U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-13092
SPECTRASCIENCE, INC.
(Exact name of small business issuer
as specified in its charter)
MINNESOTA 41-1448837
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
5909 BAKER ROAD, SUITE 580,
MINNETONKA, MINNESOTA 55345
(Address of principal executive offices)
(612) 931-9000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES _X_ NO
The number of shares of the Registrant's common stock, par value $.25,
outstanding on May 1, 1996 was 2,976,548.
Transitional Small Business Disclosure Format (Check one): Yes ___ No _X_
SPECTRASCIENCE, INC.
FORM 10-QSB
MARCH 31, 1996
INDEX
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets -- March 31, 1996 and December 31, 1995
Statements of Operations -- Three months Ended March 31, 1996 and 1995
Statements of Cash Flows -- Three months Ended March 31, 1996, and 1995
Notes to Financial Statements -- March 31, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT 3.1 AMENDMENT TO THE ARTICLES OF INCORPORATION
PART I -- FINANCIAL INFORMATION
SPECTRASCIENCE, INC.
FORM 10-QSB
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,889,438 $ 4,123,326
Accounts receivable 320 100,641
Inventory 253,486 181,871
Other current assets 59,251 80,197
------------ ------------
Total current assets 4,202,495 4,486,035
Net fixed assets 202,552 158,230
------------ ------------
TOTAL ASSETS $ 4,405,047 $ 4,644,265
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 195,479 $ 150,278
Accrued compensation and taxes 60,425 74,328
Accrued expenses 11,281 30,058
------------ ------------
Total current liabilities 267,185 254,664
Commitments
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00 per share
Authorized shares--20,000,000
Convertible preferred stock, Series A,
par value $1.00 per share:
Authorized shares--5,000,000
Issued and outstanding shares--674,998 674,998 674,998
Convertible preferred stock, Series B, par value
$1.00 per share:
Authorized shares--1,000,000
Issued and outstanding shares--792,500 792,500 792,500
Common stock, $.25 par value:
Authorized shares--10,000,000
Issued and outstanding shares--2,976,548 in 1996
and 2,933,348 in 1995 744,137 733,337
Additional paid-in capital 43,258,109 43,136,284
Accumulated deficit (41,331,882) (40,947,518)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 4,137,862 4,389,601
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,405,047 $ 4,644,265
============ ============
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to financial statements.
SPECTRASCIENCE, INC.
FORM 10-QSB
STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31
--------------------------
1996 1995
----------- -----------
Revenue $ -- $ 166,088
Cost of products sold -- 108,144
----------- -----------
Gross Profit -- 57,944
Operating expenses
Research and development 235,895 121,951
Selling, general and
administrative 199,137 122,817
----------- -----------
Total operating expenses 435,032 244,768
Interest and other
income (expense) 50,668 (9,490)
----------- -----------
Net loss $ (384,364) $ (196,314)
=========== ===========
Net loss per share $ (0.13) $ (0.07)
Weighted average common
shares outstanding 2,944,308 2,790,681
See notes to financial statements.
SPECTRASCIENCE, INC.
FORM 10-QSB
STATEMENTS OF CASH FLOW (UNAUDITED)
THREE MONTHS ENDED
MARCH 31
--------------------------
1996 1995
----------- -----------
OPERATING ACTIVITIES
Net loss $ (384,364) $ (196,314)
Adjustments to reconcile net cash
used in operating activities:
Depreciation 16,565 13,050
Recognition of deferred income -- (26,000)
Non-cash interest expense -- 3,260
Disposal of other assets -- 37,444
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 100,319 (160,415)
(Increase) decrease in inventories (71,613) 36,487
Decrease in other current assets 20,946 17,508
Increase (decrease) in current liabilities 12,521 (77,706)
----------- -----------
Net cash used in operating activities (305,626) (352,686)
INVESTING ACTIVITIES
Purchase of fixed assets (60,887) (1,171)
----------- -----------
Net cash used in investing activities (60,887) (1,171)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable -- 225,000
Proceeds from issuance of common stock 132,625 100,000
----------- -----------
Net cash provided by financing activities 132,625 325,000
----------- -----------
Net decrease in cash and
cash equivalents (233,888) (28,857)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 4,123,326 58,298
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 3,889,438 $ 29,441
=========== ===========
See notes to financial statements.
SPECTRASCIENCE, INC.
FORM 10-QSB
MARCH 31, 1996
NOTES TO FINANCIAL STATEMENTS
NOTE A BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Registrant Company's annual report on Form 10-KSB for the year ended December
31, 1995.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(A) BUSINESS
SpectraScience, Inc. (the "Company" or "SpectraScience"), is a
market-driven company which utilizes its expertise in the underlying core
technologies of spectroscopy, fiber optics, computer software and hardware, and
minimally-invasive medical delivery systems to design, develop, manufacture and
market medical products for the diagnosis and facilitation of treatment of a
broad range of human diseases.
The Company was incorporated in the state of Minnesota on May 4, 1983 as
GV Medical, Inc. Subsequently the Company changed its name to SpectraScience,
Inc. on October 16, 1992, which was approved by the shareholders on May 13,
1993. The executive offices of the Company are located at 5909 Baker Road, Suite
580, Minnetonka, Minnesota 55345. Its telephone number is (612) 931-9000 and its
fax number is (612) 933-9090.
(B) RESULTS OF OPERATIONS
Revenue for the first quarter ended March 31, 1996 was $-0- compared to
$166,088 for the first quarter of 1995. Revenues in the previous year reflected
the sale of two units of the Company's Spectroscopic Guidewire(TM) System and
guidewires to SCIMED Life Systems, Inc.
Cost of products sold during the first quarter of 1996 was $-0- compared
to $108,144 in the first quarter of 1995. As a result, the Company reported a
gross profit of $-0- for the quarter ended March 31, 1996 compared to $57,944
for the comparable quarter of 1995.
Research and development expenses for the quarter ended March 31, 1996
were $235,895 compared to $121,951 for the same period in 1995. This represented
an increase of 93.4% which was due to higher design engineering expenses
associated with the development of the Optical Biopsy(TM) System, and additional
expenses incurred in the clinical research agreement with the Massachusetts
General Hospital's Wellman Laboratory of Photomedicine, which began in June 1995
and called for the payment of approximately $50,000 per quarter in fees.
Selling, general and administrative expenses for the quarter ended March
31, 1996 were $199,137 compared to $122,817 for the same period in 1995. This
62.1% increase was primarily due to the Annual Meeting of Shareholders expenses
of approximately $61,000, held on March 28, 1996, which in fiscal year 1995 were
incurred in the second quarter.
Interest income (expense) for the quarter ended March 31, 1996 was $50,668
compared to $(9,490) for the same period in 1995. This increase was primarily
due to a much larger cash balance in the first quarter of 1996.
The Company reported a net loss for the quarter ended March 31, 1996 of
$384,364, which was a 95.8% increase from the $196,314 loss reported for the
quarter ended March 31, 1995. The loss per share increased to $0.13 per share
for the first quarter of 1996 from $0.07 per share for the same period in 1995.
(C) LIQUIDITY AND SOURCES OF CAPITAL
Cash and cash equivalents on March 31, 1996 was $3,889,438 compared to
$4,123,326 on December 31, 1995. The decrease in the cash position from December
31, 1995 to March 31, 1996 was the result of the net loss in the first quarter
of 1996.
The working capital (current assets less current liabilities) of the
Company on March 31, 1996 was $3,935,310 compared to $4,231,371 on December 31,
1995. This was primarily due to a reduction of the cash position and accounts
receivable.
Net cash used in operating activities for the quarter ended March 31, 1996
was $305,626 compared to $352,686 for the quarter ended March 31, 1995. This was
primarily achieved through a decrease in accounts receivable, though it was
offset with an increase in inventories and current liabilities.
Net cash used in investing activities for the quarter ended March 31, 1996
was $60,887 compared to $1,171 for the quarter ended March 31, 1995. This was
due to the increase in the purchase of equipment used for research and
development purposes.
Net cash provided by financing activities for the quarter ended March 31,
1996 was $132,625 compared to $325,000 for the quarter ended March 31, 1995. The
amount provided in the first quarter of 1996 was the result of stock option
exercises for 43,200 shares of the common stock of the Company. The amount
provided in the first quarter of 1995 was the result of the raising of
additional bridge loans of $225,000 and $100,000 from stock option exercises for
40,000 shares of the common stock of the Company.
SPECTRASCIENCE, INC.
FORM 10-QSB
MARCH 31, 1996
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Reference is made hereby to the Company's definitive proxy statement for
the Annual Meeting of Shareholders held on March 28, 1996, as filed with the
Securities and Exchange Commission on February 26, 1996, File No. 0-13092.
(a) The Annual Meeting of Shareholders of SpectraScience, Inc. ("Meeting") was
held on March 28, 1996.
Shareholders of record at the close of business on February 1, 1996,
("Record Date") were entitled to receive notice of and to vote at the
Meeting and any adjournment thereof. On the Record Date, 2,933,348 shares
of the Company's common stock ("Shares") were entitled to vote at the
Meeting, of which a total of 2,762,462 Shares or 94.17% of the total
Shares outstanding, were represented at the Meeting.
(b) The following individuals were re-elected to serve as directors of the
Company:
Brian T. McMahon
Henry M. Holterman
Nathaniel S. Thayer
(c) There were three proposals that were submitted to a vote by the
shareholders:
(i) Proposal One: To elect three (3) persons to serve as directors until
the next Meeting or until their respective successors shall be
elected and qualified. All three incumbent directors, as mentioned
in Item 4(b) above, were re-elected by the shareholders. The final
votes for each of the nominees were as follows:
<TABLE>
<CAPTION>
Name No. of Votes As % of Total Shares No. of Votes As % of Total
FOR Outstanding WITHHELD Shares Outstanding
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Brian T. McMahon 2,712,059 92.46% 50,403 1.72%
Henry M. Holterman 2,712,059 92.46% 50,403 1.72%
Nathaniel S. Thayer 2,712,059 92.46% 50,403 1.72%
-------------------------------------------------------------------------
TOTAL 2,712,059 92.46% 50,403 1.72%
-------------------------------------------------------------------------
The number of broker non-votes was 280 or less than 0.01% of the
total Shares outstanding.
</TABLE>
(ii) Proposal Two: To amend the Company's Articles of Incorporation to
increase the number of authorized Shares from 4,000,000 to
10,000,000. This proposal was approved by the shareholders. The
final vote for this item was as follows:
<TABLE>
<CAPTION>
No. of Votes FOR No. of Votes AGAINST No. of Votes ABSTAIN
(As % of Total Shares Outstanding) (As % of Total Shares Outstanding) (As % of Total Shares Outstanding)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
2,672,543 (91.11%) 78,262 (2.67%) 11,657 (0.40%)
</TABLE>
The number of broker non-votes was 5,400 or 0.18% of the total
Shares outstanding.
(iii) Proposal Three: To ratify certain amendments to the Company's
Amended and Restated 1991 Stock Plan ("Plan"). The following
amendments were made to the Plan:
(1) To increase the annual grant of options to non-employee
directors from 3,000 to 5,000; and
(2) To increase the aggregate number of stock options available
for issuance to all participants from 1,000,000 to 1,500,000.
This proposal was approved by the shareholders. The final vote for
this item was as follows:
<TABLE>
<CAPTION>
No. of Votes FOR No. of Votes AGAINST No. of Votes ABSTAIN
(As % of Total Shares Outstanding) (As % of Total Shares Outstanding) (As % of Total Shares Outstanding)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1,626,716 (55.46%) 135,748 (4.63%) 35,285 (1.20%)
</TABLE>
The number of broker non-votes was 280 or 0.01% of the total
Shares outstanding.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS ON THIS FORM 10-QSB
An amendment to the Articles of Incorporation of the Company, dated
March 28, 1996, is attached as Exhibit 3.1.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter
covered by this report.
SPECTRASCIENCE, INC.
FORM 10-QSB
MARCH 31, 1996
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPECTRASCIENCE, INC.
(Registrant)
MAY 2, 1996 /s/ Brian T. McMahon
Date BRIAN T. MCMAHON
President and Chief Executive
Officer (Principal Executive
Officer)
MAY 2, 1996 /s/ Ching-Meng Chew
Date CHING-MENG CHEW
Vice President of Finance and
Administration Chief Financial
Officer (Principal Financial and
Accounting Officer)
MAY 2, 1996 /s/ Dawn M. Leuer
Date DAWN M. LEUER
Controller
SPECTRASCIENCE, INC.
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 1996
EXHIBIT 3.1:
AMENDMENT TO THE ARTICLES OF INCORPORATION
OF
SPECTRASCIENCE, INC
DATED: MARCH 28, 1996
ARTICLE III
CAPITAL STOCK
The authorized capital stock of this corporation shall be Ten Million
(10,000,000) shares of common stock with a stated par value of twenty five cents
$ (.25) per share (the "Common Stock") and Twenty Million (20,000,000) shares of
preferred stock with a stated par value of one dollar $ (1.00) per share (the
"Preferred Stock"). The designation and the powers, preferences and rights, and
the qualifications, limitations or restrictions of the shares of each class of
stock shall be as follows:
SECTION 1. COMMON STOCK. Subject to all of the rights of the Preferred Stock,
and except as may be expressly provided with respect to the Preferred Stock
herein, by law or by the Board of Directors pursuant to this Article III:
(a) dividends may be declared and paid or set apart for payment upon the
Common Stock out of any assets or funds of the corporation legally
available for the payment of dividends;
(b) the holders of the Common Stock shall have the exclusive right to vote
for the election of directors and on all matters requiring stockholder
action, each share being entitled to one vote; and
(c) upon the voluntary or involuntary liquidation, dissolution or winding
up of the corporation, the net assets of the corporation shall be
distributed pro rata to the holders of the Common Stock in accordance with
their respective share ownership.
SECTION 2. PREFERRED STOCK. The Preferred Stock may be issued from time to time
by the Board of Directors as shares of one or more series. Subject to the
provisions hereof and the limitations prescribed by law, the Board of Directors
is expressly authorized by adopting resolutions providing for the issuance of
shares of any particular series and, if and to the extent from time to time
required by law, by filing with the Minnesota Secretary of State a statement
with respect to the adoption of the resolutions pursuant to the Minnesota
Business Corporation Act (or other law hereafter in effect relating to the same
or substantially similar subject matter), to establish the number of shares to
be included in each such series and to fix the designation and relative powers,
preferences and rights and the qualifications and limitations or restrictions
thereof relating to the shares of each such series. The authority of the Board
of Directors with respect to each series shall include, but not be limited to,
determination of the following:
(a) the distinctive serial designation of such series and the number of
shares constituting such series, provided that the aggregate number of
shares constituting all series of Preferred Stock shall not exceed Twenty
Million (20,000,000);
(b) the annual dividend rate on shares of such series, if any, whether
dividends shall be cumulative and, if so, from which date or dates;
(c) whether the shares of such series shall be redeemable and, if so, the
terms and conditions of such redemption, including the date or dates upon
and after which such shares shall be redeemable, and the amount per share
payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(d) the obligation, if any, of the corporation to retire shares of such
series pursuant to a sinking fund;
(e) whether shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or classes and, if
so, the terms and conditions of such conversion or exchange, including the
price or prices or the rate or rates of conversion or exchange and the
terms of adjustment, if any;
(f) whether the shares of such series shall have voting rights provided by
law, and, if so, the terms of such voting rights;
(g) the rights of the shares of such series in the event of the voluntary
or involuntary liquidation, dissolution or winding up of the corporation;
and
(h) any other rights, powers, preferences, qualifications, limitations or
restrictions thereof relating to such series.
The shares of Preferred Stock of any one series shall be identical with
each other in all respects except as to the dates from and after which dividends
thereon shall cumulate, if cumulative. Although the Board of Directors may fix
and determine the relative rights and preferences among the various series of
Preferred Stock in accordance with the authority set forth above, in all other
respects, the shares of all series shall be of equal rank with each other,
regardless of series.
2.1 REDEMPTION AND CONVERSION. Any share of any series of Preferred Stock which
has been redeemed or converted shall have the status of an authorized and
unissued share of Preferred Stock and may be reissued as a part of the series of
which it was originally a part or may be reissued as part of another series of
Preferred Stock established by the Board of Directors.
2.2 PREFERENTIAL DISTRIBUTION IN LIQUIDATION. Upon the liquidation, dissolution
or winding up of the corporation, the holders of the Preferred Stock then
outstanding shall be entitled to receive the amount per share fixed for the
various series before any of the assets of the corporation are distributed to
the holders of the Common Stock. If the assets of the corporation distributable
to the holders of the Preferred Stock have a value which is less that the full
amount so fixed for the various series, such assets shall be distributed among
the holders of the various series of Preferred Stock in accordance with any
preferences among the series that may have been established or, to the extent
that no such preferences shall have been established, pro rata among the holders
of all of the series of Preferred Stock. After distribution of the preferential
amounts required to be distributed to the holders of the Preferred Stock then
outstanding, the holders of the Common Stock shall be entitled, to the exclusion
of the holders of the Preferred Stock unless otherwise provided, to share in all
the remaining assets of the corporation.
SERIES A CONVERTIBLE STOCK
There is hereby established and created an initial series of Preferred Stock in
the number of shares and having the designation, relative rights, preferences
and limitations as follows:
2.3 DESIGNATION AND NUMBER OF SHARES. The distinctive designation of the series
shall be "Series A Convertible Preferred Stock" (par value $ 1.00 per share)
herein sometimes referred to as the "Series A Preferred Stock") and the number
of shares initially constituting the series shall be 5,000,000.
2.4 DIVIDENDS. The Series A Preferred Stock shall bear no dividends.
2.5 PREFERENCES IN LIQUIDATION.
(a) PREFERENTIAL PAYMENT. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the corporation, the holders of
shares of the Series A Preferred Stock then outstanding shall be entitled
to be paid according to their relationship with other holders of Preferred
Stock, out of the assets of the corporation available for distribution to
shareholders, whether from capital, surplus or earnings, before any
payment shall be made in respect of the corporation's Common Stock, an
amount equal to $1.00 per share. After setting apart or paying in full the
preferential amounts due the holders of the Series A Preferred Stock and
any other holders of Preferred Stock, the remaining assets of the
corporation available for distribution to shareholders, if any, shall be
distributed to the holders of Common Stock unless otherwise provided. If
upon liquidation, dissolution or winding up of the corporation, the assets
of the corporation available for distribution to its shareholders shall be
insufficient to pay the holders of the Series A Preferred Stock the full
preferential distribution of $1 per share, the holders of the Series A
Preferred Stock shall share ratably in the distribution of such assets.
(b) NOTICE. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the corporation, the corporation shall,
within 10 days after the date the Board of Directors approves such action,
or within 20 days prior to any shareholders' meeting called to approve
such action, or within 20 days after the commencement of any involuntary
proceeding, whichever is earlier, give each holder of shares of Series A
Preferred Stock initial written notice of the proposed action. Such
initial written notice shall describe the material terms and conditions of
the proposed action, including a description of the stock, cash and
property to be received by the holders of shares of Series A Preferred
Stock upon consummation of the proposed action and the date of delivery
thereof. If any material change in the facts set forth in the initial
notice shall occur, the corporations shall promptly give written notice to
each holder of shares of Series A Preferred Stock of such material change.
2.6 VOTING RIGHTS. Except as otherwise provided by law or as expressly provided
herein, the Common Stock shall have exclusive voting rights and powers,
including the exclusive right to notice of shareholders' meetings.
2.7 CONVERSION RIGHTS.
(a) OPTIONAL CONVERSION. Shares of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after March
31, 1996, (the "Conversion Period"), into fully paid and nonassessable
shares of Common Stock of the corporation.
(b) CONVERSION RATIO. Each share of Series A Preferred Stock shall be
converted into one share of the Common Stock of the corporation, subject
to adjustment as provided in paragraph 2.8 below.
(c) PROCEDURE FOR CONVERSION. The holder of any shares of Series A
Preferred Stock may exercise the conversion rights during the Conversion
Period as to such shares or any part thereof by delivering to the
corporation during regular business hours, at the office of any transfer
agent of the corporation for the Series A Preferred Stock, or at the
principal office of the corporation, the certificate or certificates for
the shares to be converted, duly endorsed for transfer to the corporation,
accompanied by written notice stating that the holder elects to convert
such shares or a part thereof. Conversion shall be deemed to have been
effected on the date when such delivery is made, and such date is referred
to herein as the "Conversion Date". As promptly as practicable thereafter
the corporation shall issue and deliver to or upon the written order of
such holder, at such office or other place designated by the corporation,
a certificate or certificates for the number of full shares of Common
Stock to which such holder is entitled and a check for cash with respect
to any fractional interest in a share of Common Stock as provided in
paragraph 2.7(d). The holder shall be deemed to have become a shareholder
of record on the applicable Conversion Date unless the transfer books of
the corporation are closed on such date, in which event he shall be deemed
to have become a shareholder of record on the next succeeding date on
which the transfer books are open, but the Conversion Ratio shall be that
in effect on the Conversion Date. Upon conversion of only a portion of the
number of shares of Series A Preferred Stock represented by a certificate
surrendered for conversion, the corporation shall issue and deliver to or
upon the written order of the holder of the certificate so surrendered for
conversion, at the expense of the corporation, a new certificate covering
the number of shares of Series A Preferred Stock representing the
unconverted portion of the certificate so surrendered.
(d) FRACTIONAL SHARES. No fractional shares of Common Stock or scrip shall
be issued upon conversion of shares of Series A Preferred Stock. If more
than one share of Series A Preferred Stock shall be surrendered for
conversion at any one time by the same holder, the number of full shares
of Common Stock issuable upon conversion thereof shall be computed on the
basis of the aggregate number of shares of Series A Preferred Stock so
surrendered. Instead of any fractional shares of Common Stock which would
otherwise be issuable upon conversion of any shares of Series A Preferred
Stock, the corporation shall pay a cash adjustment in respect of such
fractional interest equal to the fair market value of such fractional
interest as determined by the Board of Directors.
(e) RESERVED SHARES. The corporation shall reserve and keep available, out
of its authorized but unissued Common Stock, solely for the purpose of
effecting the conversion of the Series A Preferred Stock, the full number
of shares of Common Stock deliverable upon the conversion of all Series A
Preferred Stock from time to time outstanding. The corporation shall from
time to time (subject to obtaining necessary director and shareholder
action) increase the authorized amount of its Common Stock if at any time
the authorized number of shares of its Common Stock remaining unissued
shall not be sufficient to permit the conversion of all of the shares of
Series A Preferred Stock at the time outstanding.
(f) REGISTRATION. If any shares of Common Stock to be reserved for the
purpose of shares of Series A Preferred Stock require registration or
listing with, or approval of, any governmental authority, stock exchange,
or other regulatory body under any federal or state law or regulation or
otherwise, before such shares may be validly issued or delivered upon
conversion, the corporation will in good faith and as expeditiously as
reasonable endeavor to secure such registration, listing or approval, as
the case may be.
(g) VALIDLY ISSUED. All shares of Common Stock which may be issued upon
conversion of the shares of Series A Preferred Stock will, upon issuance
by the corporation, be validly issued, fully paid and nonassessable and
free from all taxes, liens and charges with respect to the issuance
thereof.
(h) NEGATIVE COVENANTS. This corporation will not, by amendment of its
articles of incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities,
or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed thereunder,
but will at all times in good faith assist in the carrying out of all the
provisions hereof and in the taking of such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of
the Series A Preferred Stock against impairment. In addition, the
corporation shall at no time issue or sell any shares of its Common Stock
or Preferred Stock, options or warrants for a consideration less than fair
market value, as reasonably determined by the Board of Directors, except
for grants or awards of Common Stock or options to acquire Common Stock
made to the corporation's employees, officers, and directors and to
consultants and other participants in the corporation's stock option,
stock award, stock purchase and other benefit plans, provided such grants
and awards made after the date of the first issuance of the corporation's
Series A Preferred Stock shall not represent more than 10% of the then
outstanding shares of Common Stock of the corporation.
2.8 ANTIDILUTION. The Conversion Ratio (referred to in paragraph 2.7 (b)) shall
be subject to adjustment from time to time, and the number of shares of Common
Stock issuable on conversion of any shares of Series A Preferred Stock shall be
subject to a resultant increase or decrease (calculated to the nearest 1/100th
of a share) by reason of such adjustment, as hereafter stated, except that no
adjustment shall be made, unless by reason of the occurrence of one or more of
the events hereinafter specified, the Conversion Ratio theretofore in effect
shall be changed by an amount equal to at least 5% thereof, but in the event
that an adjustment would be required except of insufficiency of amount, such
amount shall be carried forward and added to and shall be made at the time of
and together with any subsequent adjustment which, together with any adjustment
or adjustments so carried forward, amount to at least 5% of the Conversion Ratio
at such later time:
(a) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. In the event the
corporation shall declare a stock dividend with respect to its Common
Stock or shall effect a subdivision or combination of its Common Stock
into a greater or lesser number of shares without a proportionate and
corresponding stock dividend, subdivision or combination with respect to
its outstanding Series A Preferred Stock, then the existing Conversion
Ratio for the Series A Preferred Stock shall be increased or decreased
proportionately.
(b) CLASSIFICATION, RECLASSIFICATION, CAPITAL REORGANIZATION, ETC. In the
case of any classification, reclassification, capital reorganization or
other change of outstanding shares of Common Stock (other than a change in
par value, or from without par value to par value, or from par value to
without par value, or as a result of an issuance of Common Stock by way of
dividend or other distribution or of a subdivision or combination), or in
case of any consolidation or merger of the corporation with or into
another corporation (other than a merger with a subsidiary in which the
corporation is the continuing corporation and which does not result in any
reclassification, capital reorganization or other change of outstanding
shares of the Common Stock issuable upon conversion of the shares of the
Series A Preferred Stock) or in case of any sale or conveyance to another
corporation of the property of the corporation as an entirety or
substantially as an entirety, the corporation shall cause the holders of
the Series A Preferred Stock to have the right, by exercising their
conversion rights thereunder, to purchase the kind and amount of shares of
stock and other securities and property receivable upon such
reclassification, capital reorganization or other change, consolidation,
merger, sale or conveyance, if any, which the holders of the Series A
Preferred Stock would have received had the conversion taken place
immediately prior to such event.
2.9 CHANGES AFFECTING SERIES A PREFERRED STOCK. So long as any shares of Series
A Preferred Stock are outstanding, the corporation shall not, without first
obtaining the approval by vote or written consent, in the manner provided by
law, of the holders of at least a majority of the total number of shares of
Series A Preferred Stock outstanding, voting separately as a class, (i) alter or
change any of the powers, preferences, privileges, or rights of the Series A
Preferred Stock; or (ii) amend the provisions of this paragraph 2.9; or (iii)
create any new class or series of shares having preferences prior to the Series
A Preferred Stock or reclassifying any class or series of any Common Stock or
any other shares of stock hereafter created junior to the Class A Preferred
Stock into shares having any preference or priority over the Series A Preferred
Stock.
SERIES B CONVERTIBLE STOCK
There is hereby established and created a second series of Preferred Stock in
the number of shares and having the designation, relative rights, preferences
and limitations as follows:
2.10 DESIGNATION AND NUMBER OF SHARES. The distinctive designation of the series
shall be "Series B Convertible Preferred Stock" (par value $ 1.00 per share)
herein sometimes referred to as the "Series B Preferred Stock") and the number
of shares initially constituting the series shall be 1,000,000.
2.11 DIVIDENDS. Except as provided below, the Series B Preferred Stock shall
bear no dividends. In the event that the corporation has not increased the
number of authorized shares of its Common Stock to the extent sufficient to
enable the corporation to reserve a number of shares of Common Stock sufficient
to cover the conversion of the shares of Series B Preferred Stock and the
exercise of all Warrants issued in connection with the offering of the Series B
Preferred Stock by December 15, 1996, the Series B Preferred Stock shall bear an
8% cumulative annual dividend, payable quarterly, commencing upon the
corporation's failure to satisfy such condition and terminating on the date
compliance with such condition is satisfied.
2.12 PREFERENCES IN LIQUIDATION.
(a) PREFERENTIAL PAYMENT. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the corporation, the holders of
shares of the Series B Preferred Stock then outstanding shall be entitled
to be paid according to their relationship with other holders of Preferred
Stock, out of the assets of the corporation available for distribution to
shareholders, pari passu, whether from capital, surplus or earnings,
before any payment shall be made in respect of the corporation's Common
Stock, an amount equal to $1.00 per share. After setting apart or paying
in full the preferential amounts due the holders of the Series B Preferred
Stock and any other holders of Preferred Stock, the remaining assets of
the corporation available for distribution to shareholders, if any, shall
be distributed to the holders of Common Stock unless otherwise provided.
If upon liquidation, dissolution or winding up of the corporation, the
assets of the corporation available for distribution to its shareholders
shall be insufficient to pay the holders of the Series B Preferred Stock
the full preferential distribution of $1 per share, the holders of the
Series B Preferred Stock shall share ratably in the distribution of such
assets.
(b) NOTICE. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the corporation, the corporation shall,
within 10 days after the date the Board of Directors approves such action,
or within 20 days prior to any shareholders' meeting called to approve
such action, or within 20 days after the commencement of any involuntary
proceeding, whichever is earlier, give each holder of shares of Series B
Preferred Stock initial written notice of the proposed action. Such
initial written notice shall describe the material terms and conditions of
the proposed action, including a description of the stock, cash and
property to be received by the holders of shares of Series B Preferred
Stock upon consummation of the proposed action and the date of delivery
thereof. If any material change in the facts set forth in the initial
notice shall occur, the corporations shall promptly give written notice to
each holder of shares of Series B Preferred Stock of such material change.
2.13 VOTING RIGHTS. Except as otherwise provided by law or as expressly provided
herein, the Common Stock shall have exclusive voting rights and powers,
including the exclusive right to notice shareholders' meetings.
2.14 CONVERSION RIGHTS.
(a) OPTIONAL CONVERSION. Shares of Series B Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after
December 28, 1996 (the "Conversion Period"), into fully paid and
nonassessable shares of Common Stock of the corporation.
(b) CONVERSION RATIO. Each share of Series B Preferred Stock shall be
converted into one share of the Common Stock of the corporation, subject
to adjustment as provided in paragraph 2.15 below.
(c) PROCEDURE FOR CONVERSION. The holder of any shares of Series B
Preferred Stock may exercise the conversion rights during the Conversion
Period as to such shares or any part thereof by delivering to the
corporation during regular business hours, at the office of any transfer
agent of the corporation for the Series B Preferred Stock, or at the
principal office of the corporation, the certificate or certificates for
the shares to be converted, duly endorsed for transfer to the corporation,
accompanied by written notice stating that the holder elects to convert
such shares or a part thereof. Conversion shall be deemed to have been
effected on the date when such delivery is made, and such date is referred
to herein as the "Conversion Date". As promptly as practicable thereafter
the corporation shall issue and deliver to or upon the written order of
such holder, at such office or other place designated by the corporation,
a certificate or certificates for the number of full shares of Common
Stock to which such holder is entitled and a check for cash with respect
to any fractional interest in a share of Common Stock as provided in
paragraph 2.14(d). The holder shall be deemed to have become a shareholder
of record on the applicable Conversion Date unless the transfer books of
the corporation are closed on such date, in which event he shall be deemed
to have become a shareholder of record on the next succeeding date on
which the transfer books are open, but the Conversion Ratio shall be that
in effect on the Conversion Date. Upon conversion of only a portion of the
number of shares of Series B Preferred Stock represented by a certificate
surrendered for conversion, the corporation shall issue and deliver to or
upon the written order of the holder of the certificate so surrendered for
conversion, at the expense of the corporation, a new certificate covering
the number of shares of Series B Preferred Stock representing the
unconverted portion of the certificate so surrendered.
(d) FRACTIONAL SHARES. No fractional shares of Common Stock or scrip shall
be issued upon conversion of shares of Series B Preferred Stock. If more
than one share of Series B Preferred Stock shall be surrendered for
conversion at any one time by the same holder, the number of full shares
of Common Stock issuable upon conversion thereof shall be computed on the
basis of the aggregate number of shares of Series B Preferred Stock so
surrendered. Instead of any fractional shares of Common Stock which would
otherwise be issuable upon conversion of any shares of Series B Preferred
Stock, the corporation shall pay a cash adjustment in respect of such
fractional interest equal to the fair market value of such fractional
interest as determined by the Board of Directors.
(e) RESERVED SHARES. The corporation shall reserve and keep available, out
of its authorized but unissued Common Stock, solely for the purpose of
effecting the conversion of the Series B Preferred Stock, the full number
of shares of Common Stock deliverable upon the conversion of all Series B
Preferred Stock from time to time outstanding. The corporation shall from
time to time (subject to obtaining necessary director and shareholder
action) increase the authorized amount of its Common Stock if at any time
the authorized number of shares of its Common Stock remaining unissued
shall not be sufficient to permit the conversion of all of the shares of
Series B Preferred Stock at the time outstanding.
(f) REGISTRATION. If any shares of Common Stock to be reserved for the
purpose of shares of Series B Preferred Stock require registration or
listing with, or approval of, any governmental authority, stock exchange,
or other regulatory body under any federal or state law or regulation or
otherwise, before such shares may be validly issued or delivered upon
conversion, the corporation will in good faith and as expeditiously as
reasonable endeavor to secure such registration, listing or approval, as
the case may be.
(g) VALIDLY ISSUED. All shares of Common Stock which may be issued upon
conversion of the shares of Series B Preferred Stock will, upon issuance
by the corporation, be validly issued, fully paid and nonassessable and
free from all taxes, liens and charges with respect to the issuance
thereof.
(h) NEGATIVE COVENANTS. This corporation will not, by amendment of its
articles of incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities,
or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed thereunder,
but will at all times in good faith assist in the carrying out of all the
provisions hereof and in the taking of such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of
the Series B Preferred Stock against impairment.
2.15 ANTIDILUTION. The Conversion Ratio (referred to in paragraph 2.14 (b))
shall be subject to adjustment from time to time, and the number of shares of
Common Stock issuable on conversion of any shares of Series B Preferred Stock
shall be subject to a resultant increase or decrease (calculated to the nearest
1/100th of a share) by reason of such adjustment, as hereafter stated, except
that no adjustment shall be made, unless by reason of the occurrence of one or
more of the events hereinafter specified, the Conversion Ratio theretofore in
effect shall be changed by an amount equal to at least 5% thereof, but in the
event that an adjustment would be required except of insufficiency of amount,
such amount shall be carried forward and added to and shall be made at the time
of and together with any subsequent adjustment which, together with any
adjustment or adjustments so carried forward, amount to at least 5% of the
Conversion Ratio at such later time.
(a) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. In the event the
corporation shall declare a stock dividend with respect to its Common
Stock or shall effect a subdivision or combination of its Common Stock
into a greater or lesser number of shares without a proportionate and
corresponding stock dividend, subdivision or combination with respect to
its outstanding Series B Preferred Stock, then the existing Conversion
Ratio for the Series B Preferred Stock shall be increased or decreased
proportionately.
(b) CLASSIFICATION, RECLASSIFICATION, CAPITAL REORGANIZATION, ETC. In the
case of any classification, reclassification, capital reorganization or
other change of outstanding shares of Common Stock (other than a change in
par value, or from without par value to par value, or from par value to
without par value, or as a result of an issuance of Common Stock by way of
dividend or other distribution or of a subdivision or combination), or in
case of any consolidation or merger of the corporation with or into
another corporation (other than a merger with a subsidiary in which the
corporation is the continuing corporation and which does not result in any
reclassification, capital reorganization or other change of outstanding
shares of the Common Stock issuable upon conversion of the shares of the
Series B Preferred Stock) or in case of any sale or conveyance to another
corporation of the property of the corporation as an entirety or
substantially as an entirety, the corporation shall cause the holders of
the Series B Preferred Stock to have the right, by exercising their
conversion rights thereunder, to purchase the kind and amount of shares of
stock and other securities and property receivable upon such
reclassification, capital reorganization or other change, consolidation,
merger, sale or conveyance, if any, which the holders of the Series B
Preferred Stock would have received had the conversion taken place
immediately prior to such event.
2.16 CHANGES AFFECTING SERIES B PREFERRED STOCK So long as any shares of Series
B Preferred Stock are outstanding, the corporation shall not, without first
obtaining the approval by vote or written consent, in the manner provided by
law, of the holders of at least a majority of the total number of shares of
Series B Preferred Stock outstanding, voting separately as a class, (i) alter or
change any of the powers, preferences, privileges, or rights of the Series B
Preferred Stock; or (ii) amend the provisions of this paragraph 2.16; or (iii)
create any new class or series of shares having preferences prior to the Series
B Preferred Stock or reclassifying any class or series of any Common Stock or
any other shares of stock hereafter created junior to the Class B Preferred
Stock into shares having any preference or priority over the Series B Preferred
Stock.
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,889,438
<SECURITIES> 0
<RECEIVABLES> 320
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<INVENTORY> 312,737
<CURRENT-ASSETS> 4,202,495
<PP&E> 741,024
<DEPRECIATION> 538,472
<TOTAL-ASSETS> 4,405,047
<CURRENT-LIABILITIES> 267,185
<BONDS> 0
0
1,467,498
<COMMON> 744,137
<OTHER-SE> 1,926,227
<TOTAL-LIABILITY-AND-EQUITY> 4,405,047
<SALES> 0
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<CGS> 0
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<OTHER-EXPENSES> 435,032
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (50,668)
<INCOME-PRETAX> (384,364)
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<NET-INCOME> (384,364)
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