<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 10, 1997
REGISTRATION NO. 333-26129
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 2
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 10, 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.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OR
THE RIGHTS OR BOTH AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET,
OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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>
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- -----------------------
DIVISIONAL DIVISIONAL
OPERATIONS(1) OPERATIONS(1)
---------------------- -----------
1994 1995 1996 1996 1997
---------- ---------- ---------- ----------- ----------
Revenue(2)................... $ 296,886 $ 900,000 $ -- $ -- $ --
Cost of revenue.............. 232,636 310,103 -- -- --
Operating expenses(3)........ 1,645,556 2,553,084 4,848,774 452,157 1,384,430
Other income (expense)(4).... -- -- 441,354 75,000 (22,268)
---------- ---------- ---------- ----------- ----------
Net profit (loss)............ $(1,581,306) $(1,963,187) $(4,407,420) $(377,157) $(1,406,698)
Net profit (loss) subsequent
to incorporation(1)(5)..... $(4,030,263) $(1,406,698)
---------- ----------
---------- ----------
Pro forma net profit (loss)
per common share subsequent
to incorporation(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 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>
By Mail: By Hand/Overnight:
ChaseMellon Shareholder Services, L.L.C. ChaseMellon Shareholder Services, L.L.C.
Reorganization Department Reorganization Department
P.O. Box 798 120 Broadway, 13th Floor
Midtown Station New York, New York 10271
New York, New York 10018
</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 of this Prospectus to the
beneficial owners. You should also carry out their intentions as to the exercise
or transfer of their rights.
18
<PAGE>
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
<CAPTION>
------------ ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Total............................. 17,147,393 100.0% $ 38,248,838 100.0% 2.23
<CAPTION>
------------ ---------- ------------- ----------
------------ ---------- ------------- ----------
</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,
1995 and 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' equity and cash flows for each
of the years in the three-year period ended 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>
THREE MONTHS ENDED
MARCH 31, PERIOD FROM
YEAR ENDED DECEMBER 31, ------------------------- APRIL 1,
--------------------------------------------- 1993
DIVISIONAL (INCEPTION)
DIVISIONAL OPERATIONS(1) OPERATIONS(1) THROUGH
--------------------------------- ------------- MARCH 31,
1993 1994 1995 1996 1996 1997 1997
--------- ---------- ---------- ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
STATEMENTS OF OPERATIONS DATA:
Revenue(2).................... -- $ 296,886 $ 900,000 $ -- $ -- $ -- $1,196,886
Cost of revenue............... -- 232,636 310,103 -- -- -- 542,739
--------- ---------- ---------- ---------- ------------- ---------- ------------
Gross profit.................. -- 64,250 589,897 -- -- -- 654,147
Operating expenses:
Selling, general and
administrative.............. 304,951 787,167 1,040,070 2,979,252 216,579 784,622 5,896,062
Research and development(3)... 549,156 858,389 1,513,014 1,869,522 235,578 599,808 5,389,889
--------- ---------- ---------- ---------- ------------- ---------- ------------
Total operating expenses.... 854,107 1,645,556 2,553,084 4,848,774 452,157 1,384,430 11,285,951
Total other income
(expense)(4).............. -- -- -- 441,354 75,000 (22,268) 419,086
--------- ---------- ---------- ---------- ------------- ---------- ------------
Net profit (loss)............. $(854,107) $(1,581,306) $(1,963,187) $(4,407,420) $ (377,157) $(1,406,698) ($10,212,718)
--------- ---------- ---------- ---------- ------------- ---------- ------------
--------- ---------- ---------- ---------- ------------- ---------- ------------
Net profit (loss) subsequent
to incorporation(1)(5)...... $(4,030,263) $(1,406,698)
---------- ----------
---------- ----------
Pro forma net profit (loss)
per common share subsequent
to incorporation(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 DECEMBER 31,
----------------------------------------------
DIVISIONAL OPERATIONS(1) AS OF
---------------------------------- MARCH 31,
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..... $ -- $ -- $ -- $ 124,092 $ 65,100
Total assets.................. 60,000 1,066,328 345,664 880,430 1,187,343
Total liabilities(6).......... 914,107 3,501,741 4,744,264 2,535,937 3,251,223
Accumulated deficit(7)........ (854,107) (2,435,413) (4,398,600) (8,806,020) (10,212,718)
Total stockholders' equity
(deficit)................... (854,107) (2,435,413) (4,398,600) (1,655,507) (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 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.
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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 28, 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
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 and support services for research
activities. Revenue of $296,886 for 1994 consisted of the sale of two prototype
ChromaVision Digital Analyzer systems and support service for research
activities.
GROSS PROFIT. Gross profit of $589,897 for 1995 consisted of profit
associated with the manufacture of six ChromaVision Digital Analyzer systems and
support services. Gross profit of $64,250 for 1994 consisted of profit
associated with the manufacture of two ChromaVision Digital Analyzer systems and
support services.
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.
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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 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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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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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
51
<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.
52
<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%
53
<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
54
<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.
55
<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
56
<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
57
<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
58
<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-- Stock Option 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).
59
<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.
60
<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
61
<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
62
<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 each of the three years ended 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.
63
<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 and 1996 and for
the three months ended March 31, 1996 and 1997 (unaudited).......................... F-4
Statements of Stockholders' Deficit at Decenber 31, 1995 and 1996 and March 31, 1997
(unaudited)......................................................................... F-5
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and for
the three months ended March 31, 1996 and 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 sheets of ChromaVision Medical
Systems, Inc. (a development stage enterprise) as of December 31, 1996 and 1995
and the related statements of operations, stockholders' deficit and cash flows
for each of the years in the three year period ended 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, Inc. (a development stage enterprise) at December 31, 1996 and 1995 and
the results of its operations and its cash flows for each of the years in the
three year period ended 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>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED
---------------------------------------- PERIOD FROM MARCH 31,
APRIL 1, 1993 -------------------------
DIVISIONAL OPERATIONS (INCEPTION) DIVISIONAL
(NOTE 1) THROUGH OPERATIONS
-------------------------- DECEMBER 31, (NOTE 1)
1994 1995 1996 1996 1996 1997
------------ ------------ ------------ ------------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenue................................. $ 296,886 $ 900,000 $ -- $ 1,196,886 $ -- $ --
Cost of revenue......................... 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 2,979,252 5,111,440 216,579 784,622
Research and development.............. 858,389 1,513,014 1,869,522 4,790,081 235,578 599,808
------------ ------------ ------------ ------------------ ----------- ------------
Total operating expenses............ 1,645,556 2,553,084 4,848,774 9,901,521 452,157 1,384,430
------------ ------------ ------------ ------------------ ----------- ------------
Profit (loss) from operations....... (1,581,306) (1,963,187) (4,848,774) (9,247,374) (452,157) (1,384,430)
------------ ------------ ------------ ------------------ ----------- ------------
Other income (expense):
Interest income (expense)............. -- -- 17,829 17,829 -- (22,278)
Other income (note 4) -- -- 423,525 423,525 75,000 10
------------ ------------ ------------ ------------------ ----------- ------------
Total other income (expense)........ -- -- 441,354 441,354 75,000 (22,268)
------------ ------------ ------------ ------------------ ----------- ------------
Profit (loss) before income taxes... (1,581,306) (1,963,187) (4,407,420) (8,806,020) (377,157) (1,406,698)
Income tax expense (benefit)............ -- -- -- -- -- --
------------ ------------ ------------ ------------------ ----------- ------------
Net profit (loss)................... $ (1,581,306) $ (1,963,187) $ (4,407,420) $ (8,806,020) $ (377,157) $ (1,406,698)
Net profit (loss) subsequent to
incorporation (notes 1 and 2) $ (4,030,263) $ (1,406,698)
------------ ------------
------------ ------------
Pro forma net loss per common share
subsequent to incorporation (notes 1
and 2)................................ $ (0.33) $ (0.11)
------------ ------------
------------ ------------
Pro forma weighted average number of
common shares outstanding............. 12,111,580 12,280,331
<CAPTION>
PERIOD FROM
APRIL 1, 1993
(INCEPTION)
THROUGH
MARCH 31,
1997
-------------
<S> <C>
(UNAUDITED)
Revenue................................. $ 1,196,886
Cost of revenue......................... 542,739
-------------
Gross profit.......................... 654,147
-------------
Operating expenses:
Selling, general and administrative... 5,896,062
Research and development.............. 5,389,889
-------------
Total operating expenses............ 11,285,951
-------------
Profit (loss) from operations....... (10,631,804)
-------------
Other income (expense):
Interest income (expense)............. (4,449)
Other income (note 4) 423,535
-------------
Total other income (expense)........ 419,086
-------------
Profit (loss) before income taxes... (10,212,718)
Income tax expense (benefit)............ --
-------------
Net profit (loss)................... $ (10,212,718)
Net profit (loss) subsequent to
incorporation (notes 1 and 2)
Pro forma net loss per common share
subsequent to incorporation (notes 1
and 2)................................
Pro forma weighted average number of
common shares outstanding.............
</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)......................... -- -- -- -- -- -- --
Issuance of common stock.................. -- -- -- -- 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)......................... (4,407,420) (4,407,420)
Issuance of common stock.................. -- 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>
THREE MONTHS
ENDED
MARCH 31,
YEARS ENDED DECEMBER 31, PERIOD FROM ----------------------- PERIOD FROM
---------------------------------- APRIL 1, APRIL 1,
1993 DIVISIONAL 1993
DIVISIONAL OPERATIONS (INCEPTION) OPERATIONS (INCEPTION)
(NOTE 1) THROUGH (NOTE 1) THROUGH
---------------------- DECEMBER 31, ----------- MARCH 31,
1994 1995 1996 1996 1996 1997 1997
---------- ---------- ---------- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from development
stage activities:
Net profit (loss)............. $(1,581,306) $(1,963,187) $(4,407,420) $(8,806,020) $(377,157) $(1,406,698) ($10,212,718)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization.............. 27,159 54,417 34,739 116,315 6,080 9,605 125,920
Non-cash issuance of
preferred stock........... -- -- 770,192 770,192 -- -- 770,192
Write-off of note
receivable................ -- 40,000 -- 40,000 -- -- 40,000
Changes in operating assets
and liabilities:
Accounts receivable....... (100,000) (100,000) 199,450 (550) 200,000 -- (550)
Inventory................. (1,646) (52,556) (428,309) (502,511) (1,888) 34,100 (468,411)
Prepaid expenses.......... -- -- (27,677) (27,677) -- (14,745) (42,422)
Deposits.................. -- -- -- -- -- (35,682) (35,682)
Accounts payable.......... 466 8,317 174,590 183,373 -- 135,600 318,973
Accrued liabilities....... 1,110 5,080 1,157,270 1,166,116 21,514 (644,686) 521,430
---------- ---------- ---------- ------------ ----------- ---------- ------------
Net cash used in operating
activities.............. (1,654,217) (2,007,929) (2,527,165) (7,060,762) (151,451) (1,922,506) (8,983,268)
---------- ---------- ---------- ------------ ----------- ---------- ------------
Cash flows from investing
activities:
Notes receivable.............. (785,000) -- -- (825,000) -- -- (825,000)
Collections on notes
receivable.................. -- 785,000 -- 785,000 -- -- 785,000
Purchases of property and
equipment................... (146,841) (6,197) (44,117) (197,155) (348) (159,183) (356,338)
---------- ---------- ---------- ------------ ----------- ---------- ------------
Net cash provided by (used
in) investing
activities.............. (931,841) 778,803 (44,117) (237,155) (348) (159,183) (396,338)
---------- ---------- ---------- ------------ ----------- ---------- ------------
Cash flows from financing
activities:
Due to (from) XL Vision,
Inc......................... 2,586,058 1,229,126 (4,346,196) 380,439 136,349 71,949 452,388
Sale of common stock.......... -- -- 15,450 15,450 15,450 -- 15,450
Borrowing under revolving line
of credit................... -- -- 806,009 806,009 -- 1,152,423 1,958,432
Sale of preferred stock....... -- -- 6,364,871 6,364,871 -- 998,325 7,363,196
Capitalized offering costs.... -- -- (144,760) (144,760) -- (200,000) (344,760)
---------- ---------- ---------- ------------ ----------- ---------- ------------
Net cash provided by
financing activities.... 2,586,058 1,229,126 2,695,374 7,422,009 151,799 2,022,697 9,444,706
---------- ---------- ---------- ------------ ----------- ---------- ------------
Net increase (decrease) in
cash and cash
equivalents............. -- -- 124,092 124,092 -- (58,992) 65,100
Cash and cash equivalents--
beginning of period........... -- -- -- -- -- 124,092 --
---------- ---------- ---------- ------------ ----------- ---------- ------------
Cash and cash equivalents--end
of period..................... $ -- $ -- $ 124,092 $ 124,092 $ -- $ 65,100 $ 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.
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
(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.
(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) 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.
(E) 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)
(F) 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.
(G) 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.
(H) 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.
(I) 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.
(J) PRO FORMA 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,
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)
as if they were outstanding for all periods presented whether they are
antidilutive or not. Calculation of pro forma loss per share assumes that all
outstanding preferred shares have been converted into common shares. Calculation
of pro forma loss per share is based upon operations subsequent to the initial
capitalization (incorporation) of the Company in March 1996.
(K) 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 which has
been reflected in other income in the year ended December 31, 1996.
(5) PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
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>
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
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.
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
(7) PREFERRED STOCK (CONTINUED)
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.
(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.
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
(8) INCOME TAXES (CONTINUED)
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 advisors, 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. The vested options,
277,313, were exercised in January 1997.
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.
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)
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
Exercised.................................................... (277,313) 0.80 0.80
----------
----------
Balance outstanding March 31, 1997............................... 1,539,188 $ .80-2.40 $ 1.96 8.05
---------- ---------- ---------- ---
---------- ---------- ---------- ---
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- -----------------
<S> <C> <C>
Exercisable at December 31, 1996................................................... 551,328 $ 1.39
---------- -----
---------- -----
Exercisable at March 31, 1997...................................................... 299,016 $ 1.94
---------- -----
---------- -----
Available for grant at December 31, 1996........................................... 342,313
----------
----------
Available for grant at March 31, 1997.............................................. 173,562
----------
----------
</TABLE>
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: 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
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
(9) STOCK OPTIONS (CONTINUED)
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, 1995 and 1996 and the
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
(10) RELATED PARTY TRANSACTIONS (CONTINUED)
three months ended March 31, 1997 were $2,203,480, $4,111,072, $1,905,827 and
$359,115, respectively. An analysis of amounts due to XL Vision is summarized as
follows:
<TABLE>
<CAPTION>
Amounts due to XL Vision at December 31, 1993................... $ 911,451
<S> <C>
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-16
<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. 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 during 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 year ended 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-17
<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............................................. 29
Management........................................... 47
Certain Transactions................................. 54
Principal and Selling Stockholders................... 56
Description of Capital Stock......................... 57
Shares Eligible for Future Sale...................... 58
Underwriting......................................... 61
Legal Matters........................................ 63
Experts.............................................. 63
Additional Information............................... 63
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.**
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.
# To be filed by amendment.
(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. 2 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in San Juan
Capistrano, California on June 9, 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. 2 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 9, 1997
Douglas S. Harrington Executive Officer)
Vice President and Chief
/s/ KEVIN O'BOYLE Financial Officer
- ------------------------------ (Principal Financial and June 9, 1997
Kevin O'Boyle Accounting Officer)
* Chairman of the Board of
- ------------------------------ Directors June 9, 1997
John S. Scott
* Director
- ------------------------------ June 9, 1997
Christopher Moller
* Director
- ------------------------------ June 9, 1997
Richard Morgan
* Director
- ------------------------------ June 9, 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.**
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.
# To be filed by amendment.
<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 year ended 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 10, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Chroma
Vision Medical Systems, Inc. financial statements and is qualified by reference
to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 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> 4,407,420 1,384,420
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 22,278
<INCOME-PRETAX> (4,407,420) (1,406,698)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,407,420) (1,406,698)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,407,420) (1,406,698)
<EPS-PRIMARY> (0.33) (0.11)
<EPS-DILUTED> (0.33) (0.11)
</TABLE>
