incorporated, 777 E. Wisconsin Avenue, Milwaukee, WI
53202-5391, Attention:
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<PAGE>
Dominick P. Zarcone, and Adams, Harkness & Hill, Inc., 60 State Street,
Boston, MA 02109, Attention: Tim McMahon, with a copy to Drinker Biddle &
Reath LLP, 1000 Westlakes Drive, Suite 300, Five Westlakes, Berwyn,
Pennsylvania 19132, Attention: Robert H. Strouse, Esq. Notices to the
Company shall be directed to the address of the Company as set forth on the
facing page to the Registration Statement, with a copy to Morgan, Lewis and
Bockius LLP, 2000 One Logan Square, Philadelphia, Pennsylvania, Attention:
N. Jeffrey Klauder, Esq. Notices to Safeguard shall be directed to Safeguard
Scientifics, Inc., 800 Safeguard Building, 435 Devon Park Drive, Wayne,
Pennsylvania 19087, Attention: James A. Ounsworth, Esq., with a copy to
Morgan, Lewis and Bockius LLP, 2000 One Logan Square, Philadelphia,
Pennsylvania 19103, Attention: N. Jeffrey Klauder, Esq. In each case a party
may change its address for notice hereunder by a written communication to the
other parties.
15. Parties.
This Agreement shall inure solely to the benefit of, and shall be binding
upon, the Underwriters, the Company and the Selling Stockholders and the
Controlling Persons, and their respective successors, legal representatives and
assigns, and no other person shall have or be construed to have any legal or
equitable right, remedy or claim under or in respect of or by virtue of this
Agreement or any provisions herein contained. No purchaser of Shares from the
Underwriters shall be deemed to be a successor by reason merely of such
purchase.
16. Construction.
This Agreement shall be governed by the laws of the State of New York
without giving effect to the choice of law or conflict of laws principles
thereof. The word "including" as used herein shall not be construed so as to
exclude any other thing not referred to or described.
17. Counterparts.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original and all of which taken together shall be
deemed to be one and the same instrument.
18. Entire Agreement.
This Agreement contains the entire agreement between the parties hereto in
connection with the subject matter hereof.
If the foregoing correctly sets forth the understanding among the
Underwriters, the Company and the Selling Stockholders, please so indicate in
the space provided below for that purpose, thereupon this letter shall
constitute a binding agreement among us.
Very truly yours,
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<PAGE>
CHROMAVISION MEDICAL SYSTEMS, INC.
By:
-----------------------------------
Name:
Title:
SAFEGUARD SCIENTIFICS, INC.
By:
-----------------------------------
Name:
Title:
SAFEGUARD SCIENTIFICS (DELAWARE), INC.
By:
-----------------------------------
Name:
Title:
XL VISION, INC.
By:
-----------------------------------
Name:
Title:
TECHNOLOGY LEADERS, L.P.
By: Technology Leaders Management L.P.,
as sole general partner
By:
------------------------------
Name:
Title:
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<PAGE>
TECHNOLOGY LEADERS OFFSHORE, C.V.
By: Technology Leaders Management L.P.,
as co-general partner
By:
------------------------------
Name:
Title:
TECHNOLOGY LEADERS II, L.P.
By: Technology Leaders II Management L.P.,
as sole general partner
By:
------------------------------
Name:
Title:
TECHNOLOGY LEADERS II OFFSHORE, C.V.
By: Technology Leaders II Management L.P.,
as co-general partner
By:
------------------------------
Name:
Title:
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<PAGE>
Confirmed and accepted
as of the date first
above written:
ROBERT W. BAIRD & CO. INCORPORATED ADAMS, HARKNESS & HILL, INC.
By: By:
------------------------------ ------------------------------
Name: Name:
Title: Title:
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<PAGE>
Schedule A
Name
Centocor, Inc.
Safeguard Scientifics, Inc.
Safeguard Scientifics (Delaware), Inc.
Technology Leaders L.P.
Technology Leaders Offshore C.V.
Technology Leaders II L.P.
Technology Leaders II Offshore C.V.
XL Vision, Inc.
Kenneth S. Garber
Douglas S. Harrington
Christopher Moller
Richard C.E. Morgan
Warren V. Musser (and his assignees, if any)
Kevin O'Boyle
Charles A. Root
Michael G. Schneider
John S. Scott
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<PAGE>
Schedule B
Name of Underwriters % of Underwriter Shares
Robert W. Baird & Co. Incorporated 50%
Adams, Harkness & Hill, Inc. 50%
-52-
<PAGE>
BYLAWS
OF
MicroVision Medical Systems, Inc.
(a Delaware corporation)
ARTICLE I
Offices and Fiscal Year
SECTION 1.01. Registered Office. The registered office of the corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware
until otherwise established by a vote of a majority of the board of directors in
office, and a statement of such change is filed in the manner provided by
statute.
SECTION 1.02. Other Offices. The corporation may also have offices at
such other places within or without the State of Delaware as the board of
directors may from time to time determine or the business of the corporation
requires.
SECTION 1.03. Fiscal Year. The fiscal year of the corporation shall end
on the 31st of December in each year.
ARTICLE II
Meetings of Stockholders
SECTION 2.01. Place of Meeting. All meetings of the stockholders of the
corporation shall be held at the registered office of the corporation, or at
such other place within or without the State of Delaware as shall be designated
by the board of directors in the notice of such meeting.
SECTION 2.02. Annual Meeting. The board of directors may fix the date and
time of the annual meeting of the stockholders, but if no such date and time is
fixed by the board, the meeting for any calendar year shall be held on the third
Tuesday of May in such year, if not a legal holiday, and if a legal holiday then
on the next succeeding business day at 10:00 o'clock A.M., and at said meeting
the stockholders then entitled to vote shall elect directors and shall transact
such other business as may properly be brought before the meeting.
SECTION 2.03. Special Meetings. Special meetings of the stockholders of
the corporation for any purpose or purposes for which meetings may lawfully be
called, may be called at any time by the chairman of the board, a majority of
the board of directors, the president, or at the request, in writing, of
stockholders owning individually or together ten percent or more of the entire
capital stock of the corporation issued and outstanding and entitled to vote.
At any time, upon written request of any person or persons who have duly called
a special meeting, which written request shall state the purpose or purposes of
the meeting, it shall be the duty of the secretary to fix the date of the
meeting to be held at such date and time as the secretary may fix, not less than
ten nor more than sixty days after the receipt of the request, and to give due
notice thereof. If the secretary shall neglect or refuse to fix the time and
date of such meeting and give notice thereof, the person or persons calling the
meeting may do so.
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SECTION 2.04. Notice of Meetings. Written notice of the place, date and
hour of every meeting of the stockholders, whether annual or special, shall be
given to each stockholder of record entitled to vote at the meeting not less
than ten nor more than sixty days before the date of the meeting. Every notice
of a special meeting shall state the purpose or purposes thereof.
SECTION 2.05. Quorum, Manner of Acting and Adjournment. The holders of a
majority of the stock issued and outstanding (not including treasury stock) and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute, by the certificate of
incorporation or by these bylaws. If, however, such quorum shall not be present
or represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At any such
adjourned meeting, at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. If the adjournment is for more than thirty days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting. When a quorum is present at any meeting, the
vote of the holders of the majority of the stock having voting power present in
person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which, by express provision of the
applicable statute, the certificate of incorporation or these bylaws, a
different vote is required in which case such express provision shall govern and
control the decision of such question. Except upon those questions governed by
the aforesaid express provisions, the stockholders present in person or by proxy
at a duly organized meeting can continue to do business until adjournment,
notwithstanding withdrawal of enough stockholders to leave less than a quorum.
SECTION 2.06. Organization. At every meeting of the stockholders, the
chairman of the board, if there be one, or in the case of a vacancy in the
office or absence of the chairman of the board, one of the following persons
present in the order stated: the vice chairman, if one has been appointed, the
president, the vice presidents in their order or rank, a chairman designated by
the board of directors or a chairman chosen by the stockholders entitled to cast
a majority of the votes which all stockholders present in person or by proxy are
entitled to cast, shall act as chairman, and the secretary, or, in his absence,
an assistant secretary, or in the absence of the secretary and the assistant
secretaries, a person appointed by the chairman, shall act as secretary.
SECTION 2.07. Voting. Each stockholder shall at every meeting of the
stockholders be entitled to one vote in person or by proxy for each share of
capital stock having voting power held by such stockholder. No proxy shall be
voted or acted upon after three years from its date, unless the proxy provides
for a longer period. Every proxy shall be executed in writing by the
stockholder or by his duly authorized attorney-in-fact and filed with the
secretary of the corporation. A proxy, unless coupled with an interest, shall
be revocable at will, notwithstanding any other agreement or any provision in
the proxy to the contrary, but the revocation of a proxy shall not be effective
until notice thereof has been given to the secretary of the corporation. A duly
executed proxy shall be irrevocable if it states that it is irrevocable and if,
and only as long as, it is coupled with an interest sufficient in law to support
an irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the corporation generally. A proxy shall not be
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<PAGE>
revoked by the death or incapacity of the maker unless, before the vote is
counted or the authority is exercised, written notice of such death or
incapacity is given to the secretary of the corporation.
SECTION 2.08. Consent of Stockholders in Lieu of Meeting. Any action
required to be taken at any annual or special meeting of stockholders of the
corporation, or any action which may be taken at any annual or special meeting
of such stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Every written consent shall bear the date of signature of each
stockholder who signs the consent and no written consent shall be effective to
take the corporate action referred to therein unless, within sixty days of the
earliest dated consent delivered in the manner required above to the
corporation, written consent, signed by a sufficient number of holders or
members to take action are delivered to the corporation by delivery to its
registered office in Delaware, its principal place of business, or an officer or
agent of the corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Delivery made to a corporation's
registered office shall be by hand or by certified or registered mail, return
receipt requested. Prompt notice of the taking of the corporate action without
a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
SECTION 2.09. Voting Lists. The officer who has charge of the stock
ledger of the corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting. The list shall be arranged in alphabetical order showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
SECTION 2.10. Judges of Election. All elections of directors shall be by
written ballot, unless otherwise provided in the certificate of incorporation;
the vote upon any other matter need not be by ballot. In advance of any meeting
of stockholders, the board of directors may appoint judges of election, who need
not be stockholders, to act at such meeting or any adjournment thereof. If
judges of election are not so appointed, the chairman of any such meeting may,
and upon the demand of any stockholder or his proxy at the meeting and before
voting begins shall, appoint judges of election. The number of judges shall be
either one or three, as determined, in the case of judges appointed upon demand
of a stockholder, by stockholders present entitled to cast a majority of the
votes which all stockholders present are entitled to cast thereon. No person
who is a candidate for office shall act as a judge. In case any person
appointed as judge fails to appear or fails or refuses to act, the vacancy may
be filled by appointment made by the board of directors in advance of the
convening of the meeting, or at the meeting by the chairman of the meeting.
If judges of election are appointed as aforesaid, they shall determine the
number of shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum, the authenticity,
validity and effect of proxies, receive votes or ballots, hear and determine all
3
<PAGE>
challenges and questions in any way arising in connection with the right to
vote, count and tabulate all votes, determine the result, and do such acts as
may be proper to conduct the election or vote with fairness to all
stockholders. If there be three judges of election, the decision, act or
certificate of a majority shall be effective in all respects as the decision,
act or certificate of all.
On request of the chairman of the meeting or of any stockholder or his
proxy, the judges shall make a report in writing of any challenge or question or
matter determined by them, and execute a certificate of any fact found by them.
ARTICLE III
Board of Directors
SECTION 3.01. Powers. The board of directors shall have full power to
manage the business and affairs of the corporation; and all powers of the
corporation, except those specifically reserved or granted to the stockholders
by statute, the certificate of incorporation or these bylaws, are hereby granted
to and vested in the board of directors.
SECTION 3.02. Number and Term of Office. The board of directors shall
consist of one or more members as determined from time to time by resolution of
the board of directors. Each director shall serve until the next annual meeting
of the stockholders and until his successor shall have been elected and
qualified, except in the event of his death, resignation or removal. All
directors of the corporation shall be natural persons, but need not be residents
of Delaware or stockholders of the corporation.
SECTION 3.03. Vacancies. Vacancies and newly created directorships
resulting from any increase in the authorized number of directors may be filled
by a majority of the directors then in office, though less than a quorum, or by
a sole remaining director, and the directors so chosen shall hold office until
the next annual election and until their successors are duly elected and shall
qualify, unless sooner displaced. If there are no directors in office, then an
election of directors may be held in the manner provided by statute. Whenever
the holders of any class or classes of stock or series thereof are entitled to
elect one or more directors by the provisions of the certificate of
incorporation, vacancies and newly created directorships of such class or
classes or series may be filled by a majority of the directors elected by such
class or classes or series thereof then in office, or by a sole remaining
director so elected.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office shall constitute less than a majority of the whole
board (as constituted immediately prior to any such increase), the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office.
SECTION 3.04. Resignations. Any director of the corporation may resign at
any time by giving written notice to the president or the secretary of the
corporation. Such resignation shall take effect at the date of the receipt of
such notice or at any later time specified therein and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
SECTION 3.05. Organization. At every meeting of the board of directors,
the chairman of the board, if there be one, or, in the case of a vacancy in the
office or absence of the chairman of the board, one of the following officers
present in the order stated: the vice chairman of the board, if there be one,
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<PAGE>
the president, the vice presidents in their order of rank and seniority, or a
chairman chosen by a majority of the directors present, shall preside, and the
secretary, or, in his absence, an assistant secretary, or in the absence of the
secretary and the assistant secretaries, any person appointed by the chairman of
the meeting, shall act as secretary.
SECTION 3.06. Place of Meeting. The board of directors may hold its
meeting, both regular and special, at such place or places within or without the
State of Delaware as the board of directors may from time to time appoint, or as
may be designated in the notice calling the meeting.
SECTION 3.07. Organization Meeting. The first meeting of each newly
elected board of directors shall be held at such time and place as shall be
fixed by the vote of the stockholders at the annual meeting and no notice of
such meeting shall be necessary to the newly elected directors in order legally
to constitute the meeting, provided a quorum shall be present. In the event of
the failure of the stockholders to fix the time or place of such first meeting
of the newly elected board of directors, or in the event such meeting is not
held at the time and place so fixed by the stockholders, the meeting may be held
at such time and place as shall be specified in a notice given as hereinafter
provided for special meetings of the board of directors, or as shall be
specified in a written waiver signed by all of the directors.
SECTION 3.08. Regular Meetings. Regular meetings of the board of
directors may be held without notice at such time and place as shall be
designated from time to time by resolution of the board of directors. If the
date fixed for any such regular meeting be a legal holiday under the laws of the
State where such meeting is to be held, then the same shall be held on the next
succeeding business day, not a Saturday, or at such other time as may be
determined by resolution of the board of directors. At such meetings, the
directors shall transact such business as may properly be brought before the
meeting.
SECTION 3.09. Special Meetings. Special meetings of the board of
directors shall be held whenever called by the president or by two or more of
the directors. Notice of each such meeting shall be given to each director by
telephone or in writing at least 24 hours (in the case of notice by telephone)
or 48 hours (in the case of notice by telegram) or five days (in the case of
notice by mail) before the time at which the meeting is to be held. Each such
notice shall state the time and place of the meeting to be so held.
SECTION 3.10. Quorum, Manner of Acting and Adjournment. At all meetings
of the board a majority of the directors shall constitute a quorum for the
transaction of business and the act of a majority of the directors present at
any meeting at which there is a quorum shall be the act of the board of
directors, except as may be otherwise specifically provided by statute or by the
certificate of incorporation. If a quorum shall not be present at any meeting
of the board of directors, the directors present thereat may adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum shall be present.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors or of any committee thereof may be taken without a meeting, if all
members of the board consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the board.
SECTION 3.11. Executive and Other Committees. The board of directors may,
by resolution adopted by a majority of the whole board, designate an executive
committee and one or more other committees, each committee to consist of two or
more directors. The board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
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any meeting of the committee. In the absence of disqualification of a member,
and the alternate or alternates, if any, designated for such member, of any
committee the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another director to act at the meeting in the place of any
such absent or disqualified member.
Any such committee to the extent provided in the resolution establishing
such committee shall have and may exercise all the power and authority of the
board of directors in the management of the business and affairs of the
corporation, including the power or authority to declare a dividend or to
authorize the issuance of stock, and may authorize the seal of the corporation
to be affixed to all papers which may require it; but no such committee shall
have the power or authority in reference to amending the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151 (a) of the Delaware General
Corporation Law ("DGCL"), fix any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of assets of
the corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), adopting an agreement of
merger or consolidation under Section 251 or 252 of the DGCL, recommending to
the stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending the
bylaws of the corporation; and, unless the resolution expressly so provides, no
such committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock or to adopt a certificate of ownership and
merger pursuant to Section 253 of the DGCL. Such committee or committees shall
have such name or names as may be determined from time to time by resolution
adopted by the board of directors. Each committee so formed shall keep regular
minutes of its meetings and report the same to the board of directors when
required.
SECTION 3.12. Compensation of Directors. Unless otherwise restricted by
the certificate of incorporation, the board of directors shall have the
authority to fix the compensation of directors. The directors may be paid their
expenses, if any, of attendance at each meeting of the board of directors and
may be paid a fixed sum for attendance at each meeting of the board of directors
or a stated salary as director. No such payment shall preclude any director
from serving the corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
ARTICLE IV
Notice - Waivers - Meetings
SECTION 4.01. Notice, What Constitutes. Whenever, under the provisions of
the statutes of Delaware or the certificate of incorporation or of these bylaws,
notice is required to be given to any director or stockholder, it shall not be
construed to mean personal notice, but such notice may be given in writing, by
mail, addressed to such director or stockholder, at his address as it appears on
the records of the corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Notice to directors may also be given in accordance with
Section 3.09 of Article III hereof.
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SECTION 4.02. Waivers of Notice. Whenever any written notice is required
to be given under the provisions of the certificate of incorporation, these
bylaws, or by statute, a waiver thereof in writing, signed by the person or
persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice. Except in the
case of a special meeting of stockholders, neither the business to be transacted
at, nor the purpose of, any regular or special meeting of the stockholders,
directors, or members of a committee of directors need be specified in any
written waiver of notice of such meeting.
Attendance of a person, either in person or by proxy, at any meeting, shall
constitute a waiver of notice of such meeting, except where a person attends a
meeting for the express purpose of objecting to the transaction of any business
because the meeting was not lawfully called or convened.
SECTION 4.03. Conference Telephone Meetings. One or more directors may
participate in a meeting of the board, or of a committee of the board, by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other. Participation in
a meeting pursuant to this section shall constitute presence in person at such
meeting.
ARTICLE V
Officers
SECTION 5.01. Number, Qualifications and Designation. The officers of the
corporation shall be chosen by the board of directors and shall be a president,
one or more vice presidents, if any, a secretary, a treasurer, and such officers
as may be elected in accordance with the provisions of Section 5.03 of this
Article. One person may hold more than one office. Officers may be, but need
not be, directors or stockholders of the corporation. The board of directors
may elect from among the members of the board a chairman of the board and a
vice chairman of the board who shall be officers of the corporation.
SECTION 5.02. Election and Term of Office. The officers of the
corporation, except those elected by delegated authority pursuant to Section
5.03 of this Article, shall be elected annually by the board of directors, and
such other officer shall hold his office until his successor shall have been
elected and qualified, or until his earlier resignation or removal. Any officer
may resign at any time upon written notice to the corporation.
SECTION 5.03. Subordinate Officers, Committees and Agents. The board of
directors may from time to time elect such other officers and appoint such
committees, employees or other agents as it deems necessary, who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as are provided in these bylaws, or as the board of directors may from
time to time determine. The board of directors may delegate to any officer or
committee the power to elect subordinate officers and to retain or appoint
employees or other agents, or committees thereof, and to prescribe the authority
and duties of such subordinate officers, committees, employees or other agents.
SECTION 5.04. The Chairman and Vice Chairman of the Board. The chairman
of the board or in his absence, the vice chairman of the board, shall preside at
all meetings of the stockholders and of the board of directors, and shall
perform such other duties as may from time to time be assigned to them by the
board of directors.
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SECTION 5.05. The President. The president shall perform such duties and
shall have such rights and responsibilities as may from time to time be assigned
to him by the board of directors.
SECTION 5.06. The Vice Presidents. The vice presidents, if any, shall
perform the duties of the president in his absence and such other duties as may
from time to time be assigned to them by the board of directors or by the
president.
SECTION 5.07. The Secretary. The secretary, or an assistant secretary,
shall attend all meetings of the stockholders and of the board of directors and
shall record the proceedings of the stockholders and of the directors and of
committees of the board in a book or books to be kept for that purpose; see that
notices are given and records and reports properly kept and filed by the
corporation as required by law; be the custodian of the seal of the corporation
and see that it is affixed to all documents to be executed on behalf of the
corporation under its seal; and, in general, perform all duties incident to the
office of the secretary, and such other duties as may from time to time be
assigned to him by the board of directors or the president.
SECTION 5.08. The Treasurer. The treasurer or an assistant treasurer
shall have or provide for the custody of the funds or other property of the
corporation and shall keep a separate book account of the same to his credit as
treasurer; collect and receive or provide for the collection and receipt of
moneys earned by or in any manner due to or received by the corporation; deposit
all funds in his custody as treasurer in such banks or other places of deposit
as the board of directors may from time to time designate; whenever so required
by the board of directors, render an account showing his transactions as
treasurer and the financial condition of the corporation; and, in general,
discharge such other duties as may from time to time be assigned to him by the
board of directors of the president.
SECTION 5.09. Officers' Bonds. No officer of the corporation need provide
a bond to guarantee the faithful discharge of his duties unless the board of
directors shall by resolution so require a bond in which event such officer
shall give the corporation a bond (which shall be renewed if and as required) in
such sum and with such surety or sureties as shall be satisfactory to the board
of directors for the faithful performance of the duties of his office.
SECTION 5.10. Salaries. The salaries of the officers and agents of the
corporation elected by the board of directors shall be fixed from time to time
by the board of directors.
ARTICLE VI
Certificates of Stock, Transfer, Etc.
SECTION 6.01. Issuance. Each stockholder shall be entitled to a
certificate or certificate for shares of stock of the corporation owned by him
upon his request therefor. The stock certificates of the corporation shall be
numbered and registered in the stock ledger and transfer books of the
corporation as they are issued. They shall be signed by the president or a
vice president and by the secretary or an assistant secretary or the treasurer
or an assistant treasurer, and shall bear the corporate seal, which may be a
facsimile, engraved or printed. Any of or all the signatures upon such
certificate may be a facsimile, engraved or printed. In case any officer,
transfer agent or registrar who has signed, or whose facsimile signature has
been placed upon, any share certificate shall have ceased to be such officer,
transfer agent or registrar, before the certificate is issued, it may be issued
with the same effect as if he were such officer, transfer agent or registrar
at the date of its issue.
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SECTION 6.02. Transfer. Upon surrender to the corporation or the transfer
agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books. No transfer shall be made which would be
inconsistent with the provisions of Article 8, Title 6 of the Delaware Uniform
Commercial Code-Investment Securities.
SECTION 6.03. Stock Certificates. Stock certificates of the corporation
shall be in such form as provided by statute and approved by the board of
directors. The stock record books and the blank stock certificates books shall
be kept by the secretary or by any agency designated by the board of directors
for that purpose.
SECTION 6.04. Lost, Stolen, Destroyed or Mutilated Certificates. The
board of directors may direct a new certificate or certificates to be issued in
place of any certificate or certificates theretofore issued by the corporation
alleged to have been lost, stolen or destroyed, upon the making of an affidavit
of that fact by the person claiming the certificate of stock to be lost, stolen
or destroyed. When authorizing such issue of a new certificate or certificates,
the board of directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or his legal representative, to advertise the same
in such manner as it shall require and/or to give the corporation a bond in such
sum as it may direct as indemnity against any claim that may be against the
corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
SECTION 6.05. Record Holder of Shares. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of Delaware.
SECTION 6.06. Determination of Stockholders of Record. In order that the
corporation may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, the board of directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the board of directors, and
which record date shall not be more than sixty or less than ten days before the
date of such meeting. If no record date is fixed by the board of directors, the
record date for determining stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the board of directors may fix a new record
date for the adjourned meeting.
In order that the corporation may determine the stockholders entitled to
consent to corporate action in writing without a meeting, the board of directors
may fix a record date, which record date shall not be more than ten days after
the date upon which the resolution fixing the record date is adopted by the
board of directors. If no record has been fixed by the board of directors, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the board of directors is
required by the DGCL, shall be the first date on which a signed
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written consent setting forth the action taken or proposed to be taken is
delivered to the corporation by delivery to its registered office in
Delaware, its principal place of business, or an officer or agent of the
corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to a corporation's registered office
shall be by hand or by certified or registered mail, return receipt
requested. If no record date has been fixed by the board of directors and
prior action by the board of directors is required by the DGCL, the record
date for determining stockholders entitled to consent to corporate action in
writing without a meeting shall be at the close of business on the day on
which the board of directors adopts the resolution taking such prior action.
In order that the corporation may determine the stockholders entitled to
receive payment of any dividend or other distribution or allotment of any rights
of the stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the board of directors may fix a record date, which record date shall not
precede the date upon the resolution fixing the record date is adopted, and
which record date shall not be more than sixty days prior to such action. If no
record date is fixed, the record date for determining stockholders for any such
purpose shall be at the close of the business on the day on which the board of
directors adopts the resolution relating thereto.
ARTICLE VII
Indemnification of Directors, Officers and
Other Authorized Representatives
SECTION 7.01. Indemnification of Authorized Representatives in Third
Party Proceedings. The corporation shall indemnify any person who was or is
an authorized representative of the corporation, and who was or is a party or
is threatened to be made a party to any corporation proceeding, by reason of
the fact that such person was or is an authorized representative of the
corporation, against expenses judgments, penalties, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such third party proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal third party
proceeding (including any action or investigation which could or does lead to
a criminal third party proceeding) had no reasonable cause to believe such
conduct was unlawful. The termination of any third party proceeding by
judgment, order, settlement, indictment, conviction or upon a plea of nolo
contendere or its equivalent, shall not of itself create a presumption that
the authorized representative did not act in good faith and in a manner which
such person reasonably believed to be in or not opposed to, the best
interests of the corporation, and, with respect to any criminal third party
proceeding, had reasonable cause to believe that such conduct was unlawful.
SECTION 7.02. Indemnification of Authorized Representatives in Corporate
Proceedings. The corporation shall indemnify any person who was or is an
authorized representative of the corporation and who was or is a party or is
threatened to be made a party to any corporate proceeding by reason of the fact
that such person was or is an authorized representative of the corporation,
against expenses actually and reasonably incurred by such person in connection
with the defense or settlement of such corporate action if such person acted in
good faith and in a manner reasonably believed to be in, or not opposed to, the
best interests of the corporation, except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless
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and only to the extent that the Court of Chancery or the court in which such
corporate proceeding was pending shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such authorized representative is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
SECTION 7.03. Mandatory Indemnification of Authorized Representatives. To
the extent that an authorized representative of the corporation has been
successful on the merits or otherwise in defense of any third party or corporate
proceeding or in defense of any claim, issue or matter therein, such person
shall be indemnified against expenses actually and reasonably incurred by such
person in connection therewith.
SECTION 7.04. Determination of Entitlement to Indemnification. Any
indemnification under Section 7.01, 7.02 or 7.03 of this Article (unless ordered
by a court) shall be made by the corporation only as authorized in the specific
case upon a determination that indemnification of the authorized representative
is proper in the circumstances because such person has either met the applicable
standard of conduct set forth in Section 7.01 or 7.02 or has been successful on
the merits or otherwise as set forth in Section 7.03 and that the amount
requested has been actually and reasonably incurred. Such determination shall
be made:
(1) By the board of directors by a majority of a quorum
consisting of directors who were not parties to such third party or corporate
proceeding, or
(2) If such a quorum is not obtainable, or, even if obtainable,
a majority vote of such quorum so directs, by independent legal counsel in a
written opinion, or
(3) By the stockholders.
SECTION 7.05. Advancing Expenses. Expenses actually and reasonably
incurred in defending a third party or corporate proceeding shall be paid on
behalf of a director by the corporation in advance of the final disposition of
such third party or corporate proceeding upon receipt of an undertaking by or on
behalf of the director to repay such amount if it shall ultimately be determined
that such person is not entitled to be indemnified by the corporation as
authorized in this Article.
Expenses actually and reasonably incurred in defending a third party
or corporate proceeding shall be paid on behalf of an authorized representative
other than a director by the corporation in advance of the final disposition of
such third party or corporate proceeding as authorized by the board of directors
upon receipt of an undertaking by or on behalf of such authorized representative
to repay if it shall ultimately be determined that such person is not entitled
to be indemnified by the corporation as authorized in this Article.
The financial ability of any authorized representative to make a
repayment contemplated by this Section shall not be a prerequisite to the making
of an advance.
SECTION 7.06. Definitions. For purposes of this Article:
(1) "authorized representative" shall mean a director or officer of
the corporation, or a person serving at the request of the
corporation as a director, officer, or trustee, of another
corporation, partnership, joint venture, trust or other
enterprise;
(2) "corporation" shall include in addition to the resulting
corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have
had power and authority to indemnify its directors, officers,
employees or agents, so that any person who is or was a director,
officer, employee or agent of such constituent corporation,
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or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions
of this Article with respect to the resulting or surviving
corporation as such person would have with respect to such
constituent corporation if its separate existence had continued.
(3) "corporate proceeding" shall mean any threatened, pending or
completed action or suit by or in the right of the corporation to
procure a judgment in its favor or investigative proceeding by
the corporation;
(4) "criminal third party proceedings" shall include any action or
investigation which could or does lead to a criminal third party
proceeding;
(5) "expenses" shall include attorney's fees and disbursements;
(6) "fines" shall include any excise taxes assessed on a person with
respect to an employee benefit plan;
(7) "not opposed to the best interests of the corporation" shall
include such actions taken in good faith and in a manner the
authorized representative reasonably believed to be in the
interest of the participants and beneficiaries of a benefit plan;
(8) "other enterprises" shall include employee benefit plans;
(9) "party" shall include the giving of testimony or similar
involvement;
(10) "serving at the request of the corporation" shall include any
service as a director, officer or employee of the corporation
which imposes duties on, or involves service by, such director,
officer or employee with respect to an employee benefit plan, its
participants, or beneficiaries; and
(11) "third party proceeding" shall mean any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or in
the right of the corporation.
SECTION 7.07. Insurance. The corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in such a capacity, or arising out of his status as
such, whether or not the corporation would have the power or the obligation to
indemnify such person against such liability under the provisions of this
Article.
SECTION 7.08. Scope of Article. The indemnification of authorized
representatives and advancement of expenses, as authorized by the preceding
provisions of this Article, shall not be deemed exclusive of any other rights to
which those seeking indemnification or advancement of expenses may be entitled
under any statute, agreement, vote of stockholders or disinterested directors or
otherwise, both as to the action in an official capacity and as to action in
another capacity. The indemnification and advancement of expenses provided by
or granted pursuant to this Article shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be an
authorized representative and shall inure to the benefit of the heirs, executors
and administrators of such a person.
SECTION 7.09. Reliance on Provisions. Each person who shall act as an
authorized representative of the corporation shall be deemed to be doing so in
reliance upon rights of indemnification provided by this Article.
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ARTICLE VIII
General Provisions
SECTION 8.01. Dividends. Dividends upon the capital stock of the
corporation, subject to the provisions of the certificate of incorporation,
if any, may be declared by the board of directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock of the corporation, subject to the provisions of
the certificate of incorporation. Before payment of any dividend, there may
be set aside out of any funds of the corporation available for dividends such
sum or sums as the directors from time to time, in their absolute discretion,
think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the directors shall think conducive
to the interest of the corporation, and the directors may modify or abolish
any such reserve in the manner in which it was created.
SECTION 8.02. Annual Statements. The board of directors shall present
at each annual meeting, and at any special meeting of the stockholders when
called for by vote of the stockholders, a full and clear statement of the
business and condition of the corporation.
SECTION 8.03. Contracts. Except as otherwise provided in these bylaws,
the board of directors may authorize any officer or officers including the
chairman and vice chairman of the board of directors, or any agent or agents, to
enter into any contract or to execute or deliver any instrument on behalf of the
corporation and such authority may be general or confined to specific instances.
SECTION 8.04. Checks. All checks, notes, bills of exchange or other
orders in writing shall be signed by such person or persons as the board of
directors may from time to time designate.
SECTION 8.05. Corporate Seal. The corporate seal shall have inscribed
thereon the name of the corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or in any other manner reproduced.
SECTION 8.06. Deposits. All funds of the corporation shall be deposited
from time to time to the credit of the corporation in such banks, trust
companies, or other depositories as the board of directors may approve or
designate, and all such funds shall be withdrawn only upon checks signed by such
one or more officers or employees as the board of directors shall from time to
time determine.
SECTION 8.07. Corporate Records. At least ten days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of and number
of shares registered in the name of each stockholder, shall be open to the
examination of any stockholder, for any purpose germane to the meeting, either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
Every stockholder shall, upon written demand, under oath stating the
purpose thereof, have a right to examine, in person or by agent or attorney,
during the usual hours for business, for any proper purpose, the stock ledger,
books or records of account, and records of the proceedings of the stockholders
and directors, and make copies or extracts therefrom. A proper purpose shall
mean a purpose reasonably related to such person's interest as a stockholder.
In every instance where an attorney or other agent shall
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be the person who seeks the right to inspection, the demand under oath shall
be accompanied by a power of attorney or such other writing which authorizes
the attorney or other agent to so act on behalf of the stockholder. The
demand under oath shall be directed to the corporation at its registered
office in Delaware or at its principal place of business. Where the
stockholder seeks to inspect the books and records of the corporation, other
than its stock ledger or list of stockholders, the stockholder shall first
establish (1) compliance with the provisions of this section respecting the
form and manner of making demand for inspection of such document; and (2)
that the inspection sought is for a proper purpose. Where the stockholder
seeks to inspect the stock ledger or list of stockholders of the corporation
and has complied with the provisions of this section respecting the form and
manner of making demand for inspection of such documents, the burden of proof
shall be upon the corporation to establish the inspection sought is for an
improper purpose.
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders and its other books and records for a purpose
reasonably related to his position as a director. The Court of Chancery is
hereby vested with the exclusive jurisdiction to determine whether a director is
entitled to the inspection sought. The court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger and the stock list and to make copies or extracts therefrom. The
court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the court
may deem just and proper.
SECTION 8.08. Amendment of Bylaws. These bylaws may be altered, amended
or repealed or new bylaws may be adopted by the vote of more than fifty percent
of the stockholders or by a majority of the whole board of directors, when such
power is conferred upon the board of directors by the certificate of
incorporation, at any regular meeting of the stockholders or of the board of
directors or at any special meeting of the stockholders of the board of
directors if notice of such alteration, amendment, repeal or adoption of new
bylaws be contained in the notice of such special meeting.
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Amendments to the Bylaws
RESOLVED, that the first sentence of Section 5.01 of the Bylaws of the
Company is hereby amended to read in full as follows:
Section 5.01. Number, Qualifications and Designation. The officers
of the corporation shall be chosen by the board of directors and
shall be a chief executive officer and/or president, one or more
vice presidents, a secretary, a treasurer, or officers acting in
such capacities, and such officers as may be elected in accordance
with the provisions of Section 5.03 of this Article.
RESOLVED, that Section 5.04 of the Bylaws of the Company is hereby
amended to read in full as follows:
Section 5.04. The Chairman, Vice-Chairman of the Board and Chief
Executive Officer. The chairman of the board or in his absence, the
vice-chairman of the board, shall preside at all meetings of the
stockholders and of the board of directors, and shall perform such
other duties as may from time to time be assigned to them by the
board of directors. The chairman shall have the power to sign
documents and instruments on behalf of the corporation in the same
manner that such power is conferred upon the president. The chief
executive officer shall have all of the same powers as the
president.
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EXHIBIT 5.1
June 24, 1997
ChromaVision Medical Systems, Inc.
33171 Paseo Cerveza
San Juan Capistrano, California 92675
Re: Registration Statement on Form S-1
(File No. 333-26129
Ladies and Gentlemen:
We have acted as counsel to ChromaVision Medical Systems Inc., a
Delaware corporation (the "Company"), in connection with the preparation of
the subject registration statement on Form S-1 (the "Registration Statement")
filed with the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "Act"), to register the public
offering of up to 7,360,000 shares of Common Stock, par value $.01 per share,
of the Company (the "Common Stock"), which includes (i) 640,000 shares
purchasable by the underwriters from the Company, solely for the purpose of
covering overallotments, (ii) 6,400,000 shares issuable or transferable upon
the exercise of rights (the "Company Rights") to purchase shares of Common
Stock of the Company granted by the Company and certain selling stockholders
to the shareholders of Safeguard Scientifics, Inc. and (iii) 320,000 shares
purchasable by certain persons selected by the Company from the selling
stockholders (collectively, the "Offering"). In connection herewith, we have
examined such records, documents, statutes and decisions as we have deemed
relevant.
In our opinion, (i) the shares of Common Stock to be sold by the
Company, when issued, sold and delivered as contemplated in the Registration
Statement, will be legally issued, fully paid and nonassessable shares of the
Common Stock of the Company, (ii) the shares of Common Stock to be sold by
the selling stockholders as contemplated in the Registration Statement are
legally issued, fully paid and nonassessable shares of the Common Stock of
the Company and (iii) the Rights, when issued and distributed as contemplated
in the Registration Statement, will be legally issued and valid and binding
obligations of the Company having the rights summarized in the Registration
Statement.
<PAGE>
ChromaVision Medical Systems, Inc.
June 24, 1997
Page 2
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement and to all references to our firm in the Registration
Statement. In giving such consent, we do not thereby admit that we are
acting within the category of persons whose consent is required under Section
7 of the Act and the rules and regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
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EXHIBIT 8.1
June 24, 1997
Safeguard Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, Pennsylvania 19087
Re: Offering of Rights to Purchase Shares of Common Stock of
ChromaVision Medical Systems, Inc.
Ladies and Gentlemen:
You have requested our opinion regarding certain federal income tax
aspects of the grant by ChromaVision Medical Systems, Inc. (the "Company") of
rights (the "Rights") to purchase shares of the Company's Common Stock (the
"Offering"), all as described in the Registration Statement on Form S-1 (File
No. 333-26129), as amended, filed with the Securities and Exchange Commission
on the date hereof (the "Registration Statement"). This opinion is based
upon our review of the Registration Statement and our assumption that the
Offering will take place in accordance with the description included in the
Registration Statement.
Opinion
Based on the foregoing and on the Internal Revenue Code of 1986, as
amended (the "Code"), the regulations promulgated thereunder, and judicial
and administrative interpretations thereof, all as in effect on the date of
this letter, it is our opinion that the statements of law and conclusions of
law included in the Registration Statement under the heading, "The
Offering--Federal Income Tax Consequences" are, in all material respects,
true, correct and complete. No opinion is expressed regarding any
statements, assumptions or opinions regarding factual matters (including,
without limitation, the value of the Rights) contained in the Registration
Statement.
Should any of the facts, assumptions or understandings referred to above
prove incorrect, please let us know so that we may consider the effect, if
any, on our opinion. No assurances can be given that any of the foregoing
authorities will not be modified, revoked, supplemented, revised, reversed or
overruled or that any such modification, renovation, supplementation,
revision, reversal or overruling will not adversely affect the opinion set
forth above.
We understand that this opinion is to be used in connection with the
registration of the Rights and the Company's Common Stock pursuant to the
Securities Act of 1933, as amended. We consent to the filing of this opinion
in connection with and as a part of the Registration Statement on Form S-1
and amendments thereto. We also hereby consent to the reference to our firm
under the caption "Legal Matters" in the Registration Statement. In giving
such consents, however, we do not thereby admit that we are acting within the
category of persons whose consent is required under Section 7 of the Act and
the rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/S/ Morgan, Lewis & Bockius LLP
<PAGE>
EXHIBIT 11.1
CHROMAVISION MEDICAL SYSTEMS, INC.
(Formerly MicroVision Medical Systems, Inc.)
(A Development Stage Enterprise)
Statement Re: Computation of Earnings Per Share
For the period from March 28, 1996 (incorporation) through December 31, 1996
and for the three months ended March 31, 1997
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
<S> <C> <C>
Primary:
Net income (loss) applicable to common stock(1)................. $(4,030,263) $(1,406,698)
------------ ------------
------------ ------------
Weighted average shares outstanding for primary:
Common shares outstanding (2).................................. 1,931,250 1,931,250
Shares upon assumed conversion of Series A Preferred Stock..... 8,918,830 8,918,830
Shares upon assumed conversion of Series B Preferred Stock..... -- 277,313
Shares upon assumed exercise of stock options and
warrants issued within one year if initial public
offering (3)................................................ 1,261,500 1,152,938
------------ ------------
Weighted average shares........................................ 12,111,580 12,280,331
------------ ------------
------------ ------------
Primary net income (loss) per share.............................. $ (0.33) $ (0.11)
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(1) Net income (loss) for purposes of the computation includes the period from
incorporation (capitalization) of the Company
(2) Outstanding Series A and B preferred shares are convertible to 1.25 common
shares for every preferred share.
(3) Options issued within one year of the initial filing of the accompanying
registration statement are assumed to be outstanding for all periods
using the modified treasury stock method at the assumed initial public
offering price, regardless of whether they are anti-dilutive.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" and "Selected Financial Data" in the
Prospectus.
KPMG Peat Marwick LLP
Orlando, Florida
June 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
ChromaVision Medical Systems, Inc. financial statements and is qualified by
reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> MAR-28-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997
<CASH> 124,092 65,100
<SECURITIES> 0 0
<RECEIVABLES> 550 550
<ALLOWANCES> 0 0
<INVENTORY> 502,511 468,411
<CURRENT-ASSETS> 799,590 921,243
<PP&E> 197,155 358,338
<DEPRECIATION> 116,315 125,920
<TOTAL-ASSETS> 880,430 1,187,343
<CURRENT-LIABILITIES> 1,729,928 3,251,223
<BONDS> 0 0
0 0
71,351 73,570
<COMMON> 19,313 19,313
<OTHER-SE> (1,746,171) (2,156,763)
<TOTAL-LIABILITY-AND-EQUITY> 880,430 1,167,343
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 4,030,263 1,384,420
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 22,278
<INCOME-PRETAX> (4,030,263) (1,406,698)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,030,263) (1,406,698)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,030,263) (1,406,698)
<EPS-PRIMARY> (0.33) (0.11)
<EPS-DILUTED> (0.33) (0.11)
</TABLE>
